Highlights of the 2024 Federal Budget
The 2024 Federal Budget (“Budget 2024”) was presented on April 16, 2024 (“Budget Day”) and introduced a number of tax and non-tax measures to address the rising cost of living in Canada. Non-tax measures include the introduction of a National Pharmacare Plan, a new Canada Disability Benefit, limitations and restrictions on bank fees and measures to address the housing crisis. We have outlined the significant tax measures below, with a more detailed analysis of the budget to be provided in the coming weeks.
CAPITAL GAINS
By far the biggest proposals introduced in Budget 2024 were changes to the taxation of capital gains. Significant proposed measures are as follows:
Inclusion Rates
Currently capital gains are generally subject to an “inclusion rate” of one-half (50%), meaning half of a capital gain is included in taxable income, with the other half considered non-taxable. Budget 2024 proposes to increase this inclusion rate to two-thirds (66.67%) for individuals with net capital gains exceeding $250,000 in a year. All capital gains realized by corporations or trusts would be subject to a two-thirds inclusion rate. This new inclusion rate would apply to any capital gains realized on or after June 25, 2024.
Lifetime Capital Gains Exemption (LCGE)
The LCGE is a deduction available to eligible individuals to offset the capital gains realized on certain qualifying dispositions. Currently, the maximum amount of deduction available is $1,016,836 in 2024, indexed to inflation. Budget 2024 proposes to increase this deduction to $1,250,000 for eligible capital gains realized on or after June 25, 2024. Indexation of the LCGE would resume in 2026.
Canadian Entrepreneurs’ Incentive
In relation to the above inclusion rate changes, Budget 2024 proposes to introduce a reduction in the above-noted inclusion rate to one-third (33.33%) on the disposition of certain qualifying shares by an eligible individual. In addition to the tests required for LCGE eligibility, a qualifying share would need to meet additional prescribed conditions. This measure will be incrementally introduced over a 10-year period beginning on January 1, 2025 at $200,000 before ultimately reaching a total eligible amount of $2,000,000.
Employee Ownership Trusts (EOTs)
The 2023 Federal Budget proposed tax rules to facilitate the creation of EOTs. The 2023 Fall Economic update further proposed to exempt the first $10,000,000 in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions. Budget 2024 further expanded on these conditions, including allowing qualifying business transfers to include the sale 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.
HOUSING MEASURES
RRSP Home Buyers’ Plan
The RRSP Home Buyers’ Plan (HBP) allows Canadians to withdraw funds from their RRSP tax-free to acquire a home. Withdrawals need to be repaid to RRSPs over a fifteen-year period or the amounts will be included in income. Budget 2024 proposes to increase the amount that can be withdrawn tax-free from an RRSP from $35,000 to $60,000. In addition, the current two-year payment deferral will be temporarily extended to five years. These measures are effective immediately for withdrawals made after Budget Day.
Accelerated Capital Cost Allowance
Investors in residential rental properties are generally allowed to claim a Capital Cost Allowance (CCA) deduction on their rental properties at a rate of 4% per year. Budget 2024 proposes to increase the CCA rate to 10% for Purpose-Built Rental Housing. Eligible property will be residential complexes with at least four suites or ten private rooms where 90% of those are used for long term rentals. The requirements parallel the 100% GST recovery for the construction of similar properties announced in fall 2023.
The income tax measures apply to construction that commences after Budget Day.
CRA COMPLIANCE MEASURES
Budget 2024 proposes several amendments to the information gathering provisions in the Income Tax Act.
Notice of Non-Compliance
Budget 2024 proposes to allow the CRA to issue a new type of notice, referred to as a “notice of non-compliance”, to a taxpayer that has not complied with a requirement or notice to provide assistance or information issued by the CRA. A penalty will be assessed on a person that has been issued a notice of non-compliance of $50 for each day that the notice is outstanding, to a maximum of $25,000.
Compliance Orders
Currently, the CRA can obtain a compliance order from a court that directs a non-compliant taxpayer to comply with the CRA’s information requests. Budget 2024 proposes to impose a penalty of 10% of the aggregate tax payable for the years under the compliance order.
Questioning Under Oath
Budget 2024 proposes to amend the Income Tax Act to allow the CRA to include in a requirement or notice that any required information (oral or written) or documents be provided under oath or affirmation.
Stopping the Reassessment Limitation Clock
Under existing rules, a taxpayer may seek judicial review of a requirement or notice issued to the taxpayer by the CRA. Budget 2024 proposes to amend the “stop the clock rules” to provide that they apply when a taxpayer seeks judicial review of any requirement or notice issued to the taxpayer by the CRA in relation to an audit and enforcement process, or during any period that a notice of non-compliance is outstanding.
Avoidance of Tax Debts
The Income Tax Act contains a number of rules that prevent tax debtors from transferring assets to non-arm’s length parties at less than fair value. Budget 2024 proposes to strengthen these provisions to include common tax debt avoidance planning strategies.
Further, Budget 2024 proposes that taxpayers and planners who participate in tax debt avoidance planning be jointly and severally, or solidarily, liable for the full amount of the avoided tax debt.
OTHER TAX MEASURES
Alternative Minimum Tax
The 2023 budget proposed significant changes to the Alternative Minimum Tax (AMT). The AMT can apply a refundable tax to ensure a minimum level of income tax is collected even when individuals take advantage of certain tax deductions and credits. Budget 2024 includes several adjustments to those proposals, including allowing 80% of donations to be used in the AMT calculation, rather than 50%.
Crypto-Asset Reporting Framework
Budget 2024 proposes that commencing in 2026, crypto-asset service providers would be required to report transactions, and personal information of parties to these transactions, under an OECD backed Crypto-Asset Reporting Framework.
Volunteer Firefighters and Search and Rescue Volunteers Tax Credit
The Volunteer Firefighters Tax Credit and the Search and Rescue Volunteers Tax Credit allow individuals who performed at least 200 hours of combined volunteer service during the year as a volunteer firefighter or a search and rescue volunteer to claim a 15% non-refundable tax credit based on an amount of $3,000. Budget 2024 proposes to double the credit to $6,000 for the 2024 and subsequent taxation years.
Carbon Rebate
Budget 2024 proposes to return a portion of fuel charge proceeds from a province via the new Canada Carbon Rebate for Small Businesses, an automatic, refundable tax credit directly for eligible businesses, sized in proportion to the number of persons they employ in the province. Eligible businesses must have filed their 2023 income tax returns by July 15, 2024.
Accelerated Capital Cost Allowance (CCA)
Patents, data network infrastructure equipment and computer hardware and software have CCA rates of 25%, 30% and 55%, respectively. Budget 2024 proposes to provide immediate expensing for property in these classes which is acquired on or after Budget Day and becomes available for use before January 1, 2027.
Tax on Vacant Land
Budget 2024 announces that the government will consider introducing a new tax on residentially zoned vacant land. The government will launch consultations later this year.
If you have any questions, please contact your advisor at Wilkinson & Company LLP.