Retroactive tax changes? don’t rule them out

Should tax laws ever be made retroactive?

your answer to this question may be heavily influenced by whether you are part of the middle class, who hope that newly elected Prime minister Justin Trudeau’s planned middle-income tax cuts will be retroactive to 2015; or the one per cent, who, faced with a four-per-cent tax hike on income over $200,000, hope that such a change will be prospective and only effective starting next year.

Other Liberal pre-election tax promises for which timing could be a factor include: dropping the annual TfSA dollar limit back down to $5,500 from $10,000, imposing a $100,000 annual limitation on stock option gains eligible for the 50-percent stock option deduction.

With Parliament set to resume on dec. 3, we know one of the Liberals’ first orders of business will be to legislate the announced tax bracket changes. The question many are asking is whether such changes could be retroactive to 2015.

In most cases, tax legislation is not retroactive and is generally effective as of the announcement date. The main reason for this is fairness: Taxpayers want certainty as to the tax laws, how they will be applied and when. Nonetheless, there have been situations when governments have passed retroactive legislation, the legality of which has been unsuccessfully challenged in court on various occasions. Indeed, a decade ago, the Supreme Court of Canada concluded that “retrospectivity and retroactivity do not generally engage constitutional concerns” and that “there is no requirement of legislative prospectivity embodied in the rule of law or in any provision of our Constitution.”

In recent years, the provinces have taken different approaches with respect to retroactive tax changes. In September 2012, the Quebec government proposed to increase the provincial tax rate for taxable incomes over $130,000, retroactive to Jan. 1, 2012. There was huge opposition to such a change and the government subsequently backed down from making the hike retroactive.

In July 2014, however, Ontario’s Liberal government lowered the taxable income threshold for the province’s highest-income earners from $514,090 to $220,000 and added a second high-income bracket for taxable incomes between $150,000 and $220,000, both changes retroactive to Jan. 1, 2014.

Contrast this with Premier rachel Notley’s recent approach in Alberta. She campaigned on a promise of higher taxes for Albertans, won the election on may 5, 2015 and had new tax hikes for Albertans passed into law by the end of June. The new Alberta rates came into effect Oct. 1, 2015, resulting in prorated rates in Alberta for 2015 and the full, higher tax rates kicking in on Jan. 1, 2016.

In a 2013 paper discussing retroactive tax legislation, law professors Catherine brown of the university of Calgary and Arthur Cockfield of Queen’s university stated that the “main rationale for opposing retroactive laws (is) that they change the rules of the game after the game has been played.”

The authors quote an 1880 paper by William Pratt Wade describing the offensiveness of retroactive legislation, in which he wrote: “So repugnant is such a system of legislation to our natural sense of justice, that it has been stigmatized as more unreasonable than that adopted by Caligula, who was said to have written his laws in a very small character and hung them upon high pillars, the more effectually to ensnare the people.”