Tax Law in Limbo: What the Resignation of Prime Minister Justin Trudeau Means for Canadian Taxpayers

On January 6, 2025, Prime Minister Justin Trudeau announced his intention to step down as leader of the Liberal Party and at the same time, prorogued Parliament suspending all legislative business until March 24, 2025. The fall of Trudeau, paired with the prorogation of Parliament, has left numerous pieces of tax legislation in a state of legislative limbo, raising doubts about their future. With the Conservative and NDP parties signaling their intent to trigger an early election, taxpayers are left in a cloud of uncertainty regarding proposed tax measures that were tabled in the House of Commons as a Notice of Ways and Means motion but have not yet received Royal Assent and become law. One of the more recent measures receiving a lot of press was the legislative proposal to increase the capital gains inclusion rate from 50% to 66 2/3% which is intended to be effective retroactively to June 25, 2024 (the “Proposed Legislation”). Consistent with “Parliamentary convention,” the Canada Revenue Agency’s (“CRA’s”) position is to treat such Proposed Legislation as current law, absent any instruction from Parliament to the contrary. As the upcoming income tax season looms, taxpayers are left wondering how to proceed. This update provides an overview of the current state of affairs and outlines taxpayers’ obligations and options during this uncertain time.

Filing Options for Taxpayers

The Canadian tax system relies heavily on self-assessment, granting taxpayers with discretion over how to file their income tax returns. The current state of political affairs and the CRA’s above-noted position provide for two approaches for taxpayers to choose from in filing upcoming tax returns:

1. Ignore Proposed Legislation: The first approach is for taxpayers to ignore the Proposed Legislation when filing their income tax returns and paying tax. If the Proposed Legislation does not pass, no further action would be required by taxpayers. If the Proposed Legislation passes (retroactive to June 25, 2024), taxpayers will have underpaid tax. As such, they may have to file an amended income tax return, pay the shortfall and be subject to interest (compounded daily at the prescribed rate, currently 8%) on the shortfall amount.
2. Comply with Proposed Legislation: The second approach is for taxpayers to file income tax returns and pay their tax on the basis that the Proposed Legislation is existing law. If the Proposed Legislation never becomes law, the taxpayers could file amended income tax returns and claim a tax refund (along with refund interest commencing May 30, 2025, currently at a rate of 6%) from the CRA for the overpaid portion of the tax. This is the most conservative option as the taxpayers will not be subject to any interest if the Proposed Legislation is passed. However, if the Proposed Legislation is never passed, this option will create a scenario where taxpayers overpay tax and must wait for a tax refund.

Given that the earliest date Parliament could resume is March 24, 2025, and with a likely outcome being the fall of the Liberal government and the start of an election campaign period, the next federal election could occur as late as mid-May, which would be after the personal income tax return deadline of April 30, 2025 (and earlier for some corporations). This results in a great deal of uncertainty facing the income tax filing deadlines this year. Accordingly, taxpayers will have to decide which approach to take for the 2024 income tax filings.

In determining how to proceed, taxpayers will have to consider their risk tolerance for having to pay interest to the CRA on any tax shortfall (or overpay tax and wait for a refund from the CRA). While the most conservative approach is to file income tax returns and pay tax on the basis that the Proposed Legislation will ultimately become law, each taxpayer should consider and analyze the options available to them in conjunction with their tax advisors.

If you have any questions with respect to the matters discussed above, please contact Mariam Al-Shikarchy at [email protected], Adam Solomon at [email protected] or any other member of our Tax practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.