Federal Court sidesteps constitutional question on CRA's provisional capital gains tax authority
A group of taxpayers asked the Federal Court to declare that the Canada Revenue Agency lacked the authority to collect tax on capital gains at the new two-thirds inclusion rate before Bill C-69 received Royal Assent. The court declined to answer the question.
The dismissal, handed down in late 2024, turned on jurisdiction rather than substance. The Federal Court ruled it had no power to intervene in the CRA's administrative guidance while the legislation was still moving through Parliament. Whether the CRA acted constitutionally by enforcing a tax increase from June 25, 2024, months before the enabling statute became law, remains an open question.
Why the timing mattered to the plaintiffs
The capital gains inclusion rate moved from 50% to 66.67% for corporations and for individuals on gains above $250,000 effective mid-2024. The federal government announced the change in its spring budget, tabled a Ways and Means Motion, and instructed the CRA to begin administering the new rate immediately. Bill C-69, which would formally encode the change, did not receive Royal Assent until months later.
The plaintiffs argued that collecting tax under proposed-but-not-enacted legislation violated constitutional limits on taxation without parliamentary approval. They pointed to the gap: taxpayers were filing and remitting based on a rate that did not yet exist in statute. The CRA's position was that provisional administration of budget measures is a parliamentary convention stretching back decades, and that the court should not interfere with that convention.
The Federal Court sided with the CRA on procedural grounds. It ruled that the court lacked jurisdiction to issue declaratory relief on tax measures still in the legislative pipeline. The decision did not say the tax was constitutional. It said the court would not stop the CRA's administrative process before the law was finalized.
What the ruling actually settled
Very little. The court dismissed the case without addressing the constitutional question. This is not the same as upholding the CRA's authority. It is a refusal to rule at this stage in the process.
The practical effect is that the CRA's timeline stands. Taxpayers who realized capital gains after June 25, 2024, must file using the higher inclusion rate or risk penalties once the statute is enforced retroactively. Tax professionals now operate in a legal grey zone where the safest advice is to comply with guidance that is not yet law.
For corporations, the impact is sharper. Unlike individuals, they receive no $250,000 threshold at the 50% rate. Every dollar of capital gain realized by a corporation in 2024 and beyond is taxed at 66.67%. A small business holding investments inside a corp faced the full increase from day one, while individual shareholders of the same corp got a partial buffer.
The convention that does the work
Parliamentary convention in Canada allows the government to act as if a budget measure is law from the date of announcement. This prevents taxpayers from liquidating assets in the days between a budget speech and Royal Assent. The convention is not written in the Constitution. It is not a statute. It is a practice that has held for long enough that courts treat it as binding.
The Federal Court's dismissal reinforces that convention. It suggests that challenging the CRA's provisional authority in Federal Court is a dead end. A future constitutional challenge would likely need to wait until the law is enacted and applied, and then be brought through the Tax Court or on judicial review of an actual assessment.
The door is not closed. It is on a timer.
