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OTHER NOTABLE BUDGET HIGHLIGHTS
Canadian Entrepreneurs’ Incentive
Budget 2024 introduces the Canadian Entrepreneurs’ Incentive to reduce the tax rate on capital gains resulting from the disposition of qualifying shares of a corporation by an eligible individual.
Conditions to be a qualifying share include:
- the claimant was a founding investor at the time the corporation was initially capitalized
- the claimant held the share for a minimum of five years before disposition and owned more than 10 percent of the votes and value of the corporation at all times, and
- the claimant was actively engaged on a regular, continuous, and substantial basis in the activities of the business.
- Certain shares are not eligible for the incentive, including shares of a corporation: (i) representing a direct/indirect interest in a professional corporation, (ii) whose principal asset is the reputation or skill of its employees; (iii) carries on business in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector; or (iv) providing consulting or personal care services.
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. Under the two-thirds capital gains inclusion rate proposed in Budget 2024, this measure would result in an inclusion rate of one-third for qualifying dispositions. This measure would apply in addition to any available capital gains exemption.
This measure would apply to dispositions that occur on or after January 1, 2025. 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.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer tax credits, deductions, and exemptions than under the ordinary personal income tax rules. Taxpayers pay the higher of the ordinary tax or the AMT. Budget 2023 introduced amendments to significantly change the AMT calculation.
Following consultations on draft legislative proposals, Budget 2024 proposes the following:
- Revise the tax treatment of charitable donations to allow individuals to claim 80 percent (instead of the previously proposed 50 percent) of the Charitable Donation Tax Credit
- 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 (EOT) 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).
Employee Ownership Trusts
Budget 2024 includes further details on the proposed EOT rules that were originally announced in Budget 2023 and the 2023 Fall Economic Statement.
As proposed, a $10 million capital gains exemption would be available to an individual (other than a trust) where the following conditions are met:
- An individual, personal trust (of which the individual is a beneficiary), or a partnership (where the individual is a member), disposes of shares of a corporation that is not a professional corporation
- The transaction is a qualifying business transfer in which the trust acquiring the shares is not already an EOT or a similar trust with employee beneficiaries
- Throughout the 24 months 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 percent of the fair market value of the corporation’s assets were used principally in an active business
- At any time prior to the qualifying business 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, and
- Immediately after the qualifying business transfer, at least 90 percent of the beneficiaries of the EOT must be resident in Canada.
The exemption must be allocated amongst multiple vendors (with their agreement) such that the total exemption cannot exceed $10 million.
In order to preserve the exemption, there cannot be a “disqualifying event” which occurs when (i) an EOT loses its status or (ii) if the fair market value of the assets used principally in the active business falls below 50 percent at the beginning of two consecutive years of the corporation.
If the disqualifying event occurs within 36 months of the qualifying business transfer, the exemption is not available and any claimed exemption by an individual is retroactively denied. If the 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.
In addition, a joint election needs to be filed by the individual and the EOT (and any corporation controlled by the EOT that acquired shares) to be jointly and severally liable for the tax resulting from a disqualifying event within 36 months following the transaction. Finally, the normal reassessment period for an individual in respect of this exemption is extended by a further three years.
These exempted capital gains would be included at 30 percent for the computation of the AMT.
Accelerated capital cost allowance for rental projects
The capital cost allowance (CCA) rate for eligible new purpose-built housing projects will temporarily increase from four percent to 10 percent. To benefit from the increase, construction must begin on or after April 16, 2024 (Budget Day) and before 2031, and the property must become eligible for use before 2036.
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.
Immediate expensing for productivity-enhancing assets
Budget 2024 proposes to provide immediate expensing of capital asset purchases for new additions of property in the following CCA classes:
- Class 44 (patents or the rights to use patented information)
- Class 46 (data network infrastructure equipment and related systems software)
- Class 50 (general-purpose electronic data-processing equipment and systems software)
The proposed immediate expensing would apply to assets acquired on or after Budget Day that are available for use prior to 2027. Additions that are acquired from non-arm’s length persons or that have been transferred to the purchaser on a tax-deferred basis would be excluded from this measure.
Canada Carbon Rebate for Small Businesses
Budget 2024 proposes to return a portion of the fuel charge proceeds to Indigenous governments and small and medium businesses through the new Canada Carbon Rebate for Small Businesses. This rebate will be an automatic refundable tax credit for eligible businesses, sized in proportion to the number of persons they employ in the province.
For previous fuel charge years from 2019-2020 through 2023-2024, this refundable tax credit will be available to a Canadian-Controlled Private Corporation (CCPC) that files its tax return for the 2023 taxation year by July 15, 2024. To be eligible, a business must have less than 500 employees throughout Canada in the calendar year in which the fuel charge year begins.
Clean Electricity Investment Tax Credit
The 2023 federal budget (Budget 2023) and the 2023 Fall Economic Statement previously announced a 15 percent refundable tax credit for investments in specific electricity-generating activities and equipment for the transmission of electricity between provinces. Budget 2024 provides additional details on the eligibility and implementation of the refundable credit.
The Clean Electricity Investment Tax Credit would apply to eligible property that is:
- acquired and available for use on or after Budget Day and before 2035, provided it has not been used for any purpose before its acquisition; and
- not part of a project that began construction before March 28, 2023.
Both new projects and the refurbishment of existing projects will be eligible for this credit.
Electric Vehicle Supply Chain Investment Tax Credit
The government announced its intention to introduce a new 10 percent Electric Vehicle (EV) Supply Chain Investment Tax Credit on the cost of buildings used in key segments of the EV supply chain. The credit will be available to businesses that invest in Canada across three supply chain segments: EV assembly, battery production, and cathode active material production.
The EV Supply Chain investment tax credit would apply to property that is acquired and becomes available for use on or after January 1, 2024. The credit would be reduced to five percent for 2033 and 2034 and would no longer be in effect after 2034. Further design and implementation details of the credit will be provided in the 2024 Fall Economic Statement.
Extension of Mineral Exploration Tax Credit
The Mineral Exploration Tax Credit, which was scheduled to expire on March 31, 2024, will be extended for one year until March 31, 2025. The 15 percent non-refundable tax credit is available to taxpayers with eligible investments in flow-through shares.
Increased tax credits for volunteer firefighters and search and rescue volunteers
Budget 2024 proposes to double the Volunteer Firefighters Tax Credit and the Search and Rescue Volunteers Tax Credit. The tax credit will increase from $3,000 to $6,000 per year for 2024 and onward for those who complete at least 200 hours of eligible volunteer services in a year.
Canada Child Benefit
Budget 2024 proposes to extend the eligibility for the Canada Child Benefit from a period of one month to a period of 6 months following the death of a child. This extension would also apply to a child eligible for the Disability Tax Credit. This measure will apply for death occurring after 2024.
Disability Supports Deduction
Budget 2024 proposes to expand the list of expenses recognized under the Disability Supports Deduction, subject to specified conditions. The budget also proposes that expenses for service animals be recognized under the Disability Supports Deduction or continue to be claimed under the Medical Expense Tax Credit.
These rules will apply for 2024 and subsequent taxation years.
Crypto-Asset Reporting Framework and the Common Reporting Standard
Budget 2024 proposes to implement the Crypto-Asset Reporting Framework (CARF) developed by the Organisation for Economic Cooperation and Development (OECD). This measure would impose a new annual reporting requirement on crypto-asset service providers that are resident in Canada or that carry on business in Canada, and that provide business services to facilitate exchange transactions in crypto-assets. This would include crypto exchanges, crypto-asset brokers and dealers, and operators of crypto-asset automated teller machines.
These measures would apply to the 2026 and subsequent calendar years.
Withholding for Non-Resident Service Providers
Budget 2024 proposes to allow the government to waive the 15 percent withholding requirement, over a specified period, for payments to a non-resident service provider if the non-resident would not be subject to tax in Canada because of a tax treaty or the income is exempt because of operating in international shipping or aircraft 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.
Interest Deductibility Limits – Purpose-Built Rental Housing
The proposed excessive interest and financing expenses limitation (EIFEL) rules limit the amount of net interest and financing expenses that may be deducted by certain taxpayers in computing taxable income.
The 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 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.
Charity tax measures
Budget 2024 proposes to extend the period for which a qualifying foreign charity is granted status as a qualified donee by 12 months (for a total of 36 months). This measure would apply to charities registered after Budget Day.
The budget also announces the government’s intention to modernize the way the CRA communicates with charities and to simplify the issuance of official donation receipts to better align with modern practices. These measures would apply upon royal assent.
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. This would also ensure that payments received by class members as beneficiaries of the trusts would not be included when computing income for federal income tax purposes.
This measure would apply to the 2024 and subsequent taxation years.
Addressing non-compliance
Budget 2024 proposes to provide $73.1 million over five years, starting in 2024-25, and $14.7 million per year going forward to the CRA to continue addressing tax non-compliance in real estate transactions.
Notice of non-compliance
Budget 2024 proposes to amend the ITA to allow the CRA to issue a new type of notice (referred to as a “notice of non-compliance”) to a person who 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.
To further improve compliance with information requests, Budget 2024 proposes to impose a penalty on a person who 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.
Avoidance of tax debts
Budget 2024 proposes to introduce a supplementary rule to strengthen the tax debt anti-avoidance rule.
Where certain 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. Budget 2024 would also apply the current penalties to the planning that would be subject to these additional rules.
Budget 2024 proposes that taxpayers who participate in tax debt avoidance planning be jointly and severally, or solitarily, liable for the full amount of the avoided tax debt, including any portion that has effectively been retained by the planner. Similar amendments would be made to other federal statutes.
These measures would apply to transactions or series of transactions that occur on or after Budget Day.
Previously announced measures
Budget 2024 confirms the government’s intention to proceed with a number of previously announced tax and related measures, as modified by consultations, deliberations, and further legislative developments since their release.
Significant measures include:
- Strengthening the intergenerational business transfer framework
- AMT for individuals
- Modernizing the General Anti-Avoidance Rule
- Clean technology incentives
- Proposals relating to the Underused Housing Tax
- Employee ownership trusts
- Cross-border business tax measures including the EIFEL rules and the rules on hybrid mismatch arrangements
- Global Minimum Tax
- Digital Services Tax
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