On April 16, 2024 (“Budget Day”), the Deputy Prime Minister and Minister of Finance, Chrystia Freeland, introduced Canada’s 2024 federal budget (the “2024 Federal Budget”).

Leading up to Budget Day, it was widely predicted that the 2024 Federal Budget would include tax increases for wealthy Canadians and certain corporations in an effort to fund much of the 2024 Federal Budget’s spending measures previewed by the Liberal Government (the “Government”), including building more homes, expanding child care, strengthening the military and boosting investment in artificial intelligence.

While the 2024 Federal Budget does not propose increasing the personal or corporate tax rates in the Income Tax Act (Canada) (the “Tax Act”), it proposes to increase the capital gains inclusion rate from one-half to two-thirds for corporations and trusts, and from one-half to two-thirds on the portion of capital gains of an individual in a year that exceed $250,000, to better target “wealthy” Canadians who tend to “disproportionately benefit” from capital gains being partially taxable.

Other measures in the 2024 Federal Budget that are relevant to businesses and their owners include: (i) increasing the amount of the lifetime capital gains exemption to $1.25 million; (ii) introducing a phased in Canadian Entrepreneurs’ Incentive to reduce the tax rate on up to $2 million of capital gains realized by founding individuals on the disposition of qualifying shares; (iii) making changes to the revised alternative minimum tax rules announced in the 2023 federal budget, (iv) establishing the conditions to exempt the first $10 million of capital gains realized on the sale of a business to an employee ownership trust; (v) providing the details of the refundable clean electricity investment tax credit announced in the 2023 federal budget; and (vi) affirming the Government’s intention to proceed with a number of previously announced tax measures.

PERSONAL INCOME TAX MEASURES

Lifetime Capital Gains Exemption

Budget 2024 proposes to increase the lifetime capital gains exemption (“LCGE“) available on a disposition of “qualified small business corporation shares” or “qualified farm or fishing property” to $1.25 million of eligible capital gains. This $1.25 million applies in respect of eligible dispositions that occur on or after June 25, 2024 and will be indexed to inflation beginning in 2026. In comparison, the LCGE for 2024 is currently $1,016,836.

Draft legislation has not yet been released, however in order to accommodate the interaction of the increased LCGE, proposed changes to the capital gains inclusion rate, and the one-half inclusion rate for the first $250,000 of capital gains realized by individuals, complicated legislative provisions may be required in order to achieve this intended result. However, it is noted that the $250,000 threshold and the increased inclusion rate applies to any capital gains realized by an individual net of any capital gains in respect of which the LCGE is claimed. Although the Government projections anticipate these changes to the LCGE will result in savings for taxpayers, such savings are relatively minor in comparison to the increased tax revenues expected to be generated from the proposed increase to the capital gains inclusion rate.

Canadian Entrepreneurs’ Incentive

The 2024 Federal Budget proposes to introduce the new Canadian Entrepreneurs’ Incentive.  This incentive is stated to apply in addition to any other available exemption and would be applicable to dispositions of qualifying shares by eligible individuals that occur on or after January 1, 2025.  The incentive would reduce the inclusion rate for capital gains taxation purposes to one-half of the prevailing inclusion rate at the time of disposition.

Under this incentive, an individual would be entitled to access the reduced inclusion rate for up to $2 million of applicable capital gains during their lifetime. The $2 million limit is proposed to be phased in gradually, by $200,000 each year, starting January 1, 2025 and ending January 1, 2034. There is no indication that the lifetime limit would be indexed to inflation.

The conditions for the disposition of a share by an individual to qualify for the Canadian Entrepreneurs’ Incentive may be summarized as follows:

  • The shares must be owned by an individual who was a founding investor in the corporation.
  • The shares must have been acquired for fair market value consideration and held for at least 5 years before the disposition.
  • Throughout that 5‑year period, the individual must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business.
  • At the time of disposition, the share must be a share of the capital stock of a “small business corporation” (as defined in the Tax Act).
  • Throughout the 24-month period immediately before the disposition of the share, the share must be a share of a “Canadian-Controlled Private Corporation” (as defined in the Tax Act) and more than 50% of the fair market value of the assets of the corporation must have been:
    • used principally in an active business carried on primarily in Canada by the corporation or a related corporation,
    • certain shares or debts of connected corporations, or
    • a combination of these two types of assets.
  • At all times since the initial share subscription and up to the time of disposition, the shares of the corporation held directly by the individual must represent more than 10% of the fair market value of all issued and outstanding shares of the corporation, and entitle the individual to more than 10% of the voting rights.
  • The shares cannot represent a direct or indirect interest in a professional corporation, a corporation whose principal asset is the reputation or skill of one or more employees, or a corporation that carries on certain types of businesses (including a business in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector, or a business providing consulting or personal care services).

The Notice of Ways and Means motion accompanying the 2024 Federal Budget provides that the Tax Act is modified to give effect to the above proposals but does not set out detailed draft legislation.

Capital Gains Inclusion Rate

Since October 18, 2000, the capital gains inclusion rate under the Tax Act has been 50%. After years of speculation by the tax community, the capital gains inclusion rate is poised to increase.

While the actual draft legislation is not currently available, the 2024 Federal Budget proposes to increase the capital gains inclusion rate:

  • from one-half to two-thirds for capital gains realized by corporations and trusts on or after June 25, 2024; and
  • from one-half to two-thirds for the portion of capital gains realized by individuals on or after June 25, 2024 in excess of an annual $250,000 threshold.

The annual $250,000 exemption for individuals will include capital gains realized directly or indirectly via a partnership or trust, net of any applicable capital losses or other exemptions such as the LCGE, the proposed employee ownership trust exemption (which is summarized elsewhere in this release) or the proposed Canadian Entrepreneurs’ Incentive (which is also discussed elsewhere in this release).

The 2024 Federal Budget also proposes to decrease the employee stock option deduction from 50% to one third to provide consistency with the changes to the capital gains inclusion rate, although claimants of this deduction would continue to benefit from a deduction of one-half of the taxable benefit up to a combined $250,000 for both employee stock options and capital gains.

The 2024 Federal Budget also proposes to adjust the inclusion rate for net capital losses carried forward and applied against capital gains to reflect the inclusion rate of the capital gains being offset.

The 2024 Federal Budget further provides that transitional rules will apply to taxation years that begin before and end after effective date of the inclusion rate changes, being June 25, 2024, such that capital gains realized prior to the effective date would be subject to the one-half inclusion rate and net capital gains in excess of $250,000 realized on or after the effective date would be subject to the two-thirds inclusion rate.

The 2024 Federal Budget proposes that the $250,000 threshold for individuals will be fully available (i.e., not be prorated) for capital gains realized on or after June 25, 2024.

One issue that arises with respect to the increased inclusion rate proposals in the 2024 Federal Budget, and will need to be clarified, relates to the treatment of a capital gain realized in 2024 from the inclusion of a reserve claimed in 2023.

Alternative Minimum Tax

The 2024 Federal Budget proposes a few further changes to the significant alternative minimum tax (“AMT”) expansion announced in the 2023 federal budget.

The 2023 federal budget proposed to increase the AMT exemption from $40,000 (that applied for 2023 and prior tax years) to $173,000 for 2024. This amount represented the start of the fourth federal tax bracket, which is approximately $173,000 for 2024, and will be annually indexed for inflation. The 2023 Federal Budget also proposed to increase the AMT rate from 15% to 20.5%, to now reflect the rate applicable to the second federal income tax bracket rather than the first bracket.

The 2024 Federal Budget proposes to increase the charitable donation tax credit from 50% of the donation to 80% when calculating AMT. This is a change the charitable sector lobbied hard to achieve.

An employee ownership trust is a trust which holds shares of a corporation for the benefit of the corporation’s employees, which is designed to facilitate the purchase of a business by its employees. In welcome news, the 2024 Federal Budget proposes to fully exempt employee ownership trusts from the AMT.

The 2024 Federal Budget also proposes to provide an exemption from the AMT for trusts established for the benefit of Indigenous groups. These would include trusts established under:

  1. A law of Canada or a province, if the trust is for the benefit of an Indigenous group, community, or people that hold rights recognized and affirmed by section 35 of the Constitution Act, 1982; or
  2. A treaty or a settlement agreement between His Majesty in right of Canada, or His Majesty in right of a province, and an Indigenous group, community or people recognized and affirmed by section 35 of the Constitution Act, 1982.

However, all or substantially all of the contributions to the trust before the end of the year must be paid under the law, treaty or settlement agreement as set out in (a) or (b) above, or must be reasonably traceable to those amounts.

Furthermore, an exemption from AMT will be provided for trusts where the beneficiaries of the trust are any combination of the following persons:

  1. All of the members of a recognized Indigenous group, community or people, that has rights recognized and affirmed by section 35 of the Constitution Act, 1982;
  2. A public body performing a function of government in Canada (as defined in the Tax Act) in relation to an Indigenous group, community or people that has rights recognized and affirmed by section 35 of the Constitution Act, 1982;
  3. A registered charity or a non-profit organization that is organized and operated primarily for health, education, social welfare, or community improvement for the benefit of the members of an Indigenous group or community that has rights recognized and affirmed by section 35 of the Constitution Act, 1982;
  4. A corporation, all of the shares or capital of which are owned by any combination of persons or entities described in (b) or (c) immediately above, a Settlement Trust, or another corporation meeting this definition; or
  5. A Settlement Trust.

The 2024 Federal Budget has also proposed additional amendments to the AMT proposals, which include allowing certain disallowed credits under the AMT to be eligible for the AMT carry-forward, including, for example, the federal political contribution tax credit, investments tax credits, and labour-sponsored funds tax credits.

These amendments apply to taxation years that begin on or after January 1, 2024.

Employee Ownership Trust Tax Exemption

Initially proposed in the 2023 Federal Budget, an employee ownership trust (“EOT“), in general terms, is a trust that holds shares of a corporation for the benefit of that corporation’s employees. EOTs can be used as a mechanism by which employees of a corporation purchase the shares of that corporation from the current owner and allow such individual to claim an exemption of up to $10 million in respect of capital gains on such sale, provided certain conditions are met.  The 2024 Federal Budget provides further details on the exemption and conditions.

The conditions provided by the 2024 Federal Budget that must be satisfied for an individual (other than a trust) to claim the $10 million income tax exemption in respect of capital gains realized on a sale of shares to an EOT are as follows:

  • The individual, a personal trust of which the individual is a beneficiary, or a partnership in which the individual is a member, disposes of shares of a corporation (excluding shares of a professional corporation).
  • The transaction is a qualifying business transfer in which the trust acquiring the shares is not already an EOT or a similar trust with employee beneficiaries.
  • Throughout the 24 months immediately prior to the qualifying business transfer:
    • the transferred shares were exclusively owned by the individual claiming the exemption, a related person, or a partnership in which the individual is a member; and
    • over 50 per cent of the fair market value of the corporation’s assets were used principally in an active business.
  • At any time prior to the qualifying business transfer, the individual (or their spouse or common-law partner) has been actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months.
  • Immediately after the qualifying business transfer, at least 90 per cent of the beneficiaries of the EOT must be resident in Canada.

All individuals that dispose of shares to an EOT as part of a qualifying business transfer must share the $10 million exemption. In other words, if more than one individual disposes of shares in a qualifying business transfer to an EOT, the maximum exemption claimed by all such individuals is limited to a total of $10 million. The allocation of the exemption must be agreed upon by the individuals claiming the exemption.

The 2024 Federal Budget further provides for the consequences of disqualifying events, inclusion of exempted capital gains for the purposes of alternative minimum tax, an election by the EOT (and any corporation owned by the EOT that acquired the transferred shares) and the individual to be jointly and severally, or solidarily, liable for any tax payable by the individual as a result of the exemption being denied due to a disqualifying event within the first 36 months after a qualifying business transfer, an extension to the normal reassessment period by three years and an expansion of qualifying business transfers to include sales of shares to a worker cooperative corporation.  These measures would apply to qualifying dispositions of shares that occur between January 1, 2024 and December 31, 2026.

Qualified Investments for Registered Plans

Under the Tax Act, registered plans such as registered retirement savings plans (“RRSPs”), registered retirement income funds (“RRIFs”), tax-free savings accounts (“TFSAs”), registered education savings plans (“RESPs”), registered disability savings plans (“RDSPs”), deferred profit sharing plans (“DPSPs”) and first home savings accounts (“FHSAs”) may only acquire and hold investments that are “qualified investments”.

Since their introduction, the qualified investment rules for registered plans have been incrementally expanded, which has resulted in rules that are inconsistent and lack coherence in some cases. For example, there are different rules for making investments in small businesses depending on the registered plan, and certain pooled investment products are qualified investments only if they are registered with the Canada Revenue Agency (the “CRA”).

The Department of Finance is inviting stakeholders to provide suggestions on how the qualified investment rules can be modernized. The Department of Finance is specifically considering, among other things: (i) the harmonization of the rules relating to investments in small businesses across registered plans; (ii) how the qualified investment rules can be used to promote more Canadian-based investments; and (iii) whether crypto-based assets should be qualified investments for registered plans.

BUSINESS INCOME TAX MEASURES

Investment Tax Credits

Clean Electricity Investment Tax Credit

The 2024 Federal Budget provides design and implementation details of the previously-announced Clean Electricity investment tax credit (“ITC”).  The Clean Electricity ITC is a refundable ITC equal to 15% of the capital cost of eligible property.

The Clean Electricity ITC is only available to eligible Canadian corporations (i.e., taxable Canadian corporations, provincial and territorial Crown corporations, corporations owned by municipalities, corporations owned by Indigenous communities and pension investment corporations).  Eligible corporations that are partners of a partnership could also claim their share of the Clean Electricity ITC. An expansive list of eligible equipment is provided for this purpose.

Any equipment eligible for the Clean Electricity ITC will be subject to ongoing annual compliance with the eligibility criteria.  Furthermore, the Clean Electricity ITC would be subject to potential repayment where eligible equipment has been converted to an ineligible use, exported from Canada, or disposed of.  Eligible corporations will only be able to claim one of the Clean Electricity ITC, Clean Technology ITC, Carbon Capture, Utilization, and Storage ITC, Clean Hydrogen ITC, Clean Technology Manufacturing ITC and Electric Vehicle Supply Chain ITC where a particular expenditure would qualify for multiple ITCs.

The Clean Electricity ITC will apply to eligible property that is acquired and becomes available for use on or after Budget Day and before 2024, and that was not part of a project where construction began before March 28, 2023.

Clean Technology Manufacturing Investment Tax Credit

The 2024 Federal Budget also proposes adjustments to the previously-announced Clean Technology Manufacturing ITC.  The Clean Technology Manufacturing ITC provides a refundable tax credit equal to 30% of the cost of investments in eligible property.

The 2024 Federal Budget clarifies that the value of qualifying materials will be used as an appropriate output metric when assessing qualification for the Clean Technology Manufacturing ITC.  Furthermore, eligible expenditures are modified to include investments in eligible property used in qualifying mineral activities expected to produce primarily qualifying materials.  A safe harbour rule is provided to reduce recapture where an eligible property is converted to use in a non-qualifying activity.  These changes apply for eligible property that is acquired and becomes available for use on or after January 1, 2024.

Accelerated Capital Cost Allowance

The 2024 Federal Budget proposes an accelerated capital cost allowance (“CCA”) for certain classes.

Purpose-built rental housing is currently eligible for a CCA at a rate of 4% under Class 1.  The 2024 Federal Budget proposes an accelerated CCA rate of 10%.  The accelerated CCA rate will apply to new eligible purpose-built rental housing projects that begin construction on or after Budget Day and before January 1, 2031, and are available for use before January 1, 2036.  Eligible property for the accelerated CCA rate must be new purpose-built rental housing that is a residential complex with at least four private apartment units, or 10 private rooms or suites, and in which  90% of residential units are held for long-term rental.

Assets included in Class 44 (patents or the rights to use patented information), Class 46 (data network infrastructure equipment and related systems software) and Class 50 (general-purpose electronic data-processing equipment and systems software) are currently eligible for CCA rates of 25%, 30% and 55% respectively.  The 2024 Federal Budget provides for a 100% first-year deduction for property acquired on or after Budget Day and that becomes available for use before January 1, 2027, but such deduction is available only for the year in which the property becomes available for use.

Interest Deductibility Limits – Purpose-Built Rental Housing

The 2021 federal budget introduced the “excessive interest and financing expenses limitation” (“EIFEL”) rules as a part of the Government’s response to the recommendations under Action 4 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. A detailed description of the EIFEL rules, which are currently before Parliament in Bill C-59, is beyond the scope of this article.

The EIFEL rules provide an exemption for interest and financing expenses incurred in respect of arm’s length financing for certain public-private partnership infrastructure projects.

This exemption is proposed to be expanded by the 2024 Federal Budget to include an elective exemption for certain interest and financing expenses incurred before January 1, 2036, in respect of arm’s length financing used to build or acquire eligible purpose-built rental housing in Canada.

Eligible purpose-built rental housing would (in line with eligibility under the temporary enhancement to the Goods and Services Tax (GST) New Residential Rental Property Rebate and the proposed accelerated capital cost allowance for purpose-built rental housing included in the 2024 Federal Budget) be a residential complex:

  • with at least four private apartment units (i.e., a unit with a private kitchen, bathroom, and living areas), or 10 private rooms or suites; and
  • in which at least 90 per cent of residential units are held for long-term rental.

Consistent with the broader EIFEL amendments, this expanded exemption would apply to taxation years that begin on or after October 1, 2023.

Non-Compliance with Information Requests

The 2024 Federal Budget contains significant changes addressing non-compliance with information requests by the CRA and the information accumulation provisions in the Tax Act. These include proposed amendments to subsection 231.1(1) to clarify the circumstances under which information may be sought, including for the purpose of collecting any amount payable and enforcement of a listed international agreement or a tax treaty (mirroring the purposive language contained in section 231.2 of the Tax Act). Similar language has been proposed for subsections 231.6(1) and (8). Additional amendments to subsection 231.1(1) will require that a taxpayer provide and deliver, in a reasonable manner and without cost to the tax authorities, any information and any document.

Amendments proposed to subsection 231.2(1) of the Tax Act clarify that the requirement to provide documents or information sought under this section be completed in a reasonable manner and without cost to the Crown. Similar language has been proposed for subsection 231.6(2). A new proposed provision (section 231.41) will allow the CRA to require the information sought under specific information accumulation provisions (sections 231.1, 231.2 or 231.6) to be provided orally, under oath or affirmation, or by affidavit.

Proposed subsection 231.7(9) permits the CRA to seek a compliance order when a person has failed to comply with a requirement to provide foreign-based information or documents. Where the CRA is successful in obtaining a compliance order, proposed subsection 231.7(6) of the Tax Act imposes a penalty of 10% on the aggregate amount of tax payable on the taxpayer for each tax year to which the compliance order relates. However, this penalty is only applicable where a taxpayer’s tax owing exceeds a $50,000 threshold for a tax year to which the compliance order relates.

The Reassessment Limitation Clock

Proposed section 231.8 seeks to extend the “stock the clock” rules (i.e., the rules which suspend the counting of days in the assessment limitation period) to situations where: (i) a taxpayer seeks judicial review of a requirement or any notice issued by the CRA in respect of the taxpayer’s audit and enforcement processes, or (ii) during a period where a notice of non-compliance remains outstanding. Proposed paragraphs 231.8(1)(b) and (d) apply these rules to situations where a requirement or notice has been issued to a person that does not deal at arm’s length with the taxpayer.

Notice of Non-Compliance

The proposed amendments include a new subsection 231.9(1), which empowers the CRA to issue a notice of non-compliance for failure to comply with a requirement or a notice. The notice of non-compliance would not require a court attendance and would be issued by the CRA directly to the taxpayer.

Proposed subsection 231.9(11) imposes a penalty of $50 (up to a maximum of $2,500) for each day that a notice of non-compliance remains outstanding. A notice remains outstanding under proposed subsection 231.9(10) until the CRA determines that the taxpayer has complied with the notice to its satisfaction or the taxpayer has demonstrated that it has done everything reasonably necessary to comply with each requirement or notice to which the notice of non-compliance relates.

Taxpayers may request a CRA review of the notice of non-compliance. Proposed subsection 231.9(6) describes the circumstances under which the CRA must vacate a notice of non-compliance. A taxpayer may apply for a judicial review within 90 days of a decision by the CRA to not vacate a notice of non-compliance. A notice of non-compliance issued under proposed subsection 231.9(1) “stops the clock” and prevent taxation years from becoming statute-barred for the taxpayer and any non-arm’s length parties under proposed paragraph 231.8(1)(e).

These amendments represent a marked departure from the current compliance regime. The intention of the amendments seem to be an expansion of the arsenal available to the CRA to seek information and documents in the context of audits, investigations, reviews and other similar exercises.

Avoidance of Tax Debts

Section 160 of the Tax Act  (the “tax debt anti-avoidance rule”) is an anti-avoidance rule that applies to non-arm’s length transfers of assets by a tax debtor. Where it applies, the transferee and the transferor are jointly and severally, or solidarily, liable for the transferor ’s tax debts, to the extent that the value of the property transferred exceeds the fair market value of the consideration given by the transferee for the property.

To reduce the time and cost to challenging tax debt avoidance planning by the CRA, the 2024 Federal Budget proposes to introduce a supplementary rule that would apply where:

  • there has been a transfer of property from a tax debtor to another person;
  • as part of the same transaction or series of transactions, there has been a separate transfer of property from a person other than the tax debtor to a transferee that does not deal at arm’s length with the tax debtor; and
  • one of the purposes of the transaction or series is to avoid joint and several, or solidary, liability.

Where these conditions are met, the property transferred by the tax debtor would be deemed to have been transferred to the transferee for the purposes of the tax debt anti-avoidance rule. As a result, the tax debt anti-avoidance rule applies where property has been transferred from a tax debtor to a person and, as part of the same transaction or series, property has been received by a non-arm’s length person.

The penalty in subsection 160.1(2) of the Tax Act applies to every person who engages, participates or acquiesces in or assents to planning that they know, or would reasonably be expected to know, is tax debt avoidance planning. The maximum penalty is $100,000 plus any amount the person, or a related person, is entitled to receive or obtain in respect of the planning.

The 2024 Federal Budget proposes to extend this penalty to tax debt avoidance planning that is subject to the proposed supplementary rule.

Where tax debt avoidance planning is facilitated by a planner who receives a significant fee that is effectively funded by a portion of the avoided tax debt, the 2024 Federal Budget 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.

Similar amendments would be made to comparable provisions in other federal statutes, including  the Excise Tax Act (Canada) (the “GST/HST Act”), the Excise Act, 2001, the Select Luxury Items Tax Act, and the Underused Housing Tax Act.

These measures would apply to transactions or series of transactions that occur on or after Budget Day.

Reportable and Notifiable Transaction Penalty

Subsection 238(1) of the Tax Act imposes a general penalty for a failure to file or make a return. In view of the specific penalties in sections 237.3 and 237.4 for the failure to file information returns for reportable and notifiable transactions, the 2024 Federal Budget proposes to eliminate the overlap between these provisions by removing the mandatory disclosure rules from the general penalties specified in subsection 238(1).

This amendment is deemed to have come into force retroactively from June 22, 2023.

Mutual Fund Corporations

To qualify as a “mutual fund corporation” under the Tax Act, a corporation must be a “public corporation”, which requires that at least one class of its shares be listed on a designated stock exchange in Canada.  This generally implies that the shares of the corporation are widely held.

However, the Tax Act currently permits a corporation to qualify as a mutual fund corporation if it has one class of shares listed on Canadian stock exchange notwithstanding that all other of its shares are held by a corporate group and that such shares represent all or substantially all of the fair market value of its issued shares. This may permit a corporate group to reap unanticipated benefits from the special rules available to mutual fund corporations.

The 2024 Federal Budget proposes to address this issue by amending the Tax Act to prevent a corporation from qualifying as mutual fund corporation under subsection 131(8) if it is controlled by or for the benefit of a corporate group.

Proposed subsection 131(8.2) will deem a corporation to not be a mutual fund corporation if one or any combination of non-arm’s length persons or partnerships own, in the aggregate, shares of the corporation having a fair market value of more than 10% of the fair market value of all issued and outstanding shares of the corporation, and the corporation is controlled by or for the benefit of one or more such persons. This proposed non-qualifying deeming rule can be avoided if the corporation was incorporated more than two years prior to the determination time and the aggregate fair market value of the shares owned by the offending corporate group does not exceed $5,000,000.

These measures will apply to taxation years beginning after 2024.

Synthetic Equity Arrangements

A “synthetic equity arrangement” is defined in the Tax Act generally as specific agreements or arrangements that transfer the economic exposure in respect of a share (dividends on which would otherwise be deductible to a corporate recipient) to a counterparty. The deduction in respect of dividends received by a corporate taxpayer is denied in respect of synthetic equity arrangements.

Where a taxpayer enters into a synthetic equity arrangement in respect of a share, the taxpayer is generally obligated to compensate the other person for the amount of any dividends paid on the share and this compensation payment may result in a tax deduction for the taxpayer in addition to the dividend received deduction. Unless the synthetic equity arrangement rules applies to deny the dividend received deduction, the taxpayer may generally realize a loss as result of the two deductions.

The synthetic equity arrangement rules currently include where a taxpayer establishes (in the context of agreements traded on a recognized derivatives exchange) that no tax-indifferent investor has all or substantially all of the economic exposure in respect of the share that is otherwise the subject of the synthetic equity arrangement. The 2024 Federal Budget proposes to amend the synthetic equity arrangement rules to remove this no tax-indifferent investor exception.

This measure would apply to dividends received on or after January 1, 2025.

Manipulation of Bankrupt Status

Under the current provisions of the Tax Act, when a commercial debt has been settled for less than the full amount owing, the debt forgiveness rules generally provide for a reduction of certain tax attributes by the amount of the forgiven debt, with half of the residual amount included in the taxpayer’s income where tax attributes have been fully reduced. Bankrupt corporations, however, are excluded from these rules and are instead subject to a loss restriction rule, which fully extinguishes the losses of such corporations that have received an absolute order of discharge.

In order to avoid this specific tax treatment of forgiven debts, some corporate taxpayers have tried to manipulate their bankrupt status to avoid being subject to the debt forgiveness rules, while also avoiding the loss restriction rule.

The 2024 Federal Budget proposes to subject bankrupt corporations to the debt forgiveness rules which apply to other corporations whose commercial debts are forgiven, by repealing the exception to the debt forgiveness rules and the loss restriction rule applicable to bankrupt corporations.  These proposals apply to bankruptcy proceedings commenced on or after Budget Day.

INTERNATIONAL TAX MEASURES

Digital Services Tax

One of the international tax issues that countries have been wrestling with over the years is the taxation of large digital corporations on the income they earn from the provision of digital services in another country. Draft legislation to tax digital services was first introduced in 2021 and thereafter reintroduced in August and November 2023.

The Government announced in the 2024 Federal Budget that it is its intention to have this digital services tax legislation soon become law. The tax will be effective for calendar year 2024 with the first year covering taxable revenues earned since January 1, 2022.

Expanding Tax Transparency to Crypto-Assets

The Organization for Economic Co-operation and Development (“OECD”) has commenced an initiative involving a reporting framework for crypto asset transactions and improvements to the common reporting standard.  The Government announced its intention in the 2024 Federal Budget to implement this new framework effective as of 2026 and to permit exchanges of information with other countries under the new reporting requirements beginning in 2027.

Simplified Waiver Process for Non-Resident Service Providers

The Tax Act generally imposes a withholding obligation on persons who pay a fee, commission, or other amount to a non-resident in respect of services rendered in Canada. The amount to be withheld is 15% of the gross payment unless a waiver has been obtained.

The 2024 Federal Budget announced a broadening of the existing administrative relief by permitting the CRA to waive the withholding requirement if the non-resident service provider can demonstrate that the income would be treaty-protected or is exempt income from international shipping or operating an aircraft in international traffic.

Information Requests

The CRA has certain powers to inspect, audit and examine the records of taxpayers for the purposes of administering or enforcing the Tax Act.  The powers will be extended to the administration and enforcement of tax treaties with other countries.

SALES AND EXCISE TAX MEASURES

The 2024 Federal Budget proposes two measures aimed at extending relief with respect to the cost of building student housing.

Currently, universities, public colleges, and school authorities that operate on a not-for-profit basis are generally entitled to claim a public service body rebate under the GST/HST Act and are not subject to the GST/HST rules that apply to builders. Further, the conditions for claiming the GST Rental Rebate are difficult for such educational institutions, given student housing is typically shorter-term and transient in nature. This can make it difficult for such not-for-profit educational institutions to claim the Enhanced (100%) GST Rental Rebate that was announced in September 2023 to temporarily remove GST from new purpose-building rental housing project.

To ensure that universities, public colleges, and school authorities can claim the Enhanced (100%) GST Rental Rebate, the 2024 Federal Budget proposes that the GST/HST Act be modified to allow such educational institutions to apply the same GST/HST rules that apply to other builders in respect of new student housing projects.

The 2024 Federal Budget also proposes to amend the GST/HST Act to relax rebate conditions for new student housing provided by not-for-profit universities, public colleges, and school authorities.

The proposes measures will apply to student residences that begin construction after September 13, 2023 and before 2031, and that complete construction before 2036.

PREVIOUSLY ANNOUNCED MEASURES

The 2024 Federal Budget confirms the Government’s intention to proceed with a number of previously announced tax and related measures, as modified to take into account, consultations, deliberations, and legislative developments, since their release, including:

  • Legislative proposals released on December 20, 2023, including with respect to the clean hydrogen investment tax credit, the clean technology manufacturing investment tax credit, concessional loans, short-term rentals and international shipping.
  • Legislative and regulatory proposals announced in the 2023 Fall Economic Statement, including with respect to the proposed expansion of eligibility for the clean technology and clean electricity investments tax credit to support generation of electricity and heat from waste biomass, the proposals relating to the GST/HST joint venture election rules, the application of the Enhanced (100%) GST Rental Rebate to qualifying co-operative housing corporations; and the proposals relating to the Underused Housing Tax.
  • Legislative and regulatory amendments to implement the Enhanced (100%) GST Rental Rebate for purpose-built rental housing announced on September 14, 2023.
  • Legislative proposals released on August 4, 2023, including with respect to the carbon capture, utilization, and storage investment tax credit, the clean technology investment tax credit, the labour requirements related to certain investment tax credits, enhancing the reduced tax rates for zero-emission technology manufacturers, flow-through shares and the critical mineral exploration tax credit, EOTs, retirement compensation arrangements, strengthening the intergenerational business transfer framework, AMT, the tax on repurchases of equity, modernizing the general anti-avoidance rule; Global Minimum Tax (Pillar Two), digital services tax; technical amendments to GST/HST rules for financial institutions and EIFEL.
  • Legislative amendments to implement changes discussed in the transfer pricing consultation paper released on June 6, 2023.
  • Tax measures announced in the 2023 federal budget, including the dividend received deduction by financial institutions.
  • Legislative proposals released on August 9, 2022, including with respect to substantive Canadian-controlled private corporations and the remaining legislative and regulatory proposals relating to the GST/HST, excise levies and other taxes and charges announced in the August 9, 2022 release.
  • Legislative amendments to implement the hybrid mismatch arrangements rules announced in the 2021 federal budget.
  • Regulatory proposals released in the 2021 federal budget related to information requirements to support input tax credit claims under the GST/HST Act.

Please reach out to a member of our Corporate Tax team if you have any questions about how the 2024 Federal Budget may impact you.

Raymond Adlington, Andrew Bateman, Ron Choudhury, William Fowlis, Bryant Frydberg, Thomas Ghag, Neil Gurmukh, Brendon Ho, Barry Horne, Carolyn Inglis, Lesley Kim, Emmanuelle Laliberté, Molly Luu, Colleen Ma, Nathalie Marchand, Justin Ng, Regan O’Neil, Pierce Quaghebeur and Andrew Rodrigues contributed to this year’s Budget Review. A French edition will follow shortly.

Read about the proposals affecting the Charities and NPO sector in the 2024 Federal Budget Edition of our Social Impact Newsletter.