CRA Wins Administration Battle on Capital Gains Tax, But Constitutional Question Remains Untested

The Federal Court ruled last week that it lacked jurisdiction to stop tax collectors from enforcing a rate that technically wasn't law yet. That's the short version of what happened when a group of taxpayers tried to block the CRA from administering the 2024 capital gains inclusion rate hike before Parliament had finished voting on it.

Since June 25, 2024, Canada's capital gains inclusion rate has sat at 66.67% for corporations and trusts, and for individuals on gains exceeding $250,000 per year. The legislation authorizing this increase did not receive Royal Assent until months after that date. In the interim, the CRA was administering the new rate based solely on a Notice of Ways and Means Motion, a budget proposal with no force of law on its own.

The applicants argued this violated Section 53 of the Constitution Act, 1867, which requires all tax bills to originate in the House of Commons and pass through the full legislative process before taking effect. They asked the court for an injunction to stop the CRA from collecting under the provisional rate.

The court said no. But not because the practice is constitutional.

Why the court declined to intervene

The ruling turned on parliamentary privilege, not on the merits of the constitutional claim. Parliamentary privilege is the doctrine that protects the internal workings of the legislature from judicial interference. The court held that blocking the CRA from following a Ways and Means Motion would amount to second-guessing Parliament's own procedures while a bill was still under debate. That's outside the judiciary's lane.

This is a procedural win for the government, not a substantive one. The court did not say provisional tax implementation is lawful. It said the legal challenge was premature and aimed at the wrong target. An injunction during the legislative process interferes with Parliament. A lawsuit after the law passes and taxes are paid does not.

The gap between convention and text

Canada has been doing this for decades. Governments announce tax changes in the federal budget, set an effective date (often the day of the announcement), and the CRA begins administering those changes immediately. The actual legislation can lag by six months or more.

The justification is efficiency. Without provisional implementation, every budget would trigger a multi-month arbitrage window where taxpayers could dump appreciated assets at the old rate before the new one took effect. The revenue loss would be severe, and market distortions would ripple through every asset class with taxable gains.

But efficiency doesn't equal constitutionality. Section 53 doesn't have a carve-out for "situations where waiting would be inconvenient for the Treasury." It says tax laws must pass through the legislative process. The convention allowing early administration is exactly that, a convention. Conventions can be politically sticky and practically necessary. They are not law.

What happens next

The dismissal leaves the door open. A taxpayer who paid under the 66.67% rate can sue for a refund once the dust settles, arguing that taxes collected before Royal Assent were unconstitutional. That case would be harder to dismiss on procedural grounds, because it wouldn't be asking a court to interfere with an active legislative process. It would be asking for money back after an allegedly unlawful collection.

The federal government would defend that suit by pointing to decades of precedent and the chaos that ending provisional implementation would cause. The plaintiff would point to the text of the Constitution. Neither side has a slam dunk.

For now, the CRA's administrative power is intact. The constitutional question isn't answered. It's deferred.