What Prorogation Means for Canada’s Capital Gains Tax

Justin Trudeau’s announcement that he will step down and that Parliament will be prorogued halts his government’s plan to implement the proposed capital gains tax changes for the time being. However, Canadians should not assume the tax measures are definitively off the table.

The proposal would increase the taxable portion of capital gains from one-half to two-thirds for companies, and it would also apply to individuals whose capital gains exceed $250,000 annually.

These measures were first introduced in the government’s April budget and later separated from the broader fiscal plan through a ways and means motion. That motion never received royal assent because the House of Commons was stalled last year amid Conservative filibustering over the government’s green technology fund.

What happens to the capital gains tax changes?

When Parliament is prorogued, the parliamentary order paper is cleared. That means any motions or measures that did not receive royal assent must be reintroduced when the House of Commons reconvenes.

Reintroducing the capital gains proposal could be delayed or abandoned entirely if the Liberals lose an anticipated non-confidence vote after the new session begins on March 24.

There is a complicating factor tied to the ways and means motion, explained Larry Nevsky, head of the tax group at law firm Dentons in Toronto. Only a minister can table a ways and means motion, and once presented it can provide the government with temporary authority to collect revenue.

“The mere tabling of the ways and means motion by parliamentary convention provides temporary authority to impose taxes effective immediately,” Nevsky wrote in a LinkedIn post, noting the unique legal status of such motions.

Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth, said last year the Canada Revenue Agency told accountants it would follow “standard practice” and begin administering the proposed capital gains measures on gains realized on or after June 25, 2024, even though formal legislation had not yet passed.

CRA yet to offer guidance

The Canada Revenue Agency had not issued an update immediately after prorogation. Both the CRA and the finance ministry were slow to respond to media questions about how they will treat taxes tied to the Liberal proposal. (Update: “CRA to continue administering changes to capital gains tax during prorogation.”)

“Taxpayers are approaching the 2024 filing season without certainty because Parliament has not passed the legislation,” Golombek said, highlighting the difficulty for individuals and businesses trying to complete their returns under unclear rules.

Golombek recommends clients prepare to pay the higher capital gains tax rate. His logic: if you pay under the proposed rules and the legislation ultimately fails, you can likely obtain a refund; but if the rules are enacted later and you failed to pay earlier, you could face interest and penalties on back taxes.

Reaction from the business community

Business groups and technology leaders reacted strongly to the proposed capital gains changes, arguing they would hurt investment, entrepreneurship and worker compensation tied to stock options.

Benjamin Bergen, president of the Council of Canadian Innovators, said the proposal is effectively dead unless reintroduced by the next Liberal leader. Bergen, whose group represents more than 150 CEOs of high-growth Canadian companies, said members welcomed the pause.

The government estimated the change would affect the wealthiest 0.13% of taxpayers and generate roughly $19.3 billion in revenue over five years, but industry leaders argued the tax could discourage risky capital formation and push entrepreneurs, investment and talent to jurisdictions with more favorable tax treatment.

“If it becomes less attractive to raise risky capital in Canada, that money and those entrepreneurs may flow elsewhere,” Bergen said, warning of negative effects on Canada’s innovation ecosystem and on workers who receive equity compensation.

Shopify president Harley Finkelstein criticized the proposal sharply on social media, calling it a penalty on innovation and risk-taking rather than a wealth tax.

Kim Furlong, head of the Canadian Venture Capital and Private Equity Association, warned in April that the proposal would “significantly dampen Canada’s entrepreneurial spirit” and stifle growth in critical sectors. Her association on Monday urged the CRA to provide urgent clarity so businesses can file taxes and plan investments in the months ahead.

Read more about capital gains tax in Canada:

• What to know as Canada’s capital gains tax changes remain in legal limbo
• Capital gains tax in Canada, explained
• Yes, a cottage can be an investment property—how to minimize capital gains tax
• How to plan for uncertainty around future tax policy—including capital gains