New Legislation Released Increasing the Capital Gains Inclusion Rate in Canada

Executive summary

On June 10, 2024, the Ministry of Finance announced amendments to the Income Tax Act to increase the capital gains inclusion rate effective June 25, 2024. Corporations and trusts will see an increase from 1/2 to 2/3, while individuals realizing capital gains of more than $250,000 will also be subject to the increased rate. The upcoming legislation will maintain the principal residence exemption, prohibit tax elections or on-paper realizations, and ensure that capital gains cannot be averaged over multiple years, among other measures.


Background

On June 10, 2024, the Ministry of Finance released a Notice of Ways and Means Motion (NWMM) to amend the Income Tax Act and Income Tax Regulations to implement the Budget 2024 initiative to increase the capital gains inclusion rate. Starting June 25, 2024, the capital gains inclusion rate was originally proposed to be adjusted as follows:

  • For corporations and trusts: The capital gains inclusion rate will be increased from 1/2 to 2/3.
  • For individuals: For capital gains that exceed an annual threshold of $250,000, the capital gains inclusion rate will be increased from 1/2 to 2/3.

The NWMM provides an overview of various measures introduced by the government to implement the higher capital inclusion rate proposed in the Budget 2024. This article will focus on measures impacting middle market taxpayers.

Little relief offered despite requests from numerous interested parties

In a related press release by the Department of Finance, certain suggestions put forth by interested regulatory parties were quelled, offering the following summary of the changes:

  • No changes to the principal residence exemption.
  • No ability to elect to internally trigger capital gains in anticipation of the June 25 deadline.
  • No ability to average capital gains over multiple years to stay under the $250,000 threshold.
  • No ability to split the $250,000 threshold with corporations.
  • No exceptions for specific assets or types of corporations.
  • No distinction based on how long an asset is held or otherwise.

On top of the summary above, the Department of Finance also released a more comprehensive summary of the changes.

New draft legislation
Transitionary rules for the new capital gains inclusion rate

The draft legislation acknowledged that the inclusion rate increase date of June 25, 2024, being in the middle of many ordinary taxation years, offers complications. As a result, the draft legislation introduces transitionary measures to identify how the inclusion rate will be applied based on a taxpayer’s individual circumstances. Firstly, the draft legislation separates out a taxation year between two relevant periods:

  • The beginning of the taxation year until the end of the day June 24, 2024 (“Period 1”); and,
  • The beginning of the day June 25, 2024 until the end of a taxpayer’s taxation year (“Period 2”)

Taxpayers would then need to net capital gains against capital losses for each period to determine whether that particular period yielded either a cumulative net capital gain or net capital loss. Then, the following capital gains inclusion rates would apply:

  • If a taxpayer only has net capital gains or net capital losses in Period 1 and Period 2, a 1/2 inclusion rate would apply for gains/losses incurred in Period 1 and a 2/3 inclusion rate would apply for gains/losses incurred in Period 2.
  • If a taxpayer has no net capital gains or net capital losses in either period, a 2/3 inclusion rate would apply for all gains/losses.
  • If a taxpayer has net capital gains in Period 1 that exceed net capital losses in Period 2, a 1/2 inclusion rate would apply for all gains/losses.
  • If a taxpayer has net capital losses in Period 1 that exceed net capital gains in Period 2, a 1/2 inclusion rate would apply for all gains/losses.
  • If a taxpayer has net capital gains in Period 1 that are less than net capital losses in Period 2, a 2/3 inclusion rate would apply to all gains/losses, to the extent not sheltered by the $250,000 threshold.
  • If a taxpayer has net capital losses in Period 1 that are less than net capital gains in Period 2, a 2/3 inclusion rate would apply for all gain/losses.

Interested parties should consider reading the draft legislation for specific timing considerations that may apply to their situation when trying to determine whether certain gains/losses arise during Period 1 or Period 2.

New $250,000 threshold for individuals

Individuals (excluding most trusts) will be able to shelter the first $250,000 of their capital gains to remain taxable at 1/2 even after June 24, 2024. This threshold would apply to all capital gains incurred on or after June 25, 2024 and will be net of any capital losses for the year, the lifetime capital gains exemption, the employee ownership trust tax exemption, and the proposed Canadian entrepreneurs’ incentive. This threshold will be algebraically determined by multiplying the threshold by 1/6 and allowed as a deduction from taxable capital gains, allowing for an effective 1/2 inclusion rate. Note that this threshold will not be prorated for 2024.

Capital gains reserves

Under certain circumstances, taxpayers are able to defer the recognition of capital gains in situations where the proceeds of the sale of capital property are received over a number of years. In these circumstances, a capital gain is realized in income with a reserve being taken based on the amount of proceeds that have not yet been received, with a minimum of 10% or 20% of the gain to be brought into income each year (depending on the type of asset sale and subject to the new draft intergenerational transfer rules). The reserve enters into taxable income in the following year.

For purposes of the capital gains inclusion rate change, reserves will be considered to enter into income on the first day of the taxation year. This means that taxation years that begin before June 25, 2024 will have that capital gain subject to a 1/2 inclusion rate. As the reserve enters into income in subsequent years, the prevailing capital gains inclusion rate for that year would apply (i.e., possibly 2/3). In other words, the capital gains inclusion rate on the actual date of sale does not get maintained as the reserve is utilized.

Net capital loss carryforwards

Net capital losses can be carried back three years and forward indefinitely to offset capital gains in other years, with adjustments made to reflect the applicable inclusion rate. For example, net capital losses incurred when the inclusion rate was 1/2 and utilized when the capital gains inclusion rate is 2/3 will be multiplied upwards to 4/3, in order to allow the relevant capital loss to offset an equivalent capital gain regardless of inclusion rates.

Employee stock option deduction

Under the current rules, when an employee exercises a stock option, the difference between the fair market value of the stock and its exercise price results in a taxable benefit (the “stock option benefit”) and is included in the employee’s income. Where the employer is a Canadian-controlled private corporation (CCPC), the stock option benefit arises at the time the shares are ultimately disposed of or exchanged by the employee. Generally, the taxation of employee stock options in Canada mirrors the taxation of capital gains and hence, the employees can claim a stock option deduction at the rate of 1/2 of the stock option benefit.

Consequent to the proposed amendment to the inclusion rate, the stock option deduction would be 1/3 of the stock option benefit for stock options exercised (or disposed of or exchanged in case of a CCPC) on or after June 25, 2024. The annual $250,000 limit described above would apply to the total amount of stock option benefit and capital gains for a particular taxation year. In a situation where the total stock option benefit and capital gains exceed $250,000, the taxpayer would have the discretion to choose the preferential tax treatment (lower inclusion rate) for allocating the amounts.

Allowable business investment losses

A business investment loss arises when bad debt arises on the amount owed by a small business corporation (SBC) or the shares of a bankrupt SBC are disposed of. 1/2 of the capital losses, referred to as allowable business investment losses (ABIL), can be used to offset other income like income from business, property, and employment. Any unused ABIL can be used to offset income from any source and can be carried back three years and carried forward 10 years. Any amount of ABIL remaining after 10 years gets converted to an ordinary capital loss that can be carried forward indefinitely and used to offset only capital gains.

With the increase in the capital gains inclusion rate, 2/3 of business investment losses realized on or after June 25, 2024, would be deductible. Furthermore, unlike other capital losses carried over, ABILs would not be adjusted in value to reflect the new inclusion rate that applies in the year the loss is claimed. In other words, ABILs realized on or after June 25, 2024 would be determined based on the 2/3 inclusion rate even if carried back and applied in any of the three previous years.

Partnership allocations and trust designations

Generally, partnerships calculate net income as if they are a taxable entity for Canadian tax purposes. The income is then allocated to the partners based on the partnership agreement. Capital gains earned in a partnership are typically transferred out as taxable capital gains for the year. For partnerships that have capital gains in a fiscal period that straddle June 25, 2024, those taxable capital gains, allowable capital losses, or ABILs will instead be grossed up back to the original amount and deemed to be realized by the relevant partner. Partnerships would be required to disclose to partners which gains arose during which period, to potentially allow access to the $250,000 threshold.

Trusts are taxable entities for Canadian tax purposes and compute taxable income accordingly. Trusts can allocate its income to beneficiaries at the end of the trust’s taxation year, and also preserve the character of the income for beneficiaries, to allow them to take advantage of various tax preferred treatments. For trust taxation years that straddle June 25, 2024, trusts would similarly gross-up their net capital gains back to their original amount and have them deemed to be recognized by the relevant beneficiary. Trusts would be required to disclose to those beneficiaries which gains arose during which period, with certain simplifying calculations for commercial trusts.

International tax adjustments

Certain international tax measures will be adjusted to be brought in line with the change in capital gains inclusion rate, including:

  • Computing the foreign accrual property income of a foreign affiliate and deductions for dividends received from a foreign affiliate’s hybrid surplus.
  • The withholding tax rate for non-residents disposing of taxable Canadian property will increase from 25% to 35%, effective for dispositions occurring on or after Jan. 1, 2025.
Only two weeks left for implementation

Overall, the changes to the capital gains inclusion rate and related measures remain largely unchanged from when they were originally announced in Budget 2024. Despite updated draft legislation being expected at the end of July, it is not expected to affect the new measures significantly. Taxpayers are only left with two weeks to finalize any tax planning they would like to implement prior to June 25, 2024, after which they should expect a significantly different tax landscape for capital gains in Canada.


This article was written by Daniel Mahne, Chetna Thapar, Patricia Contreras and originally appeared on 2024-06-10. Reprinted with permission from RSM Canada LLP.
© 2024 RSM Canada LLP. All rights reserved. https://rsmcanada.com/insights/tax-alerts/2024/new-legislation-increasing-capital-gains-inclusion-rate-canada.html

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The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP 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 LLP 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.

What do the proposed Alternative Minimum Tax changes mean for charitable giving?

Executive summary

Individuals and trusts who benefit from tax deductions, credits and exemptions may find themselves paying a higher rate of tax under the Alternative Minimum Tax (AMT) regime. The 2023 and 2024 Federal Budgets proposed changes to the calculation of AMT by limiting the inclusion rates of some significant deductions and credits, including charitable donations.


What is AMT?

For each taxation year, individual taxpayers and certain trusts calculate their taxes payable under two methods: regular income tax and AMT. The method which yields the higher taxes payable determines the amount the taxpayer owes for the year. Compared to the regular income tax method, the AMT limits the ability to offset income earned with certain eligible deductions and credits. Typically, AMT applies in situations where high-income taxpayers substantially lowered their taxes payable due to deductions and credits.

If a taxpayer is subject to AMT in a given year, the difference between the amount calculated under the AMT method and the amount calculated under the regular tax method can be carried forward for seven years. The carry forward is treated as a credit against taxes payable calculated under the regular tax method.

Charitable Donations under the Current AMT regime

Under the regular tax system, taxpayers that make donations of publicly listed securities receive a tax receipt for the fair market value of the securities donated and an exemption on any applicable taxes on the accrued capital gain of those donated securities.

Similarly, under the current AMT regime, charitable giving does not have an impact on the AMT calculation as:

  • the full amount of all donation tax credits can be fully applied against any AMT owing and;
  • the full capital gains from donating public securities are excluded in calculating AMT owing

For high income taxpayers, the current method allows them to shelter potentially large accrued gains on the donation of publicly traded securities, as opposed to donating an equivalent cash amount.

Charitable Donations under the Proposed AMT regime
The following changes will be effective Jan. 1, 2024.

The federal government has proposed to increase the AMT flat rate from 15% to 20.5% when calculating adjusted taxable income. Moreover, it is proposed to concurrently raise the AMT exemption threshold, being the amount of adjusted taxable income to which AMT does not apply, from $40,000 to $173,000. This should result in fewer Canadians being subject to AMT.

Alongside the increased rate and exemption base, the treatment of charitable donations is proposed to be changed so that:

  • an increase in the inclusion of capital gains realized on the donation of qualifying securities from 0% to 30%, and,
  • A decrease in the recognition of the donation tax credit from 100% to 80%

For large donations of publicly traded securities, taxpayers may now find themselves with an AMT payable, when previously any accrued gains would have been exempt.

Impact on Taxpayers

The proposed changes to charitable donations will likely have a significant impact on how taxpayers subject to the new AMT make donations going forward.

Consider a taxpayer (below) that wants to make a significant donation of publicly traded securities with a large accrued capital gain. Under the proposed changes, the capital gain inclusion rate for the donated property is 30% alongside limiting the donation tax credit to 80%. This increases the taxpayer’s tax liability that they will have to personally fund even when no consideration has been received for the donated property and may result in taxpayers being less inclined to donate as a result.

 

Current AMT

Proposed AMT

Earned Income

1,000,000

1,000,000 (A)

Capital Gain on donated public securities

500,000

500,000

Taxable Capital Gain on donated public securities

150,000 (B)

Adjusted Taxable Income

1,000,000

1,150,000 (A+B)

Basic AMT exemption

(40,000)

(173,000)

Taxable Income

960,000

977,000

AMT rate

15%

20.5%

 

144,000

200,285

Donation Tax Credit

(165,000)

(132,000)

 

(21,000)

68,285

Planning Strategies

Taxpayers that consider donating significant cash or property on an annual basis need to start planning ahead to determine if these donations will result in any AMT being payable.

Perform charitable giving through a corporation

Taxpayers may consider donating publicly traded shares with accrued capital gains through a corporation, as AMT is not applicable at the corporate level. This may be advantageous as the tax-free amount of the capital gain of the donation of public securities will be added to the corporation’s Capital Dividend Account (CDA) and can be distributed to shareholders on a tax-free basis.

Spreading out the donations

Taxpayers may consider donating smaller amounts over the span of several years as opposed to one large lump-sum. This could help limit the amount calculated under the AMT method in a given year.

Managing taxable income

If taxpayers have the flexibility to do so, they may consider managing their income in future years to ensure they can get a credit from any tax paid under AMT that can be applied against regular income tax for up to seven years.

Charitable giving at death

AMT does not apply in the year of death. Taxpayers may consider charitable giving through their will at death to avoid AMT but still create the positive impact of giving.


This article was written by Farryn Cohn and originally appeared on 2024-05-29 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2024/proposed-alternative-minimum-tax-changes.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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How to Make a Payment with Canada Revenue Agency for Your Business

Online Banking Payments

Make a payment to the CRA through online banking, the same way you pay your phone or hydro bill.

  • Sign in to your financial institution’s online business banking service.
  • Under “Add a payee,” look for an option such as:
    • Federal – Corporation Tax Payments – TXINS
    • Federal – GST/HST Payment – GST-P (GST-P)
    • Federal Payroll Deductions – Regular/Quarterly – EMPTX – (PD7A)
    • Federal Payroll Deductions – Threshold 1 – EMPTX – (PD7A)
    • Federal Payroll Deductions – Threshold 2 – EMPTX – (PD7A)
    • Federal – Canada emergency wage subsidy repayment
  • Enter your 15 digit business number as your CRA account number.

You are responsible for any fees that may be charged by your financial institution.


Debit Card Payments Via ‘My Payment’

Make a payment with your Visa® Debit, Debit MasterCard®, or Interac® Online debit card.

My Payment is an electronic payment service offered by the CRA that uses Visa® Debit, Debit MasterCard® or Interac® Online for businesses to make payments directly to the CRA using their bank access cards.  The CRA does not charge a fee for using the My Payment service. Credit Cards not accepted with this service.

To use My Payment you need a card with a Visa Debit logo, a Debit MasterCard logo, and/or an Interac Online logo from a participating Canadian financial institution.

If your bank access card has both a Visa Debit logo and an Interac logo, use the Visa Debit option to pay.

If your bank access card has both a Debit MasterCard logo and an Interac logo, use the Debit MasterCard option to pay.

Before you start ask your financial institution about your daily or weekly transaction limit and any fees for making online payments. The CRA does not charge a fee for using this service.

CRA’s My Payment Webpage


Pay Through a Canadian Financial Institution

To make a payment at your Canadian financial institution, you will need a personalized remittance voucher. Financial institutions will not accept photocopies of remittance vouchers or payment forms.

You can make a payment in foreign funds.  The exchange rate you receive for converting the payment to Canadian dollars is determined by the financial institution handling your transaction on that day. You are responsible for any fees that are incurred.

Arrangements will need to be made with your financial institution if you are making a payment of more than $25 million.

Be sure to provide accurate information to help the CRA apply your payment to the intended account.  A personalized remittance voucher will help CRA apply your payment properly.  You can request personalized remittance vouchers online or by phone.


Mailing Your Payment

The government released legislation, effective January 1, 2024, that any tax payment or remittance made by a corporation to the CRA exceeding $10,000 must be done through electronic means.

If your tax payments exceed $10,000, you should no longer make these payments using a cheque.

It is highly encouraged to remit payments to the CRA electronically even if the amount is less than $10,000 as electronic payments are processed quicker. This will also significantly reduce the risk of lost or misapplied payments. Furthermore, it is usually far easier and faster for the CRA to trace a lost or misapplied electronic payment than a cheque mailed to the CRA.

If you still wish to send a cheque or money order, make it payable to the Receiver General for Canada and include your remittance voucher. Note: Payment is considered received on the date CRA receives the cheque, not the postmark date.

Mailing address:
Canada Revenue Agency
PO Box 3800 STN A
Sudbury ON P3A 0C3


Payment by Pre-Authorized Debit (PAD)

Set up a pre-authorized debit agreement and eliminate the need for postdated cheques.

Pre-authorized debit (PAD) is a secure, online, self-service payment option for individuals and businesses. This option lets you set the payment amount that you authorize the CRA to withdraw from your Canadian chequing account to pay your taxes on a date, or dates, of your choosing.

Due to the processes that must take place between the CRA and the financial institution, the taxpayer’s selected payment date must be at least 5-business days from the date their PAD agreement is created or managed.

See Federal holidays for a list of non-business days.

There is a ‘pay by pre-authorized debit’ option through GST/HST netfile available for an amount owing.

A PAD agreement can only be set up online, not over the phone.

Steps to create a pre-authorized debit agreement for businesses

To create a PAD you have to be registered for My Business Account.  Click on ‘CRA register’ or ‘Continue to Sign-In Partner’ and complete the steps.  Once completed, your official access code will be sent to you by mail.  Once you enter the access code into My Business Account you will have full access, which allows you to view, create, modify, cancel, or skip a payment.

This option is not designed to be used frequently due to the limitations on payments and the fees involved.

Steps to create a pre-authorized debit agreement for individuals

To create a PAD, you must to be registered for My Account. Once signed in:

  • Select the ‘Proceed to pay’ button and select the ‘Pay later’ option to create a PAD agreement.
  • Access ‘Manage pre-authorized debit’ under the Related services within the Accounts and payments section to view, modify, cancel, or skip a payment.
  • A PAD agreement can also be created within MyCRA, for an amount owing, by selecting the ‘Proceed to pay’ button and the ‘Pay later’ option. Your credentials are the same as in My Account.

Cash or Debit Card Payments

Make a payment with cash or debit in person at any Canada Post outlet.

You can pay your individual tax, benefits, and credits repayments, Part XIII – non-resident withholding tax, source deductions, T2 corporation tax, or GST/HST payments to the Canada Revenue Agency (CRA) in person with cash or debit card at any Canada Post outlet across Canada for a fee.  To do so you will need a self-generated quick response (QR) code.  This QR code will be personalized by you and will contain information that will allow the CRA to credit your account.  Canada Post uses a third-party service provider to generate and process the QR code.  To create your QR code, see the link below*.  

*Generate your QR code here.

It is a simple two-step process.  On the site, you will be asked to select the tax type you want to pay, your social insurance number or account number, your name, and the amount you want to pay.  A service fee will be charged based on the amount of the payment and displays when creating the QR code.

When you have completed the required fields, press ‘Continue’ to select where you want your QR code to display.  The choices are:  Send to Email; Send to Mobile or Print at Home.  You can choose any or all of these options.  If you choose Send by Email, you will need to enter your email address.  If you choose Send to Mobile, you will need to enter your 10-digit Mobile Number.  If you choose to print at home, a print icon will display.

Be sure to bring your phone or printed QR code to any Canada Post outlet to make a payment.  The clerk will scan your QR code and ask you how much you want to pay.  The amount you initially entered is for your reference only and is not displayed to the clerk.  The clerk does not see any CRA account information. The clerk will key in the amount you want to pay, add the service fee and accept payment by cash or debit card.  The clerk will then give you a paper receipt with the amount paid and the reference number for your files.


Credit Card Payments via Third-Party Service Providers

You can make a payment with a credit card by using a third-party service provider.

The third-party service provider will send your business or individual payment and remittance details online to the CRA for you.  

Ensure that you set up your payment well in advance of your payment’s due date as payment delivery is not immediate, and is determined by the third-party service provider that is used.

Note: Third-party service providers charge a fee for their services. Click here for a full list of third-party service providers.  


Payments via Wire Transfer for Non-Residents

Non-residents who do not have a Canadian bank account can make payments to the CRA by wire transfer.

Wire transfers for submitting your non-resident GST/HST security deposit are not available at this time.

What you need to know

All wire transfers must be in Canadian dollars.

Your financial institution may have standard charges that apply to wire transfer payments.  Make sure that your financial institution does not deduct the wire transfer fee from the total payment amount due as this will result in an underpayment.

Wire details

You will need the following information to transfer funds to the CRA’s account:

Name of banking institution: The Fédération des Caisses Desjardins du Québec
100 rue de Commandeurs
Levis, Quebec
Canada G6V 7N5
SWIFT: CCDQCAMM
Bank number: 815
Transit number: 98000
Beneficiary name: Receiver General of Canada
Beneficiary account number: MFI09708060815CAD3
(if space limitations, use at least: 815980000970806)
Beneficiary address: 11 Laurier Street
Gatineau, Quebec K1A 0S5
Description field: Authorization number: 122-25678-CRA
ABA code, if required: 081598000
Charges field: “OUR”

To avoid processing delays include the following information with your wire transfer:

For Businesses:

  • non-resident account number or business number
  • business name
  • period end date
  • fiscal year
  • telephone number
  • return/remittance
    • Provide a copy of your tax remittance or GST/HST return/remittance by fax to the CRA:
    • Attention: Revenue Processing Section
    • Fax: 204-983-0924
    • Provide the amount paid, the date paid and the confirmation number if available

Avoid late fees

You are responsible for making sure the CRA receives your payment by the payment due date. If you are using a third-party service provider, please ensure that you clearly understand the terms and conditions of the services that you are using.

Our History

Since 1940, Durward Jones Barkwell & Company LLP (DJB) has been providing financial and business consulting services to companies of all sizes. We can assist with complex mergers and acquisitions or guide you through the many facets of starting a small business. We do all this while remaining personally involved with our clients and the communities where we work and live.

Our professionals service clients locally, nationally, and internationally, offering industry-specific advice to clients in several industries, including agribusiness, construction & real estate, general contracting, healthcare, manufacturing & distribution, not-for-profit, professional services, tourism & hospitality, transportation, and wineries.

To learn more about our history, download the printable pdf.

Why is Operational Resiliency Important?

During a crisis, companies need to be able to continue to deliver core products and services. Companies that fail to prepare for unexpected challenges can suffer a host of negative consequences that include reputational damage and financial loss.

Creating a business model that anticipates and has a plan to rebound from disaster will ultimately achieve a high degree of operational resiliency.

This article drills down on the importance of operational resiliency in today’s business atmosphere and breaks down the steps that companies can take now to plan, prepare, respond, and recover from a crisis.

Managed services can deliver results for businesses

Effectively utilizing managed services is becoming a critical success factor for companies of all sizes and in all industries. Often times, a board might recommend maintaining an in-house model to manage risks, but that may not be completely realistic anymore.

With risks coming quicker and from many more directions, adopting a managed services strategy may be the best option.

In this article from RSM Canada, they explore how organizations can use managed services to assist with supporting smaller back-office functions or to fill an executive role, or staff an entire department such as human resources or finance.

Federal Economic Statement 2023

Executive summary

On November 21, 2023, the Minister of Finance, Chrystia Freeland, released Canada’s 2023 Fall Economic Statement (2023 Economic Statement). The Economic Statement introduces several new tax measures that focus on Canada’s plan for affordable housing and building a strong economy in the form of clean energy credits and addressing international tax gaps.

The Economic Statement also affirms the government’s intention to proceed with previously announced tax measures, including by providing clarifications to certain priority economic areas.

Economic Statement 2023

Business tax measures
Clean hydrogen investment tax credit

The 2023 Economic Statement provides further details on the clean hydrogen investment tax credit (Clean Hydrogen ITC), originally proposed in the 2023 Federal Budget (Budget 2023), outlines key design elements of the credit, including eligible projects, credit rates, and carbon intensity measurement. The federal government plans to continue reviewing low-carbon hydrogen production pathways leading up to Budget 2024.

Budget 2023 highlighted that the Clean Hydrogen ITC would provide support for clean ammonia production, offering a 15% credit rate with specific conditions. The 2023 Economic Statement extends eligibility of the credit to property converting clean hydrogen into ammonia, subject to sufficient production capacity, transportation feasibility, and hydrogen sourcing criteria. The 2023 Economic Statement also addresses the conditions necessary for the inclusion of power purchase agreements and similar instruments for calculating project’s carbon intensity (CI). Eligibility is contingent on sourcing electricity from hydro-, solar- or wind-powered generation that:

  • first commenced production on or after March 28, 2023, and no more than one year before the initial CI assessment; and,
  • is located in the same province or territory and connected to the electricity grid of that province or territory. 

The Clean Hydrogen ITC’s positive environmental impact aligns with the federal sustainable development strategy, aiming to reduce greenhouse gas emissions by 40% to 45% below 2005 levels by 2030 and achieve net-zero emissions by 2050.

Clean Technology and Clean Electricity Investment Tax Credits

The 2022 Fall Economic Statement introduced a 30% refundable clean technology investment tax credit for eligible taxpayers investing in clean technology property between March 28, 2023, and 2035, subject to a phase-out in 2034. Budget 2023 added a 15% refundable clean electricity investment tax credit for eligible property starting from Budget 2024 until 2034.

Notably, the 2023 Economic Statement extends the eligibility of these tax credits to encompass systems that support the generation of electricity, heat, or a combination thereof, from waste biomass.

The expanded eligibility for the clean technology investment tax credit applies to property acquired on or after the day of the 2023 Economic Statement, as long as it has not been used before acquisition. For the clean electricity investment tax credit, eligibility starts from the Budget 2024 release date and extends to projects that have not commenced construction before March 28, 2023.

Exception on dividend received deduction by financial institutions

In Budget 2023, the government proposed to disallow financial institutions from claiming a deduction for dividends received on shares of other corporations resident in Canada where those shares are mark-to-market property. This measure is intended to better calculate the income of financial institutions from securities consistent with the purpose of the mark-to-market property rules.

The 2023 Economic Statement offers relief from the above amendments by allowing financial institutions to continue to claim the deduction on dividends received on “taxable preferred shares”. Financial institutions will need to review their holdings to fully understand the tax impact of losing this deduction on securities that do not qualify for the exemption.

These changes are proposed to apply to dividends received on or after January 1, 2024.

Supporting the adoption of employee ownership trusts

First introduced in Budget 2022, employee ownership trusts (EOTs) serve as a mechanism to allow employees to purchase a business without requiring them to pay directly to acquire the shares of the business. EOTs also serve as a valuable option for owners planning business succession.

To further incentivize the use of EOTs, the 2023 Economic Statement expands on the proposals contained in Budget 2023. The government proposes to exempt the first $10 million in capital gains realized from the sale of a business to an EOT from taxation. This incentive will apply to the 2024 to 2026 tax years. Details on the exemption will be provided at a future date.

Concessional loans

When a taxpayer receives government assistance in the course of earning income from business or property, the amount of assistance may reduce the amount of related expenses, property costs, or may result in a potential inclusion in the taxpayer’s overall income.

Historically, non-forgivable and concessional loans from public authorities were not considered government assistance, until a pivotal 2021 decision by the Tax Court of Canada. This ruling, upheld in 2022 by the Federal Court of Appeal, changed the treatment of concessional loans, considering their full principal amount as government assistance.

Addressing this shift, the 2023 Economic Statement proposes a crucial amendment to the Income Tax Act. The proposed change aims to exclude bona fide concessional loans with reasonable repayment terms from public authorities as government assistance. If enacted, this amendment will take effect on the day of the 2023 Economic Statement, signaling a swift government response to evolving tax law.

International tax measures
Underused Housing Tax

The Underused Housing Tax Act (UHTA) requires affected owners of residential property in Canada to file an annual return starting for the 2022 calendar year. Where the residential property is considered vacant or underused, the owner is required to pay an annual federal 1% tax. The implementation of the UHTA has caused significant confusion and most recently necessitated a second administrative extension to the filing and payment deadline regarding the 2022 calendar year. In particular, if affected owners file their returns and pay the underused housing tax for the 2022 calendar year by April 30, 2024 (previously extended to October 31, 2023), the CRA will waive all penalties and interest otherwise applicable.

In light of feedback received on the UHTA, the 2023 Economic Statement proposes several amendments to the legislation. The UHTA was originally positioned in Budget 2021 as a tax on property owned by non-Canadian individuals and entities. Despite this intention, certain Canadian owners of residential property were also required to file returns and potentially pay tax. The amendments proposed in the 2023 Economic Statement will bring the UHTA closer in line with its original objective by expanding the definition of “excluded owner”. Excluded owners are not required to file a UHTA return or pay tax on their property. “Specified Canadian corporations”, partners of “specified Canadian partnerships” and trustees of “specified Canadian trusts” will now be considered excluded owners. The definitions of “specified Canadian partnership” and “specified Canadian trust” will also be expanded. These changes will apply for 2023 and subsequent calendar years.

The other proposed changes to the UHTA are:

  • Decreasing the minimum failure to file penalty from $5,000 for individuals and $10,000 for corporations to $1,000 and $2,000, respectively, for 2022 onwards;
  • Introducing an exception for residential properties held as a place of residence or lodging for employees in rural areas for 2023 onwards; and,
  • Exempting unitized (“condominiumized”) apartment buildings from the definition of “residential property” for 2022 onward, and limiting the “vacation property” exemption to only one residential property for a calendar year for 2024 onward, in addition to other technical changes alluded to but not described.
Canada’s intention to proceed with implementing global minimum tax

The 2023 Economic Statement reiterates Canada’s commitment to international efforts to reform corporate taxation, particularly through the implementation of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two, aimed at establishing a global minimum tax rate.

Canada intends to enact the Global Minimum Tax Act (GMTA) to implement Pillar Two of the inclusive framework, with an effective date after December 31, 2023. Pillar Two (and the GMTA by extension) would establish a global minimum tax rate of 15% on the profits of large multinational corporations, regardless of where they maintain tax residency. Tax revenue is projected to exceed $3.1 billion by fiscal year 2029 from the Pillar Two international tax reform.

The 2023 Economic Statement also includes an exemption from the application of the GMTA for income from shipping companies to align with global treatment.

Indirect tax measures
Removing GST from new co-op rental housing

The federal government proposed on September 14, 2023, to remove the goods and services tax (GST) from new purpose-built rental housing construction projects to incentivize the rapid construction of new homes. The federal government has also called on provinces to remove provincial sales taxes on rental property construction. Consistent with the federal government, Ontario plans to offer full HST rebates for long-term rental units, as previously announced in the 2023 Ontario Fall Economic Statement.

In the 2023 Economic Statement, co-operative housing corporations that provide long-term rental accommodation will also be eligible to benefit from the GST exemption, subject to additional conditions. The exemption will not apply to substantial renovations of existing residential properties to prevent the displacement of existing renters.

The GST exemption will apply to construction projects that are initiated between September 14, 2023, and December 31, 2030, and fully completed before 2036.

Other tax measures
Non-compliant short-term rentals

The Economic Statement outlines the federal government’s proactive measures to address the growing issue of non-compliant short-term rentals in major Canadian cities like Montréal, Toronto, and Vancouver.

The federal government plans to deny income tax deductions for expenses related to earning short-term rental income, including interest expenses, in provinces and municipalities that have prohibited such rentals. This denial of deductions is also extended to cases where short-term rental operators are non-compliant with provincial or municipal licensing, permitting or registration requirements. These measures are set to take effect from January 1, 2024.

Intention to proceed with previously announced measures

Subject to amendments resulting from public consultations and legislative processes, the government intends to proceed with previously announced tax measures. These measures include, but are not limited to:

  • The introduction of:
    • Hybrid mismatch arrangements rules;
    • Excessive interest and financing expenses limitations (EIFEL) regime and;
    • Substantive Canadian-controlled private corporations.
  • Amendments to:
    • Alternative minimum tax for high-income individuals;
    • Intergenerational business transfers;
    • General anti-avoidance rule and;
    • Information requirements for claiming input tax credits for GST/HST purposes, back from the 2021 Federal Budget. 

As some of these measures are slated to come into effect in 2024, middle-market companies should consider proactive changes to ensure readiness for these new measures.


This article was written by Clara Pham, Daniel Mahne, Farryn Cohn, Sigita Bersenas, Cassandra Knapman, Olukayode Akinbosede, Elizabeth Ojesekhoba and originally appeared on 2023-11-21 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2023/federal-economic-statement-2023.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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For more information on how DJB can assist you, please contact us.

New Financial Statement Disclosure Requirements for the Construction Industry and Enhanced Guidance Issued for the Percentage of Completion Method under ASPE

The Accounting Standards Board has issued significant application guidance for entities utilizing the percentage of completion method (POC) for revenue recognition under Canadian Accounting Standards for Private Enterprises (ASPE). This will specifically affect the construction industry since the POC is utilized in accounting for revenue on long term contracts. Also, there are new disclosure requirements outlined in the ASPE revenue recognition standard which mandate specific details that companies operating in the construction sector must now include in their financial statements.

Next steps:

With the enhanced guidance issued, entities should review their existing methods to ensure they are following the new requirements. Entities will want to evaluate their methods to ensure they have selected  the appropriate basis for progress measurement, the type of costs for inclusion in the POC calculation (such as whether it is appropriate to include uninstalled materials or equipment when an input method is used) and the method of calculating amounts of revenue and costs recorded in the reporting period. Identifying contract costs and reviewing your process to allocate general costs to a specific contract will be an important consideration under the new amendments. Lastly, entities should review their processes to compare total contract costs to expected contract revenue and recognize an expected loss when total contract costs exceed contract revenue.

New disclosures:

The additional guidance added specific disclosure requirements to Section 3400 of the ASPE Accounting Handbook for any contracts accounted for using the percentage of completion method. These new disclosures provide users of the financial statements with information regarding the significant estimates and assumptions involved in calculating revenue using this method. An enterprise is required to disclose each of the following for contracts in progress at the end of the reporting period accounted for using the percentage of completion method: (a) The method or methods of measuring the degree of completion; (b) The aggregate amount of costs incurred and recognized profits (less recognized losses) to date; (c) The aggregate amount of advances received; (d) The aggregate amount of holdbacks withheld; and (e) Uncertainties affecting the measurement of the degree of completion.  These disclosures are required for entities with fiscal year ends beginning on or after January 1, 2022. These new disclosures make take time and effort to accumulate this information.

If you need assistance with implementing these amendments and new disclosure requirements, please reach out to your trusted advisor at DJB.

Included is an article authored by RSM Canada, some helpful insights on the percentage of completion method.

 

Tax Planning: 2023 Year-end Considerations for Businesses and Individuals

RSM Canada’s 2023 year-end tax guide summarizes the key federal, provincial, and territorial tax updates that may create risk or opportunity for middle-market taxpayers in 2024 and beyond.

Tax trends and topics discussed as the Canadian economy moves into 2024 include:

  • Revisions to the general anti-avoidance rule
  • Mandatory disclosure rules
  • Financial institutions dividend
  • Tax on repurchase of equity

As year-end approaches, companies and individuals alike must carefully consider tax-planning opportunities in light of economic uncertainty and evolving tax legislation and regulations. Learn more in our year-end planner.

 

 

Canadian tax integration on private company Income

Tax integration is achieved when a particular stream of income is subject to the same or similar total tax rate once it reaches the individual taxpayer level. These tables provide an illustration of how the Canadian income tax integration system works.