Posted on April 17th, 2024 in Domestic Tax
Canada’s 2024 Federal Budget (Budget 2024), delivered by Deputy Prime Minister and Finance Minister Chrystia Freeland on April 16, 2024, addresses critical economic challenges faced by Canadians and businesses.
The government announced a variety of targeted anti-avoidance measures to enhance the CRA’s compliance efforts and enforcement actions.
To address concerns of the CRA’s effectiveness in compliance and enforcement actions, Budget 2024 proposes to amend several information gathering provisions in the ITA, the Excise Tax Act (ETA), and other legislation administered by the CRA. These amendments would come into force on royal assent of the enacting legislation.
Budget 2024 proposes to allow the CRA to issue a new type of notice called a “notice of non-compliance” to a person that has not complied with a requirement, or a notice to provide assistance or information, issued by the CRA. Where a notice of non-compliance has been issued, a penalty would be applied equal to $50 for each day that the notice is outstanding to a maximum of $25,000. The government also proposes to extend the period to reassess a taxation year where a notice of non-compliance is outstanding for a taxpayer or a person that does not deal at arm’s length with the taxpayer.
If a taxpayer disagrees with the issuance of a notice of non-compliance, it would be reviewable by the CRA and could be vacated if the CRA determines that it was unreasonable to issue the notice or that the person had reasonably complied with the initial requirement. There will also be a further statutory right of review by the Federal Court.
Budget 2024 proposes to amend the ITA to allow the CRA to include in a requirement or notice that any required information in written, oral or document form, be provided under oath or affirmation.
To encourage compliance with CRA information requests, Budget 2024 proposes to impose a penalty when the CRA obtains a compliance order from the court against a taxpayer. The penalty would be equal to 10% of the aggregate tax payable by the taxpayer in respect of the taxation year(s) to which the compliance order relates. The penalty would only be applied if the tax owing in respect of one of the taxation years to which the compliance order relates exceeds $50,000.
Budget 2024 further proposes an amendment to allow the CRA to seek a compliance order when a person has failed to comply with a requirement to provide foreign-based information or documents.
Budget 2024 proposes to extend the CRA’s period to reassess a taxpayer when the taxpayer seeks judicial review of any requirement or notice issued to the taxpayer related to the audit and enforcement process, or during any period that a notice of non-compliance is outstanding. The period to reassess would end when the judicial review is disposed of. Similar rules would apply where a requirement or notice has been issued to a person that does not deal at arm’s length with the taxpayer. These rules are similar to those proposed under the notice of non-compliance.
The ITA includes an anti-avoidance rule which prevents taxpayers from avoiding paying their tax liabilities by transferring their assets to non-arm’s length persons. The effect of this tax debt avoidance rule is to make the transferee jointly and severally, or solidarily liable with the transferor for the transferor’s tax debts less any consideration given by the transferee for the property. Some taxpayers have attempted to circumvent this rule by transferring assets to a third-party first.
Budget 2024 proposes to expand this rule and have it apply where:
Budget 2024 proposes to penalize third-party advisors who assist with these schemes by imposing a penalty equal to the lesser of:
Budget 2024 also proposes that taxpayers who participate in tax debt avoidance planning be jointly and severally, or solidarily liable for the full amount of the avoided tax debt, including any portion that has effectively been retained by the planner.
These rules are proposed to apply to transactions or series of transactions that occur on or after April 16, 2024. The federal government also intends to make similar amendments to other federal provisions, such as those under the ETA, the Select Luxury Items Tax Act, and the Underused Housing Tax Act.
Under the ITA, a person who fails to file or make a return, or comply with certain specified rules, is guilty of an offence and liable for penalties up to $25,000 and imprisonment up to a year. Budget 2024 announces the government’s intention to exempt the failure to report a reportable or notifiable transaction from this penalty. This amendment would be deemed to have come into force on June 22, 2023.
Budget 2024 proposes to increase the capital gains inclusion rate for corporations from 50% to 66.67% while also providing accelerated write-offs for eligible purpose-built rental housing and productivity-enhancing assets.
For tax years that begin after June 25, 2024, Budget 2024 proposes to increase the capital gains inclusion rate for corporations from 50% to 66.67%. Any net capital losses carried forward are adjusted to their value to reflect the inclusion rate of the capital gains being offset. As a result, any capital losses realized before the rate change would fully offset an equivalent capital gain after the rate change.
The capital cost allowance (CCA) system provides a deduction for businesses each year in respect of the capital cost of its depreciable property. Depending on the nature of the depreciable property, different CCA depreciation rates are used.
Budget 2024 proposes an accelerated CCA rate of 10% for new eligible purpose-built rental projects that begin construction on or after April 16, 2024, and before Jan 1, 2031, provided the building is made available for use before Jan. 1, 2036. New purpose-built rental housing includes residual complexes with at least four private apartment units or 10 private rooms/suites. Additionally, at least 90% of the residential units must be held for long-term rental.
Projects that convert existing non-residential real estate into a residential complex or costs incurred to create a new addition to an existing structure are eligible for the accelerated CCA rate. Renovations of existing residential complexes would not be eligible.
Budget 2024 proposes a 100% first-year deduction for property that is acquired on or after April 16, 2024 and becomes available for use before Jan 1, 2027 in respect of patents, data network infrastructure equipment, and general-purpose electronic data-processing equipment. The immediate expensing will only be available in the year the property becomes available for use.
Currently, the federal government implements a fuel charge in various provinces and returns a portion of these proceeds to the public via the Canada Carbon Rebate and a refundable tax credit for farmers. Budget 2024 proposes to return the remainder of fuel charge proceeds to small and medium-sized business through the new Carbon Rebate for Small Businesses.
The Carbon Rebate for Small Businesses will be available to certain CCPCs for the 2019-20 to 2023-24 fuel charge years provided their tax return for the 2023 taxation year is filed by July 15, 2024. For the 2024-25 fuel charge year onwards, similar filing criteria would need to be met.
Mutual fund corporations are afforded various tax benefits, including not being subject to mark-to-market taxation and being able to elect capital gains treatment on the disposition of Canadian securities.
Budget 2024 proposes amendments to preclude a corporation from qualifying as a mutual fund corporation where it is controlled by or for the benefit of a corporate group. Exceptions would be provided to ensure that the measure does not adversely affect mutual fund corporations that are widely held pooled investment vehicles.
This measure would apply to taxation years that begin after 2024.
The ITA allows a corporation to deduct the amount of any dividends received on a share of a corporation resident in Canada, subject to certain limitations. Where a taxpayer enters into a synthetic equity arrangement, the taxpayer is generally obligated to compensate the other person for the amount of any dividends paid on the share. This compensation payment may result in a tax deduction for the taxpayer in addition to the dividend received deduction in certain situations involving a tax-indifferent investor.
Budget 2024 proposes to remove the tax-indifferent investor exception, thereby disallowing the deduction under those certain situations. This measure would apply to dividends received on or after Jan. 1, 2025.
The ITA exempts bankrupt taxpayers from the general debt forgiveness rules. Instead, a separate loss restriction rule applies to extinguish the losses of bankrupt corporations that have received an absolute order of discharge.
To prevent the manipulation of the bankrupt status of an insolvent corporation to benefit from the exception of the debt forgiveness rules while simultaneously avoiding the loss restriction rule, Budget 2024 proposes to repeal the loss restriction rule and the exception to the debt forgiveness rules and applicable to bankrupt corporations. The bankruptcy exception to the debt forgiveness rules would remain in place for individuals.
These proposals would apply to bankruptcy proceedings that are commenced on or after April 16, 2024.
Budget 2024 announces that a new tax on residentially zoned vacant land is being considered. Consultations will be launched later this year.
Budget 2024 introduces, elaborates, and expands on the clean economy tax credits and reinforces the government’s commitment to modernizing the scientific research & experimental development program.
Budget 2024 provides details on the previously announced clean electricity investment tax credit (ITC), offering a 15% refundable credit on the capital cost of eligible property. The eligible property must be acquired and become available for use on or after April 16, 2024 and before 2035. The property cannot have not been used for any purpose before its acquisition or be part of a project that began construction before March 28, 2023.
The ITC will be available to Canadian corporations, including those exempt from tax, as well as provincial and territorial Crown corporations (provided they commit to a net-zero electricity grid by 2035). Additionally, corporations can claim their share of the credit from a partnership. The list of eligible property includes equipment used to generate electricity from “green” sources (e.g., solar, geothermal) as well as to store and to transmit electricity between provinces and territories.
For expenditures that qualify for multiple clean economy ITCs, such as the clean technology ITC or the carbon capture, utilization, and storage ITC, eligible corporations will be able to claim one of the credits. However, more than one credit may be claimed in respect of the same project, albeit on separate expenditures. The credit rate will be reduced by 10% if the claimant does not comply with certain labour requirements (i.e., a prevailing wage and apprenticeship requirement) contained in Bill C-59.
The clean technology manufacturing ITC (CTMITC) is a refundable ITC that was proposed in Budget 2023. Budget 2024 proposes amendments to better allow projects engaged in the production of multiple metals to qualify for the credit.
Some of these changes include:
Budget 2024 announces the intention to introduce a new 10% electric vehicle (EV) supply chain ITC on the cost of buildings involved in the EV supply chain. To claim the credit, the taxpayer or related party must claim the proposed CTMITC across all three of the following supply chain segments:
An exception to claim the proposed CTMITC in only two of the three segments above is available under certain circumstances.
The EV ITC will apply to property acquired and available for use on or after Jan. 1, 2024. The credit rate will be reduced to 5% for 2023 and 2024 and will no longer be in effect after 2034.
On Jan. 1, 2024, the federal government launched consultations to modernize scientific research & experimental development (SR&ED) tax incentives. The government sought feedback on cost-neutral ways to enhance SR&ED to better support innovative businesses and drive economic growth. Budget 2024 announced a second phase of consultations to consider specific policy parameters including consideration of extending the enhanced tax credit to Canadian public companies.
Budget 2024 introduces significant reporting requirements for crypto-asset services providers in Canada and provides the CRA the ability to waive withholding requirements for payments to non-residents who provide services in Canada.
The Common Reporting Standard (CRS) requires Canadian financial institutions to report information on financial accounts held in Canada by non-residents to the CRA.
For the 2026 and subsequent calendar years, Budget 2024 proposes to implement a Crypto-Asset Reporting Framework (CARF) into the Income Tax Act (ITA). The CARF would impose a new annual reporting requirement on Canadian-resident entities and individuals, as well as any other entities or individuals that carry on business in Canada, that provide business services effectuating exchange transactions in crypto-assets.
The policy behind this measure is to address evolving financial markets, wherein crypto assets (e.g., stablecoins or non-fungible tokens) can be transferred or held without interacting with traditional financial intermediaries and, as a result, do not need to be reported under the CRS.
Crypto-asset service providers would include crypto exchanges, crypto asset brokers and dealers, and operators of crypto-asset automated teller machines. Crypto-asset service providers would be required to report to the CRA, in respect of each customer and in respect of each crypto-asset, the annual value of:
Further, crypto-asset service providers are required to obtain and report detailed information on each of their customers.
Persons who pay a non-resident for services provided in Canada are required to withhold 15% of the payment and remit it to the CRA. Non-residents who do not have a permanent establishment in Canada, operate international shipping services, or operate an aircraft in international traffic services, are generally exempt from Canadian tax under an applicable tax treaty. Currently, non-resident service providers who do not owe Canadian tax may either apply for a refund of the withheld amounts or apply to the CRA in advance for a waiver.
Budget 2024 proposes to allow the CRA to waive the withholding requirement on multiple transactions with a single waiver, over a specified period, for payments made to a non-resident service provider if:
The measure would come into force upon royal assent.
The excessive interest and financing expense limitation (EIFEL) rules, currently before Parliament in Bill C-59, limits the deduction of interest and financing expenses (IFE) to a fixed percentage of a taxpayer’s earnings before interest, taxes, depreciation, and amortization.
The EIFEL rules provide an exemption for IFE 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 IFE incurred before Jan. 1, 2036, in respect of arm’s length financing used to build or acquire eligible purpose-built rental housing.
Since university and college student housing are not considered long-term residences, new student housing could not qualify for the enhanced (100%) GST rental rebate. Budget 2024 proposes to amend the rules to apply the normal GST/HST rules that apply to other builders (i.e., paying GST/HST on the final value of the building) to new student housing projects. New rebate conditions would allow student housing provided by universities, public colleges, and school authorities that operate on a not-for-profit basis to qualify for the 100% rebate. The relaxed rebate conditions would not be extended to universities, public colleges, and school authorities that operate on a for-profit basis.
The amendments apply to student housing projects that began construction after Sept. 13, 2023, and before 2031, provided that construction is completed before 2036.
Budget 2024 proposes to repeal the temporary zero-rating of certain face masks or respirators and certain face shields under the GST/HST. This measure would apply to supplies made on or after May 1, 2024.
Budget 2024 proposes to increase the tobacco excise duty rate by $4 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates for other tobacco products such as cigarettes, manufactured tobacco, and cigars. The total rate of $5.49 includes the automatic inflationary adjustment of $1.49 per carton of 200 cigarettes that took effect on April 1, 2024.
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 (subject to certain exemptions) to account for the $4 increase. Taxpayers would have until June 30, 2024, to file a return and pay the cigarette inventory tax.
Additionally, Budget 2024 proposes to provide a new prescribed limit of up to 2500 grams of packaged raw leaf tobacco for importation for personal use, along with a consequential amendment to the definition of “packaged” for raw leaf tobacco. This measure would come into force on the first day of the month following royal assent.
Budget 2024 also announces the Government’s intention to increase the vaping product excise duty rate by 12% to come into force on July 1, 2024.
While Budget 2024 introduces and expands on various capital gains exemptions, the government proposes an increase in capital inclusion rates from 50% to 66.67% for individuals with capital gains in excess of $250,000 and for all capital gains earned by trusts.
Budget 2024 proposes an increase to the capital gains inclusion rate on capital gains above $250,000 annually for individuals and all capital gains realized for trusts from 50% to 66.67% effective June 25, 2024. This $250,000 threshold will be realized net of any current-year capital losses as well as capital losses from prior years applied to reduce current-year capital gains. The threshold will also account for any reductions to net capital gains in respect of the lifetime capital gains exemption (LCGE), proposed employee ownership trust capital gains exemption, and the newly proposed Canadian entrepreneurs’ incentive. Net capital losses from prior years will continue to be deductible against current-year taxable capital gains by adjusting their value to reflect the inclusion rate of the capital gain being offset.
To reflect the new capital gains inclusion rate, individuals claiming the stock option deduction would be entitled to a deduction at 33.33% of the taxable benefit to the extent the combined capital gains and stock option benefit exceeds $250,000.
Capital gains from the sale of a principal residence (PR) and any gains realized on the sale of a PR will remain tax-free. However, properties that have been acquired as an investment asset and are flipped (i.e., bought and sold within a year) will continue to be treated as business income unless certain exemptions are met.
Budget 2024 proposes to increase in the LCGE from $1,016,836 to $1,250,000 on the sale of qualified small business corporation shares and eligible farming and fishing property effective June 25, 2024. This is an increase beyond the current level of inflation and was likely included due to the increase in capital gains inclusion rates.
To continue to encourage entrepreneurship and competitiveness, the government is proposing to introduce a Canadian entrepreneurs’ incentive which will reduce the inclusion rate on the disposition of qualifying shares by an eligible individual. Eligible capital gains would be included at a rate of 33.3% starting on Jan. 1, 2025 with a lifetime limit that would be phased by increments of $200,000 each year until it reaches a lifetime maximum of $2 million by Jan 1, 2034.
This incentive is available to founding investors in certain sectors who own at least 10% of shares in their business from initial subscription and where the company has been their principal employment for at least five years. The share cannot represent a direct or indirect interest in a professional corporation.
This measure, in conjunction with the enhanced LCGE, is expected to attract entrepreneurship as it will provide a combined exemption of at least $3.25M on the sale of a business when fully rolled out.
Budget 2024 builds on the existing proposed changes to the alternative minimum tax (AMT) introduced in Budget 2023. The amendments to these proposed rules include:
The government proposes additional exemptions for certain trusts established for the benefit of Indigenous groups, provided all or substantially all of the contributions made to the trust in the year are amounts paid under the law or settlement agreement in place.
These amendments to this measure would apply to taxation years that begin on or after Jan. 1, 2024.
In the 2023 Fall Economic Statement, the government proposed to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from tax, subject to certain conditions. Budget 2024 proposes to provide further details on this exemption.
If the following conditions are met, an individual would qualify for the exemption:
The exemption will be shared among all individuals disposing of shares to an EOT. Prescribed disqualifying events would deny or limit the exemption.
These proposals will be effective for qualifying dispositions of shares that occur between Jan. 1, 2024 and Dec. 31, 2026. Further details on the proposed exemption will be released in the coming months.
Other measures of note include:
Intention to proceed with numerous previously announced tax measures, including:
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Canada’s housing supply is targeted with tax incentives relating to the construction of certain rental housing, including accelerated CCA and an exception from interest deductibility limitations.
Read more: Budget 2024: A boon or bane for the real estate industry?
Canada continues its commitment to environmental measures by expanding clean economy tax credits.
Read more: Does Budget 2024 sufficiently encourage industrials to innovate?
To improve the rules related to registered charities, Budget 2024 extends the period for qualifying foreign charities to 36 months and simplifies the requirements for issuing donation receipts.
Dispositions of shares of professional corporations will be excluded from the Canadian entrepreneurs’ incentive but are compensated by an increased lifetime capital gains exemption.
Read more: Budget 2024 shakes up exit opportunities for professional services
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Source: RSM Canada
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https://rsmcanada.com/insights/services/business-tax-insights/federal-budget-commentary.html
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