Canadians pay the price when new tax rules are proposed #CanadaFinance

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A core principle of taxation is that taxpayers have the right to pay no more — and no less — than what is required by law.

But what happens if the government proposes a new taxation law to be effective immediately (or at a later date) and the proposed law itself is in flux or, worse, hasn’t even been fully drafted? Or if flawed draft legislation has been released and requires significant changes? In such situations, how are Canadians supposed to plan their financial affairs when the rules they are expected to follow are unclear or incomplete?

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In order to provide taxpayers with the ability to effectively plan their affairs, it has been common and tradition for decades that most new tax proposals are accompanied by detailed draft legislation when first announced. In most cases, the draft legislation is well crafted, but might need some tinkering to fix unintended consequences, correct errors or make other adjustments. By doing this, the government provides taxpayers with a detailed roadmap to enable them to proactively plan their affairs.

Lately, however, it has become common for many new tax proposals announced in the annual budget or the fall economic statement to not be accompanied by draft legislation. The announcement simply states that draft legislation will be released later.

For example, the capital gains inclusion rate increase was first proposed in the April 16, 2024, federal budget to be effective roughly 10 weeks later on June 25. But the announcement did not contain any draft legislation, so taxpayers were unable to effectively plan their affairs.

The first batch of draft legislation was released on June 10, just two weeks before the implementation date. The material was imperfect despite the best efforts of Department of Finance bureaucrats, who acknowledged such imperfections and promised another version would be released no later than the end of July.

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That promise was not kept and the second round of draft legislation wasn’t released until Aug. 12. It contained many corrections to the June 10 draft, but it is still far from perfect and will require many more changes.

The result of all this is uncertainty for taxpayers. This uncertainty is not just an inconvenience; it’s a failure of government accountability.

Canadians deserve better than vague promises and half-baked proposals. It is not unreasonable to expect clear and detailed draft legislation when a new tax proposal is announced. Yet lately, these new proposals lack those essential details.

The ripple effect of this uncertainty extends far beyond individual taxpayers. Tax software businesses rely on clear tax rules to update their systems and remain compliant. Without concrete legislation, these companies cannot make necessary updates, leading to incorrect filings (for those taxpayers who rely on that software to file appropriate returns) and potentially costly interest and penalties for businesses with corporate year-ends from June 25 until Royal Assent on the new capital gains rules.

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There’s also the always-on political risk. Is it possible that Canada will have an election soon and the capital gains legislation will not get passed before that time? If a new government is elected, would it be required to pass the new tax proposals? It is possible that the proposals could die and a new government would not be required to reintroduce them. It’s unlikely to happen, but it is still possible.

Some of my international tax colleagues have suggested Canada should revert to a system where tax proposals only become effective when they become law. Sounds like a simple fix, but that is much easier said than done and not likely practical for a variety of reasons.

Canadian taxpayers should demand better. The government must return to its historical practice and tradition of releasing detailed legislation when new tax rules are announced, thereby giving people the tools they need to plan their lives with better certainty.

Effective tax planning allows individuals and businesses to minimize uncertainty, align their finances with their long-term goals and make informed decisions. Without the ability to plan, taxpayers are at the mercy of an unpredictable tax regime, which could harm economic stability and personal financial security.

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Having said that, we all know that life is uncertain, and one needs to deal with that fact in order to be successful in life. “The glorious uncertainty of the law was a thing well known and complained of, by all ignorant people, but a learned gentleman considered it as its greatest excellency,” the 18th-century English politician Richard Brinsley Sheridan once said.

But constant uncertainty in taxation matters that affects the masses needs to be minimized. It’s time to hold our government accountable for the growing gap between tax announcements and the implementation of the necessary legislation. It is crucial to recognize the real cost of these delays. Families, businesses and the broader economy pay the price for governmental inefficiencies.

Until Canada returns to its tradition of transparency and accountability in tax legislation, taxpayers will continue to live in uncertainty in an already crazy uncertain world and pay the price for governmental delay since they don’t know if they are paying no more — or no less — than what is required by law.

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Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. He will be co-hosting a seminar on the new tax proposals on Oct. 2.

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(As a side note, Jay Goodis of Tax Templates Inc. and myself will be instructing a webinar on this material on Oct. 2, 2024, through our Canadian Tax Matters platform to try to put this very complex material into as plain English as possible for taxpayers and professionals).

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