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Budget

Our Summary of the 2024-2025 Federal Budget

A Fair Chance for Every Generation

On April 16, 2024, the Government of Canada tabled the federal budget for the year 2024 in Ottawa. In this period of economic uncertainty, the middle class is at the forefront: the proposed measures take into account the housing crisis and therefore propose the construction of more affordable housing. The aim is to give the younger generation a chance to succeed, by reducing the cost of living in a variety of ways.

Investments to Turn your Ideas into Reality

Increased investment to encourage the kind of innovation that can create more jobs will also give many entrepreneurs a chance to obtain the resources they need to turn their ideas into reality.

Our tax experts have identified the major factors that could affect your business.

A fair chance to build a good life in the middle class – to do as well as your parents, if not better – that’s Canada’s promise.

– The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance

Demers Beaulne presents its complete budget summary.

MEASURES AFFECTING COMPANIES

Currently, 50% of a taxpayer’s capital gain is included in income. It is proposed to increase this inclusion rate to 66 2/3% for corporations and trusts. For individuals, this inclusion rate applies to the portion of earnings for the year exceeding a threshold of $250,000.

Calculating the $250,000 threshold

The $250,000 threshold available to individuals is calculated on the gain resulting from the deduction of these items:

  • current year capital losses and other years applied to reduce current year gains;
  • capital gains for which certain reliefs are claimed. These include the lifetime capital gains exemption, the tax exemption for collective trusts, and the incentive for Canadian entrepreneurs proposed in this budget.

The capital gain inclusion below the $250,000 threshold remains at 50%. Note that the $250,000 threshold will not be pro-rated in 2024 and will be available entirely to individuals.

Capital losses incurred before change in inclusion rate

Capital losses incurred prior to the effective date of the measure will be adjusted to reflect the inclusion rate of capital gains offset by these losses. This allows a loss to fully offset the equivalent gain.

Effective Date

The measure to change the capital gain inclusion rate to 66 ⅔% affects capital gains realized on or after June 25, 2024. The budget specifies that further details will be communicated in the coming months.

For taxation years that begin before June 25, 2024, but end after that date, the tax year will be split into two periods, period 1 and period 2, to identify capital gains and losses realized before the effective date and those realized after that date.

The capital cost allowance (CCA) system is used to determine the deductions a company can claim each year for income tax purposes on the capital cost of its depreciable assets.

Dwellings built specifically for rental

Currently, buildings built for residential rental are eligible for a 4% CCA rate under Category 1. Budget 2024 proposes to grant an accelerated CCA rate of 10% to new residential rental projects.

Eligible Assets

Eligible goods are:

  • New buildings built expressly for residential rental purposes whose construction begins after April 15, 2024 and before January 1, 2031, and which are ready for commissioning before January 1, 2036;
    • with at least four (4) private apartments or at least ten (10) private rooms or suites;
    • where at least 90% of the units are held for long-term rental (this term may be specified).

Projects to convert an existing non-residential building, such as an office building, into a residential building are eligible if the above conditions are met. The accelerated CCA does not apply to renovations of existing residential buildings. However, the cost of a new addition to an existing structure is eligible, provided it meets the above conditions.

In addition, a building that qualifies as eligible property, but also has a commercial rental portion, will be eligible for accelerated depreciation on the fair market value of the portion of the building attributable to the residential portion.

Interaction with the accelerated investment incentive

Eligible investments for this measure continue to benefit from current incentives, including the suspension of the half-year rule, granting CCA at the full rate for eligible assets placed in service before 2028.

For buildings commissioned after 2027, the half-year rule applies. This means that in the first year, the amortization rate will be 5% rather than 10%.

Productivity-enhancing assets

Currently, these categories have a prescribed rate of:

The 2024 budget proposes to provide for immediate expensing of new assets in these three categories, if the asset is acquired on or after budget day and becomes ready for service before January 1, 2027. Immediate expensing grants a 100% deduction for the first year, and is only available for the year in which the asset becomes ready for use.

Restrictions

Used goods in these categories are eligible for accelerated CCA only if the following two conditions are met:

  • neither the taxpayer nor a person not dealing at arm’s length with the taxpayer previously owned the property;
  • the property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.

Employee group trusts (EGTs) offer business owners an additional option for succession planning and business transfer. To meet the definition of an ECT, a trust must be resident in Canada, and all or substantially all of the assets it holds must be shares of eligible businesses for the benefit of employee beneficiaries of the trust.

The Fall 2023 Economic Statement proposed to exempt from tax the first $10,000,000 in capital gains realized on the sale of a business to a CFE. The 2024 budget specifies the conditions for this exemption.

Eligibility Requirements

If several individuals dispose of shares to a CFC as part of a qualifying transfer of business and the above conditions are met, they may each claim the exemption, but the total exemption may not exceed $10,000,000. The individuals will have to agree on how to allocate the exemption.

Disqualification Events

The exemption would not be available if either of the following two disqualification events occurs:

  • FCE loses its FCE status;
  • Less than 50% of the fair market value of the shares of the qualifying business are attributable to assets that are used principally in an active business at the beginning of the two taxation years following the transfer.

If the disqualification event occurs more than 36 months after a qualifying transfer of business, the CFF, not the individual, would be deemed to have realized a capital gain equivalent to the amount of the exempt capital gain.

Alternative Minimum Tax

Capital gains covered by the ten-million exemption would be subject to a 30% inclusion rate for alternative minimum tax (AMT) purposes. It is therefore possible that even though an individual benefits from the exemption, he or she will still have to pay AMT in the year of disposition. Nevertheless, the AMT is a tax that can be refunded within seven years.

Administration

In order to claim the exemption, the CFF (and any corporation owned by the CFF) and the individual will have to elect to be jointly and severally liable for payment of the tax payable in the event of a disqualification event within 36 months of a qualifying transfer.

An individual’s normal reassessment period for a taxation year in respect of this exemption would also be extended by 3 years, to 6 years.

Workers’ cooperatives

The 2024 budget proposes to expand eligible transfers of business to include the sale of shares to a worker cooperative corporation. An exemption could therefore be claimed and the qualifying transfer of business would qualify for the 10-year capital gains reserve and the 15-year exception to the shareholder loan rule and deemed interest benefit rule announced in the 2023 budget.

Effective Date

This measure would apply to qualifying dispositions of shares made between January 1, 2024 and December 31, 2026.

The Excessive Interest and Financing Expense Limitation Rules (EIFELR) provide a mechanism to limit a taxpayer’s interest deduction. The RDEIF includes an exemption for interest and financing expenses incurred in connection with arm’s-length financing of certain Canadian public-private partnership infrastructure projects.

The 2024 budget proposes to expand this exemption to include an optional exemption for certain interest and financing expenses incurred before January 1, 2036 in respect of arm’s-length financing used to construct or acquire eligible housing built specifically for rental in Canada.

Eligible dwellings are defined as apartment buildings built for residential rental with the following characteristics:

  • with at least four (4) private apartments or ten (10) private rooms or suites;
  • with at least 90% of units held for long-term rental (this term may be specified).

This change applies to tax years beginning on or after October 1, 2023 (i.e., in accordance with the more far-reaching changes to the RDEIF rules).

MEASURES AFFECTING INDIVIDUALS

The lifetime capital gains exemption on the disposition of qualified small business corporation shares and qualified farm or fishing property is $1,016,836 in 2024.

Qualified small business corporation shares are shares that meet certain criteria, notably that the assets be used primarily in the active operation of the business during the 24 months preceding the disposition, and that the assets be used all or substantially all in the active operation of the business at the time of disposition.

For dispositions taking place on or after June 25, 2024, the exemption will be increased to $1,250,000. This amount will be indexed from 2026.

A reduction in the tax rate on capital gains resulting from the disposition of eligible shares is announced for Canadian entrepreneurs.

The Canadian entrepreneurs’ incentive is a measure that allows entrepreneurs to benefit from a one-third inclusion rate (rather than the two-thirds inclusion rate) on capital gains on the disposition of eligible shares, in addition to any available capital gains exemption.

Several criteria must be met at different times to qualify shares as eligible, including the following:

This measure comes into effect on January1, 2025, and the cumulative ceiling will increase progressively, starting at $200,000, up to a lifetime maximum of $2,000,000.

Several changes to the Alternative Minimum Tax (AMT) calculation were proposed in the 2023 federal budget, and additional changes are announced in the 2024 budget.

The changes ensure, among other things, that:

  • Allow individuals to claim 80% of the charitable tax credit instead of 50%;
  • Allow deductions for Guaranteed Income Supplement payments, deductions for social assistance benefits and deductions for workers’ compensation;
  • Exempt AMT employee group trusts;
  • Allow certain credits disallowed under the AMT to be eligible for AMT carry-forward, namely the labour-sponsored funds tax credit, the political contribution credit and the investment tax credit;
  • Propose an exemption for certain trusts benefiting aboriginal groups.

It should be noted that these changes would apply at the same time as the first changes to the calculation of the IMR, i.e. from January1, 2024.

The Home Buyers’ Plan (HBP) helps eligible buyers save for a down payment by allowing them to withdraw up to $35,000 from a Registered Retirement Savings Plan (RRSP) for the purchase or construction of a first home, without having to pay income tax on the funds withdrawn.

Amounts withdrawn under the HBP must be repaid to an RRSP over a maximum period of 15 years, beginning in the second year following the year in which the first withdrawal was made. If the amounts are not repaid in a particular year, they must be declared as taxable income.

The 2024 budget proposes two changes to the RAP:

  • Withdrawal limit increased from $35,000 to $60,000;
  • Deferral of the start of the 15-year repayment period by an additional three (3) years for participants making a withdrawal between January1, 2022 and December 31, 2025.

These changes take effect from April 16, 2024.

The Canada Child Tax Benefit (CCTB) is a monthly benefit to support eligible families with a child under age 18.

In the event of the child’s death

To date, the monthly benefit becomes ineligible for the child’s caregiver in the month following the child’s death. It is proposed to amend the Income Tax Act to extend the payment of benefits to six (6) months following death.

Please note that this extension also affects disabled children’s benefits paid with ACE for a child eligible for the disability tax credit.

The measure is due to come into force for deaths occurring on or after January1, 2025.

Disabled people can deduct the cost of certain products and services on their tax return, enabling them to:

  • earn business or employment income; or
  • to attend school.

These expenses include, among others, the cost of accessibility devices (Braille note-taking and speech synthesizers), as well as the cost of auxiliary care or tutoring.

For an expense to be eligible, it must be specified in the Income Tax Act, and the individual must have a written prescription from a physician.

Eligible Expenses

The 2024 budget proposes to add eligible expenses to the deduction. Among the additions is a special one:

Expenses for service animals have been added to expenses. The individual can choose whether to deduct this expense under the deduction or include it in the calculation of the medical expense tax credit.

This expansion will apply to the 2024 and subsequent tax years.

OTHER PROPOSED MEASURES

The Income Tax Act currently provides an anti-avoidance rule to prevent taxpayers from avoiding their tax obligations by transferring assets to non-arm’s length parties. Under this rule, the transferee is jointly and severally liable for the transferor’s tax liability.

A scheme to transfer property from a taxpayer to a non-arm’s length person with the complicity of a third party is included in this rule.

Joint and several liability would also be extended to fees paid to the planner who implemented the tax avoidance strategy.

In addition to joint and several liability, penalties will apply to participating taxpayers. These tax avoidance penalties are equal to the lesser of the following amounts:

  • 50% of the tax avoided;
  • 100,000 in addition to any amount the related person is entitled to receive under the plan.

Transactions or series of transactions carried out on or after the budget date must include these changes.

The Income Tax Act provides a set of rules for the forgiveness of debts where a trade debt is settled for less than the principal amount of the debt. The effect of these rules is to reduce losses and the cost of other tax attributes by the amount of debt forgiven. If the forgiven debt exceeds the cost of the tax attributes, the excess is included in income as if it were a capital gain, i.e. at 50%.

These debt forgiveness rules do not apply to bankrupt companies. Some taxpayers have therefore manipulated the bankruptcy status of insolvent companies in order to benefit from this exception and avoid the debt forgiveness rules. This approach enables them to retain the losses and other tax attributes of the insolvent company, while settling debts for less than the principal amount of the debt.

Repeal the exception to debt forgiveness

Bankrupt companies would therefore be subject to debt forgiveness rules. Relief may be available for the income inclusion rule for debt forgiven under existing deductions for insolvent corporations.

These proposals would apply to bankruptcy proceedings commenced on or after budget day.

From the point of view of the Department of Finance, limiting the existing information-gathering powers of the Canada Revenue Agency (CRA) under the Income Tax Act undermines the effectiveness of its compliance and enforcement measures.

Budget 2024 proposes several changes to the information gathering provisions of the Income Tax Act. The proposed amendments are designed to improve the efficiency and effectiveness of tax audits and facilitate the timely collection of tax revenues.

The changes include the following:

ENTRY INTO FORCE

These amendments would come into force on the date of Royal Assent of the implementing legislation.

INTERNATIONAL TAX MEASURES

Budget 2024 proposes to implement a new framework (called the “Cryptoasset Reporting Framework” or CRF) in Canada. The measure would impose a new annual reporting obligation on entities and individuals (known as crypto-asset service providers) who reside or operate a business in Canada, and who provide operational services in the form of crypto-asset exchange transactions.

Crypto asset service providers would be required to report to the CRA in respect of each customer and each crypto asset, the annual value of the following:

  • exchanges between crypto-assets and fiat currencies;
  • exchanges for other crypto-assets;
  • crypto-asset transfers, including the obligation to report information relating to a merchant’s customer where the crypto-asset service provider processes payments on behalf of the merchant and the customer has transferred crypto-assets to the merchant in exchange for goods or services valued in excess of US$50,000.

In addition to crypto asset transaction information, crypto asset service providers will be required to obtain and report information on each of their customers, including name, address, date of birth, jurisdiction(s) of residence and taxpayer identification numbers for each jurisdiction of residence. Reporting is mandatory for both Canadian resident and non-resident customers.

ENTRY INTO FORCE

These measures apply to calendar years 2026 and beyond. This allows the first declaration and exchange of information under the CDA to take place in 2027 for the calendar year 2026.

Under current tax rules, a person who pays amounts to a non-resident for services rendered in Canada must withhold 15% of the payment and remit it to the CRA. The budget proposes to give the CRA the legislative authority to waive the withholding obligation, over a specified period, for payments to a non-resident service provider if one of the following conditions is met:

  • the non-resident would not be subject to Canadian income tax on the payments due to a tax treaty between his or her country of residence and Canada;
  • income from the provision of services represents exempt income from international shipping or the operation of an aircraft in international transport.

This measure comes into force on the date of Royal Assent of the enabling legislation.

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