Is the capital gains hike legally binding? What it would take to change the rules

The proposed tax change was subsequently separated from the budget implementation bill, with the Liberals introducing a ways and means motion to increase the capital gains inclusion rate as originally set out in the budget. The motion was approved in the House of Commons on June 11, and updated draft legislation is expected to be released in July.

So, what comes next? Are the new capital gains rules legally binding effective June 25, or on the day the legislation is passed, potentially in the fall?

Does the ways and means motion make it official?

Typically, if a ways and means motion proposes an increase in taxation, the increase will be effective on the day the notice of the motion is made.

Minister of Finance Chrystia Freeland announced the proposed capital gains inclusion rate change when she presented the budget on April 16, and introduced the ways and means motion on June 10. The government gave everyone some notice introducing it, so people could put their affairs in order to prepare for the new inclusion rate. Assuming the legislation is passed, the new inclusion rate will be effective retroactive to June 25.

There could be changes to the capital gains tax between now and the passing of the law. But typically, a new ways and means motion would be tabled for that purpose. Also, the change would need to be consistent with the general policy statements introduced in the budget. In my opinion, tweaks to the language of the legislation within the scope of the motion are more likely.

Could further capital gains changes be introduced?

I see two likely outcomes:

1. The capital gains inclusion rate changes to two-thirds as of June 25.
2. The legislation doesn’t pass, and the capital gains inclusion rate stays the same as it is now.

I don’t anticipate a third option, where a different rate is introduced, but never say never!

It is worth noting that a new federal government could change the rate. Case in point: In 2000, Jean Chrétien’s government reduced the inclusion rate from 75% to 50%, where it has remained until now. That is the longest period of stability we’ve had since inclusion rates were introduced in 1972.

There are two purposes for tax policy. The first is to increase revenue so the government can provide services, and the second is to encourage certain behaviours through incentives. Chrétien’s stated objective in lowering the inclusion rate was to encourage tech investment in Canada.

Did it work? Maybe. But consider how Canada’s GDP is heavily weighted on real estate, and how this also encouraged Canadians to invest their money there. Maybe the extended period the inclusion rate has remained at 50% has contributed to the housing crisis.

What happens if the law doesn’t pass?

Let’s return to the possibility that the legislation does not pass and the inclusion rate remains the same. Could a legal case be made against the government by someone who pre-emptively sold their cottage or business believing the tax rules would change?

Sure. But I can’t imagine a scenario in which they’re likely to succeed. And from a policy perspective, a successful outcome would be bad for taxpayers.

Think of it this way. Imagine you were planning a wedding and, like Alanis Morissette, you didn’t want rain on your wedding day. The meteorologist told you, “It’s going to rain on the day you’re getting married.” So, you cancelled your lavish outdoor wedding and moved it inside, but it ended up sunny anyway. If you successfully sued the meteorologist because you changed your plans based on their warning, no one would risk forecasting the weather ever again.

The same logic applies to the proposed changes to the capital gains inclusion rate. From the perspective of incentives, suing the government for warning us ahead of time would not be a great idea. The government might never again give advance notice. You would find out about a tax hike after it becomes law, and you would have just one choice… to pay more taxes.

Read more about capital gains tax:

• How to prepare for future changes in tax policy—including capital gains tax
• How much is capital gains tax in Canada?—and other reader questions answered
• How it works: Capital gains tax on the sale of a property
• Capital gains tax in Canada, explained

About Mark Evans

Mark Evans is a partner in the business law group at Lerners LLP in London, Ontario. He represents small and medium enterprise clients, advising and assisting them in structuring and restructuring as corporations, joint ventures, partnerships and limited partnerships.

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