A Federal Court in Saskatoon has dismissed a taxpayer’s challenge to the Canada Revenue Agency’s (CRA) planned administration of the proposed increase to the capital gains inclusion rate, which was ultimately dropped. The court found there was no CRA decision or policy to legally review and that, regardless, the matter was moot.
The taxpayer had filed an application with the Federal Court in January 2025 for a judicial review of the CRA’s provisional implementation of the tax proposal. At the time, Parliament was prorogued, so all proposed legislation — including the notice of ways and means motion with the capital gains tax proposal — had been terminated. The CRA had then confirmed it would still administer the proposal, consistent with standard practice.
“This application must be dismissed, as there is no discrete matter” — such as a CRA decision or policy — “identified by the applicant for judicial review,” the Federal Court’s decision, published on July 15, states.
The court didn’t rule on whether provisional tax implementation (PTI) is constitutional.
“We’re disappointed the court declined to decide the central question this case raised: whether the CRA can administer and collect taxes that Parliament has never passed,” said Devin Drover, Atlantic director and general counsel with the Canadian Taxpayers Federation, and co-counsel for the taxpayer, in an emailed statement. The question of constitutionality “is important, and it remains unanswered.”
He and co-counsel are “still reviewing the full decision and deciding on next steps, including a possible appeal,” he said.
Provisional tax implementation not mandatory
The court’s decision described PTI as “an administrative convention.” After a notice of ways and means motion is tabled and before legislative enactment, the CRA issues forms permitting taxpayers to file their taxes in compliance with upcoming proposals.
However, taxpayers aren’t required to file their taxes based on proposed legislation in a notice of ways and means motion. Because compliance with PTI is “voluntary,” the taxpayer’s argument that the CRA made a policy decision that is reviewable fails, the court’s decision says.
As explained in the decision, applications for judicial review may be brought for matters that affect legal rights, impose legal obligations or cause prejudicial effects.
The taxpayer argued that PTI caused prejudicial uncertainty, but “having the choice to file according to either the new [capital gains] inclusion rate or the enacted rate does not amount to prejudicial uncertainty,” the decision states. “In fact, any doubts about whether the new inclusion rate would apply to the transaction at issue in this judicial review would have dissolved completely by January 31, 2025.” That’s when, one week after the application for review was filed, the Finance Department deferred the proposed increase to the capital gains inclusion rate to 2026 (from the original proposed date of June 25, 2024).
A second and separate application for judicial review of PTI and the capital gains tax proposal was dropped after Finance’s announced deferral.
The Federal Court in Saskatoon also ruled that the application it considered must be dismissed as moot, because any live issue related to tax liability was resolved with the deferral.
Constitutionality unaddressed
The taxpayer also argued that the CRA doesn’t have authority to administer a tax proposal before legislation is enacted, citing section 53 of the Constitution Act, which says bills for imposing tax are to originate in the House of Commons.
The judge, Glennys McVeigh, considered whether to grant the application for review despite its mootness but determined not to, based on factors that included the court’s proper role.
In doing so, McVeigh wrote that the “minority conditions in Parliament and its prorogation in January 2025 revealed the structural flaws arising from the core assumptions underlying PTI as a conventional practice.” However, the court’s role isn’t to determine “how the CRA should prepare to administer tax proposals prior to their enactment.”
In his statement, Drover said, “Notably, the court itself recognized that last year’s events exposed structural flaws in the assumptions underlying this practice [of PTI]. Canadians are entitled to know whether the CRA has the authority to collect a tax before their elected representatives have actually approved it.”
Rare circumstances not likely to reoccur
Kevyn Nightingale, leader of cross-border tax planning with Levy Salis LLP in Toronto, said the “structural flaws” described by McVeigh were in fact circumstantial.
A backlog of proposed legislation had piled up, given the minority government at the time and then prorogation of Parliament on Jan. 6, when then-prime minister Justin Trudeau stepped down as Liberal Party leader. In March 2025, Prime Minister Mark Carney, the new Liberal leader, dropped the proposed increase to the capital gains inclusion rate before calling a federal election.
The circumstances surrounding the application were “rare,” Gergely Hegedus, a partner in Dentons’ tax group in Edmonton, said. “I don’t know if these circumstances are likely to arise again.”
Even with minority governments, “it is relatively rare for law that is proposed … not to actually come into force,” Nightingale said. PTI “makes administration of the law much easier, and, most importantly, it is optional, not mandatory,” which was the main reason for the Federal Court’s decision, he said.
“You can say this [capital gains tax proposal] seems different because it was so controversial, and there was a large chance of it not getting passed, and in fact, it did not get passed,” Nightingale said. “But that doesn’t change what PTI is about.”
The court decision stated that, while PTI has no express statutory basis, its logic is apparent: “It prevents the chaos likely to arise from tax legislation taking retroactive effect, as it avoids a rush of amendments and refiling of returns, as well as transaction-timing arbitrage around announced effective dates.”
The intent of PTI is not to prejudice taxpayers but to help them, Hegedus said. But “it’s easy to forget that, when you have taxpayers … trying to figure out how to file and on what basis.”
Constitutionally, PTI “still could be challenged, because there’s no determination at all by the court” on that basis, Hegedus said.
A challenge would require “a taxpayer who actually has a live issue, that they’re in some way prejudiced by the provisional tax implementation,” he said. As things stand, “taxpayers clearly have a choice” whether to file under existing laws or proposed changes, Hegedus said. “Yes, they might have to amend their filings if changes are made or aren’t made. But it’s really up to the taxpayer” how to file.
“The problem lies more with the politicians who propose laws sometimes that are unreasonable, unfair, and in such cases, probably need a full hearing before they come into effect,” Nightingale said.
PTI is not a constitutional issue, but rather a question of whether a government is run “effectively, reasonably, fairly [and] efficiently,” he said. “None of those words could be used to describe Justin Trudeau’s governments.”
Another challenge to PTI is unlikely, he said.
“With the current government we’ve got, and frankly any government that I can see going forward, we would have a much more businesslike approach to tax legislation,” Nightingale said. “This fiasco is not likely to occur again.”