As the federal government advances and revisits aspects of its tax agenda, middle market taxpayers should stay mindful of how these changes are implemented and enforced in order to effectively plan for their current and future tax obligations.
Tax changes were among some of the earliest decisions made by Mark Carney when he first took office as prime minister—and understanding how these processes unfolded is critical for Canadian taxpayers.
These actions include an end to the consumer carbon tax, a proposal for middle-class tax cuts and the intention to repeal the digital services tax amid ongoing U.S. trade negotiations.
While these moves appear definitive based on federal announcements and enforcement by the Canada Revenue Agency (CRA), they were each introduced through different avenues that carry their own implications and provide different levels of certainty to taxpayers on their current reporting obligations.
Businesses and individual taxpayers should be cognizant of the various means by which each change was enacted and how they could affect current and future tax obligations.
To understand the government’s tools to affect changes to tax laws, it is important to examine the differences between amending legislation and making regulations.
The passage of legislation provides the clearest picture of tax obligations for Canadians. Tax legislation is introduced to the House of Commons with a notice of ways and means motion (NWMM) after being drafted by federal ministries, which is often the Department of Finance.
If the NWMM is adopted, a bill is brought forward by the government. The bill is then read, studied and voted on by both the House of Commons and the Senate before being signed into law by the Governor General. Any amendments or repeals of legislation must follow the same process.
In contrast, regulations are created by authorities designated in the enabling legislation, such as a minister or the governor-in-council (the Governor General acting by and with the advice of the federal cabinet). They become law when the order-in-council is signed by the Governor General and is subsequently published in the Canada Gazette, unless exempt from publication under the Statutory Instruments Act.
Regulations are intended to carry out the purposes of existing legislation or expand on them. For example, section 221 of the Income Tax Act allows the governor-in-council to enact regulations for any matter that the act specifies must be prescribed or determined by regulations. This may include rates, reporting requirements and eligibility criteria.
Although regulations have the force of law, their use to make changes to tax rates does not guarantee the rate will remain consistent in the future. The underlying legislation would need to be formally repealed in order for a more definitive result.
This was the case when Carney ended the consumer carbon tax outlined in the Greenhouse Gas Pollution Pricing Act (GGPPA).
The GGPPA was enacted by the Liberal government under Justin Trudeau in 2019 as part of Canada’s strategy to meet its 2030 greenhouse gas emission reduction target. It includes a provision which allows the governor-in-council to make amendments to the application of the fuel charge—more colloquially known as the consumer carbon tax.
As a result, the federal cabinet had the power to reduce the relevant charge rates to zero without formally repealing the law. The government also removed certain registration and reporting requirements to complement the adjusted nil charge.
As of May 27, the government signalled its intent to repeal the consumer charge of the GGPPA altogether while maintaining the tax for industrial emitters of greenhouse gas emissions. These developments should provide some level of assurance that the government will not change its mind on this policy.
Corresponding legislation to remove the charging provisions has not been passed but was tabled in a NWMM along with affordability measures. Regardless, the regulations themselves provide clarity to taxpayers regarding the carbon tax in terms of its current application as it no longer imposes a fuel charge and related filing obligations.
Individual tax rates, by comparison, are written into Canada’s Income Tax Act and are not prescribed by regulation. This means the federal cabinet—in concert with the Governor General—does not have the authority to adjust individual tax rates through regulation alone.
The government was required to introduce legislation to reduce the full-year tax rate for the lowest personal tax bracket to 14.5 per cent for 2025 and 14 per cent for 2026 and future years. Similar to recent experiences with the capital gains inclusion rate, where legislation was enforced by the CRA before receiving royal assent, the CRA noted that income subject to source deductions could have tax withheld at 14 per cent effective July 1.
Rescinding the digital services tax, meanwhile, is markedly different from the previous examples.
The tax was intended as an interim measure as the Organisation for Economic Co-operation and Development (OECD) worked towards a multilateral solution to tax challenges arising from the digitalization of the economy. It imposed a three per cent tax on certain revenue streams of multinational groups that exceeded significant revenue thresholds.
The government announced that digital services tax collection would halt as of June 30. But unlike the middle-class tax cuts, no legislation has been introduced to repeal the digital services tax.
Regulatory powers prescribed by the Digital Services Tax Act do not permit a rate change for the first year of application, which distinguishes this situation from the end of the consumer carbon tax. Notably, taxpayers are not afforded the same level of clarity; since the law remains in effect until it is formally repealed, taxpayers are left in a state of legal uncertainty.
However, the retroactive digital services tax payable for the first year of application contains a rate prescribed by regulation—and, as such, may be modified in a similar manner to the fuel charge.
Since the decision was made with an eye on trade negotiations with the U.S., it is possible the federal government could change its position amid ongoing policy uncertainty.
The federal government introduces tax changes in different formats, but not all provide the same level of clarity for taxpayers.
Repealing or amending legislation provides taxpayers the highest level of confidence on their obligations. In contrast, announcing an intent to repeal legislation can create uncertainty, as the law remains technically enforceable until a regulation is adopted (if possible) or legislation is repealed or amended.
Looking ahead, it’s imperative for taxpayers to carefully evaluate how the government introduces future tax changes. Businesses and individuals should consider consulting advisors regarding the potential effects of any federal tax updates—whether introduced by legislation, regulation of other means.
Carney and the Liberal Party made several pledges during the campaign, including building off measures announced by the government in the 2024 fall economic statement.
As the current tax system is still undergoing significant changes due to new and previous government commitments, as well as international projects such as base erosion and profit shifting, it will be critical for middle-market taxpayers to monitor policies that could affect their bottom line.
