Year: 2024

Executive summary

Effective June 25, 2024, Federal Budget 2024 proposed to increase the capital gains inclusion rate from 50% to 66.67%. The increased rate will lead to a higher tax liability for taxpayers owning assets such as shares, bonds, multiple properties etc. upon disposal of such assets with a realization of a capital gain. Individuals with excess capital gains above the annual threshold of $250,000 are to be taxed at a higher rate. However, for corporations and trusts, the higher rate will apply to all the capital gains beginning the proposed date. As the effective date of the amendment is just few weeks away, taxpayers need to be proactive and undertake tax planning and optimization strategies to make sure that the higher rate doesn’t come as a surprise to them later on.

Plan ahead to overcome increased capital gains inclusion rate

Background

Canada’s 2024 Federal Budget (Budget 2024), tabled on April 16, 2024, introduced significant changes to the taxation of capital gains. Among these changes, the most notable is the increase in the inclusion of capital gains in taxable income, which under the current rules provides a 50% inclusion rate.

Taxpayers owning assets like stocks, bonds, rental properties, a secondary home, or even business equipment will be impacted by the amendment if they dispose of such assets and realize a capital gain.

Capital gains arising from the sale of the principal residence will not be impacted by the proposed amendment and will remain tax-free.

Proposed inclusion rate changes in Budget 2024

Budget 2024 proposes to amend the capital gains inclusion rate for capital gains realized on or after June 25, 2024, as below:

Type of taxpayer	Proposed Budget 2024 changes
Corporations and Trusts	The capital gains inclusion rate will be increased from 50% to 66.67%.
Individuals	For capital gains that exceed an annual threshold of $250,000, the capital gains inclusion rate will be increased from 50% to 66.67% The $250,000 annual threshold would apply to current year capital gains net of: Current year capital losses Capital losses of other years applied to reduce current year capital gains Capital gains in respect of which the individual claimed the lifetime capital gains exemption, the proposed employee ownership trust exemption, or the proposed Canadian entrepreneurs’ incentive

The value of net capital losses from previous years will be adjusted to align with the inclusion rate applicable to the capital gains being offset.

To facilitate the amendment, transitional rules will apply to taxation years that begin before and end on or after June 25, 2024:

• Capital gains realized before June 25, 2024 would be subject to the 50% inclusion rate; and,
• Capital gains realized on or after June 25, 2024 would be subject to a 66.67% inclusion rate.

The proposed transitional rules will ensure that the $250,000 threshold is not prorated in 2024 and will apply only against capital gains realized on or after June 25, 2024.

Budget 2024 also proposes to amend the taxability of the employee stock options (ESO). Generally, the taxation of ESOs in Canada mirrors the taxation of capital gains, except if the ESO relates to certain large corporations. Under the current rules, employees are generally entitled to a deduction of 50% of the taxable benefit arising from the qualifying stock options, resulting in a net 50% inclusion of the ESO taxable benefit in the taxable income. However, with the proposed amendment, the ESO deduction will also be reduced from 50% to 33.33%, to the extent that both the ESO taxable benefit and capital gains exceed $250,000.

Tax implications

The increase in the capital gains inclusion rate will change the effective rate of tax on the capital gains realized by the taxpayers on or after June 25, 2024. The effective change in tax rates due to these proposed changes is summarized below:

Current taxation rates (Ontario)
	Individuals in the highest marginal tax bracket	Non-Canadian-controlled private corporation (CCPC) corporations
Tax rate on ordinary income	53.53%	26.50%
Tax rate on capital gains [A]	26.77%	13.25%
Proposed taxation rates (Ontario)
	Individuals in the highest marginal tax bracket	Non-CCPC corporations
Tax rate on ordinary income	53.53%	26.50%
Tax rate on capital gains* [B]	35.69%	17.67%
Percentage increase in tax rates due to proposed rules [B] – [A]	8.92%	4.42%

*For individuals, this rate applies to capital gains in excess of the proposed $250,000 threshold. For capital gains of $250,000 or less, the highest marginal tax rate would remain the same at 26.77%.

Planning opportunities

RSM can assist taxpayers in taking proactive measures before the proposed capital gains inclusion rules take effect on June 25, 2024 to minimize tax on capital gains. Examples of planning opportunities in light of the amendment can include:

Accelerating transaction timelines (e.g., sales, reorganizations, estate freezes, etc.)

Taxpayers who are currently in the process of selling a capital asset such as business equipment, stocks, or undertaking a corporate reorganization/estate freeze may consider accelerating the timeline of their transactions to close before June 25, 2024. Business owners considering an intergenerational transfer of their business under the rules introduced by Bill C-208 may want to consider closing before June 25, 2024.

Preparing tax plans and/or reviewing current draft plans will ensure the optimal timing of transactions.

Crystalizing capital gains before June 25, 2024 and utilizing tax attributes or exemptions

Where it is not feasible for taxpayers to accelerate the timelines of their transactions, taxpayers may consider crystallizing the inherent capital gains before June 25, 2024. Mitigation strategies such as the lifetime capital gains exemption or maximizing the utilization of carry-forward capital loss balances should be assessed to minimize the taxes on capital gains.

Maximizing carrybacks of capital losses – now vs. defer?

The value of net capital losses from previous years will be adjusted to align with the applicable inclusion rate. Therefore, taxpayers may wish to consider deferring the utilization of losses carried forward over the next few years as they will be more valuable when used against the capital gains realized at a higher rate. Modeling the utilization of carry-forward capital losses for future years can be undertaken to minimize anticipated tax costs.

Optimal structure of holding capital assets – corporations, individuals, trusts, partnerships, or a combination thereof?

Individuals who do not expect to earn capital gains exceeding the $250,000 threshold may want to consider holding their investments directly rather than a corporation as corporations will not have a minimum threshold under the proposed changes. Actions to take now include modeling the optimal structure of holding assets considering future capital gains, capital loss balances, and/or exemptions.

Revisiting estate plans

Budget 2024 was notably silent on whether any exceptions will be made for capital gains arising on death under the proposed changes. Generally, the death of a taxpayer triggers the deemed disposition of all the taxpayer’s assets at fair market value, resulting in realized capital gains. Consequent to the amendment, such deemed disposition will lead to higher taxes on death. Individuals should revisit existing estate plans in light of the higher inclusion rate to account for the increased tax liability upon death.

Only 8 weeks left to plan

The capital gains amendment underscores the need for preemptive tax planning. Although no legislation currently exists and the proposed changes may undergo further revisions, the new rules are proposed to be effective in less than two months. This leaves a short window for taxpayers to assess their portfolios, explore tax-optimization opportunities, and strategize their next course of action.

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This article was written by Patricia Contreras, Daniel Mahne, Chetna Thapar and originally appeared on 2024-04-26 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2024/plan-ahead-to-overcome-increased-capital-gains-inclusion-rate.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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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.

Enhancing CRA’s information gathering capabilities

In general, a personal services business (PSB) exists where the individual performing the work would be considered to be an employee of the payer if it were not for the existence of the individual’s corporation. These workers are often referred to as incorporated employees. Where it is determined that the income is earned from a PSB, the corporate tax rate increases significantly (potentially as high as 39% over the small business rate, depending on the province). In addition, significantly fewer expenditures are deductible against the income.

Since 2022, CRA has been conducting an educational pilot project in respect of PSBs. They have recently published findings from the project and highlighted future planned phases.

Phase I – Identifying companies that hire PSBs

Phase I of the project was conducted from June to December 2022. The results were as follows:

• approximately 10% of participating corporations were likely to be carrying on PSBs;
• approximately 64% of potential PSBs were incorrectly claiming the small business deduction (an average of $16,711 of additional federal corporate tax would be payable if this were corrected);
• nearly 74% of potential PSBs work in the following three industries:
  • transportation and warehousing (35%), with 95% of these working in freight trucking;
  • professional, scientific and technical services (26%); and
  • construction (13%).

Phase II – Identifying potential PSBs

CRA indicated that Phase II is planned for October 2023 to June 2024, and will examine approximately 2,100 randomly selected corporations identified as potential PSBs. The examination will include a voluntary interview and focus on the 2022 tax year. CRA indicated that they hope to gain greater insight into how and why PSBs operate the way they do.

Phase III – Assisted compliance for PSBs

CRA indicated that the timing of Phase III has not yet been determined. They expect to address the 2022 and subsequent tax years with continued education, review of PSBs and assisted compliance of non-compliant PSBs.

ACTION ITEM: Identification of PSBs has become a focal point for CRA. If there is a risk of your corporation carrying on a PSB, inquire as to the corporation’s exposure and potential mitigation strategies.

 

On March 26, 2024, the Minister of Finance Peter Bethlenfalvy released the 2024 Budget: Building a Better Ontario.  The budget focuses on limited tax relief due to the current budget deficit, municipal vacant homes tax, and extended relief for gas and fuel taxes.

Business tax measures:

The corporate tax rates remain unchanged at:

• Small business tax rate: 12.2%
• General corporate tax rate: 26.5%
• Manufacturing and processing tax rate: 25.0

Modifications to the  (OCASE) Tax Credit:

The Ontario Computer Animation and Special Effects (OCASE tax credit), which applies to eligible labour expenditures related to computer animation and special effects activities, has been modified:

• Qualifying corporations must now have a minimum eligible labor expenditure of $25,000 for each production claimed within a specific time limit.
• This change eliminates the need for film or television productions to be certified for other tax credits to qualify for OCASE.
• Effective for eligible productions where computer animation and special effects work begins on or after March 26, 2024.

Individual tax measures:

New provincial policy framework to assist housing affordability

In 2017, Ontario’s Fair Housing Plan was implemented empowering Toronto and other interested municipalities with an option to introduce a tax on vacant homes. Currently, Toronto, Ottawa, and Hamilton have the authority to impose such tax. To help address housing affordability issues in the province, the Ontario Budget 2024 proposes to extend authority to all municipalities to impose a tax on vacant homes. Municipalities will be supported through a new, forthcoming provincial policy framework that will set out best practices for implementing the tax, including encouraging a higher tax rate for vacant homes owned by foreigners. There is no date set for implementing this new policy framework.

Other tax measures:

Updates to senior citizen annual income payments

The Ontario Guaranteed Annual Income System (GAINS) provides monthly, non-taxable payments to qualifying low-income seniors. Starting July 2024, Ontario Budget 2024 proposes to increase the maximum monthly benefit from $83 to $87 for eligible single seniors and from $168 to $174 for couples. Additionally, going forward, the benefit will be indexed for inflation annually.

To expand the number of eligible recipients, the annual private income eligibility threshold is proposed to be increased from $1,992 to $4,176 for single seniors and from $3,984 to $8,352 for couples.

Ontario extends gasoline and fuel tax cuts

On July 1, 2022, the gasoline and fuel tax rates were cut by 5.7 and 5.3 cents per litre, respectively, reducing both rates to 9 cents per litre. Ontario Budget 2024 proposes to extend these rate cuts until Dec. 31, 2024.

Changes to alcohol taxation

The government plans to scrap the basic tax for Ontario wine and wine coolers in on-site winery retail stores starting April 1, 2024. A review of taxes and fees on other alcoholic beverages will also be conducted with the aim to boost competitiveness for Ontario producers and consumers.

Enhancements to the non-resident speculation tax

Ontario implemented a non‐resident speculation tax (NRST) in October 2022 on residential property purchased by a foreign entity. The government is aiming to strengthen the NRST with amendments to support compliance and improve fairness. In addition, Ontario is taking steps to increase information sharing between provincial, federal, and municipal governments to better understand vacancy and foreign‐purchasing patterns.

 

Various changes and issues have arisen in respect of T-slips to be filed and processed for the 2023 year.

Dental benefits

Beginning with the 2023 year, issuers of the T4 Statement of Remuneration Paid and T4A, Statement of Pension, Retirement, Annuity, and Other Income must report whether the recipient or any of their family members were eligible to access dental insurance or dental coverage of any kind (including health spending and wellness accounts) from their current or former employment.

The T4 will include new box 45, employer-offered dental benefits.

The T4A will include a new box 015, payer-offered dental benefits. This box must be completed if an amount is reported in box 016, pension or superannuation.

CRA indicated that it is mandatory to indicate whether the employee/former employee, or any of their family members were eligible, on December 31 of that year, to access any dental care insurance, or coverage of dental services of any kind, that the employer offered.

The employer/issuer must select which of the following scenarios apply.

1. Not eligible to access any dental care insurance, or coverage of dental services of any kind
2. Payee only
3. Payee, spouse, and dependent children 4.Payee and their spouse 5.Payee and their dependent children

Electronic Distribution

In a December 13, 2023, update to CRA’s webpage, CRA discussed the ability to distribute T4, T4A, T5, and T4FHSA slips using the issuer’s secure electronic portal without obtaining written or electronic consent from the employees or recipients. However, using a secure electronic portal is not available where any of the following situations exist:

• the employee or recipient requested that paper copies of the slips be provided;
• the employee or recipient cannot reasonably be expected to have access to the slips in electronic format at the time the slips are issued; or
• for T4s, if the issuer distributes the T4 when the employee is on extended leave or is a former employee at the time the slip is issued.

Employers/payers must also provide the option to receive these slips in paper form.

If distributing these slips by email, the employer/payer must receive consent in writing or electronic format before sending by email.

Electronic filing thresholds

Effective January 1, 2024, certain information returns must be filed electronically with CRA where more than 5 information returns (reduced from 50) of a particular type are required for a calendar year. The impacted information slips include forms NR4, T5007, T5018, T4ANR, T5, T5013, T4A, T4, and T3. A penalty of $125 will apply where between 6 and 50 slips are filed on paper.

Errors on T-slips

In a recent communication, CRA addressed the concern that auditors and appeals officers may base a decision on issued T-slips without considering the possibility that the issuer made an error in their preparation.

CRA stated that it is the taxpayer’s responsibility to verify the validity and accuracy of the information slip. If the taxpayer notices an error, the taxpayer should contact the issuer to attempt to discuss/resolve the issue. CRA noted that they cannot validate the accuracy of a slip as the relevant information to do so is retained by the issuer and the taxpayer. If the issuer refuses to correct the form, the taxpayer can inform CRA by filing an employee complaint with the employer accounts and services section.

When a taxpayer objects to CRA’s assessment/ reassessment, the taxpayer must provide the reason for the objection. The appeals officer should investigate the accuracy of the information slip when it is part of the disputed issue. The appeals officer may also ask the taxpayer to provide representations.

ACTION ITEM: Various changes to T-slip completion, filing, and distribution are effective for 2023 slips, filed in early 2024. Ensure that these changes are incorporated into your business processes.

On December 11, 2023, Health Canada issued details on the Canada dental care plan that would cover a wide variety of dental services for certain Canadian residents. The plan will be rolled out from late 2023 to 2025.

To be eligible, the individual and their spouse or commonlaw partner (if applicable) must meet all of the following conditions:

• have an adjusted family net income (AFNI) of less than $90,000;
• be a Canadian resident for tax purposes;
• have filed their tax return in the previous year; and
• not have access to dental insurance, meaning that it is not available through the taxpayer’s or a family member’s employer or pension, or not purchased through a group plan.

Eligibility for children under 18 will be determined by their parents’/guardians’ eligibility.

Individuals will need to meet the eligibility requirements annually. More information on the annual reassessment process will be provided by the government at a later date.

The CDCP will pay for eligible services provided by an oral health provider (such as dentists, denturists, dental hygienists, and dental specialists), less a portion that is to be paid directly by the patient (the “co-payment”). No copayment is required if AFNI is under $70,000. The co-payment starts at 40% for AFNI between $70,000 and $79,999 and increases to 60% for AFNI between $80,000 and $89,999.

Oral health providers are encouraged to follow the CDCP fees, which are not the same as the provincial and territorial fee guides, so their patients do not face additional charges at the point of care. Oral health providers who have enrolled with CDCP will bill the plan directly. Health Canada noted that patients should ask if the provider has enrolled in the CDCP when booking their appointment to limit unexpected out-of-pocket payments.

The program will be first rolled out to seniors with application invitation letters starting in December 2023. Eligible seniors will be able to engage in covered services as early as May 2024. Those with a disability tax credit certificate (T2201) or under 18 years of age can begin to apply as of June 2024. The remaining eligible residents will be able to apply in 2025.

CRA noted that only those who are 70 years old or older by March 31, 2024, have AFNI of less than $90,000 for 2022, and were Canadian tax residents for 2022 will receive the initial application instruction letters.

Once an individual has applied and is determined to be eligible, Service Canada will share the individual’s information with Sun Life, the contracted service provider, for enrolment into the CDCP. Eligible individuals will receive a member card, and be notified of the start date of their coverage. The start date will vary based on when each group can apply, when the application is received and when enrollment is completed.

Oral health providers will be able to enroll voluntarily as a participating CDCP provider directly with Sun Life in early 2024. Details on this process will be available on Health Canada’s webpage when enrollment opens. Oral health providers enrolled in the CDCP will be required to submit the claims directly to Sun Life for payment rather than having patients seek reimbursement from Sun Life for services covered under the plan.

ACTION: If you are an eligible individual, apply for this new benefit when invited. If you are a oral health care provider, consider enrolling as a provider in the plan.

The $2/day flat rate method available to claim expenses for employees working from home was a temporary administrative measure only available from 2020 to 2022; it is no longer available in 2023. As such, employees working from home can only use the detailed calculation when claiming expenses.

For 2023 and subsequent years, a deduction can only be claimed where one of the following criteria is met:

1. the work space was the place where the individual principally (more than 50% of the time) performed their duties of employment; or
2. the individual used the space exclusively during the period to earn employment income and used it on a regular and continuous basis for meeting clients, customers, or other people with respect to employment.

CRA indicated that they would consider i) to be met by employees who were required to work from home more than 50% of the time for a period of at least four consecutive weeks in the year.

ACTION ITEM: The $2/day temporary flat rate method cannot be used by employees to claim home office expenses in 2023. Instead, receipts and records must be kept to make claims under the detailed method.