Proroguing of Parliament: What Ultra-High Net Worth Families Should Know

Written by: Angela Smith

On January 6, 2025, Prime Minister Justin Trudeau prorogued the Canadian Parliament, a procedural move that temporarily halts parliamentary operations. While this is a normal political process (and was last used by Trudeau in August of 2020 during the WE Charity scandal), it has significant implications for legislation that has yet to receive royal assent. When Parliament is prorogued, all unpassed bills are effectively wiped from the agenda.  This places draft legislation in limbo until prorogation ends and the current or incoming government decides whether to reintroduce it in a future session.

Why This Matters

In recent years, Canada’s tax rules have undergone numerous changes, including those introduced in the Liberals’ 2024 budget last spring. While some of these changes have been enacted —such as the new trust reporting requirements and specific updates to the Alternative Minimum Tax—others remain in draft form. One of the most consequential draft proposals for ultra-high net worth families is the planned increase to the inclusion rate for realized capital gains on or after June 25, 2024.  This change would affect individuals, corporations, and certain trusts. Although the proposed change to the capital gains inclusion rate was part of the budget discussions, the Liberals separated the proposed capital gains tax changes from other budget items. They opted to table them as a notice of ways and means motion on September 23, 2024. Debate delays by the Conservatives prevented the Liberals’ minority government from passing the legislation, leaving the capital gains proposal unratified.  With the proroguing of parliament, many industry experts are calling into question the impending reality of this draft legislation.  Moreover, many families have already undertaken tax planning in 2024 based on the expectation that these draft rules would become law for the 2024 taxation year. Now, uncertainty looms.

Impact on 2024 Tax Filings

The Canada Revenue Agency (CRA) typically administers tax changes based on proposed legislation, meaning that it assesses taxpayers as though the draft legislation is legally effective. The CRA believes this approach reflects the government’s intent and provides predictability for taxpayers. This has been a longstanding practice of the CRA. To no surprise, this is consistent with the approach the CRA recommends taxpayers follow for the legislative proposals for the capital gains inclusion rate. In fact, tax forms reflecting these changes are expected to be available by January 31, 2025. However, taxpayers are not legally obligated to comply with draft legislation until that legislation receives royal assent. This creates a pivotal decision point for the 2024 tax filing season.

What Does It All Mean?

Taxpayers face two options when filing their 2024 tax returns:

1. File Based on Draft Legislation (i.e., 2/3 of Capital Gains Included in Income):
   • Pros: This conservative approach aligns with the CRA’s recommendation and minimizes the risk of interest and/or penalties if the legislation is enacted.
   • Cons: There is a risk of overpaying taxes, especially if the draft legislation does not become law. If this happens, taxpayers will need to amend their returns.
2. File Based on Current Legislation (i.e., 1/2 of Capital Gains Included in Income):
   • Pros: This more aggressive approach will likely result in lower taxes and is generally more beneficial for taxpayers.
   • Cons: If the proposed changes are enacted later, taxpayers could face additional tax liabilities, interest, and penalties. This would also necessitate filing amended tax returns to account for the higher inclusion rate.

Where Does That Leave Canadian Taxpayers?

Under Canada’s self-assessment tax system, taxpayers are held accountable for determining how to prepare and file their tax returns. Given the current uncertainties, seeking guidance from a knowledgeable tax advisor is essential to choosing the most suitable and effective filing strategy for each taxpayer.

Disclaimer: The information provided above is for informational purposes only and is not intended to serve as a comprehensive analysis or a substitute for professional tax advice.