Authors:
Pierre Alary, Malya Amghar, André Bergeron, Michael Bussmann, Paul Carenza, Andrew Coates, Laura Gheorghiu, Ash Gupta, Carl Hinzmann, Xin Jiang, Daniel Lacelle, Christine Perry, David Stevens, John Sorensen, Ian Therrien, Jim Wilson, Pouyan Zabihian
Statistics Canada estimates that there will be about 4.5 million Canadians under the age of 30 (Gen-Z) eligible to vote in the next federal election, or approximately 14 per cent of all eligible voters. It will also be the first federal election in which millennials will outnumber boomers.
On April 16, 2024, Deputy Prime Minister and Finance Minister Chrystia Freeland delivered the 2024 federal budget (Budget 2024), with spending measures aimed largely at this demographic using promises of affordable rental housing and first-time home buyer incentives. The corollary, Budget 2024 also introduces measures to fund this new spending, principally via an increase in capital gains taxes that the Department of Finance expects to affect 0.13 per cent of the wealthiest Canadians.
While Budget 2024 did not introduce the wealth tax that was speculated in the lead-up to Budget Day, this was as close to a proxy without actually introducing one. For the first time in 24 years, the capital gains inclusion rate will increase from one-half to two-thirds for individuals with more than $250,000 of gains in a taxation year, as well as for corporations and trusts. With this change alone, Canada's wealthiest taxpayers are expected to fill the Government coffers with $19.3 billion over the next five years. Yet, even with the additional revenue, Budget 2024 represents the ninth consecutive budget with a deficit.
The bulk of the remainder of Budget 2024 continued the theme of recent federal budgets, focusing on stimulating innovation and business start-ups, clean-energy and clean-tech initiatives and tightening rules around perceived tax abuses in the form of new, revised or enhanced anti- avoidance measures and greater powers bestowed upon the Canada Revenue Agency.
Table of contents
- Increase in capital gains inclusion rate
- Lifetime capital gains exemption
- Canadian entrepreneur's incentive
- Employee ownership trusts
- Housing measures
- Alternative Minimum Tax
- Clean economy investment tax credits
- Polymetallic extraction and processing
- Canada Carbon Rebate for Small Businesses
- Mineral Exploration Tax Credit
- Accelerated CCA: Productivity enhancing assets
- Qualified investments for registered plans
- Mutual fund corporation qualification limitation
- Amendment of synthetic equity arrangement rules
- Manipulation of bankrupt status
- Non-compliance with information requests
- Avoidance of tax debts
- Reportable and notifiable transactions penalty
- International tax measures
- Indigenous fuel, cannabis, tobacco and vaping tax framework
- Charities and qualified donees
Learn more about Gowling WLG's Tax Group
1. Increase in capital gains inclusion rate
Budget 2024 proposes to increase the inclusion rate for capital gains from 50 per cent to two-thirds for corporations and trusts, and to two-thirds for capital gains above a $250,000 threshold for individuals. The inclusion rate for capital gains below the $250,000 threshold for individuals will continue to be 50 per cent. The new inclusion rates will apply to capital gains realized on or after June 25, 2024.
The $250,000 threshold for individuals will apply to capital gains realized directly or indirectly through a trust or a partnership. It will apply to capital gains net of current year capital losses and prior year capital losses, and net of capital gains in respect of which the lifetime capital gains exemption (LCGE), the proposed employee ownership trust (EOT) exemption and the proposed Canadian Entrepreneur's Incentive is claimed. For 2024, the threshold will not be prorated, and it will be available only in respect of capital gains realized after June 25, 2024.
The employee stock option deduction is similarly decreased from 50 per cent to one-third for taxable benefits over a combined $250,000 threshold for both employee stock options and capital gains.
Net capital losses will continue to be deductible from taxable capital gains and will be adjusted to match the inclusion rate of the capital gain being offset.
Budget 2024 notes that there will be transition rules for 2024 to address situations where capital gains are realized before and after June 25, 2024.
There is no proposed statutory language accompanying the proposed changes.
An increase in the inclusion rate has been a point of speculation for many years now, and many taxpayers have engaged in planning in anticipation of a speculated change. With Budget 2024, it has finally arrived. It is somewhat curious that the effective date is June 25, 2024. Perhaps the delay in implementation is intended to give time for drafting the legislation, which will require some precision. It may also be indicative of workload issues in the Department of Finance or, alternatively, late development of the policy. The delay may present some planning opportunities for taxpayers who are about to realize gains soon anyways.
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2. Lifetime capital gains exemption
Budget 2024 proposes to increase the LCGE from $1,016,836 of eligible capital gains to $1,250,000. This proposed change will take effect on June 25, 2024, and indexation will resume in 2026. The LCGE is available for gains realized on the disposition of qualified small business corporation shares and qualified farm or fishing property.
The June 25, 2024 implementation date may incentivize some taxpayers in the midst of sale discussions to delay their closing date to after June 24, 2024, provided the total proceeds would not be expected to be so high as to trigger greater aggregate tax once the increased capital gains inclusion rate is factored in on proceeds above the LCGE.
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3. Canadian entrepreneur's incentive
Budget 2024 proposes to introduce a measure that reduces the inclusion rate on capital gains realized on the disposition of "qualifying shares" by an "eligible individual." The inclusion rate is reduced to one-half the prevailing inclusion rate in respect of capital gains of up to $2,000,000. The incentive will be phased in by increments of $200,000 per year, commencing January 1, 2025, when the measure comes into force, until it reaches $2,000,000 by January 1, 2034.
A number of conditions must be met for the share to be a "qualifying share," including the following:
- At the time of disposition, it must be a share of a small business corporation owned directly by the claimant.
- Throughout the 24-month period prior to the disposition, it was a share of a Canadian-controlled private corporation (CCPC) and more than 50 per cent of the fair market value (FMV) of the assets of the CCPC must be used principally in an active business carried on primarily in Canada by the CCPC or by a related corporation.
- The claimant is a founding investor at the time of initial capitalization and has held the share for a minimum of five years.
- At all times the claimant owned shares with more the 10 per cent of the votes and value of the issued and outstanding shares, and throughout the 5-year period immediately preceding the disposition was actively engaged on a regular, continuous and substantial basis in the activities of the business.
- Shares in certain corporations, including professional corporations, are not eligible.
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4. Employee ownership trusts
In Budget 2022, the Federal Government announced plans to create rules for EOT. These were proposed to encourage employee ownership in Canadian businesses and allow business owners a tax-efficient way to transfer ownership of a business to their employees.
Budget 2023 proposed draft rules, including draft legislation to define the qualifying conditions of an EOT. However, Budget 2023 fell short of providing the tax incentives to sellers necessary to make a sale to an EOT attractive. Our 2023 Budget commentary can be found here.
Perhaps due to the limited interest in EOTs and to better align this measure with similar rules in other jurisdictions, in the November 2023 Fall Economic Statement, the Federal Government proposed to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, for sales between 2024 and 2026, with the specific conditions to be outlined at a later date. Our commentary on that announcement can be found here.
Budget 2024 sets out, without the benefit of draft legislation, the conditions for the previously announced $10 million exemption:
- The exemption is available only to an individual (directly, through a personal trust or partnership) who disposes of shares of a corporation that is not a professional corporation.
- The purchasing trust is not already an EOT or a trust with employee beneficiaries.
- Throughout the 24 months preceding the transfer, the transferred shares were exclusively owned by the individual claiming the exemption, by a related person or by a partnership in which the individual is a member and over 50 per cent of the FMV of the business's assets were used principally in an active business.
- At any time prior to the transfer, the individual (or their spouse or common-law partner) was actively engaged in the business on a regular and continuous basis for a minimum period of 24 months.
- Immediately after the transfer, at least 90 per cent of the beneficiaries of the EOT are residents in Canada.
The requirement that a seller be actively involved in the business appears to deny passive investors, including family members other than the seller's spouse or common-law partner, from benefitting from the exemption. Further, if multiple selling individuals transfer shares to an EOT, the aggregate exemption is limited to $10 million, requiring the sellers to agree on how to share the exemption. This is likely to add an element of complexity to sale transactions, particularly those involving unrelated sellers.
Further, if a "disqualifying event" occurs within 36 months of the transfer to the EOT, the exemption would retroactively cease to be available. A disqualifying event includes the EOT losing status as an EOT or if less than 50 per cent of the FMV of the shares of the qualifying business is attributable to assets used principally in an active business at the beginning of two consecutive taxation years of the corporation. The individual and the EOT will have to elect to be jointly and severally liable for any tax payable by the individual as a result of the exemption being denied within the first 36 months, presumably with the individual being subject to interest charges from the year of the transfer.
If the disqualifying event occurs more than 36 months after the transfer, the EOT would be deemed to have a capital gain equal to the total of the gains for which this exemption was claimed. These conditions are likely to inject significant complexity into a sale transaction, including covenants on how the transferred business is to be conducted, as well as potential indemnities for actions that cause the exemption to be lost.
We await the draft legislation to determine whether these proposed conditions will stifle what could otherwise have been a significant incentive to business owners.
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5. Housing measures
Budget 2024 contains a number of housing-related tax measures, consistent with its overall housing-related focus – including an increase in the Home Buyers' Plan (HBP) and measures to incentivize rental housing.
Home Buyers' Plan
Budget 2024 increases the withdrawal limit under the HBP substantially, from $35,000 to $60,000, for withdrawals made after April 16, 2024. The HBP allows eligible home buyers to withdraw from their RRSP, up to the withdrawal limit, to purchase or build their first home without having to pay tax on such a withdrawal.
Amounts withdrawn under the HBP must be repaid to an RRSP over a maximum period of 15 years, starting the second year following the year in which a first withdrawal was made. Otherwise, amounts due for repayment within a specific year will be taxable as income for that year. However, Budget 2024 temporarily defers the start of the 15-year repayment period by an additional three years for participants making a first withdrawal between January 1, 2022 and December 31, 2025.
Interest deductibility limits: Purpose-built rental housing
Budget 2024 introduces a new elective exemption from the draft excess interest and financing expenses limitation (EIFEL) rules. In general terms, the EIFEL rules are intended to limit the amount of net interest and financing expenses that may be deducted in computing a taxpayer's income to no more than a fixed ratio of earnings before interest, taxes, depreciation and amortization (EBITDA).
The existing draft EIFEL rules only provide an exemption for interest and financing expenses incurred for certain public-private partnership infrastructure projects. Budget 2024 proposes an additional 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.
Purpose-built rental housing under this provision would consist of a residential complex meeting the following requirements:
- A minimum of four private apartment units, or 10 private rooms or suites.
- At least 90 per cent of residential units are held for long-term rental.
Consistent with broader EIFEL rules, this amendment would apply to taxation years that begin on or after October 1, 2023.
Accelerate CCA: Purpose-built rental housing
Budget 2024 also introduces a substantial boost for the development of new eligible purpose-built rental projects by proposing an accelerated CCA of 10 per cent, a significant increase from the current four per cent rate under Class 1.
The accelerated CCA applies to new eligible purpose-built rental projects that begin construction between April 16, 2024, and January 1, 2031, and become available for use before January 1, 2036. Eligible properties include new purpose-built rental housing, as defined for the purpose-built rental housing exemption from the EIFEL rules. Additionally, projects converting existing non-residential real estate into a residential complex or new additions to existing structures meeting the defined criteria are eligible. The accelerated CCA would not apply to renovations of existing residential complexes.
Projects eligible for this measure will continue to benefit from the accelerated investment incentive's provisions, which currently suspend the half-year rule. This suspension allows for a full CCA deduction for eligible property put into use before 2028, providing a more immediate tax benefit. After 2027, the half-year rule will be reinstated, limiting the CCA allowance in the year an asset is acquired to one-half of the full deduction.
The exemption from the EIFEL rules amendment and the CCA acceleration for purpose-built rental housing aims to encourage investment in residential complexes with a focus on long-term rentals.
GST relief on student residences
The Government of Canada previously announced an enhanced GST rental housing rebate for the full five per cent of the federal GST for qualifying new purpose-built housing, where construction began after September 13, 2023 and is completed before 2031.
Budget 2024 proposes to amend the qualifying conditions under the Excise Tax Act for new student housing provided by universities, public colleges and school authorities that operate on a not-for-profit basis. The proposal will not require the first use of a residence unit to be used as a primary place of residence of an individual under a lease for a period of at least 12 months, provided the student residence is primarily for the purpose of providing a place of residence for students.
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6. Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a parallel tax system which imposes a minimum level of tax on taxpayers who have reduced their taxable income to very low levels by claiming tax credits, exemptions and deductions.
Under the AMT system, taxable income is calculated using only those more limited tax credits, exemptions and deductions that are permitted for AMT purposes. The taxpayer is liable for the higher of the AMT tax or the tax computed under the regular system. The excess of the AMT over the regular tax may be carried forward seven years, offsetting the tax calculated under the regular system in any future year in which it exceeds the AMT.
Budget 2023 previously announced changes to the AMT beginning in 2024. These changes expanded the AMT tax base (by eliminating or reducing certain exemptions, credits and deductions) and increased the AMT tax rate from 15 per cent to 20.5 per cent. As well, the AMT exemption, a threshold of adjusted taxable income below which AMT will not apply, was increased from $40,000 (in 2023 and prior) to the fourth federal tax bracket (in 2024 and forward, currently $173,205). In August 2023, the government released draft measures for these various proposals.
Budget 2024 proposes a number of amendments to the draft measures. Most significantly, individuals may now claim 80 per cent of the charitable deduction tax credit when calculating AMT, rather than the 50 per cent originally proposed in the draft legislation. The inclusion rate on donations of publicly traded securities to a charity remained constant, with 30 per cent of the capital gain included in the AMT base. Under the regular tax system, the accrued gain is completely excluded, providing a significant incentive. This 30 per cent inclusion similarly applies to the donation of securities obtained through an exercise of employee stock options.
Other amendments included the exemption of EOTs from AMT, the proposed exemption of certain trusts for the benefit of Indigenous groups and the allowance of certain minor credits and deductions when calculating AMT.
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7. Clean economy investment tax credits
General update on measures
Our Budget 2022 bulletin, Budget 2023 bulletin and FES 2023 bulletin contain details regarding the various clean economy investment tax credits.
In November 2023, the government introduced Bill C-59, which enacts the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS ITC) and the Clean Technology Investment Tax Credit (Clean Tech ITC), as well as labour requirements for enhanced ITCs under several of the credits (which are also discussed in our previous bulletins noted above). The Government anticipates Bill C-59 will receive Royal Assent before June 1, 2024.
The Government will also shortly introduce legislation to deliver the Clean Hydrogen Investment Tax Credit (Hydrogen ITC) and the Clean Technology Manufacturing Investment Tax Credit (Manufacturing ITC).
Clean Electricity Investment Tax Credit (Clean Electricity ITC)
Budget 2023 introduced the refundable Clean Electricity ITC of 15 per cent for eligible investments in eligible properties.
Labour requirements regarding prevailing wages and apprenticeships, proposed in Bill C-59, must also be met to qualify for the full Clean Electricity ITC. If not, the credit will be reduced to five per cent. The Clean Electricity ITC could be claimed on the same eligible property in addition to the Atlantic Investment Tax Credit, but generally not with any other ITC.
Both new projects and the refurbishment of existing facilities will be eligible.
With respect to entities other than Crown corporations, the credit is available for eligible property that is acquired and becomes available for use on or after Budget Day and before 2035 (provided that it was not used for any purpose before the acquisition). The credit is also available where no project construction began before March 28, 2023, other than preliminary work such as permit and regulatory approval, environmental impact assessments and community consultations.
Eligible property
The following is eligible property:
- Equipment used to generate electricity from solar, wind or water energy described in CCA Class 43.1 (hydro-electric installations are not subject to capacity limits).
- "Concentrated solar energy equipment" (defined under the Clean Tech ITC) used to generate electricity.
- Equipment used to generate electricity, or both electricity and heat, from nuclear fission (defined under the Clean Tech ITCs but with less restrictions).
- Equipment used for the purpose of generating electricity, or both electricity and heat, solely from geothermal energy described in CCA Class 43.1 (excluding when part of a system that extracts fossil fuel for sale).
- Equipment that is part of a system used to generate electricity, or both electricity and heat, from specified waste materials (see FES 2023 bulletin).
- Stationary electronic storage equipment and equipment used for pumped hydroelectric energy, described in CCA Class 43.1, excluding equipment that uses any fossil fuel in operation.
- Equipment that is part of an eligible natural gas energy system.
- Equipment and structures used for the transmission of electricity between provinces and territories (including electrical transmission equipment, structures and related equipment to manage traded electricity).
Eligible natural gas energy systems are those that use fuel all or substantially all of which is natural gas solely to generate electricity, or both electricity and heat, and use a carbon capture system to limit emissions. Qualifying property must meet an emission intensity limit of 65 tonnes of carbon dioxide per gigawatt hour of energy produced and is subject to a five-year requirement to report emissions intensity and a one-time verification of emissions intensity based on an average of the reported amounts over the reporting period. If average emission intensity exceeds the emission intensity limit, there will be full recovery of the ITC.
Carbon storage can only occur in eligible jurisdictions for dedicated geological storage, which are currently proposed to include Alberta, British Columbia and Saskatchewan. The ITC claim must be validated through submissions to Natural Resources Canada.
Continued eligible use
Eligible property must meet the conditions for inclusion on an annual basis. Similar to the rules for Clean Tech ITCs, the eligible property must not be converted to an ineligible use within ten years (20 for natural gas energy systems) from the date of its acquisition or the taxpayer will be subject to potential repayment obligations.
Eligible entities
The credit is available to Canadian corporations that are:
- Taxable Canadian corporations.
- Provincial or territorial Crown corporations, only for investments in designated provinces and territories.
- Corporations owned by municipalities.
- Corporations owned by Indigenous communities.
- Pension investment corporations.
Where property is owned by a partnership, partners that are corporations eligible for the credit may claim their share, subject to partnership rules generally consistent with those proposed for the Clean Tech ITC in Bill C-59. In cases where a property is eligible for both the Clean Electricity ITC and Clean Tech ITC, partners must choose which credit to claim.
Tax exempt corporations
Corporations that are exempt from tax must agree to be subject to the provisions of the Income Tax Act (ITA) related to the credit, including provisions related to audit, penalties and collections, and agree not to assert any immunity or exemption in respect of the credit.
Crown corporations
As previously announced, for a province or territory to be designated, its government must have publicly committed to (i) achieve a net-zero electricity grid by 2035, and (ii) for the Crown corporation to reduce the electricity bills of ratepayers by an amount equivalent to the amount of the ITC. Further, the Crown corporation must report annually to the Federal Government on how it reduces ratepayers' bills or risk a penalty. Further consultation with the provinces and territories is ongoing.
Where a province or territory becomes designated before March 31, 2025, the credit can be claimed for all property acquired on or after Budget Day for a project for which construction began on or after March 28, 2023. Where a province is designated after that date, only property acquired after the designation date can be eligible for the credit, on condition also that the project construction must not have begun before March 28, 2023.
EV Supply Chain Investment Tax Credit (EV Supply Chain ITC)
Budget 2024 also announces an EV Supply Chain ITC aimed at incentivizing electric vehicle supply chain consolidation in Canada. The 10 per cent credit, mirrored on the Manufacturing ITC will apply to the building costs of buildings used in key segments of the electric vehicle supply chain: (i) electric vehicle assembly, (ii) electric vehicle battery production and (iii) cathode active material production.
Construction costs qualify where the taxpayer (or a member of a group of related taxpayers) claims the Manufacturing ITC in all three of the specific segments. It can also be claimed where the group claims the Manufacturing ITC in two of the segments and holds at least a qualifying minority interest in an unrelated corporation that claims the Manufacturing ITC in the third segment. In such a case, all of the participants, including the unrelated corporation, could claim the EV Supply Chain ITC.
The EV Supply Chain ITC applies to property that is acquired and available for use on or after January 1, 2024 until December 31, 2034. The credit is reduced to five per cent in 2033 and 2034. Further details regarding the EV Supply Chain ITC will be published in the Fall Economic Statement.
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8. Polymetallic extraction and processing
Budget 2023 announced a series of targeted tax initiatives aimed at aiding Canada's development of a clean economy, meeting its greenhouse gas emissions reduction targets for 2030 and encouraging the creation of high-paying jobs.
Among these initiatives was the introduction of the Manufacturing ITC, which covers clean technology manufacturing and processing, as well as the extraction and processing of critical minerals, offering up to a 30 per cent tax credit on the capital cost of certain depreciable property that is used all or substantially all for eligible activities. Budget 2024 intends to build upon these initiatives, specifically by broadening the Manufacturing ITC to include businesses involved in the extraction and processing of polymetallic materials (i.e., projects engaged in the production of multiple metals).
Budget 2024 also proposes to expand the definition of eligible expenditures, allowing for investments in properties engaged in qualifying mineral activities projected to primarily generate qualifying materials at mine or well sites, including tailing ponds and mills located at these sites. To qualify, the property must be used or be expected to be used, in activities where qualifying materials account for at least half of the output's financial value. Claimants will need to provide an attestation from an arm's-length qualified engineer or geoscientist for each relevant mine or well site.
The tax credit may be recaptured if the property that has received the tax credit is repurposed for a non-qualifying activity within a 10-year period following its acquisition. To address a potential recapture due to mineral price fluctuations, Budget 2024 proposes a safe harbour rule. This rule allows for the initial claim of the tax credit to be calculated using a five-year historical average of mineral prices. These average prices would then be used to assess the production of qualifying materials throughout the 10-year period for recapture.
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9. Canada Carbon Rebate for Small Businesses
Budget 2024 aims to redistribute a segment of the fuel charge proceeds gathered from a province through the Canada Carbon Rebate for Small Businesses. This initiative introduces an automatic, refundable tax credit for qualifying businesses, calculated according to the number of employees they have within the province.
For the 2019-20 to 2023-24 fuel charge years, the tax credit would be available to CCPCs that have filed a tax return for their 2023 taxation year by July 15, 2024, and who have no more than 499 employees throughout Canada in the calendar year in which the fuel charge year begins.
The tax credit amount that eligible businesses can anticipate for a given fuel charge year will be calculated for each province where the corporation had employees during the calendar year that the fuel charge year begins. This amount will be the product of the number of employees the corporation had in the province for that calendar year and a payment rate specified by the Minister of Finance for the province for the relevant fuel charge year.
The Canada Revenue Agency (CRA) will directly disburse the tax credit payments to eligible corporations, separately from CRA tax refunds. Additionally, Budget 2024 enhances the allocation of fuel charge proceeds to Indigenous governments, doubling it from one per cent to two per cent of the direct proceeds starting this year.
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10. Mineral Exploration Tax Credit
As previously announced in late March 2024, the government proposes to extend eligibility for the Mineral Exploration Tax Credit (METC), which is legislated to expire on March 31, 2024, for one year, to flow-through share agreements entered into, on, or before March 31, 2025.
The METC is a non-refundable tax credit that is equal to 15 per cent of specified mineral exploration expenses incurred in Canada that resource companies renounce or "flow through" to investors owning flow-through shares.
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11. Accelerated CCA: Productivity enhancing assets
Budget 2024 proposes to provide immediate expensing, providing a 100 per cent first-year CCA deduction for new additions of property acquired on or after April 16, 2024, and available for use before January 1, 2027, for the following three CCA classes of assets:
- Class 44 (patents or the rights to use patented information for a limited or unlimited period).
- Class 46 (data network infrastructure equipment and related systems software).
- Class 50 (general-purpose electronic data-processing equipment and systems software).
The accelerated CCA will be available only for the year in which the property becomes available for use and is prorated for a short taxation year. Property that becomes available for use after 2026 and before 2028 would continue to benefit from the accelerated investment incentive, which suspends the half-year rule.
Property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer would be eligible for the accelerated CCA only if both of the following conditions are met:
- Neither the taxpayer nor a non-arm's-length person previously owned the property.
- The property has not been transferred to the taxpayer on a tax-deferred basis..
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12. Qualified investments for registered plans
Registered plans (e.g., RRSPs, TFSAs, etc.) can invest only in qualified investments for those plans. Broadly speaking, qualified investments include mutual funds, publicly listed securities, government and corporate bonds and GICs. Both the qualified investment rules for different plans, as well as the variety of registered plans, have expanded over the years, and slightly different rules for determining what is a qualified investment for different registered plans has created complexity, inconsistency and increased the cost of compliance.
In Budget 2024, the Department of Finance announced an invitation for stakeholders to provide suggestions by July 15, 2024 on how the qualified investment rules could be modernized on a prospective basis to improve the clarity and coherence of the registered plans regime. Matters specifically flagged for consideration include:
- Harmonizing the qualified investment rules for investments in small businesses.
- Whether annuities that are qualified investments only for RRSPs, RRIFs and RDSPs should continue to be qualified investments.
- The conditions relating to certain pooled investment products in order to be qualified investments.
- Whether and how qualified investment rules could promote an increase in Canadian-based investments.
- Whether crypto-backed assets are appropriate as qualified investments.
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13. Mutual fund corporation qualification limitation
Corporations that meet certain criteria under the ITA can qualify as a "mutual fund corporation" and, unlike other corporations, can act as a pass through for their investors in respect of capital gains. Existing criteria to qualify as a mutual fund corporation are generally based on an underlying principle that it is widely held.
Budget 2024 proposes to limit the ability of a corporation to qualify as a mutual fund corporation in certain circumstances where it is controlled by or for the benefit of a corporate group (including a corporate group that consists of any combination of corporations, individuals, trusts or partnerships that do not deal with each other at arm`s length). More specifically, under the proposed amendments, a corporation will be deemed not to be a mutual fund corporation after a particular time, if at that time:
- A person or partnership, or any combination of persons or partnership not dealing at arm's length ("specified persons"), collectively owns 10 per cent or more of the shares by value.
- The corporation is controlled by or for the benefit of one or more specified persons.
Relief for newer mutual fund corporations is provided where the mutual fund corporation was incorporated within the previous two years and the aggregate FMV of the shares held by specified persons does not exceed $5 million.
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14. Amendment of synthetic equity arrangement rules
Budget 2015 and Budget 2018 introduced synthetic equity arrangement rules to address perceived abuses of the dividend rental arrangement rules. Budget 2024 proposes further changes to the synthetic equity arrangement rules, effective January 1, 2025, to eliminate the "tax-indifferent investor exception" (including the exchange traded exception) to the existing anti-avoidance rules.
The change is expected to principally effect financial institutions. Draft legislation has not yet been released.
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15. Manipulation of bankrupt status
Budget 2024 proposes to repeal the exception to the debt forgiveness rules for bankrupt corporations and the loss restriction rule applicable to bankrupt corporations.
The change is aimed at perceived abuse of bankruptcy status within certain loss trading type transactions. As a result of the change, bankrupt corporations will be treated the same as any other non-bankrupt insolvent corporation whose commercial obligations are forgiven or settled for less than full value. The bankruptcy exception to the debt forgiveness rules will remain in place for individuals.
The change will apply to bankruptcy proceedings that are commenced on or after Budget Day.
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16. Non-compliance with information requests
Budget 2024 includes provisions that seek to ensure timely compliance with CRA requests for information. In light of the CRA's myriad existing audit powers and ability to assume facts in the absence of documents and information, it is an open question whether granting further statutory powers to the CRA is necessary.
The proposed new powers that would apply to the ITA, Excise Tax Act and other fiscal statutes are:
Notice of non-compliance
This proposal would allow the CRA to issue a notice to a person who has not complied with CRA requests for assistance or information. A notice would be reviewable by the CRA and possibly vacated if the CRA determines that its own notice was unreasonable or if the person had reasonably complied with the initial requirement.
A skeptic may wonder whether this scheme is meaningful or little more than an unnecessary administrative labyrinth.
The issuance of a notice may also be reviewable by the Federal Court, which is the venue for the existing compliance application regime. The proposed notice scheme would have teeth – the normal reassessment period would be extended by the time that a notice of non-compliance is outstanding, and a penalty of $50 would be exigible for each day that a notice is outstanding, to a maximum of $25,000. The CRA's ability to seek a compliance order would not be affected by the timing of a notice of non-compliance.
Questioning under oath
The 2022 amendments to subsection 231.1(1) of the ITA included the power for authorized CRA officers to compel not only written answers to questions but also oral interviews, either in-person, by video-conference or by some other means of electronic communication.
The amendments responded to the outcome in Canada (National Revenue) v. Cameco Corporation, 2017 FC 763 (aff'd 2019 FCA 67), a case in which the CRA unsuccessfully sought to rely on the old statutory wording to compel interviews with dozens of employees. The Federal Court application judge described oral interviews with auditors as essentially examinations for discovery, but broader and without procedural safeguards, which would circumvent the Tax Court of Canada Rules (General Procedure). Notwithstanding this assessment of the power to compel oral interviews, the Government of Canada then amended subsection 231.1(1) to do the very thing that the judgment cautioned against.
Now, Budget 2024 proposes that the CRA would have the power to require that oral or written submissions or documents be provided under oath or affirmation. This proposal exacerbates the exact issue that the courts have highlighted, because it would grant the authority to question under oath to CRA personnel not equipped to deploy that kind of power and again without any of the usual procedural protections that would apply in the context of an actual examination for discovery.
Upping the ante on audit responses and, in particular, oral interviews would increase the likelihood that counsel will have to be more deeply involved in audits, and that counsel will have to do what they do best: manage, interject, take questions under advisement and, from time to time, force the matter to come before a judge for direction. However, there would likely be a cost associated with counsel doing their jobs and enforcing the rights of taxpayers during audits, because of the pernicious effect of the notice of non-compliance proposals and the compliance order penalties summarized below.
The compliance order regime has also been proposed to be expanded to include requiring oral or written answers and foreign-based information.
Compliance order penalties
Budget 2024 commented that compliance applications, by which the CRA seeks to compel taxpayers to provide requested information, have been ineffective because the punishment for not adhering to a compliance order is generally not significant.
To address this perceived issue, Budget 2024 proposes to impose a penalty when the CRA obtains a compliance order, computed as 10 per cent of the aggregate tax payable for years to which the compliance order relates (only if the tax owing for one of the subject years exceeds $50,000). It was suggested that the proposed penalty would incentivize taxpayers to comply with the original request for information or assistance.
This is another surprising turn because there are scenarios in which a taxpayer may reasonably disagree with the CRA, at which point the CRA may have recourse to the Federal Court to resolve the dispute. The outcome of the hearing may be indeterminate. Creating a disincentive against challenging a branch of the government or taking that challenge to court seems oddly out of step with the fair and reasonable function of a regulatory regime in a free and democratic society.
Proposed amendments concerning non-compliance with CRA information requests would come into force upon Royal Assent.
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17. Avoidance of tax debts
Section 160 of the ITA is an anti-avoidance rule that seeks to prevent taxpayers from avoiding their tax debts by transferring their assets to non-arm's length persons. The provision makes the recipient jointly, severally or solidarily liable with the transferor for the latter's tax debts to the extent that the value of the property transferred is greater than the consideration provided by the recipient. Although a stringent rule, section 160 may be circumvented in certain situations, for example, where a third party is interposed between the non-arm's length parties and one of the purposes of the series of transferring transactions is to avoid liability. Proposed amendments would look past the third party and treat the transfer as being between the non-arm's length parties. The existing penalty for so-called "debt avoidance planning" would be extended to the proposed rule.
Similar amendments would apply to comparable provisions in other fiscal statutes, and the proposed measures would apply as of Budget Day.
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18. Reportable and notifiable transactions penalty
Budget 2024 proposes that the general fine and punishment provision in section 238 of the ITA need not apply to failures to comply with the reportable and notifiable transactions regime, because they already include specific penalties for non-filing.
Thus, non-compliance with the reportable and notifiable transactions filing requirements will be excluded from section 238. The coming into force of this amendment is deemed to have occurred on June 22, 2023.
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19. International tax measures
Crypto-Asset Reporting Framework and the Common Reporting Standard
The Common Reporting Standard (CRS) was developed by the OECD to facilitate the automatic exchange of financial information for tax purposes, and was ultimately enacted into the ITA. The CRS requires Canadian financial institutions to report to the CRA information on financial accounts held in Canada by non-residents. The CRA in turn shares this information with foreign tax authorities in exchange for information held outside Canada in respect of Canadian residents.
The emergence of crypto-assets has prompted the OECD to develop the Crypto-Asset Reporting Framework (CARF) to provide for the automatic exchange of information relating to crypto-asset transactions. Budget 2024 proposes to implement the CARF, which imposes a new annual reporting requirement in the ITA for crypto-asset service providers that are resident in Canada or carry on business in Canada. Crypto-asset service providers will be required to report the annual value of specified crypto-asset transactions and obtain and report information on each of their customers, including natural persons who exercise control over customers that are corporations or other legal entities.
Budget 2024 also proposes amendments to the CRS that have been endorsed by the OECD in connection with the CARF. These amendments expand the scope of the CRS to include specified electronic money products and central bank digital currencies not covered by the CARF. The proposed changes aim to ensure effective coordination between the CRS and the CARF, minimize duplicative reporting and strengthen due diligence procedures for financial institutions.
Further proposed amendments to the CRS would remove Labour-Sponsored Venture Capital Corporations (LSVCCs) from the list of non-reporting financial institutions and treat a non-registered account held in an LSVCC as an excluded account if annual contributions to the account do not exceed US$50,000. Budget 2024's proposed changes to the CRS also seek to clarify that its anti-avoidance provision applies to arrangements where the primary purpose is to circumvent CRS obligations.
These measures would apply to the 2026 and subsequent calendar years, allowing for the first reporting and exchange of information under the CARF and amended CRS to occur in 2027 for the 2026 calendar year.
Withholding for non-resident service providers
Regulation 105 mandates a 15 per cent withholding tax on fees, commissions or other amounts paid by a person to a non-resident in respect of services rendered in Canada. This withholding tax is credited against any Canadian tax the non-resident may owe. However, the Regulation 105 system can pose challenges for non-resident taxpayers, especially if they do not ultimately owe any Canadian tax and must file a Canadian tax return to claim a refund.
While non-residents exempt from Canadian taxes under a treaty can seek waivers from the CRA for a specific planned transaction, the current waiver system has limitations and can be cumbersome for taxpayers with multiple or ongoing transactions in Canada. Consequently, many non-resident service providers instead pass the withholding tax cost on to their Canadian counterparties.
Budget 2024 proposes to introduce new subsection 153(8) of the ITA, which will provide the CRA with the legislative authority to waive the withholding tax requirement for multiple transactions over a specified period of time, on payments to a non-resident service provider. This waiver would apply in situations where the non-resident is either tax exempt under a treaty (e.g. no permanent establishment in Canada) or the income is exempt income from international shipping or from operating an aircraft in international traffic.
This proposed change represents a positive development for the Regulation 105 system. While the specifics of how the CRA will administer this legislation remain unclear, any improvements to streamline or broaden the effectiveness of the current waiver system are welcome and may alleviate Canadian counterparties from bearing this cost burden.
Pillar One and the Digital Services Tax
Pillar One seeks to ensure that large profitable global corporations, including prominent digital entities, pay their fair share of tax in the jurisdictions where their users and customers are located.
Pillar One was part of the two-pillar plan agreed to in October 2021 by the members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. At that time, the Government of Canada chose to temporarily pause the implementation of its recently announced Digital Services Tax (DST) while negotiations for Pillar One were ongoing, despite the fact that seven other countries (Austria, France, India, Italy, Spain, Turkey and the United Kingdom) continued to enforce their digital services taxes.
However, as the implementation of Pillar One has been delayed due to a lack of consensus among participating countries, Budget 2024 reaffirms the Government of Canada's commitment to Pillar One, but also confirms its intention to proceed with the DST. The DST would begin to apply for calendar year 2024, with that first year covering taxable revenues earned since January 1, 2022.
Pillar Two and the Global Minimum Tax Act
Pillar Two of the two-pillar plan is a global minimum tax regime to ensure that large multinational corporations uphold a minimum effective tax rate of 15 per cent on their profits worldwide. Along with other countries, Budget 2024 confirms the Government of Canada's intention to introduce legislation – the Global Minimum Tax Act – that will implement this regime in Canada.
The global minimum tax will apply to fiscal years commencing on or after December 31, 2023.
Transfer pricing legislative amendments
Budget 2024 confirms the Government of Canada's intention to proceed with the previously announced legislative amendments to implement changes discussed in the transfer pricing consultation paper released in June 2023.
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20. Indigenous fuel, cannabis, tobacco and vaping tax framework
Budget 2024 proposes a framework to permit Indigenous governments to agree to impose a sales tax on fuel, cannabis, tobacco and vaping products on reserves or settlement lands.
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21. Charities and qualified donees
Budget 2024 proposes a number of minor amendments to the ITA and the Regulations for the welcome purpose of improving the operation of certain rules related to registered charities and other qualified donees. These included:
- Simplification and modernization of the process for issuing and voiding official donation receipts.
- Simplification and modernization of the provision of services by CRA, as well as of CRA communications to registered charities and qualified donees through:
- Enhanced use of digital notices.
- Elimination of registered mail for all but compliance-related notices for those charities that have not opted to receive information electronically.
- Change to the effective date of a revocation of the registration of a charity or other qualified donee by eliminating the requirement of publication in the Canada Gazette in favour of digital publication of the revocation notice on a government website.
- Extension of the temporary period during which foreign charities may be registered as a qualified donee (if certain conditions are met) from 24 to 36 months. This extension was coupled with enhanced reporting requirements for the foreign charities, namely the introduction of a requirement to submit an annual information return which would be made publicly available.
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Read more of Gowling WLG’s coverage of Budget 2024:
This analysis was prepared by the following members of the Gowling WLG Tax Group:
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