A legal challenge to the Canada Revenue Agency’s (CRA) administration of the proposed capital gains tax changes continues even though the Finance Department has deferred the proposed hike in the capital gains inclusion rate to 2026.
“We welcome the Trudeau government’s decision to delay enforcing the capital gains tax hike, but our court challenge will continue,” said Devin Drover, Atlantic director and general counsel with the Canadian Taxpayers Federation, in an email.
Drover is co-counsel for an applicant asking the Federal Court for a judicial review of the CRA’s administration of the tax proposals. That application, as well as a separate one by a different applicant, was filed one week before Finance deferred the proposed increase to the capital gains inclusion rate (CGIR). The separate application was dropped the day of Finance’s decision. (Legal counsel in that case didn’t respond to a request for comment).
Drover said the application for judicial review “is not moot.”
“We are seeking a judicial declaration on whether the CRA can implement tax changes without legislative authority,” Drover said. “A clear ruling will benefit both taxpayers and the CRA by defining the limits of its power and preventing future uncertainty.”
Last September the Liberal government tabled a notice of ways and means motion in the House of Commons to implement proposed changes to the capital gains inclusion rate. In January the prime minister stepped down as Liberal party leader and prorogued Parliament, meaning any proposed legislation would need to be reintroduced. The Department of Finance then confirmed the CRA would administer the capital gains tax changes as proposed in the notice of ways and means motion.
Given the lack of political support for the proposals in the face of an upcoming federal election, the changes are unlikely to become law. On Wednesday, the Canadian Taxpayers Federation called on Finance to stop the increase to the CGIR after Liberal leadership hopeful Mark Carney committed to reversing the measure if he were elected.
Drover said his client’s case is about “setting a firm legal precedent that the CRA’s actions were both unreasonable and unconstitutional.” Specifically, the CRA’s administration of the proposed capital gains tax changes violated, among other statutes, Section 53 of the Constitution, “which guarantees no taxation without representation,” Drover said.
In an emailed statement, a Finance official said the administration of Canada’s taxation system is under the purview of the CRA. “The Department of Finance works closely with the CRA in joint stewardship of the Canadian tax system, and continuously monitors judicial decisions to inform the development of tax policy,” the official said. “As this matter is before the courts, we will not be commenting further.”
When asked about the CRA’s position on the judicial review, a spokesperson for the agency stated only: “The new effective date for the capital gains inclusion rate change is Jan. 1, 2026.”
With the increase in the CGIR deferred, the court may not proceed with the judicial review, said Gergely Hegedus, a partner in Dentons’ tax group in Edmonton. “It’s possible the court says it’s not a live issue.”
Still, “there’s definitely a benefit” to a court ruling on the CRA’s power to provisionally implement tax legislation, Hegedus said. “It’s good to have certainty for the government and for taxpayers.”
The joint committee on taxation of the Canadian Bar Association and CPA Canada previously recommended that Finance introduce legislation to govern the administration of proposed legislation. And the Canadian Federation of Independent Business has said it will lobby the next federal government for such legislation, similar to that in the U.K.
In the 1980s, that kind of legislation was considered in Canada but not established, as noted in a recent article by Carl Irvine, a member of the C.D. Howe Institute’s fiscal and tax competitiveness council, and John Tobin, a tax partner with Torys LLP.
“A [court] decision could lead Parliament to pass legislation governing the provisional implementation of tax measures, which we support,” said Ryan Minor, tax director with CPA Canada, in an email.
The capital gains tax proposals include an increase to the lifetime capital gains exemption, to $1.25 million. When Finance announced the deferred CGIR, it confirmed the increase to the lifetime capital gains exemption was effective June 25, 2024.
In a judicial review, if the court ruled the CRA doesn’t have the power to provisionally implement tax legislation, a potential loss of that particular measure could be mitigated by “the government introducing legislation in the House of Commons, which can backdate the start of the lifetime capital gains exemption to its stated effective date,” Drover said.