2024 Federal Budget Commentary

Compared to our international G7 peers,* Canada continues to have the smallest net debt and deficit as a share of gross domestic product (GDP) in the G7. Canada maintains an excellent AAA credit rating compared to other G7 countries (on par with Germany). Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) project that Canada will see the strongest economic growth in the G7 in 2025.

The Canadian deficit for fiscal year 2023-24 came in at the $40 billion target set in the last budget (equivalent to 1.4% of GDP). Even in a downside scenario, Canada’s deficit is projected to move below 1 per cent of GDP in 2026-27.

Canada has the lowest Marginal Effective Tax Rate (METR) in the G7. The METR is an estimate of the level of taxation on a new business investment, accounting for federal, provincial, and territorial taxation, as well as investment tax credits, and capital cost allowances. It is a metric for comparing the level of taxation on a new business investment between countries. Click here to see a chart of METR for the G7 countries in 2024.

*G7 Countries: Canada, France, Germany, Italy, U.S., U.K., Japan

Budget 2024 proposes to increase the capital gains inclusion rate from ½ to ⅔ for corporations and trusts, and from ½ to ⅔ on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after June 25, 2024.

The $250,000 threshold would effectively apply to capital gains realized by an individual, either directly or indirectly via a partnership or trust, net of any:

• current-year capital losses;
• capital losses of other years applied to reduce current-year capital gains; and
• capital gains in respect of which the Lifetime Capital Gains Exemption (LCGE), the proposed Employee Ownership Trust (EOT) Exemption or the proposed Canadian Entrepreneurs’ Incentive is claimed.

Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This means that 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 be fully available in 2024 (i.e., it would not be prorated) and would apply only in respect of net capital gains realized in Period 2.

The Government, in an unusual practice, did not release draft legislation with respect to these changes and so we can only advise based on the plain language provided in the budget document.

Effective tax rate on capital gain

We have summarized the effective tax rate before and after these changes below.

Claimants of the employee stock option deduction would be provided a ⅓ deduction of the taxable benefit to reflect the new capital gains inclusion rate, but would be entitled to a deduction of one half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

No draft legislation was released with respect to this change so it’s unclear when exactly this change applies but we suspect it is also effective on and after June 25, 2024. It’s unclear whether the change would apply to options granted or exercised on or after this date.

The Budget proposes to increase the Lifetime Capital Gains Exemption (LCGE) to apply to up to $1.25 million of eligible capital gains. This measure would apply to dispositions that occur on or after June 25, 2024. Indexation of the LCGE would resume in 2026.

Budget 2024 proposes several amendments to the Alternative Minimum Tax (AMT) proposals. These amendments would:

• allow individuals to claim 80 % (instead of the previously proposed 50%) of the Charitable Donation Tax Credit when calculating AMT;
• fully allow deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments;
• allow individuals to fully claim the federal logging tax credit under the AMT;
• fully exempt Employee Ownership Trusts from the AMT; and
• allow certain disallowed credits under the AMT to be eligible for the AMT carry-forward (i.e., the federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit).

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

Increasing the withdrawal limit

Budget 2024 proposes to increase the withdrawal limit from $35,000 to $60,000, for withdrawals made after April 16, 2024 and in subsequent calendar years. This increase would also apply to withdrawals made for the benefit of a disabled individual.

Temporary repayment relief

For participants making a first withdrawal between January 1, 2022, and December 31, 2025, the Budget proposes to temporarily defer the start of the 15-year repayment period by an additional three years. Accordingly, the 15-year repayment period would start the fifth year following the year in which a first withdrawal was made.

Budget 2024 proposes the CEI that allows individuals to use a 1/3 capital gains inclusion rate on the disposition of qualifying shares subject to a lifetime limit of $2 million. The lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025. This measure would apply in addition to any available capital gains exemption.

A share of a corporation would be a qualifying share if certain conditions are met, including all the following conditions:

• At the time of sale, it was a share of the capital stock of a small business corporation owned directly by the claimant.
• Throughout the 24-month period immediately before the disposition of the share, it was a share of a Canadian-Controlled Private Corporation and more than 50 % of the fair market value of the assets of the corporation were:
  • used principally in an active business carried on primarily in Canada by the Canadian-Controlled Private Corporation, or by a related corporation,
  • certain shares or debts of connected corporations, or
  • a combination of these two types of assets.
• The claimant was a founding investor at the time the corporation was initially capitalized and held the share for a minimum of five years prior to disposition.
• At all times since the initial share subscription until the time that is immediately before the sale of the shares, the claimant directly owned shares amounting to more than 10 % of the fair market value of the issued and outstanding capital stock of the corporation and giving the individual more than 10 % of the votes that could be cast at an annual meeting of the shareholders of the corporation.
• Throughout the five-year period immediately before the disposition of the share, the claimant must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business.
• The share does not 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:
  • operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector; or
  • providing consulting or personal care services.
• The share must have been obtained for fair market value consideration.

This measure would apply to dispositions that occur on or after January 1, 2025.

Budget 2024 proposes to double the tax credit amount to $6,000. This would increase the maximum tax relief to $900. This enhancement would apply to the 2024 and subsequent taxation years.

The government proposes to extend eligibility for the tax credit for one year, to flow-through share agreements entered into on or before March 31, 2025.

For the 2024 and subsequent taxation years, the Budget proposes to expand the list of expenses recognized under the Disability Supports Deduction to include:

• service animals trained to perform specific tasks for people with certain severe impairments;
• alternative computer input devices, such as assistive keyboards, braille display, digital pens, and speech recognition devices; and ergonomic work chairs and bed positioning devices, including related assessments.

Purpose-Built Rental Housing

Budget 2024 proposes to provide an accelerated Capital Cost Allowance (CCA) of 10% for new eligible purpose-built rental projects that begin construction on or after April 16, 2024 and before January 1, 2031, and are available for use before January 1, 2036.

Productivity-Enhancing Assets

Budget 2024 proposes to provide immediate expensing for new additions of property in respect to the following three classes, if the property is acquired on or after April 16, 2024 and becomes available for use before January 1, 2027:

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

The enhanced allowance would provide a 100 % first-year deduction and would be available only for the year in which the property becomes available for use. Property that becomes available for use after 2026 and before 2028 would continue to benefit from the Accelerated Investment Incentive.

The Budget provides further details on the exemption of the first $10 million in capital gains realized on the sale of a business and proposed conditions. It also proposes to expand qualifying business transfers to include the sale of shares to a worker cooperative corporation. This measure would apply to qualifying dispositions of shares that occur between January 1, 2024 and December 31, 2026.

A 15% refundable tax credit rate for eligible investments in new equipment or refurbishments related to:

• low-emitting electricity generation systems using energy from wind, solar, water, geothermal, waste biomass, nuclear, or natural gas with carbon capture and storage.
• stationary electricity storage systems that do not use fossil fuels in operation, such as batteries and pumped hydroelectric storage.
• transmission of electricity between provinces and territories.

Robust labour requirements to pay prevailing union wages and create apprenticeship opportunities will need to be met to receive the full 15% tax credit. The tax credit would apply to property that is acquired and becomes available for use on or after April 16, 2024 for projects that did not begin construction before March 28, 2023. The credit would no longer be in effect after 2034.

Budget 2024 proposes to provide the CRA with the legislative authority to waive the withholding requirement, over a specified period, for payments to a non-resident service provider 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 income from international shipping or from operating an aircraft in international traffic.

This proposal 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.

The new Budget proposes to extend the period for which qualifying foreign charities are granted status as a qualified donee from 24 months to 36 months. In addition, foreign charities would be required to submit an annual information return to the CRA.

The Budget proposes to permit the CRA to communicate certain official notices digitally, where the charity has opted to receive electronic information from the CRA.

The Budget also proposes the revocation of registration would become effective upon the publication of an official notice on a government webpage.

Budget 2024 proposes to remove the requirement that official donation receipts contain:

• the place of issuance of the receipt;
• the name and address of the appraiser, if an appraisal of the donated property has been done; and
• the middle initial of the donor.

Budget 2024 also proposes to expressly permit charities to issue official donation receipts electronically.

Measures relating to the extension of the registration period for foreign charities would apply to foreign charities registered after April 16, 2024. New reporting requirements for foreign charities would apply to taxation years beginning after April 16, 2024.

Budget 2024 proposes several amendments to the information gathering provisions in the ITA.

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 person that has not complied with a requirement or notice to provide assistance or information issued by the CRA.

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

Budget 2024 proposes to impose a penalty 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. This penalty would not apply if a notice of non-compliance is ultimately vacated by the CRA or a court.

Questioning Under Oath

Budget 2024 proposes 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

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 when the CRA obtains a compliance order against a taxpayer. The penalty would be equal to 10 % of the aggregate tax payable by the taxpayer in respect of the taxation year or years to which the compliance order relates. It would only be applied if the tax owing in respect of one of the taxation years to which the compliance order relates exceeds $50,000.

Budget 2024 further proposes 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, a taxpayer may seek judicial review of a requirement or notice issued to the taxpayer by the CRA. In these circumstances, the reassessment period is extended by the amount of time it takes to dispose of the judicial review. An analogous rule applies in respect of a compliance order.

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 the audit and enforcement process or during any period that a notice of non-compliance is outstanding. Analogous rules would apply where a requirement or notice has been issued to a person that does not deal at arm’s length with the taxpayer.

Eligibility conditions for the removal of GST on new student residences will be relaxed for not-for-profit universities, public colleges, and school authorities. The relaxed eligibility will apply to new student residences that begin construction on or after September 14, 2023, and before 2031, and that complete construction before 2036. Private institutions will not be eligible for this support.

The Organization for Economic Cooperation and Development (OECD) has developed a new framework (referred to as the Crypto-Asset Reporting Framework, or CARF) that provides for the automatic exchange of tax information in relation to transactions in crypto-assets.

The Budget proposes to implement the CARF in Canada. The measure would impose a new annual reporting requirement on entities and individuals (referred to as crypto-asset service providers) that are resident in Canada, or that carry on business in Canada, and that provide business services effectuating exchange transactions in crypto-assets. This would include crypto exchanges, crypto-asset brokers and dealers, and operators of crypto-asset automated teller machines. These measures would apply to the 2026 and subsequent calendar years.