What is Canada Revenue Agency's position regarding assessment of proposed legislation and how would it apply to the increase to the capital gains?

Blue J’s Answer:

Taxpayers should file their returns based on the current law, even if there is proposed legislation that may change the capital gains inclusion rate. The CRA's longstanding practice is to ask taxpayers to file on the basis of proposed legislation to ease compliance and administrative burdens. However, if the proposed legislation results in an increase in benefits or a significant rebate or refund, the CRA generally waits until the measure is enacted before reassessing returns to reflect the proposed changes.

If the proposed increase to the capital gains inclusion rate is not enacted, taxpayers who filed based on the proposed legislation are expected to take immediate steps to correct their filings and pay any taxes owing. The CRA will waive penalties and/or interest if taxpayers acted reasonably, took immediate steps to correct their filings, and paid any taxes owing.

Regarding reassessment, the CRA generally will not reassess if the initial assessment was correct in law. Therefore, a taxpayer's request to amend their tax records to reflect proposed legislation will be denied unless the legislation is enacted. To protect their interests, taxpayers are recommended to file a waiver in respect of the normal reassessment period.

In summary, taxpayers should:

1.      File their returns based on the current law.

2.      Monitor the status of the proposed legislation.

3.      File a waiver to protect their interests if the proposed legislation is not yet enacted.

4.      Take immediate corrective actions if the proposed legislation is not enacted, including paying any taxes owing.

5.      The CRA will waive penalties and/or interest if taxpayers acted reasonably and promptly corrected their filings.

The crystallization of an accrued capital gain prior to an increase in the capital gains inclusion rate, solely to ensure access to the current inclusion rate, would generally not be subject to the GAAR. However, if the crystallization is part of a series of transactions with the main purpose of obtaining additional tax benefits, it may be scrutinized under the GAAR.

Sources

[1] ITA s. 248 Definitions

[2] S5-F1-C1, Determining an Individual’s Residence Status

[3] External T.I. 2022-0949081E5 - CMETC -Qualified Engineer or Geoscientist

[4] CTF Roundtable Q. 5, 2022-0949751C6 - The New Proposed Critical Mineral Exploration Tax Credit

[5] Chapter 12.0 The Income Tax Audit Manual

[6] ARCHIVED - Income Tax - Technical News No. 44

[7] External T.I. 2024-1016011E5 - General Anti-Avoidance Rule

 John Oakey analysis:

• Not sure why Blue J provided ITA reference of section 248,
• Not sure why Blue J provided reference to S5-F1-C1 “Determining an Individual’s Residence Status”
• Blue J provided relevant sources in [3] to [6]
• Blue J provided relevant source related to GAAR and the increase in the capital gains inclusion rate.

Concluding comments:

Blue J’s answer pulled together information from various CRA sources regarding their long-standing position to file based on proposed legislation.  The part of the question “how would it apply to a proposed increase to the capital gains inclusion rate” did not result in any information specific to this situation.  The answer states “If the proposed increase to the capital gains inclusion rate is not enacted, taxpayers who filed based on the proposed legislation are expected to take immediate steps to correct their filings and pay any taxes owing”.  This is a correct statement published by CRA, but it is not applicable with the increase in capital gains inclusion rate because there would be no additional taxes to pay if the proposed legislation was not enacted.

Blue J states in the first sentence that “Taxpayers should file their returns based on the current law, even if there is proposed legislation that may change the capital gains inclusion rate”.  Once again, there is accuracy to this statement, but taxpayers should determine their best filing position weighing the possibility of penalties, interest and administrative costs.

Blue J does a good job pulling information from appropriate sources and providing one-click hyperlinks to those sources.  The information provided by Blue J related to GAAR is not relevant to the specific question, but it is good additional information to be aware of and it shows that Blue J is providing current information.

I researched this exact question previously, which took me several hours of typing in different search strings, sorting through the results, and then assembling the relevant information (cut and paste).  Blue J did all of this in 30 seconds.  Similar to my previous post, there is some level of professional judgement that needs to be applied to Blue J’s response to tailor it appropriately, and a review of some of the sources is good risk management to ensure an accurate and complete response – but once again, Blue J saved me hours of research time.