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2024 FEDERAL BUDGET COMMENTARY

On April 16, 2024, the fourth federal budget, Fairness for Every Generation, was tabled.

This summary highlights measures, we believe are of greatest interest to you, of the proposed tax changes announced in the federal budget (Budget).

Capital Gains Inclusion Rate

After several years of speculation, the Budget announced an increase to the capital gains inclusion rate from 50% to 66.66% of the capital gain realized on the disposition of capital property for all taxpayers effective June 25, 2024.

Corporations:    The capital gains inclusion rate will increase from 50% to 66.66% for capital gains, net of capital losses.

Trusts:              The capital gains inclusion rate will increase from 50% to 66.66% for capital gains, net of capital losses. 

                        When deciding whether to crystalize on the lower capital gains inclusion rate of 50% prior to June 25, 2024, it is important to also consider the impact of Alternative Minimum Tax (AMT) on the transaction.

Personal:          The capital gains inclusion rate will increase from 50% to 66.66% for capital gains in excess of $250,000, net of capital losses and net of capital gains from the application of a lifetime capital gains exemption. 

                        As with Trusts, when deciding whether to crystalize on the lower capital gains inclusion rate of 50% prior to June 25, 2024, it is important to also consider the impact of Alternative Minimum Tax (AMT) on the transaction.

Employee Stock Options:           The deduction will be decreased to 33% to reflect the new capital gains inclusion rate, but the deduction will be increased to 50% of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

Alternative Minimum Tax (AMT)

The federal government proposed AMT changes on August 4, 2023, but many concerns were raised.  The 2024 Budget has made some changes, partially responding to concerns expressed by the charitable community, and others as follows:

  1. allow individuals to claim 80% (instead of the previously proposed 50%) of the Charitable Donation Tax Credit when calculating AMT;
  2. fully allow deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments;
  3.  allow individuals to fully claim the federal logging tax credit;
  4. fully exempt Employee Ownership Trusts;
  5. allow certain disallowed credits 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); and
  6. exempt from AMT certain trusts for the benefit of Indigenous groups. 

These changes will apply to taxation years that begin on or after January 1, 2024.

Lifetime Capital Gains Exemption (LCGE)

The Budget will increase the LCGE to $1.25 million of eligible capital gains (from $1,016,836 in 2024) realized on the disposition of qualified small business corporation shares and qualified farm or fishing property, effective for dispositions that occur on or after June 25, 2024. Indexation of the LCGE will resume in 2026. 

Canadian Entrepreneurs’ Incentive (CEI)

A new CEI will reduce the tax rate on capital gains on the disposition of qualifying shares by an eligible individual. To the eligible individual, the capital gains inclusion rate will be 50% of the general inclusion rate of 66.66% or 33.33% up to $2 million in capital gains per eligible individual over their lifetime. This measure will be introduced over the next 10 years (2025 to 2034) in $200,000 increments as follows:

  1. in 2025 there will be a lifetime limit of $200,000 of capital gains; 
  2. in 2026, it will be $400,000, assuming no earlier claim is made, and incrementally to 2034 when the balance of $2 million is attained.

This capital gain relief will be in addition to any other available capital gains exemption (specifically the LCGE). 

There are several conditions that will need to be met for a share to be a qualifying share for the CEI: 

  1. at the time of sale, it was a share of a small business corporation owned directly by the individual;
  2. throughout the 24 months preceding 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:
    1. used principally in an active business carried on primarily in Canada by the CCPC or related corporation, and/or 
    1. certain shares or debt of connected corporations,
  3. the individual was a founding investor when the corporation was initially capitalized and held the share for a minimum of 5 years;
  4. at all times since the initial share subscription, the individual directly owned shares providing them with 10% of votes and value in the corporation;
  5. throughout the 5 years preceding the sale, the individual was actively engaged on a regular, continuous, and substantial basis in the activities of the business;
  6. 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 like operating in the financial or real estate sector, or providing consulting services; and
  7. the share was obtained for fair market value consideration. 

This measure will apply to dispositions that occur on or after January 1, 2025.

Disability Supports Deduction

The budget will expand the list of expenses recognized under the Disability Supports Deduction, effective for 2024 and subsequent years.

Home Buyers’ Plan

The budget proposes to:

  1. increase the RRSP withdrawal limit to $60,000 (from $35,000), effective for 2024 and subsequent years for withdrawals made after April 16, 2024; and
  2. 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.

Purpose Built Rental Housing

The budget proposes an accelerated CCA of 10% (from 4%) 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. 

Productivity-enhancing assets

The budget proposes immediate expensing for new additions of property in three classes: 

  1. Class 44 (patents or the rights to use patented information for a limited or unlimited period);
  2. Class 46 (data network infrastructure equipment and related systems software); and
  3. Class 50 (general-purpose electronic data processing equipment and systems software), if the property is acquired on or after April 16, 2024, and becomes available for use before January 1, 2027. 

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. 

Canada Carbon Rebate for small businesses 

The budget proposes to return a portion of pollution pricing fuel charge proceeds via a new Canada Carbon Rebate for eligible small and medium sized businesses.

The refundable tax credit would be available to a Canadian-controlled private corporation that files a tax return for its 2023 taxation year by July 15, 2024. 

Interest deductibility limits for Purpose-built rental housing

The budget proposes to expand an exemption from the excessive interest and financing expenses limitation (EIFEL) rules to 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.

Canada Revenue Agency’s Increased Powers

Non-compliance with information gathering requests

The budget proposes several amendments to the information gathering provisions in the Income Tax Act to enhance the efficiency and effectiveness of tax audits and facilitation of tax collection on a timelier basis. 

These amendments will result in a proposed new notice of non-compliance issued by the CRA where:

  1. penalties are $50/day to a maximum of $25,000
  2. stopping the reassessment limitation clock
  3. questioning under oath
  4. penalties where CRA obtains a compliance order from a court that directs a taxpayer to comply with a CRA information request. The penalty is 10% of the aggregate tax payable but only if the taxes owing is greater than $50,000
  5. certain tax statutes administered by the CRA

These amendments will come into effect on royal assent.

Avoidance of tax debts

The budget proposes a supplementary rule to strengthen the tax debt anti avoidance rule. This measure will apply to transactions or series of transactions that occur on or after April 16, 2024. 

Reportable and notifiable transactions penalty

The government intends to remove from the scope of this general penalty provision the failure to file an information return for a reportable or notifiable transaction under the mandatory disclosure rules. This amendment will be deemed to have come into force on June 22, 2023.

Just as significant, there are no Budget proposals that introduce: 

  1. personal tax rate increases;
  2. wealth or estate taxes;
  3. changes to the taxation of dividends and/or interest;
  4. changes to the principal residence exemption;
  5. changes to the taxation of group insurance; 
  6. changes to exempt life insurance, corporate owned insurance or the capital dividend account arising from life insurance; and
  7.  changes to the taxation of private corporations (other than capital gains inclusion rates) including the TOSI and passive investment rules.

It is truly a Fairness for Every Generation budget?

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