On January 6, 2025, Justin Trudeau announced his resignation as Prime Minister of Canada and indicated that the Governor General had accepted his request to prorogue the current session of Parliament until March 24, 2025. As a result, all motions and bills before Parliament which did not receive Royal Assent prior to prorogation were considered to have “died on the order paper” and do not have the force of law. All such motions and bills must be reintroduced in a subsequent session of Parliament.

In our January 9, 2025 Tax  Notes article, Prorogation of Parliament leaves previously announced tax measures in a precarious position, we briefly identified those income tax measures previously announced by the federal Liberal government that did not become law prior to prorogation and that could be potentially impacted by prorogation.

In this article, we raise some considerations for taxpayers who entered into transactions to crystallize capital gains prior to June 25, 2024 having regard to the proposed increase to the capital gains inclusion rate effective June 25, 2024 in light of prorogation. In a subsequent article, we will highlight some considerations for taxpayers relating to capital gains realized on or after June 25, 2024 in light of prorogation.

Background and effect of prorogation

The 2024 Federal Budget proposed an increase to the capital gains inclusion rate as follows, very generally:

  • from one-half to two-thirds for capital gains realized by corporations and trusts on or after June 25, 2024; and
  • from one-half to two-thirds for the portion of capital gains realized by individuals on or after June 25, 2024 in excess of an annual $250,000 threshold.

On September 23, 2024, the federal Liberal government tabled in the House of Commons a notice of ways and means motion (“NWMM”) to introduce a bill to implement the proposed increase to the capital gains inclusion rate and other consequential amendments to the Income Tax Act (Canada) (the “Tax Act”). The NWMM was not voted upon the House of Commons prior to prorogation. As such, the bill contained in the NWMM was entirely terminated as a consequence of prorogation.

There is a long-standing practice of Parliament administratively treating proposed tax measures as being in effect (if the applicable measures have an effective date prior to Royal Assent) as soon as the notice of ways and means motion upon which those measures are based is tabled in the House of Commons.[1]  As a result, the Department of Finance has confirmed that, notwithstanding prorogation, the Canada Revenue Agency (“CRA”) will administer the Tax Act based on the NWMM tabled on September 23, 2024,[2] including the increased capital gains inclusion rate, unless “[u]pon the resumption of Parliament [ . . . ] no bill is passed in the House of Commons, and the government signals its intent to not proceed with the proposed measures”.[3]

Pre-June 25, 2024 crystallization transaction alternatives

In contemplation of the proposed increase to the capital gains inclusion rate, a number of taxpayers entered into transactions with an intention to crystallize accrued capital gains at the one-half inclusion rate on or before June 24, 2024.  This generally involved a transfer of assets pursuant to a transaction which allowed for the filing of an election under subsection 85(1) of the Tax Act.

With Prime Minister Trudeau’s resignation and the prorogation of Parliament, there is uncertainty as to whether the proposed increase to the capital gains inclusion rate will ever be passed into law with effect as of June 25, 2024.  For this to occur, implementing legislation would need to be re-introduced by a new government at some future time once Parliament resumes on March 24, 2025, and the effective date of that implementing legislation would need to be retroactive to June 25, 2024. As such, it is unclear if there is still a tax-efficiency rationale which would support triggering accrued capital gains in the context of a crystallization transaction prior to June 25, 2024.

The following are some non-exhaustive options that may be available to taxpayers who entered into crystallization transactions before June 25, 2024 that allow for an election under subsection 85(1) of the Tax Act.

Option 1: Definitively crystallizing pre-June 25, 2024 capital gains

The taxpayer triggers the pre-June 25, 2024 capital gain by (i) either not filing Form T2057 (i.e., the prescribed election form under subsection 85(1) of the Tax Act) altogether or filing Form T2057 with an elected amount(s) that exceeds the cost of each transferred asset, (ii) reporting the gain in their 2024 income tax return, and (iii) paying to the CRA the tax on such gain. Subject to rules and restrictions in the Tax Act in this regard, the taxpayer would thereby receive an increase to their adjusted cost base in respect of the transferred assets.

This option may be attractive to taxpayers seeking certainty respecting their tax liabilities and those with sufficient cash flow to pay the tax arising on the crystallized pre-June 25, 2024 capital gain. However, in the event that the proposed increase to the capital gains inclusion rate is ultimately abandoned, this approach would effectively cause the taxpayer to unnecessarily pay the tax.

Option 2: Definitively deferring pre-June 25, 2024 capital gains

The taxpayer defers the pre-June 25, 2024 capital gain by filing Form T2057 with an elected amount(s) equal to the cost of each transferred asset and filing their 2024 income tax return on a consistent basis.

Under this approach, however, the taxpayer would be subject to the increased capital gains inclusion rate on a future disposition of the relevant asset(s) should a new government ultimately implement the increased capital gains inclusion rate.

Option 3: Retaining some discretion

There are different ways this could be addressed, depending on the taxpayer’s particular circumstances. 

One approach involves a taxpayer paying to the CRA the tax in respect of their pre-June 25, 2024 capital gain as though the taxpayer decided to trigger such gain pursuant to the crystallization transaction, but postponing the filing of their 2024 income tax return and Form T2057 in respect of the crystallization transaction. Once the new government announces whether or not it intends to pursue the increased capital gains inclusion rate, the taxpayer may late-file its 2024 income tax return and Form T2057 (subject to late-filing penalties and interest) to either report or defer the gain depending on whether the new government intends to implement the capital gains inclusion rate increase.[4]

If the taxpayer desires to retain some discretion, but does not have sufficient cash flow to fund the payment of the tax to the CRA in respect of the crystallization transaction as noted in the paragraph directly above, a taxpayer might decide to not make that payment and late-file their 2024 income tax return and Form T2057 in respect of the crystallization transaction. This approach could, however, subject the taxpayer to additional interest and penalties.

As lawyers, however, we cannot counsel a client to take an approach that is not compliant with the Tax Act. Rather, we recommend that taxpayers seek advice from their tax professionals and make decisions in accordance with their own risk tolerances and their particular circumstances.

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We continue to monitor any developments regarding prorogation’s effect on the proposed increase to the capital gains inclusion rate, and in particular, any commentary or clarifications published by the CRA. If you have any questions about your filing obligations under the Tax Act, please contact a member of the Miller Thomson LLP Corporate Tax group.

[1] House of Commons Procedure and Practice, 3rd ed by Marc Bosc and André Gagnon, Chapter 19: Financial Procedures, available online: <https://www.ourcommons.ca/procedure/procedure-and-practice-3/ch_18_4-e.html>.

[2] Canada Revenue Agency, “Businesses: Here are the top changes that will affect business taxes in 2025 (January 8, 2025), available online: <https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/top-changes-affecting-business-taxes-2025.html>.

[3] Craig Lord, “Here’s how capital gains tax changes will work after Parliament prorogues”, Global News, available online < https://globalnews.ca/news/10946218/capital-gains-taxes-parliament-prorogued/>.

[4] If the taxpayer defers the pre-June 25, 2024 capital gain on their late-filed 2024 tax return and Form T2057, a refund on the taxpayer’s overpaid tax in this circumstance could be delayed given anticipated delays in administering the proposed increased capital gains inclusion rate.