2024 Federal Budget Highlights

On April 16, 2024, Finance Minister Chrystia Freeland tabled the Government’s 2024 Federal Budget. Read below for a summary of key tax changes:

Capital Gains Inclusion Rate

Effective for capital gains realized on or after June 25, 2024, Budget 2024 proposes to increase the capital gains inclusion rate from 50% to two-thirds for corporations and trusts, and from 50% to two-thirds on the portion of capital gains realized, net of any capital losses or capital gains exemptions applied, in the year that exceeds $250,000 for individuals. It is currently unclear whether capital gains realized in prior years, with reserves being recognized after June 25, 2024 would be subject to the new inclusion rate.

For the 2024 transition year, the $250,000 threshold for individuals will not be prorated. That is, the two-thirds inclusion rate will only apply to the net capital gains realized between June 24 to December 31, 2024 that exceeds the full $250,000 threshold.

Capital losses realized in prior years will be adjusted for the new inclusion rate and would continue to be deductible against capital gains in the current year at the same rate and should fully offset an equivalent capital gain realized after the rate change.

A claimant of the employee stock option deduction will obtain a one-third deduction of the related taxable benefit but will be entitled to a deduction of 50% of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

Personal Income Tax Measures

Lifetime Capital Gains Exemption (LCGE)

The LCGE available to individuals who dispose of qualified small business corporation shares and qualified farm or fishing property is $1,016,836 in 2024 and is indexed to inflation. Budget 2024 proposes to increase the LCGE to a maximum of $1,250,000 of eligible capital gains, with indexation of the LCGE resuming in 2026. This change will apply to dispositions that occur on or after June 25, 2024.

Canadian Entrepreneurs’ Incentive

Budget 2024 proposes to introduce a new Canadian Entrepreneurs’ Incentive that applies a capital gains inclusion rate of 50% of the prevailing inclusion rate (i.e., one-third) on the disposition of qualifying shares by an eligible individual. This incentive will be subject to a lifetime limit of up to $2 million and will be phased in by increments of $200,000 per year beginning on January 1, 2025. The lifetime limit will be fully phased in by January 1, 2034.

A qualifying share is a share of a corporation that meets all of the following conditions:

  • At the time of sale, it was a share of the capital stock of a small business corporation owned directly by the claimant;
  • Throughout the 24-month period immediately before the sale, it was a share of a Canadian-Controlled Private Corporation (CCPC) and more than 50% of the fair market value of the assets of the corporation were:
    • used principally in an active business carried on primarily in Canada by the CCPC or 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 when the corporation was originally capitalized and held the shares for a minimum of five years prior to sale;
  • From the initial share subscription until the time that is immediately before the sale of shares, the claimant directly owned more than 10% votes and value of the corporation;
  • The claimant must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business throughout the five-year period immediately prior to the sale of shares;
  • The share does not represent an interest in a professional corporation, a corporation whose principal asset is the reputation or skill of one more employees, or a corporation operating in the consulting, personal care, financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector; and
  • The share must have been obtained for fair market value consideration.

Alternative Minimum Tax (AMT)

Draft legislative proposals to implement changes to the AMT were published for consultation in August of 2023. Budget 2024 proposes to make further changes to the AMT that includes, amongst other changes, allowing individuals to claim 80% of the Charitable Donation Tax Credit, instead of the previously proposed 50%, and fully exempting Employee Ownership Trusts from the AMT.

Budget 2024 further proposes to exempt certain Indigenous settlement and community trusts from the AMT and invites stakeholders to provide their views on these proposed exemptions to the Department of Finance Tax Policy Branch by June 28, 2024.

Employee Ownership Trust (EOT) Tax Exemption

Budget 2024 provides the conditions required to be satisfied for an individual taxpayer to claim the tax exemption on up to $10 million of capital gains realized on the sale of a business to an EOT. These conditions include the following:

  • The shares subject to disposition are not shares of a professional corporation;
  • The transaction is a qualifying business transfer, as defined in the proposed rules for EOTs, in which the trust acquiring the shares is not already an EOT or a similar trust with employee beneficiaries;
  • Throughout the 24-month period immediately prior to the qualifying business transfer, the transferred shares were exclusively owned by the individual claiming the exemption, a related person, or a partnership in which the individual is a member, and over 50% of the fair market value of the corporation’s assets were used principally in an active business;
  • The individual was actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months at any time prior to the qualifying business transfer; and
  • Immediately after the qualifying business transfer, at least 90% of the beneficiaries of the EOT must be residents in Canada.

The Budget clarifies that if multiple individuals dispose of shares to an EOT as part of a qualifying business transfer, they each may claim the exemption; however, the total exemption in respect of the qualifying business transfer cannot exceed more than $10 million, so the individuals would be required to agree on how to allocate the exemption.

If a disqualifying event occurs within 36 months of the qualifying business transfer, an exemption would not be available and would be retroactively denied.  A disqualifying event would occur if an EOT loses its status as an EOT or if less than 50% of the fair market value of the qualifying business’ shares is attributable to assets used principally in an active business at the beginning of two consecutive tax years of the corporation. If a disqualifying event occurs more than 36 months after a qualifying business transfer, the EOT would be deemed to realize a capital gain equal to the total amount of exempt capital gains.

For an individual to claim an exemption on the sale to an EOT, the individual, the EOT, and any corporation owned by the EOT that acquired the transferred shares, would need to elect to be jointly and severally, or solidarily, liable for any tax payable by the individual as a result of the exemption being denied due to a disqualifying event within the first 36 months after a qualifying business transfer.

The normal reassessment period of an individual for a tax year in respect of the exemption is proposed to be extended by three years.

For AMT purposes, capital gains exempted under this measure will be subject to a 30% inclusion rate.

The Budget proposes to expand qualifying business transfers to include the sale of shares to a worker cooperative corporation. Additional details in respect of this will be released in the coming months.

This measure applies to qualifying dispositions of shares occurring between January 1, 2024 and December 31, 2026.

Home Buyer’s Plan (HBP)

Budget 2024 proposes to increase the withdrawal limit under the HBP from $35,000 to $60,000. The increase would also apply to withdrawals made for the benefit of a disabled individual. This measure would apply to the 2024 and subsequent calendar years in respect of withdrawals made after Budget Day.

The Budget proposes to temporarily defer the start of the 15-year repayment period by an additional three years to the fifth year following the year of first withdrawal for participants making a first withdrawal between January 1, 2022 and December 31, 2025.

Canada Child Benefit (CCB)

A CCB recipient becomes ineligible for the CCB in respect of a child the month following the child’s death. Budget 2024 proposes to extend the eligibility for the CCB in respect of a child for six months following the child’s death if the individual would have otherwise been eligible for the CCB in respect of that child. The extended period would also apply to the Child Disability Benefit that is paid with the CCB in respect of a child eligible for the Disability Tax Credit.

This measure would be effective for deaths that occur after 2024.

Mineral Exploration Tax Credit

The Budget proposes to extend the eligibility for the Mineral Exploration Tax Credit for one year, to flow-through share agreements entered into on or before March 31, 2025 (rather than March 31, 2024).

Charities and Qualified Donees

The Budget proposes to extend the period for which qualifying foreign charities are granted status as a qualified donee from 24 months to 36 months. This measure would apply to foreign charities registered after Budget Day.

Disability Supports Deduction

The Budget proposes to expand the list of expenses recognized under the Disability Supports Deduction, subject to specified conditions, and further proposes that expenses for service animals be recognized. Taxpayers would be able to choose to claim an expense under the Medical Expense Tax Credit or the Disability Supports Deduction. This measure would apply to the 2024 and subsequent tax years.

Volunteer Firefighters and Search and Rescue Volunteer Tax Credits

Budget 2024 proposes to double the credit amount for the Volunteer Firefighters Tax Credit and the Search and Rescue Volunteers Tax Credit to $6,000. This would increase the maximum tax relief to $900. This enhancement applies to the 2024 and subsequent tax years.

Indigenous Child and Family Services Settlement

Budget 2024 proposes to exclude the income of the trusts established under the First Nations Child and Family Services, Jordan’s Principle, and Trout Class Settlement Agreement from taxation to ensure that payments received by class members as beneficiaries of the trusts would not be included in computing income for federal income tax purposes.

This measure would apply to the 2024 and subsequent taxation years.

Business Income Tax Measures

Interest Deductibility Limits – Purpose Built Rental Housing

The currently proposed excessive interest and financing expenses limitation (EIFEL) rules limit the deductibility of net interest and financing expenses by certain taxpayers. Budget 2024 proposes to provide 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.

Eligible purpose-built rental housing would be a residential complex:

  • With at least four private apartment units (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, being the effective date of the broader EIFEL amendments.

Accelerated Capital Cost Allowance (CCA)

Purpose-Built Rental Housing

Budget 2024 proposes to provide an accelerated CCA rate of 10% (currently 4%) for new eligible purpose-built rental projects (as defined under Interest Deductibility Limits above) that begin construction on or after Budget Day and before January 1, 2031, and are available for use before January 1, 2036.

Projects that convert existing non-residential real estate (i.e., office building) into a residential complex or the cost of a new addition to an existing structure would be eligible, provided the conditions for purpose-built rental housing are met. However, the accelerated CCA would not apply to renovations of existing residential complexes.

Eligible property that is put in use before 2028 would continue to benefit from the Accelerated Investment Incentive, which suspends the half-year rule.

Productivity-Enhancing Assets

Budget 2024 proposes to provide immediate expensing for new additions of property in respect of productivity-enhancing assets acquired on or after Budget Day and that become available for use before January 1, 2027. The accelerated CCA would provide 100% deduction for the year in which properties in the following CCA classes become available for use:

  • Class 44 – patents or rights to use patented information (currently 25%);
  • Class 46 – data network infrastructure equipment and related systems software (currently 30%); and
  • Class 50 – general-purpose electronic data-processing equipment and systems software (currently 55%).

Property that becomes available for use after 2026 and before 2028 will 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 will 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.

The accelerated CCA will be prorated for short taxation years and would not be available in the following taxation year.

Canada Carbon Rebate for Small Businesses

Budget 2024 proposes to provide an automatic refundable tax credit directly to eligible businesses as a return of a portion of provincial fuel charge proceeds.

With respect to the 2019-20 to 2023-24 fuel charge years, the tax credit will be available to a CCPC that:

  • Files a tax return for its 2023 taxation year by July 15, 2024; and
  • Employs less than 500 employees throughout Canada in the calendar year in which the fuel charge year begins (i.e., less than 500 employees in 2022 for the 2022-23 fuel charge year).

The CRA will automatically determine and pay the tax credit amount to an eligible corporation, no application is required. The tax credit will be determined based on the number of persons employed by the eligible corporation in a province in that calendar year, multiplied by the payment rate determined by the Minister of Finance for the province for the fuel charge year. The Minister will specify payment rates for the 2019-20 to 2023-24 fuel charge years once sufficient information is available from the 2023 taxation year.

Clean Electricity Investment Tax Credit (CEITC)

Budget 2024 provides implementation details of previously announced CEITC, which provides a 15% tax credit on the capital cost of eligible property.  The CEITC applies to eligible property acquired and becomes available for use on or after Budget Day and before 2035, provided it is not part of a project that began construction before March 28, 2023.

The CEITC will be available to Eligible Corporations, including:

  • Taxable Canadian corporations;
  • Pension investment corporations;
  • Corporations owned by Indigenous communities;
  • Certain Crown corporations; and
  • Corporations owned by municipalities.

Corporations with any immunity or exemption from tax will be required to agree to be subject to the provisions of the Income Tax Act related to the tax credit, including provisions related to audit, penalties and collections.  Corporate partners will be allowed to claim their share of the partnership’s CEITC.

Eligible property includes the following equipment (and costs to refurbish existing facilities):

  • Equipment used to generate electricity from solar, wind, or water energy;
  • Concentrated solar energy equipment;
  • Equipment used to generate electricity, or both electricity and heat, from nuclear fission;
  • Equipment used for generating electricity, or both electricity and heat, solely from geothermal energy;
  • Equipment that is part of a system used to generate electricity, or both electricity and heat, from specified waste materials;
  • Stationary electricity storage equipment, excluding equipment that uses any fossil fuel;
  • Equipment that is part of an eligible natural gas energy system; and
  • Equipment and structures used for the transmission of electricity between provinces and territories.

Eligibility for the 15% CEITC requires compliance with proposed labour requirements and ongoing compliance with the eligibility criteria. The CEITC is subject to potential repayment obligations when the property is converted to an ineligible use, exported from Canada, or disposed of. 

Eligible corporations can benefit from both the CEITC and Atlantic investment tax credit, but not in combination with any other clean economy credits.

Other clean energy initiatives

For property acquired and available for use on or after January 1, 2024, Budget 2024 proposes to:

  • Extend the Clean Technology Manufacturing investment tax credit to businesses engaged in polymetallic extraction and processing; and
  • Modify eligible expenditures to include investments in eligible property used in qualifying mineral activities that are expected to produce primarily (50% or more of the financial value of output) qualifying materials at mine or well sites.

Manipulation of Bankrupt Status

For corporations commencing bankruptcy proceedings on or after Budget Day, Budget 2024 proposes to repeal the exception to the debt forgiveness rules and loss restriction rules. Bankrupt corporations (not individuals) would be subject to the general debt forgiveness rules, including the reduction of loss carryforward balances and other tax attributes. As insolvent corporations, bankrupt corporations may qualify for relief from income inclusion under the general debt forgiveness rules.

Synthetic Equity Arrangements

Synthetic equity arrangements include arrangements that provide all or substantially all of the risk of economic exposure in respect of a share to another person. For dividends received on or after January 1 2025, Budget 2024 proposes to remove the tax indifferent investor exception, which would prevent taxpayers from claiming the dividend received deduction for dividends received on a share that is subject to a synthetic equity arrangement.

Mutual Fund Corporations

For taxation years beginning after 2024, Budget 2024 proposes to preclude a corporation from qualifying as a mutual fund corporation where it is controlled by or for the benefit of a corporate group (including a corporate group that consists of any combination of corporations, individuals, trusts, and partnerships that do not deal at arm’s length). 

Exceptions would be provided to ensure widely held pooled investment vehicles are not adversely affected by this measure.

International Tax Measures

Withholding for Non-Resident Services Providers

Budget 2024 proposes to allow the CRA to waive the 15% withholding requirement (Regulation 105) for payments to a non-resident service provider, over a specified period, 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 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.

This measure will come into force upon receiving royal assent.

Crypto-Asset Reporting Framework (CARF) and Common Reporting Standards (CRS)

Budget 2024 proposes to implement the CARF, as developed by the OECD, in Canada. Crypto-asset service providers (CASPs) are entities and individuals who are resident in Canada, or carry on business in Canada, and provide business services effectuating exchange transactions in crypto-assets. CASPs would include crypto exchanges, crypto-asset brokers and dealers, and operators of crypto-asset automated teller machines.

For the 2026 and subsequent calendar years, CASPs will be required to report to the CRA, in respect of each customer and in respect of each crypto-asset, the annual value of:

  • Exchanges between the crypto-asset and fiat currencies;
  • Exchanges for other crypto-assets; and
  • Transfers of the crypto-assets.

CASPs will also be required to obtain and report information on each of their (resident and non-resident) customers, including name, address, date of birth, jurisdiction(s) of residence, and taxpayer identification numbers for each jurisdiction of residence. The same information will be required in respect of natural persons who exercise control over a corporation or other legal entity.

The budget also proposes amendments to broaden the scope of the CRS requirements for financial institutions. The expansion will require additional information to be reported in respect of financial accounts and account holders. The due diligence procedures that financial institutions are required to follow under the CRS will be strengthened under these proposals.

Sales and Excise Tax Measures

Extending Goods and Services Tax (GST) Relief to Student Residences

On September 14, 2023, the Government announced that it would temporarily remove the GST from new purpose-built rental housing projects, such as apartment buildings, student housing, and senior residences built specifically for long-term rental accommodation through an Enhanced GST Rental Rebate.

Qualifying purpose-built rental housing units include those that are part of a residential complex that contains at least four private apartment units or at least 10 private rooms or suites; and in which all or substantially all of the residential units meet the conditions of the existing GST rental rebate.

The Budget further proposes to allow universities, public colleges and school authorities to apply the normal GST/HST rules that apply to other builders in respect of new student housing projects to ensure they can claim the Enhanced GST Rental Rebate. The Budget also proposes to relax the rebate conditions for new student housing provided by universities, public colleges and school authorities that operate on a not-for-profit basis.

These measures would apply to projects and student residences that begin construction after September 13, 2023 and before 2031, and that complete construction before 2036.

GST/HST on Face Masks and Face Shields

The Budget proposes to repeal the temporary zero-rating of certain face masks or respirators and certain face shields. This measure would apply to supplies made on or after May 1, 2024.

Tobacco and Vaping Product Taxation 

The Budget increases the tobacco excise duty rate by $4 per carton of 200 cigarettes. Inventories of cigarettes held by certain manufacturers, importers, wholesalers and retailers at the beginning of the day on April 17, 2024 would be subject to an inventory tax of $0.02 per cigarette to account for the $4 increase. Taxpayers would have until June 30, 2024 to file a return and pay the cigarette inventory tax. The Budget also proposes various increases to the vaping product excise duty rate effective July 1, 2024.

Administrative Measures

Notice of Non-Compliance and Information Requests

Budget 2024 proposes to allow the CRA to issue a new “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.  The normal reassessment period for any taxation year will be extended by the period of time the notice of non-compliance remains outstanding.

A person who receives a notice of non-compliance may request that the CRA review the notice, to confirm, vary or vacate the notice. The notice would be vacated if the CRA determines that it was unreasonable to issue the notice or that the person had reasonably complied with the notice.  A further statutory right of review by a judge of the Federal Court would be available following the CRA’s review. 

A penalty of $50 per day, up to a maximum of $25,000, will be imposed on a person served with a notice of non-compliance. The penalty will be waived if the notice is ultimately vacated by the CRA or a court.

The budget also proposes to:

  • Allow the CRA to include a requirement or notice that any required information (oral or written) or documents be provided under oath or affirmation.
  • Impose a penalty equal to 10% of the aggregate tax payable when the CRA obtains a compliance order against the taxpayer, where the tax owing in respect of one of the taxation years to which the compliance order relates exceeds $50,000.
  • Allow the CRA to seek a compliance order when a person fails to comply with a requirement to provide foreign-based information or documents.
  • Amend the “stop the clock” rules, which extends the reassessment period, 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 or enforcement process or during any period that a notice of non-compliance is outstanding.

The budget proposes to amend other tax statutes administered by the CRA to address the issues above, including the Excise Tax Act (e.g., GST/HST, fuel excise tax), the Underused Housing Tax Act, and the Select Luxury Items Tax Act.

The above measures would be effective upon receiving royal assent.

Avoidance of Tax Debts

Where property of a tax debtor is transferred to a non-arm’s length transferee, the transferee is jointly and severally, or solidarily, liable with the tax debtor for tax debts, to the extent that the value of the property transferred exceeds the amount of consideration given by the transferee for the property. Budget 2024 proposes to strengthen the tax debt anti-avoidance rule 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 the above conditions are met, the property transferred by the tax debtor would be deemed to have been transferred to the transferee, ensuring that the tax debt avoidance rule applies, making both the transferee, and any planner who facilitates the avoidance planning, jointly and severally, or solidarily, liable for the tax debt with the tax debtor.

The 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 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.

The budget proposes to extend this penalty to tax debt avoidance planning that is subject to the proposed supplemental rule above.

Similar amendments are proposed to be made to other tax statutes, as noted above in the prior section. 

The above measures would be effective for transactions that occur on or after Budget Day.

Reportable and Notifiable Transactions Penalty

Budget 2024 proposes to remove reportable or notifiable transactions from the general provision that provides that a person who fails to file or make a return liable for a penalty of up to $25,000, imprisonment, or both.  Reportable or notifiable transactions under the mandatory disclosure rules include specific penalties, making this general penalty unnecessary in these circumstances.

This amendment would be deemed to have come into force on June 22, 2023.

Other Tax Measures

Budget 2024 confirms the government’s intention to proceed with various previously announced tax and related measures, including, amongst others:

  • Substantive CCPC;
  • Proposals relating to the Underused Housing Tax;
  • Enhanced 100% GST Rental Rebate for purpose-built rental housing;
  • Alternative minimum tax; 
  • Intergenerational business transfers;
  • Employee Ownership Trusts;
  • Concessional loans not considered government assistance;
  • Denied deductions for non-compliant short-term rentals; and
  • Various green energy initiatives released on August 4, 2023 and December 20, 2023.

If you have any questions or would like further information relating to the 2024 Budget and its impact on you, please contact your Smythe advisor.