On April 16, 2024, Deputy Prime Minister and Minister of Finance, Chrystia Freeland, presented Budget 2024.
The budget increases the lifetime capital gains exemption, introduces a new Canadian Entrepreneurs’ Incentive, increases the capital gains inclusion rate, and aims to help Canadians buy their first home.
Here are the highlights of the 2024 budget.
Personal Tax Measures
Capital Gains Inclusion Rate (For Individuals and Corporations)
Budget 2024 proposes to increase the capital gains inclusion rate from ½ to ⅔ for corporations and trusts, and from ½ to ⅔ on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after June 25, 2024.
The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:
- current year capital losses;
- capital losses of other years applied to reduce current year capital gains; and
- capital gains in respect of which the Lifetime Capital Gains Exemption (LCGE), the proposed Employee Ownership Trust (EOT) Exemption or the proposed Canadian Entrepreneurs’ Incentive is claimed.
Net capital losses realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.
The annual $250,000 threshold for individuals would be fully available in 2024 (i.e., it would not be prorated) and would apply only in respect of net capital gains realized on or after June 25, 2024.
Lifetime Capital Gains Exemption
On the disposition of qualified small business corporation shares, Budget 2024 proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains.
This measure would apply to dispositions that occur on or after June 25, 2024. Indexation of the LCGE would resume in 2026.
Canadian Entrepreneurs’ Incentive
Budget 2024 proposes to introduce the Canadian Entrepreneurs’ Incentive. This incentive would reduce the tax rate on capital gains on the disposition of qualifying shares by an eligible individual. Specifically, this incentive would provide for a capital gains inclusion rate that is one half the prevailing inclusion rate, on up to $2 million in capital gains per individual over their lifetime.
The lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025, before ultimately reaching a value of $2 million by January 1, 2034.
Under the ⅔ capital gains inclusion rate proposed in Budget 2024, this measure would result in an inclusion rate of ⅓ for qualifying dispositions. This measure would apply in addition to any available capital gains exemption.
Qualifying shares must meet certain conditions, including all of the following:
- At the time of sale, it was a share of a small business corporation owned directly by the claimant.
- Throughout the 24-month period immediately before the disposition, it was a share of a Canadian-Controlled Private Corporation and more than 50 % of the fair market value of the assets of the corporation were:
- used principally in an active business carried on primary in Canada, or by a related corporation,
- certain shares or debts of connected corporations, or
- a combination of these two types of assets.
- The claimant was a founding investor at the time the corporation was initially capitalized and held the share for a minimum of 5 years prior to disposition.
- At all times since the initial share subscription until the time that is immediately before the sale of the shares, the claimant directly owned shares amounting to more than 10 % of the fair market value of the issued and outstanding capital stock of the corporation and 10 % of the voting rights.
- Throughout the 5-year period immediately before the disposition, the claimant must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business.
- The share does not represent a direct or indirect interest in a professional corporation, a corporation whose principal asset is the reputation or skill of one or more employees, or a corporation that carries on certain types of businesses including a business:
- operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector; or
- providing consulting or personal care services.
- The share must have been obtained for fair market value consideration.
Home Buyers’ Plan
Budget 2024 proposes to increase the withdrawal limit from $35,000 to $60,000.
This measure would apply to the 2024 and subsequent calendar years in respect of withdrawals made after April 16, 2024.
Budget 2024 proposes to temporarily defer the start of the 15-year repayment period by an additional three years for participants making a first withdrawal between January 1, 2022, and December 31, 2025. Accordingly, the 15-year repayment period would start the fifth year following the year in which a first withdrawal was made.
Alternative Minimum Tax
Budget 2024 proposes several amendments to the Alternative Minimum Tax (AMT) proposals. These amendments would:
- allow individuals to claim 80% (instead of the previously proposed 50%) of the Charitable Donation Tax Credit when calculating AMT;
- fully allow deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments;
- allow individuals to fully claim the federal logging tax credit under the AMT;
- fully exempt Employee Ownership Trusts from the AMT; and
- allow certain disallowed credits under the AMT to be eligible for the AMT carry-forward (i.e. the federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit).
These amendments would apply to taxation years that begin on or after January 1, 2024.
Employee Ownership Trusts
Budget 2024 provides further details on the proposed Employee Ownership Trust (EOT) rules, particularly the exemption of the first $10 million in capital gains realized on the sale of a business and proposed conditions.
The exemption will be available when the following conditions are met:
- Available to an individual on the sale of shares of a corporation that is not a professional corporation.
- The sale is a qualifying business transfer in which the trust acquiring the shares is not already an EOT or a similar trust with employee beneficiaries.
- The transferred shares must be exclusively owned by the individual claiming the exemption or a related person and over 50% of the fair market value of the corporation’s assets were used principally in an active business.
- At any time prior to the transfer, the individual (or their spouse or common-law partner) has been actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months.
- Immediately after the transfer, at least 90% of the beneficiaries of the EOT must be resident in Canada.
The total exemption cannot exceed $10 million.
This measure would apply to qualifying dispositions of shares that occur between January 1, 2024 and December 31, 2026.
Mineral Exploration Tax Credit
The government proposes to extend eligibility for the tax credit for one year, to flow-through share agreements entered into on or before March 31, 2025.
Business Tax Measures
Clean Electricity Investment Tax Credit
Budget 2024 announces the design and implementation details of the Clean Electricity investment tax credit. The 15% refundable tax credit rate for eligible investments in new equipment or refurbishments related to:
- Low-emitting electricity generation systems using energy from wind, solar, water, geothermal, waste biomass, nuclear, or natural gas with carbon capture and storage.
- Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries and pumped hydroelectric storage.
- Transmission of electricity between provinces and territories.
The tax credit would apply to property that is acquired and becomes available for use on or after April 16, 2024 for projects that did not begin construction before March 28, 2023. The credit would no longer be in effect after 2034.
Polymetallic Extraction and Processing
Budget 2023 proposed the Clean Technology Manufacturing investment tax credit, which would provide a refundable tax credit equal to 30% of the cost of investments in eligible property used all or substantially all for eligible activities.
Budget 2024 proposes adjustments to the Clean Technology Manufacturing investment tax credit to provide greater support and clarity to businesses engaged in these activities.
These changes would apply for property that is acquired and becomes available for use on or after January 1, 2024.
Electric Vehicle Supply Chain Investment Tax Credit
The government intends to introduce a new 10% tax credit on the cost of buildings used in key segments of the electric vehicle supply chain, for businesses that invest in Canada across three supply chain segments: electric vehicle assembly, electric vehicle battery production and cathode active material production.
This credit will apply to property that is acquired and becomes available for use on or after January 1, 2024. The credit would be reduced to 5% for 2033 and 2034, and it would no longer be in effect after 2034.
Canada Carbon Rebate for Small Businesses
The budget introduces a new Canada Carbon Rebate for Small Businesses in the form of an automatic refundable tax credit for eligible businesses.
The tax credit would be available to a Canadian-controlled private corporation that:
- For the 2019 – 2020 through 2023 – 2024 fuel charge years, files a tax return for its 2023 taxation year by July 15, 2024, and for future fuel charge years, files a tax return for a taxation year ending in the calendar year in which the fuel charge year begins, and
- Has no more than 499 employees throughout Canada in the calendar year in which the fuel charge year begins.
The tax credit amount for an eligible corporation for an applicable fuel charge year would be:
- Determined for each applicable province in which the eligible corporation had employees in the calendar year in which the fuel charge year begins, and
- Equal to the number of persons employed by the eligible corporation in the province in that calendar year multiplied by a payment rate specified by the Minister of Finance for the province for the corresponding fuel charge year.
The CRA will automatically determine and pay the tax credit amount to eligible corporations.
Accelerated Capital Cost Allowance
Purpose-Built Rental Housing
Budget 2024 proposes to provide an accelerated Capital Cost Allowance (CCA) of 10% for new eligible purpose-built rental projects that begin construction on or after April 16, 2024 and before January 1, 2031, and are available for use before January 1, 2036.
Eligible property would be new purpose-built rental housing that is a residential complex:
- with at least 4 private apartment units (i.e., a unit with a private kitchen, bathroom, and living areas), or 10 private rooms or suites; and
- in which at least 90% of residential units are held for long-term rental.
Investments eligible for this measure would continue to benefit from the Accelerated Investment Incentive, which currently suspends the half-year rule, providing a CCA deduction at the full rate for eligible property put in use before 2028. After 2027, the half-year rule would apply.
Productivity-Enhancing Assets
Budget 2024 proposes to provide immediate expensing for new additions of property in respect to the following 3 classes, if the property is acquired on or after April 16, 2024 and becomes available for use before January 1, 2027:
- Class 44 (patents or the rights to use patented information for a limited or unlimited period),
- Class 46 (data network infrastructure equipment and related systems software), and
- Class 50 (general-purpose electronic data-processing equipment and systems software).
The enhanced allowance would provide a 100% first-year deduction and would be available only for the year in which the property becomes available for use.
Property that becomes available for use after 2026 and before 2028 would continue to benefit from the Accelerated Investment Incentive.
Property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer would be eligible for the accelerated CCA only if both of the following conditions are met:
- neither the taxpayer nor a non-arm’s-length person previously owned the property; and
- the property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.
Interest Deductibility Limits – Purpose-Built Rental Housing
The excessive interest and financing expenses limitation (EIFEL) rules provide an exemption for interest and financing expenses incurred in respect of arm’s length financing for certain public-private partnership infrastructure projects.
Budget 2024 proposes expanding this exemption to also include an elective exemption for certain interest and financing expenses incurred before January 1, 2036, in respect of arm’s length financing used to build or acquire eligible purpose-built rental housing in Canada.
Consistent with the proposed Accelerated Capital Cost Allowance for Purpose-Built Rental Housing, eligible purpose-built rental housing would be a residential complex:
- with at least 4 private apartment units (i.e., a unit with a private kitchen, bathroom, and living areas), or 10 private rooms or suites; and
- in which at least 90% of residential units are held for long-term rental.
This change would apply to taxation years that begin on or after October 1, 2023.
Non-Compliance with Information Requests
Budget 2024 proposes several amendments to the information gathering provisions in the ITA.
Notice of Non-Compliance
Budget 2024 proposes to allow the CRA to issue a new type of notice (referred to as a “notice of non-compliance”) to a person that has not complied with a requirement or notice to provide assistance or information issued by the CRA.
Where a notice of non-compliance related to a taxpayer has been issued to the taxpayer or a person that does not deal at arm’s length with the taxpayer, the normal reassessment period for any taxation year of the taxpayer to which the notice of non-compliance relates would be extended by the period of time the notice of non-compliance is outstanding.
Budget 2024 proposes to impose a penalty on a person that has been issued a notice of non-compliance of $50 for each day that the notice is outstanding, to a maximum of $25,000. This penalty would not apply if a notice of non-compliance is ultimately vacated by the CRA or a court.
Questioning Under Oath
Budget 2024 proposes to allow the CRA to include in a requirement or notice that any required information (oral or written) or documents be provided under oath or affirmation.
Compliance Orders
Currently, the CRA can obtain a compliance order from a court that directs a non-compliant taxpayer to comply with the CRA’s information requests.
Budget 2024 proposes to impose a penalty when the CRA obtains a compliance order against a taxpayer. The penalty would be equal to 10% of the aggregate tax payable by the taxpayer in respect of the taxation year or years to which the compliance order relates. It would only be applied if the tax owing in respect of one of the taxation years to which the compliance order relates exceeds $50,000.
Budget 2024 further proposes to allow the CRA to seek a compliance order when a person has failed to comply with a requirement to provide foreign-based information or documents.
Stopping the Reassessment Limitation Clock
Under existing rules, a taxpayer may seek judicial review of a requirement or notice issued to the taxpayer by the CRA. In these circumstances, the reassessment period is extended by the amount of time it takes to dispose of the judicial review. An analogous rule applies in respect of a compliance order.
Budget 2024 proposes to amend the stop the clock rules to provide that they apply when a taxpayer seeks judicial review of any requirement or notice issued to the taxpayer by the CRA in relation to the audit and enforcement process or during any period that a notice of non-compliance is outstanding. Analogous rules would apply where a requirement or notice has been issued to a person that does not deal at arm’s length with the taxpayer.
Avoidance of Tax Debts
The ITA includes an anti-avoidance rule that is intended to prevent taxpayers from avoiding paying their tax liabilities by transferring their assets to non-arm’s length persons.
Budget 2024 proposes to introduce a supplementary rule to strengthen the tax debt anti-avoidance rule. This rule would apply in the following circumstances:
- there has been a transfer of property from a tax debtor to another person;
- as part of the same transaction or series of transactions, there has been a separate transfer of property from a person other than the tax debtor to a transferee that does not deal at arm’s length with the tax debtor; and
- one of the purposes of the transaction or series is to avoid joint and several, or solidary, liability.
Where these conditions are met, the property transferred by the tax debtor would be deemed to have been transferred to the transferee for the purposes of the tax debt avoidance rule. This would ensure that the tax debt avoidance rule applies in situations where property has been transferred from a tax debtor to a person and, as part of the same transaction or series, property has been received by a non-arm’s length person.
Penalty
The ITA contains a penalty for those who engage in, participate in, assent to, or acquiesce in planning activity that they know, or would reasonably be expected to know, is tax debt avoidance planning. The penalty is equal to the lesser of:
- 50% of the tax that is attempted to be avoided; and
- $100,000 plus any amount the person, or a related person, is entitled to receive or obtain in respect of the planning activity.
Budget 2024 proposes to extend this penalty to tax debt avoidance planning that is subject to the proposed supplementary rule.
Expanded Joint and Several, or Solidary, Liability
Budget 2024 proposes that taxpayers who participate in tax debt avoidance planning be jointly and severally, or solidarily, liable for the full amount of the avoided tax debt, including any portion that has effectively been retained by the planner.
These measures would apply to transactions or series of transactions that occur on or after April 16, 2024.
Manipulation of Bankrupt Status
The ITA contains a set of debt forgiveness rules that apply where a commercial debt is settled for less than its principal amount. The Act also contains a rule that entitles an insolvent corporation to a corresponding deduction to offset all or part of an income inclusion from the debt forgiveness rules.
Bankrupt taxpayers are generally excluded from these debt forgiveness rules. Instead, a separate loss restriction rule applies to extinguish the losses of bankrupt corporations that have received an absolute order of discharge.
Budget 2024 proposes to repeal the exception to the debt forgiveness rules for bankrupt corporations and the loss restriction rule applicable to bankrupt corporations. This change would subject bankrupt corporations to the general rules that apply to other corporations whose commercial debts are forgiven. The bankruptcy exception to the debt forgiveness rules would remain in place for individuals. While bankrupt corporations would be subject to the reduction of their loss carryforward balances and other tax attributes upon debt forgiveness, as insolvent corporations they could qualify for relief from the debt forgiveness income inclusion rule provided under the existing deduction for insolvent corporations.
These proposals would apply to bankruptcy proceedings that are commenced on or after April 16, 2024.
International Tax Measures
Withholding for Non-Resident Service Providers
Budget 2024 proposes to provide the CRA with the legislative authority to waive the withholding requirement, over a specified period, for payments to a non-resident service provider if either of the following conditions are met:
- the non-resident would not be subject to Canadian income tax in respect of the payments because of a tax treaty between its country of residence and Canada; or
- the income from providing the services is exempt income from international shipping or from operating an aircraft in international traffic.
This proposal would allow the CRA to waive the withholding requirement on multiple transactions with a single waiver, subject to any conditions and information requirements necessary to reduce compliance risks.
This measure would come into force on royal assent of the enacting legislation.