A federal judge rejected the Attorney General of Canada's motion to dismiss the application
A lawsuit challenging the Canada Revenue Agency’s decision to implement a capital gains tax hike without parliamentary approval last year can move forward, a federal judge ruled Tuesday, stating she is not convinced that the lawsuit is “entirely bereft of success.”
The judge rejected the Attorney General of Canada’s motion to dismiss the lawsuit, with the caveat that the government “raises arguments that may well succeed at the hearing of the judicial review application.”
Devin Drover, who represents the plaintiff as Atlantic director and general counsel of the Canadian Taxpayers Federation, told Canadian Lawyer on Tuesday, “This ruling is a win for Canadian taxpayers because it allows our constitutional challenge to move forward.
“It’s a significant step in defending a core principle of our democracy: the Constitution protects Canadians by requiring that tax increases be debated and approved in Parliament, not quietly implemented by unelected officials.”
A spokesperson for the Canada Revenue Agency declined to comment, stating that the agency does not comment on specific details of court cases.
An Ontario resident filed the lawsuit in January, shortly after former Prime Minister Justin Trudeau prorogued Parliament. A British Columbia company filed a similar lawsuit challenging the tax hike the same month.
In April 2024, the federal government introduced the proposed capital gains tax changes, which aimed to increase the capital gains inclusion rate – i.e., the proportion of capital gains that counts as taxable income – from one-half to two-thirds.
Later that year, then-Minister of Finance Chrystia Freeland tabled notices of ways and means motions with draft legislation on the new inclusion rate. The CRA then announced that it would begin implementing the new inclusion rate, in keeping with the agency’s historical policy of asking taxpayers to file their taxes based on proposed tax legislation.
When Trudeau prorogued Parliament, the move effectively terminated all unfinished business at the House of Commons, including the second ways and means motion. A week after the lawsuits challenging the tax hike were filed, the CRA announced it would defer the policy's effective date to Jan. 1, 2026.
In asking the federal court to dismiss the lawsuit, the attorney general argued that the plaintiff’s application “is bereft of any possibility of success” and that the CRA’s announcement about implementing the tax hike did not impact the plaintiff’s “legal rights or obligations or cause her prejudice.” The plaintiff, who sold a property in 2024, had alleged that the policy would affect the amount of tax she owed.
The attorney general also argued that the plaintiff’s lawsuit “is premature as the assessment process has yet to run its course.”
The federal court noted that during a hearing, it asked the attorney general’s counsel whether all their arguments “rested on characterizing the application as a disguised challenge to an assessment that has not yet been made.
“I was advised that they do,” the court said. “I do not accept this characterization. The facts which [the plaintiff] asserts about her purchase and sale of property give context to the application, but its true essence is a challenge to the CRA’s implementation of an unlegislated taxation change.”
The court also rejected the attorney general’s argument that the Tax Court of Canada had jurisdiction over the case.
Drover says he believes it is important to continue pursuing the lawsuit even though the government has delayed the tax hike because “the constitutional issue remains and will remain until a precedent is set.
“Canadians deserve clarity from the courts that future governments cannot sidestep Parliament to impose tax increases,” he says. “Without that clarity, the door remains open for any government to quietly impose tax hikes without a vote, and that’s exactly what section 53 of the Constitution Act, 1867 was designed to prevent.”
