Canadian Tax and Estate Planning

On April 16, 2024, Deputy Prime Minister and Minister of Finance Chrystia Freeland delivered the 2024 federal budget, which was titled “Fairness For Every Generation”. The Minister presented the Budget as the government’s plan, “to build a Canada that works better for every generation, where you can get ahead, where your hard work pays off, where you can buy a home – where you have a fair chance at a good middle class life.”

This Budget expects the 2023/24 deficit to be $40 billion and forecasts similar deficits for 2024/2025 and 2025/2026 (The government’s fiscal period runs from April 1 to March 31). Announced spending will be offset by increased taxes – some coming from expected economic growth and the rest through announced tax changes.

After years of speculation, the government finally increased the capital gains inclusion rate from half to two-thirds for dispositions on or after June 25, 2024. A bit of a surprise is that individuals will still be subject to a 50 per cent inclusion rate on the first $250,000 of gains annually. Past changes to the inclusion rate have always been effective on the announcement date so that taxpayers could not plan to avoid the change, but this time we have been given two months’ notice.

The amount of the Lifetime Capital Gains Exemption was increased to $1.25 million, and the details of the previously announced Employee Ownership Trust (EOT) were provided. Eligible dispositions to an EOT are tax exempt up to $10 million of capital gains. Also announced was the Canadian Entrepreneurs’ Incentive which will reduce the tax on capital gains on qualifying shares by eligible individuals.

To address the current housing affordability crisis, the government announced a number of measures. Budget 2024 provides incentives for purpose-built rental housing through an accelerated capital cost allowance for new property additions and an elective exemption from the interest deductibility limitation rules. First time home buyers will now be eligible to withdraw $60,000 from their RRSP under the Home Buyers’ Plan, up from $35,000, and the 15-year repayment period is temporarily deferred to the fifth year following the first withdrawal.

Building on past budgets, investment tax credit details were announced for the clean electricity and clean technology manufacturing tax credits and the Electric Vehicle Supply Chain Tax Credit was introduced.

Leading up to the April 1, 2024 increase in the federal carbon tax, much has been written on the impact on taxpayers, including small businesses. The carbon tax applies only in provinces that have not implemented their own carbon pricing system. Individuals in provinces for which the federal carbon tax applies receive carbon rebate payments. Budget 2024 introduces a carbon rebate for small businesses.

In welcome news for charities, the Budget proposes to increase the Charitable Donation Tax Credit when calculating the Alternative Minimum Tax.

This does not appear to be a pre-election budget. With the next federal election scheduled for October 2025, this government will have one more budget before heading to the polls, unless they call an early election, or lose a non-confidence vote in the House of Commons. A budget bill is automatically a confidence vote, so it will be interesting to see whether the NDP will support this budget or force an early election.

Capital gains inclusion rate

Currently, when a taxpayer realizes a capital gain (for example, from the sale of an investment property or a portfolio of securities), only 50 per cent of the capital gain is taxable and is included in the taxpayer’s income for the year.

Budget 2024 proposes to increase the portion of the capital gain that is taxable from half, or 50 per cent, to two-thirds for corporations and trusts. At the same time, for individuals, the proposed increase would only apply to the capital gains over the annual $250,000 threshold. Any capital gains realized within the year below this threshold would still be 50 per cent taxable. The proposed change will apply to capital gains realized on or after June 25, 2024.

Under the proposed changes, the $250,000 threshold would apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of the following:

• Current year capital losses
• Capital losses of other years applied to reduce current-year capital gains
• Capital gains in respect of which the Lifetime Capital Gains Exemption, the proposed Employee Ownership Trust Exemption, or the proposed Canadian Entrepreneurs’ Incentive is claimed

The proposed changes do not impact the value of net capital losses realized in prior years, as it would be adjusted to reflect the inclusion rate of the capital gains being offset. This means that a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.

For taxation years that begin before and end on or after June 25, 2024, two different inclusion rates would apply, meaning that capital gains and losses realized before and after June 25, 2024, would need to be separately identified. However, for individuals, the 2024 annual $250,000 threshold would be fully available for any capital gains realized after June 25, 2024.

Lastly, individual taxpayers who are claiming employee stock option deduction would be eligible for a deduction equal to one-third of the taxable benefit as opposed to a half that is available under current rules. Under the proposed changes, individuals would be entitled to a deduction of half of the taxable benefit up to a combined $250,000 limit for both employee stock options and capital gains.

Employee Ownership Trust tax exemption

The 2023 Budget introduced proposals for the Employee Ownership Trust (EOT), an additional option for succession planning. The 2023 Fall Economic Update subsequently proposed to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions, with Budget 2024 now providing further details.

Budget 2024 also expands qualifying business transfers to include the sale of shares to a worker cooperative corporation.

Qualifying conditions for the $10M exemption

The exemption of the first $10 million in capital gains is available to an individual on the sale of shares to an EOT, when all of the following are met:

• The individual, a personal trust of which the individual is a beneficiary or a partnership in which the individual is a member, disposes of shares of a corporation (other than a professional corporation)
• The transaction is a qualifying business transfer 
• Throughout the 24 months immediately prior to the qualifying business transfer, the transferred shares were exclusively owned by the individual, a related person, or a partnership in which the individual is a member and over 50 per cent 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 business on a regular and continuous basis for a minimum period of 24 months
• Immediately after the qualifying business transfer, at least 90 per cent of the beneficiaries of the EOT must be residents of Canada

Multiple individuals disposing of shares as part of a qualifying business transfer would need to allocate the $10 million gain exemption. This would be achieved by the EOT and the individual filing a joint election allocating the exemption.

Capital gains exempted would be subject to an inclusion rate of 30 per cent for the purposes of the alternative minimum tax.

Disqualifying events

A disqualifying event would occur if an EOT loses its EOT status (conditions outlined in Budget 2023)  or if less than 50 per cent of the fair market value of the shares is attributable to active business assets at the beginning of two consecutive taxation years of the corporation.

If a disqualifying event occurs within 36 months of the qualifying business transfer, the exemption would not be available or would be retroactively denied. If occurring after 36 months, the EOT would be deemed to realize a capital gain equal to the total amount of exempt capital gains.

Claiming the exemption in a taxation year would extend the normal reassessment period of the individual by three years in respect of the year of claim.

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

Canadian Entrepreneurs’ Incentive

Budget 2024 proposes to introduce the Canadian Entrepreneurs’ Incentive which would reduce the tax rate on capital gains on the disposition of qualifying shares by an eligible individual.

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.

The measure would apply in addition to any available capital gains exemption. It is worth noting that Budget 2024 proposes to increase the lifetime capital gains exemption to $1.25 million from $1,016,836 of eligible capital gains on dispositions after June 25, 2024.

A share of a corporation would be a qualifying share if all the following conditions are met:

• At the time of sale, it was a share of the capital stock of a small business corporation owned directly by an individual
• Throughout the 24-month period immediately before the disposition of the share, it was a share of a Canadian-Controlled Private Corporation (CCPC) and more than 50 per cent of the fair market value (FMV) of the assets of the corporation were:
  • used principally in an active business carried on primarily in Canada by the CCPC, or by a related corporation,
  • certain shares or debts of connected corporations, or
  • a combination of these two types of assets.
• The individual was a founding investor and held the share for a minimum of five years prior to disposition
• At all times from the initial share subscription until the time that is immediately before the sale of the shares, the individual directly owned shares amounting to more than 10 per cent of the FMV of the issued and outstanding capital stock of the corporation and giving the individual more than 10 per cent of the votes
• Throughout the five-year period immediately before the disposition of the share, the individual must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business
• The share must have been obtained for FMV consideration
• 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 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.

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

Accelerated Capital Cost Allowance (CCA)

Purpose-built rental housing

The budget proposed to change the accelerated CCA rate from four per cent to 10 per cent for purpose-build rental projects that begin construction on or after April 16, 2024, and before January 1, 2031.

The eligible property will be new purpose-built rental housing that is a residential complex:

• With at least four private apartment units, or 10 private rooms or suites; and
• At least 90 per cent of residential units are held for long-term rental.

Converting existing non-residential real estate into a residential complex would be eligible if the above conditions are met. The accelerated CCA does not apply to renovations of existing residential complexes. However, the cost of a new addition to an existing structure would be eligible if additional conditions were met.

The Accelerated Investment Incentive (AII) will eliminate the half year rule for eligible property put in use before 2028. After 2027, the half year rule would apply, which limits the CCA allowance in the year an asset is acquired to one-half of the full CCA deduction.

Productivity-enhancing assets

Budget 2024 provides immediate expensing for new additions of assets acquired on or after April 16, 2024, and becomes available for use before January 1, 2027, including 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).

Properties available for use after 2026 and before 2028 should continue to benefit from AII. The accelerated CCA can be claimed under a prorated basis in a short taxation year and would not be available in the following taxation year in respect of the property.

Properties that have 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.

Investment tax credit for clean electricity

Budget 2023 first announced a 15 per cent refundable credit for clean electricity that would apply to eligible property that was acquired and became available for use on or after Budget 2024 and before 2035 or eligible property that was not part of a construction project that began before March 28, 2023.

Budget 2024 defines the eligible entities that can claim this credit, further expands on eligible property for this credit, and outlines other rules to keep in mind as this credit comes into effect.

The investment tax credit for clean electricity can only be claimed by the following eligible entities, all of which are Canadian corporations:

• Taxable Canadian corporations;
• Provincial and territorial Crown corporations, subject to additional requirements;
• Corporations owned by municipalities;
• Corporations owned by Indigenous communities; and
• Pension investment corporations.

Where a Canadian corporation is a corporate partner in a partnership, the corporation would still be able to claim its portion of the partnership’s clean electricity investment tax credit (Clean Electricity ITC), subject to partnership rules generally consistent with those proposed for the Clean Technology ITC.

For this credit, eligible property includes the following types of equipment:

• Certain class 43.1 equipment used to generate electricity from solar, wind, or water energy;
• Concentrated solar energy equipment (as defined under the proposed Clean Technology ITC
• Equipment used to generate electricity, or both electricity and heat, from nuclear fission (as defined under the proposed Clean Technology ITC but without generating capacity limits or other requirements of that credit)
• Geothermal equipment, including heat generating equipment, if it is used exclusively for that purpose (excluding any equipment that is part of a system that extracts fossil fuel for sale);
• Equipment that is part of a system used to generate electricity, or both electricity and heat, from specified waste materials;
• Stationary electricity storage equipment that is described under Class 43.1 and equipment used for pumped hydroelectric energy storage that is described under Class 43.1, but excluding equipment that uses any fossil fuel in operation;
• Equipment that is part of an eligible natural gas energy system;
  • An eligible natural gas energy system has a number of criteria including but not limited to the following:
    • The system uses fuel or mostly natural gas to generate electricity, or both electricity and heat;
    • The system uses a carbon capture system to limit emissions no greater than 65 tonnes of CO2 per gigawatt hour of energy produced;
    • The system stores the captured CO2 appropriately;
    • Only certain equipment would form part of the system such as equipment that generates both electrical and heat energy, heat recovery equipment, and electrical generating heat. Buildings and certain types of other equipment such as heat rejection equipment, and equipment for transporting CO2 are excluded.
  • Equipment and structures used for the transmission or management of electricity between provinces and territories;
    • Examples of such equipment include electrical transmission equipment like cables and switches and electrical transmission structures like towers and lattices. Buildings and certain other types of equipment used for electrical distribution and transmission would be excluded.

Application for the credit

Before the claim for the Clean Electricity ITC can be made with the CRA for an eligible natural gas system, Natural Resources Canada would first review project plans to assess equipment and system eligibility. Natural Resources Canada would also verify equipment eligibility after expenditures are incurred.

Repayment obligations

Where an eligible property is later converted to an ineligible use or disposed of, the tax credit received will become repayable over a 10-year period or a 20-year period where an eligible natural gas energy system is involved.

Reminders from Budget 2023

Multiplication of tax credit

As mentioned in Budget 2023, eligible expenditures that qualify for multiple tax credits (i.e. Clean Electricity ITC, the Clean Technology ITC, the Investment Tax Credit for Carbon Capture, Utilization and Storage  the Clean Hydrogen Investment Tax Credit, the Clean Technology Manufacturing Investment Tax Credit and the Electric Vehicle Supply Chain Investment Tax Credit) can only be claimed once.

Labour requirements

As mentioned in Budget 2023, corporations must meet certain labour requirements to be eligible for the full 15 per cent credit, otherwise, the credit is reduced to five per cent.

Investment tax credit for clean technology manufacturing

Budget 2024 proposes various measures to further clarify the clean technology manufacturing investment tax credit for the production of qualifying materials (copper, nickel, cobalt, lithium, graphite, and rare earth elements) that occur at polymetallic projects (projects that produce multiple metals). In particular, the following are proposed:

• When assessing the extent to which property is used or expected to be used for qualifying mineral activities to produce qualifying materials, the value of qualifying materials would be the appropriate output metric;
• When defining eligible expenditures for this credit, investments in eligible property that produce primarily qualifying materials at mines or well sites, including tailing ponds and mills, should now be included;
• When an eligible property is converted to a non-qualifying activity within a certain time period, a safe harbour rule should apply on the recapture of the credit. Details of this rule will be provided at a later date.

 Canada Carbon Rebate for Small Businesses

The Budget 2024 proposes to return a portion of fuel charge proceeds from a province through a new Canada Carbon Rebate for Small Businesses. The rebate will be an automatic refundable tax credit for eligible businesses.

The refundable tax credit will be available to CPCCs that:

• Has no more than 499 employees throughout Canada in the calendar year in which the fuel charge year begins; and
• For the 2019-20 to the 2023-23 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.

The amount of the automatic refundable tax credit for an eligible corporation for an applicable fuel charge year would be:

• Determined for each applicable province for which the eligible corporation had employees in the calendar year in which the fuel chare year begins, and
• Is 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.

Alternative Minimum Tax

Budget 2023 introduced new rules related to the calculation of Alternative Minimum Tax (AMT).

The changes to AMT are proposed to be effective January 1, 2024. However, this is still awaiting Royal Assent.

Budget 2024 is proposing the following additional changes to the computation of the AMT that were first introduced in Budget 2023:

• Individuals can claim 80 per cent of the Charitable donation tax credit (instead of the previously proposed 50 per cent in Budget 2023) when calculating their AMT
• Full deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments
• Fully claim to the federal logging tax credit
• Allowing certain disallowed credits such as the federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit to be eligible for the AMT carry-forward

Additionally, the newly announced Employee Ownership Trusts will be fully exempt from the AMT.

Withholding for non-resident service providers

Under existing income tax legislation, any person paying a non-resident for services provided physically in Canada is required to withhold 15 per cent of the payment and remit it to the Canada Revenue Agency (CRA). This withholding is intended to be a pre-payment of the income tax payable by the non-resident and can be claimed as a fully refundable credit on their Canadian tax return.

Many of the non-residents affected by this withholding do not owe any income tax on their Canadian-based services, due to not having a permanent establishment in Canada under the tax treaty with their country of residence, or because they are earning exempt income from international shipping or the operation of aircraft for international travel.

A waiver program currently exists which allows a non-resident to apply for an exemption from this withholding requirement. Waivers must be applied for on a per project/job basis, and the application must be made at least 30 days in advance of work starting in Canada. The waiver will apply only for the period provided in the application. Due to these requirements, many non-residents do not find applying for waivers under the existing program feasible or cost-effective.

Budget 2024 proposes to provide the CRA with enhanced authority with respect to the issuance of waivers. A waiver for multiple transactions occurring over a specified period may now be issued, provided that the non-resident either would not be subject to income tax in Canada due to the benefits of the relevant tax treaty, or the non-resident is earning exempt income from international shipping or operating of aircraft for international travel.

This change may allow for more non-resident service providers to effectively access the waiver program. This should decrease costs to non-residents of providing services in Canada and conversely reduce the passing on of those expenses to Canadian customers.

This measure will come into force on Royal Assent of the enacting legislation.

For any questions regarding Budget 2024, please reach out to our Canadian Tax team.