The business papers, including our Siamese twin the Financial Post, have been busy this week explaining how the prorogation of Parliament affects the hike in the capital gains tax inclusion rate that was announced by then-finance minister Chrystia Freeland (ah, remember when?) in the spring. The guillotining of the legislative session has created a problem for the Canada Revenue Agency (CRA), because the rate change has not yet actually been made law by Parliament or given royal assent. The House of Commons passed a ways and means motion endorsing the change, but there has been no bill, and no tax filer can be forced to pay up at the new rate until a bill goes through — which is now quite likely never to happen.
The established practice in situations like this is for the CRA to administer the changes as if they went into operation on the date of the initial ways and means motion, or sometimes even on the date of a budget speech, and that’s what they’re doing in this case. Tax forms will instruct taxpayers to pay on the basis of the proposed, unlegislated new rate. But with no force of law behind that instruction, taxpayers actually have the option not to comply, based on their own sniffing of the political winds, and to calculate their taxes using the prior rate.
If and when the new rate becomes law, those who chose to file on the basis of the old, lower rate will later be charged for the unpaid tax plus interest. On the other hand, those who follow the instructions on the tax form will be due a refund, plus a smaller rate of interest, if no bill is ever passed.
This Heisenbergian uncertainty is obviously an infernal injustice to the taxpayer and a completely undesirable and harmful feature of a taxation system. The source of the problem is that ministries have, for their own convenience, permitted routine contempt of Parliament on the part of a government department. (This is not to say that the CRA’s bean counters enjoy or insist on behaving this way: they are known to be uncomfortable with these sorts of temporarily-voluntary-provisional-quantum taxes.) When there’s a majority government nobody is ever made aware of such problems, but when there’s a minority government that might be brought down at any moment, they can detonate.
So would it be possible to have a rule that the CRA doesn’t collect an increased tax until the date on which the increase actually acquires legal force? The justification for quantum taxation is basically that sometimes it’s better for the government to spring unpleasant surprises on the citizenry without giving them a chance to dodge. You can dig into the theory yourself: the Library of Parliament has an official explanation of the parliamentary financial cycle (see section 5.4) which in turn cites a 1985 white paper bearing the imprimatur of then-finance minister Michael Wilson (ah, remember when?).
Wilson’s paper gives several examples of situations in which it’s hypothetically desirable for tax changes to be immediate upon being announced. Fiscal measures intended to provide economic stimulus might have the opposite effect, for example, if beneficiaries have to wait for them to pass. And certainty about the date of a tax change helps the finance ministry estimate revenues a little more reliably, for what that’s worth (and it’s not nothing).
But when it comes to a tax increase that’s intended mostly to help the government pay for handouts it’s whizzing out the door — and that was the explicit justification for this rate change — the bottom line is that provisional taxation sacrifices principles of justice and the rule of law to the convenience of the state. (Come to think of it, the same could be said of having different interest rates that apply to tax arrears and tax refunds in a situation where a taxpayer has no choice but to guess what tax rate will eventually be legal.)
At a bare minimum, governments ought to favour non-retroactive taxation when choosing implementation dates, whether or not this facilitates some tax avoidance. At best we would run a reformed, simple-as-possible tax system that doesn’t have to be updated constantly to cover improvised, desperate political promises. But I realize I might as well ask for the moon.
National Post