2024 Federal Budget Tax Highlights

Currently, 1/2 of capital gains and losses are included in calculating taxable income. Budget 2024 proposes to increase the inclusion rate from 1/2 to:

• 2/3 for corporations and trusts, and

• 2/3 of the portion of capital gains realized in the year in excess of $250,000 for individuals. 

This measure will be effective for capital gains realized on or after June 25, 2024. 

The $250,000 threshold for individuals will apply to capital gains realized, either directly or indirectly, via a partnership or trust, net of any:

• capital losses realized in the current year;

• capital losses of other years applied to reduce current-year capital gains; and

• capital gains in respect of which the Lifetime Capital Gains Exemption, the proposed Employee Ownership Trust Exemption or the proposed Canadian Entrepreneurs’ Incentive is claimed.

Where an individual claims the employee stock option deduction, the current deduction of 1/2 of the taxable benefit will remain in place up to a limit of $250,000 of the aggregate employee stock option benefits and capital gains realized in the year. Any employee stock option benefits in excess of the limit will be entitled to a reduced 1/3 deduction analogous to the increased capital gain inclusion rate. 

Net capital losses from prior years will be adjusted to reflect the inclusion rate of the capital gains being offset. Therefore, a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.

The annual $250,000 threshold for individuals will not be prorated for 2024 and would apply only for net capital gains realized on or after June 25, 2024. Where a taxpayer’s fiscal year straddles the effective date, they would be required to identify capital gains and losses realized before and after the effective date to apply the appropriate inclusion rate. 

Further amendments and details to reflect the new inclusion rate will be considered and released in the coming months.

Capital gains generated on the disposition of Qualified Small Business Corporation shares and qualified farm or fishing property could be realized tax-free up to a limit of $1,016,836. This is referred to as the lifetime capital gains exemption (LCGE), and Budget 2024 proposes to increase this limit to $1,250,000. This increased limit would come into effect for dispositions that occur on or after June 25, 2024.

The CRA is bringing another program into effect that can be seen as complementary to the LCGE called the Canadian Entrepreneurs’ Incentive (CEI). This incentive is in addition to the above LCGE. Under the proposed measure, individual taxpayers can use a 1/3 capital gains inclusion rate for the disposition of qualifying shares (detailed below). There will be a lifetime limit of $2,000,000 per individual, and the measure will be phased in by increments of $200,000 per year starting on January 1, 2025, before reaching $2,000,000 by January 1, 2034.

The characteristics of the shares that qualify are similar to those under the LCGE, with some additional requirements. All the following conditions must be met to qualify: 

• The owner of the shares must be a founding shareholder at the time the corporation was capitalized and must have held the shares for at least five years.

• The owner of the shares must be actively engaged on a regular, continuous, and substantial basis in the primary activities of the corporation throughout the five years noted above immediately before the disposition of the shares.

• From the date of the initial share subscription to the sale date, the owner held shares representing more than 10% of the votes and value of the company’s issued shares.

• The share does not represent a direct or indirect interest in certain corporations, including professional corporations or those operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sectors.

• The share must be a share of a “small business corporation” (SBC) at the time of sale. This condition is also required to qualify for the LCGE.

• The share must be a share of a “Canadian Controlled Private Corporation” (CCPC), and more than 50% of the fair market value of the assets of the corporation must be used in an active business carried on primarily in Canada throughout the 24 months (about two years) before the disposition. This condition is also required to qualify for the LCGE.

Budget 2023 announced significant amendments to the Alternative Minimum Tax (AMT), and draft legislative proposals were published for consultation in August 2023. Budget 2024 proposes further changes to the AMT, including:

• Individuals will be permitted to claim 80% of the charitable donation tax credit when calculating AMT instead of the previously proposed 50%;

• Employee Ownership Trusts will be fully exempt from the AMT, as will certain Indigenous settlement and community trusts (interested stakeholders are invited to comment on the proposed exemptions for Indigenous trusts by June 28, 2024);

• Deductions will be fully allowed for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments;

• Individuals may claim the full federal logging tax credit; and

• Certain disallowed credits under the AMT will be eligible for the AMT carryforward (i.e., federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit).

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

Budget 2024 provides the conditions for the temporary tax exemption on up to $10 million in capital gains realized on the sale of a qualifying business by an individual (other than a trust) to an Employee Ownership Trust (EOT). These conditions include that:

• The individual, trust, or partnership disposes of shares of a corporation that is not a professional corporation.

• The transferred shares must be exclusively owned by the individual claiming the exemption or a related person or partnership in which the individual is a member, and over 50% of the fair market value of the corporation’s assets must be used principally in an active business, throughout the immediately preceding 24 months.

• The individual, or their spouse or common-law partner, must be actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months at any time before the transfer.

• 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.

• Immediately after the qualifying business transfer, at least 90% of the beneficiaries of the EOT must be residents of Canada.

Furthermore, both the individual and the EOT (and any corporation owned by the EOT that acquired the transferred shares) must elect to be jointly and severally, or solitarily, 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 the transfer. A disqualifying event would occur if the EOT loses its status as an EOT or if less than 50% of the fair market value of the qualifying business’ shares is attributable to assets used principally in an active business at the beginning of two consecutive taxation years of the corporation.   If the disqualifying event occurs after 36 months, the EOT would be deemed to realize a capital gain equal to the exempt capital gain(s).

Multiple individuals may claim the exemption for a qualifying business transfer, but the total exemption for a particular transfer cannot exceed $10 million, and the individuals must agree on how to allocate the exemption.

For AMT purposes, the capital gains exempted under this measure will be subject to a 30% inclusion rate, resulting in the same AMT treatment as capital gains exempted under the lifetime capital gains exemption.

In addition, Budget 2024 proposes to expand qualifying business transfers to include the sale of shares to a worker's cooperative corporation, with more specific details to come.

These measures apply to qualifying dispositions of shares between January 1, 2024, and December 31, 2026.

Mineral Exploration Tax Credit

Resource companies may issue flow-through shares to investors and then renounce (or flow through) mineral exploration expenses incurred in Canada to them, who can deduct the amounts from their income. Investors can also claim the Mineral Exploration Tax Credit, equal to 15% of the mineral exploration expenses renounced to them.

This credit was legislated to expire on March 31, 2024, and, as has been a regular yearly occurrence, Budget 2024 proposes to extend eligibility for the Mineral Exploration Tax Credit for one year to flow-through share agreements entered into on or before March 31, 2025. 

Volunteer Firefighters and Search and Rescue Volunteers Tax Credits

Individuals who performed at least 200 hours of combined volunteer service during the year as a volunteer firefighter or search and rescue volunteer are eligible to claim the Volunteer Firefighters Tax Credit and/or Search and Rescue Volunteers Tax Credit. Currently, this credit is based on an amount of $3,000, and a non-refundable tax credit may be claimed thereon (at a combined rate of 20.06% in BC and 25% in Alberta).

Budget 2024 proposes to double this tax credit to $6,000, allowing for a maximum tax reduction of $900 at the federal level. Assuming this measure is also implemented provincially, there would be a combined maximum tax reduction of approximately $1,200 for BC residents and $1,500 for Alberta residents. This proposed measure would be effective for 2024 and subsequent taxation years.

Deduction for Tradespeople’s Travel Expenses

Eligible tradespeople and apprentices in the construction industry may deduct up to $4,000 for certain travel and relocation expenses in a year by claiming the Labour Mobility Deduction for Tradespeople. A private member’s bill had been introduced to enact an alternative deduction for certain travel expenses incurred by tradespeople in the construction industry, retroactive to 2022, and has no limit on expenses.

Budget 2024 is announcing the Government’s intention to legislate a single, harmonized deduction for tradespeople’s travel that respects the intent of this private member’s bill. 

Home Buyers’ Plan

The Home Buyers’ Plan (HBP) allows individuals to withdraw up to $35,000 from their RRSP to purchase a first home or a home for a disabled individual without paying tax on these withdrawals. These withdrawals must be repaid to an RRSP over 15 years starting the second year following the year the first withdrawal was made; otherwise, any unpaid amounts due for a year would be taxed as income inclusions.

Budget 2024 proposes to increase the withdrawal limit to $60,000, including withdrawals made for the benefit of a disabled individual, applicable to 2024 and subsequent years for withdrawals made after April 16, 2024.

Budget 2024 also proposes to temporarily defer the start of the 15-year repayment period to the fifth year following the year the first withdrawal was made. This measure would apply to the first withdrawals made between January 1, 2022, and December 31, 2025. 

Canada Child Benefit 

The Canada Child Benefit (CCB) is a benefit that provides support for eligible families with children under the age of 18 and is based on the family’s net income.

In the event of a child’s death, CCB recipients currently become ineligible for the CCB in respect of a child the month after the child’s death. Budget 2024 proposes to extend eligibility for the CCB in respect of a child for six months after the child’s death. This extension would also apply to the Child Disability Benefit, which is paid with the CCB for a child eligible for the Disability Tax Credit. This measure would apply to deaths occurring after 2024.

Disability Supports Deduction

The Disability Supports Deduction allows individuals with impairments in physical or mental functions to deduct certain expenses that enable them to earn business or employment income or attend school. A medical practitioner must prescribe such expense or otherwise certify in writing that it is required.

Budget 2024 proposes to expand the expenses eligible for the Disability Supports Deduction, including:

• The cost of an ergonomic work chair, including payments for an ergonomic assessment

• The cost of a bed positioning device, including payments for an ergonomic assessment

• The cost of a mobile computer cart

• The cost of an alternative input device to allow the individual to use a computer

• The cost of a digital pen device to allow the individual to use a computer

• The cost of a navigation device for low-vision

• The cost of memory or organization aids for impairments in mental functions

Expenses for service animals are also proposed to be recognized under the Disability Supports Deduction, and taxpayers can choose whether to claim such expenses under the Disability Supports Deduction or Medical Expense Tax Credit.

This measure would be effective for 2024 and subsequent taxation years.

Charities and Qualified Donees

Budget 2024 proposes various amendments to modernize and improve the operation of rules for registered charities and other qualified donees. Measures include permitting the CRA to communicate certain official notices digitally and simplifying the issuance of official donation receipts. These measures are generally effective upon royal assent.

Qualified Investment for Registered Plans

Registered plans, such as RRSPs, RRIFs, and TFSAs, can only invest in certain qualified investments. Budget 2024 invites stakeholders to provide suggestions on how the qualified investment rules could be modernized going forward to improve the clarity and coherence of these rules. Comments may be submitted by July 15, 2024.

Budget 2024 proposes a temporary accelerated Capital Cost Allowance (CCA) of ten percent for new eligible purpose-built rental projects that begin construction on or after Budget Day (April 16, 2024) and before January 1, 2031, and are available for use before January 1, 2036. This proposal increases the current CCA rate of four percent under Class 1. 

Eligible property would be new purpose-built rental housing that is 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.

Converting existing non-residential real estate, such as an office building, into residential complexes would also be eligible if these conditions are met. The measure would not apply to renovations of existing residential complexes, but the cost of a new addition to an existing one may be eligible.

Investments eligible for this measure would continue to benefit from the Accelerated Investment Incentive, which suspends the half–year rule – providing a CCA deduction at the full rate for eligible property put in use before 2028.

Budget 2024 also proposes immediate expensing for new additions of property purchased in the following CCA classes: 

• Class 44 (patents or the rights to use patented information)

• Class 46 (data network infrastructure equipment and related systems software)

• Class 50 (general-purpose electronic data-processing equipment and systems software)

The enhancement would allow a 100 per cent first-year deduction and would be available only for the year in which the property becomes available for use. To qualify, the property must be acquired on or after April 16 and become available for use prior to January 1, 2027. Property acquired from non-arm’s length persons or that has been transferred to the purchaser on a tax-deferred basis would be excluded from this measure.

Budget 2024 proposes changes to the excessive interest and financing expenses limitation (EIFEL) rules. The current EIFEL rules limit the amount of interest and financing expenses that can be deducted in computing taxable income by certain taxpayers and provides an exemption for interest and financing expenses incurred in respect of arm’s length financing for certain public-private partnership infrastructure projects.

Budget 2024 proposes expanding this exemption to include an elective exemption for certain interest and financing expenses incurred before January 1, 2036, regarding arm’s length financing used to build or acquire eligible purpose-built rental housing in Canada.

Eligible purpose-built rental housing would 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.

This change would apply to taxation years that begin on or after October 1, 2023.

Budget 2024 proposes to provide the CRA with the legislative authority to waive the 15% non-resident withholding tax requirement for businesses that pay non-resident service providers, over a specified period if either of the following conditions are met: 

• The non-resident would not be subject to Canadian income tax in respect of the payments because of a tax treaty between its country of residence and Canada; or 

• The income from providing the services is exempt from international shipping or operating an aircraft in international traffic. 

This measure would allow the CRA to waive the withholding requirement on multiple transactions with a single waiver, subject to any conditions and information requirements necessary to reduce compliance risks. This measure would come into force on royal assent of the enacting legislation

Budget 2024 proposes the new Canada Carbon Rebate for Small Businesses. This is an automatic, refundable tax credit for eligible businesses based on the number of employees a business has in a particular province.

For the 2019-20 to 2023-24 fuel charge years, a Canadian-controlled private corporation may claim the credit by filing a tax return for its 2023 taxation year by July 15, 2024. To be eligible for a credit in a fuel charge year, the corporation would need to have had no more than 499 employees throughout Canada in the calendar year in which the fuel charge year begins.

The tax credit amount for a particular fuel charge year would be determined for each applicable province in which the eligible corporation had employees in the calendar year in which the fuel charge year begins. The tax credit would equal the number of persons employed by the eligible corporation in the province in that calendar year multiplied by a payment rate specified by the Minister of Finance for the province for the corresponding fuel charge year. The Minister of Finance will specify payment rates for the 2019-20 to 2023-24 fuel charge years once sufficient information is available from the 2023 taxation year. 

The Canada Revenue Agency would automatically determine the tax credit amount for an eligible corporation and pay the amount to the eligible corporation.

Budget 2024 provides an update on various past budget matters surrounding Green Initiatives. 

Clean Electricity Investment Tax Credit (CEITC)

Budget 2024 provides the design and implementation details of the Clean Electricity Investment tax credit initially announced in Budget 2023. The credit is equal to 15% of the capital cost of eligible property that is acquired and becomes available for use on or after April 16, 2024, and before 2035 

Eligible Entities 

• Taxable Canadian corporations

• Provincial and territorial Crown corporations, subject to additional requirements

• Corporations owned by municipalities

• Corporations owned by Indigenous communities

• Pension investment corporations

Examples of Eligible Property 

• Equipment used to generate electricity from solar, wind, or water energy

• Concentrated solar energy equipment, as defined for the proposed Clean Technology investment tax credit, but limited to equipment used to generate electricity

• Equipment used to generate electricity, or both electricity and heat, solely from geothermal energy

• Equipment that is part of a system used to generate electricity, or both electricity and heat, from specified waste materials

• Stationary electricity storage equipment and equipment used for pumped hydroelectric energy storage

• Equipment that is part of an eligible natural gas energy system

• Equipment and structures used for the transmission of electricity between provinces and territories

To qualify for the 15% CEITC, there are proposed labour requirements for wages and apprenticeships that must be met. If the labour requirements are not met, a 5% credit would still be available.
 
Eligible corporations would only be able to claim one of the CEITC, the Clean Technology Investment Tax Credit (CTITC), the Carbon Capture, Utilization, and Storage Investment Tax Credit, the Clean Hydrogen Investment Tax Credit, the Clean Technology Manufacturing Investment Tax Credit, and the Electric Vehicle Supply Chain Investment Tax Credit in respect to the same expenditure.

Polymetallic Extraction and Processing

The 2022 Fall Economic Statement proposed the Clean Technology Investment Tax Credit (CTITC) as a refundable tax credit equal to 30% of the capital cost of an eligible property that has been acquired and becomes available for use on or after March 28, 2023.

Eligible activities for the tax credit include qualifying mineral activities producing all or substantially all qualifying materials. Budget 2024 clarifies that Qualifying mineral activities would consist of extraction; certain processing activities at mine or well sites, tailing ponds, mills, smelters, or refineries; certain recycling activities; and certain graphite activities.

Budget 2024 also proposes to modify eligible expenditures to include investments in eligible property used in qualifying mineral activities that are expected to produce primarily qualifying materials at mine or well sites, including tailing ponds and mills located at these sites (50% or more of the financial value of output comes from qualifying materials). 

Budget 2024 proposes to relax the GST rebate conditions for new student housing provided by universities, public colleges, and school authorities to allow these entities to claim the Enhanced 100-per-cent GST Rental Rebate in respect of any new residence they acquire or construct primarily to provide a place of residence to the students on a not-for-profit basis.

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

Budget 2024 proposes to repeal the temporary zero-rating of certain face masks or respirators and certain face shields under the GST/HST that has been implemented for the COVID-19 pandemic. This proposed measure would apply to supplies made on or after May 1, 2024.

Budget 2024 proposes that effective April 17, 2024, the tobacco excise duty rate will be increased by $4 per carton of 200 cigarettes (i.e., by $0.02 per cigarette), along with corresponding increases to the excise duty rates for the following tobacco products:

• Cigarettes (per five cigarettes or fraction thereof) – $0.92883 (from $0.82883)

• Tobacco Sticks (per stick) – $0.18576 (from $0.16576)

• Manufactured Tobacco (per 50 grams or fraction thereof) – $11.61031 (from $10.36032)

• Cigars – $40.43121 per 1,000 cigars plus the greater of $0.14533 per cigar and 88% of the sale price or duty-paid value (from $36.07829 per 1,000 cigars plus the greater of $0.12968 per cigar and 88% of the sale price or duty-paid value)

Budget 2024 increasing the vaping product excise duty rate, effective July 1, 2024. The increased duty rate will be as follows:

• Non-Participating Jurisdictions: $1.12 per 2 ml or fraction thereof for the first 10 ml of vaping substance in the vaping device or immediate container, and $1.12 per 10 ml or fraction thereof for amounts over the first 10 ml

• Participating Jurisdictions: $2.24 per 2 ml or fraction thereof for the first 10 ml of vaping substance in the vaping device or immediate container, and $2.24 per 10 ml or fraction thereof for amounts over the first 10 ml

Budget 2024 proposes to provide additional flexibility to Indigenous governments to enable them to enact a value-added sales tax, under their own laws, on fuel, alcohol, cannabis, tobacco, and vaping (FACT) products within their reserves or settlement lands.

Indigenous governments would have the choice to levy FACT sales taxes and would have the flexibility to choose which FACT products(s) to tax. On products for which an Indigenous FACT sales tax applies, the federal GST, or federal component of HST, would not apply.

Budget 2024 proposes several amendments to the information-gathering provisions in the Income Tax Act (the Act) to enhance the Canada Revenue Agency’s (CRA) compliance and enforcement actions and facilitate the collection of tax revenues. There are also proposals for other federal tax statutes administered by the CRA with similar provisions (i.e., Excise Tax Act, Air Travellers Security Charge Act, Excise Act, 2001, the Underused Housing Tax Act, the Select Luxury Items Tax Act, etc.) be amended, as needed, to address the issues discussed below. The amendments would come into force on royal assent of the enacting legislation.

Notice of Non-Compliance

Budget 2024 proposes to amend the Act to allow the CRA to issue a new type of notice, a Notice of Non-Compliance (Notice), to a person (Person) that has not complied with a requirement or Notice to provide assistance or information issued by the CRA. The Notice may be reviewed by the CRA, if requested by the Person, and vacated if the CRA subsequently determines that it was unreasonable to issue the Notice or if the Person had reasonably complied. There would be a further statutory right to have the Notice reviewed by a Federal Court judge.

The normal reassessment period for any taxation year of the taxpayer to which the non-compliance relates would be extended by the period of time the Notice is outstanding, where a Notice relating to a taxpayer has been issued to the taxpayer or a person that does not deal at arm’s length with the taxpayer.

Budget 2024 also proposes a penalty of $50 for each day that the Notice is outstanding to a maximum of $25,000 unless the Notice is ultimately vacated by the CRA or a court.

Questioning Under Oath

Budget 2024 proposes to amend the 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.

Compliance Orders

To incentivize taxpayers to comply with the CRA’s original request for information or assistance, Budget 2024 proposes to amend the Act to impose a penalty when the CRA successfully obtains a compliance order from a court to direct a non-compliant taxpayer to comply with the CRA’s information requests. The penalty would be equal to 10% of the aggregate tax payable by the taxpayer with respect to the taxation year(s) to which the compliance order relates but is only applicable if the tax owing in one of those taxation years exceeds $50,000. 

Budget 2024 further proposes an amendment to allow the CRA to seek a compliance order when a person has failed to comply with a requirement to provide foreign-based information or documents.

Stopping the Reassessment Limitation Clock

Under existing rules, when a taxpayer seeks judicial review of a requirement or notice issued to the taxpayer by the CRA, the reassessment period is extended by the amount of time it takes to dispose of the judicial review (Stop the Clock Rules) to ensure the CRA has sufficient time to properly review any information obtained before the expiry of the statutory reassessment period fixed by the Act. An analogous rule applies in respect of a compliance order.

Budget 2024 proposes to amend the Stop the Clock Rules to apply when a taxpayer seeks judicial review of any requirement or notice issued to the taxpayer by the CRA related to the audit and enforcement process or during any period that the Notice is outstanding. Analogous rules would apply where a requirement or notice has been issued to a person who does not deal at arm’s length with the taxpayer.