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Tax

Taxpayers in limbo: Compliance in uncertain times

Capital gains and bare trusts back in the spotlight on Parliament Hill as embattled government faces non-confidence motions

Taxpayers are faced with a great deal of uncertainty this fall with several proposed tax changes facing an unclear path to royal assent. Two proposals causing a lot of concern for taxpayers are the changes to the capital gains inclusion rate and trust reporting. As a result of the uncertainty surrounding our Parliament, it is unclear whether taxpayers should be considering the existing or proposed tax legislation when planning or even filing their tax returns. 

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The legislation to enact these proposed changes has not yet been introduced in the House of Commons, and with the minority government stuck debating parliamentary privilege and facing multiple non-confidence motions, it is hard to determine when, or even if, these tax proposals will reach royal assent.  

The 2024 federal budget announced an increase in the inclusion rate for capital gains, effective for dispositions on or after June 25, 2024. The Department of Finance published a Notice of Ways and Means Motion on Sept. 23, 2024, after a short consultation period, signaling the intent to move quickly on the capital gains legislation. Despite this effort, taxpayers may have to file tax returns prior to the passage of the legislation and even prior to the CRA updating its assessing program and published forms. 

The CRA has a longstanding practice of allowing taxpayers to file their returns based on proposed legislation, but this longstanding practice is contingent on a high degree of certainty that proposed legislation will become law. In this case, the level of certainty needed for CRA’s longstanding practice does not exist. With regards to reporting of capital gains, a leading tax software company provided the following comment on their webpage, “CRA doesn’t want clients to adjust their calculations with the new capital gains measures since their assessment systems are not updated to treat the proposed inclusion rate. CRA told us that they should adjust their system for the new inclusion rate somewhere around the end of 2024 and beginning of 2025.”  

As such, it seems that taxpayers who have already filed before the CRA updates its systems will have to amend their tax returns to implement the new inclusion rate. The CRA has not stated how it would handle interest and/or penalties relating to filing/amending these returns.   

Also uncertain is the status of reporting rules for bare trusts. Legislation passed in 2022 greatly expanding the types of trusts that are required to file an annual information return. Under these new measures, trustees of “bare trusts” are supposed to file such a return unless they are exempted. These measures created such onerous compliance obligations that they were widely criticized and are now the subject of an ombudsperson investigation. As a result, the CRA exempted bare trusts from filing for 2023. Draft legislation released on Aug. 12, 2024, includes important technical changes to try and narrow the scope of bare trusts required to file. The draft legislation repeals the previous bare trust rule and replaces it with new rules, which are only effective for tax years ending after Dec. 30, 2025 (2025 taxation year). As a result of the draft legislation, bare trusts would not be required to file for 2024. However, if this draft legislation does not pass before the filing deadline for 2024 trust returns (March 31, 2025), the old rules will remain in effect. If this situation materializes then taxpayers will need further guidance from the CRA, which hopefully will be timelier. 

Adding to the uncertainty about the status of these measures is the status of the federal government itself. The NDP has ended its support agreement with the Liberals’ minority government and two Parliamentary confidence motions have been tabled recently, raising the spectre of an election. If an election is called, legislation that has been introduced but not enacted will “die” on Parliament’s Order Paper and have to be reintroduced by a new government before it can become law.   

Guidance from the CRA on these matters would be helpful for taxpayers, and their advisers, to understand their obligations and meet them as efficiently as possible. CPA Canada continues to have on going conversations with CRA regarding these and other issues.