A legal challenge to the Canada Revenue Agency’s (CRA) administration of the now-defunct increase to the capital gains inclusion rate tax is still in play, following a Federal Court decision on Tuesday.
The judge in the case denied the Attorney General of Canada’s motion to dismiss an application for judicial review of the CRA’s planned implementation of the tax hike, which hadn’t passed into law.
Tuesday’s Federal Court decision is “a win for Canadian taxpayers because it allows our constitutional challenge to proceed,” Devin Drover, general counsel for the Canadian Taxpayers Federation and co-counsel in the case, said in an emailed statement on Wednesday.
The Department of Finance, when asked for comment on the Federal Court’s decision, referred to the CRA.
“We do not comment on the specific details of court cases,” a CRA spokesperson said in an emailed statement on Wednesday.
The application for judicial review was filed in January, after Finance had said on Jan. 7 that the CRA would administer the tax proposal — included in a September 2024 notice of ways and means motion — despite former prime minister Justin Trudeau having stepped down and Parliament being prorogued.
On Jan. 31, Finance deferred the proposal to 2026. The Liberals ultimately dropped the proposal ahead of the federal election in April.
While the proposed increase to the capital gains inclusion rate was dropped, the proposed increase to the lifetime capital gains exemption was effective June 25, 2024.
On behalf of his client, the applicant, Drover has argued that the decision to administer the proposed tax hike before legislation was enacted violates the Constitution, including Section 53 which says bills for imposing tax are to originate in the House of Commons.
“Canadians are constitutionally protected to ensure that tax increases are debated and approved by Parliament and not quietly imposed by unelected officials behind closed doors,” Drover said in his statement. The decision is “a significant step in defending a core principle of our democracy and the rights of taxpayers under the Constitution.”
The Attorney General argued against the application on the grounds of mootness, jurisdiction and that the Jan. 7 statement about CRA administering the proposal wasn’t a legally reviewable decision by the Federal Court.
In dismissing the Attorney General’s motion, the Federal Court judge stated in an order and reasons that the bar to strike an application for judicial review is “very high.” Citing case law, the judge said the application must be “bereft of any possibility of success.”
“[A]lthough the [Attorney General] raises arguments that may well succeed at the hearing of the judicial review application, I am not convinced that the application, read generously for its essential character, is entirely bereft of success,” the judge stated.
The judge deferred the issue of mootness to the judge who will hear the application.
The joint committee on taxation of the Canadian Bar Association and CPA Canada have 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 federal government for such legislation, similar to that in the U.K.
In the 1980s, such legislation was considered in Canada but not established, as noted in a January 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.
Drover said in his email that work continues on the next steps in the legal challenge, “including cross-examinations on affiants, if required, and then moving to have a court date set for a hearing on the merits of the case.”