On April 16, 2024, Deputy Prime Minister and Minister of Finance Chrystia Freeland tabled Canada’s 2024 federal budget. Titled “Budget 2024: Fairness for Every Generation,” this year’s fiscal plan is designed to appeal to younger generations, with significant spending on initiatives to increase the housing supply, enhance protections for renters, and address the rising cost of living.
Projecting a deficit of $39.8 billion—roughly in line with last year—the budget also includes numerous measures intended to promote research and innovation, clean technology development, and the adoption of artificial intelligence by Canadian businesses.
From a tax perspective, this year’s budget seeks to improve “tax fairness,” with an increase to the capital gains inclusion rate grabbing many headlines. However, several other significant tax measures were announced, including changes to withholding tax requirements, accelerated capital cost allowance for certain assets, revisions to the Alternative Minimum Tax, a new tax incentive for entrepreneurs, good and services tax (GST) relief for new student residences, and increases to various “sin” taxes. These and other interesting tax changes are summarized below.
Corporate Tax Measures
Regulation 105 Withholding Tax Waivers
In the absence of a tax waiver, Regulation 105 requires a 15% withholding tax on payments to non-residents providing services physically in Canada and otherwise carrying on business in Canada. The tax waiver process is limited to finite periods and may not be granted for longer-term assignments.
The budget proposes to allow the Canada Revenue Agency (CRA) to waive the withholding requirement on multiple transactions with a single waiver and over a specified period for payments to a non-resident service provider, provided 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 their 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 measure would come into force upon the enacting legislation receiving royal assent.
Accelerated Capital Cost Allowance
The budget proposes to provide 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.
The budget also addresses accelerated depreciation for productivity-enhancing asset additions acquired on or after April 16, 2024, and becoming available for use before January 1, 2027, in the following three CCA classes:
- 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.
Employee Ownership Trust Exemption
Last year’s federal budget and fall economic statement proposed to exempt $10 million of capital gains on the sale of a business to an Employee Ownership Trust (EOT). This year’s budget provides the criteria for this exemption. The exemption will apply to qualifying share dispositions from January 1, 2024, through December 31, 2026.
The exemption for an individual (other than a trust) on a sale applies where the following conditions are satisfied:
- The individual, a personal trust of which the individual is a beneficiary, or a partnership in which the individual is a member, disposes of shares of a corporation that is not a professional corporation;
- The transaction is a qualifying business transfer in which the trust acquiring the shares is not already an EOT;
- For the 24 months immediately prior to transfer, the transferred shares were exclusively owned by the individual claiming the exemption, a related person, or a partnership in which the individual is a member and more 50% of the fair market value (FMV) of the corporation’s assets were used principally in an active business;
- At any time prior to transfer, the individual or spouse was actively engaged in the business for a period of at least 24 months; and
- Immediately after the transfer, at least 90% of the beneficiaries are residents in Canada.
A disqualifying event can exist where an EOT loses its status or less than 50% of the FMV of the qualifying business shares is attributable to assets used principally in an active business at the beginning of two consecutive years of the corporation. If an EOT has a disqualifying event within 36 months of the transfer, the exemption claim will be retroactively denied. If the event occurs more than 36 months after the transfer, the EOT will be deemed to realize a capital gain equal to the total exempt gain.
The EOT, any corporation owned by the EOT that acquired the transferred shares, and the individual will need to elect to be jointly and severally liable for any tax assessed on the exemption being denied during the first 36 months.
The normal reassessment period for an individual in relation to the exemption will also be extended by an additional three years. The capital gain on the transfer is also subject to the Alternative Minimum Tax (AMT) inclusion rate of 30% on the same basis as gains eligible for the lifetime capital gains exemption.
New Notice of Non-compliance
The government plans to introduce a new type of notice of non-compliance to be issued to a person who has not complied with a requirement or notice issued by the CRA to provide assistance or information. 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 amount of time the notice of non-compliance is outstanding.
Furthermore, penalties of $50 for each day that the notice is outstanding, to a maximum of $25,000, would apply. This penalty would not apply if a notice of non-compliance is ultimately vacated by the CRA or a court.
Other Corporate Tax Measures
The budget also proposes several other noteworthy corporate tax changes, including measures to:
- Repeal the exception to the debt forgiveness rules and the loss restriction rule applicable to bankrupt corporations;
- Remove the tax-indifferent investor exception to the anti-avoidance rule that would otherwise allow a dividend-received deduction on synthetic equity arrangements (this measure prevents a double deduction of the dividend received and the compensation payment in such transactions);
- Preclude a corporation from qualifying as a mutual fund corporation where it is controlled by or for the benefit of a corporate group (the government no longer wishes to extend the benefits of a mutual fund corporation to a limited group of corporations, as the mutual fund corporation tax regulations are intended to apply to a widely held public venture);
- Hold taxpayers who participate in tax debt avoidance planning jointly and severally liable for the full amount of the avoided tax debt, including any portion that has effectively been retained by a planner charging fees for the transaction;
- Expand an exemption to the excessive interest and financing expenses limitation with respect to arm's length financing used to build or acquire eligible purpose-built rental housing in Canada; and
- Implement an automatic carbon rebate with respect to the 2019–20 to 2023–24 fuel charge years for Canadian-controlled private corporations that file a tax return for the 2023 taxation year by July 15, 2024, and had no more than 499 employees throughout Canada in the calendar year in which the fuel charge year begins.
Personal Income Tax Measures
Capital Gains Inclusion Rate
Currently, only half of a capital gain is included in computing a taxpayer's income. This year’s budget proposes to increase the capital gains inclusion rate from one-half to two-thirds for corporations and trusts, as well as for the portion of capital gains realized in a year by individuals that exceeds $250,000, effective for capital gains realized on or after June 25, 2024.
For employee stock option deductions, the new one-third limit would apply to the taxable benefit to reflect the new capital gains inclusion rate, but there would still be entitlement to a deduction of half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.
Further Revisions to Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a secondary personal tax calculation that reduces tax credits, deductions, and exemptions available under the regular income tax rules. An individual taxpayer will pay the greater of regular income tax and AMT, when applicable.
The budget proposes further changes to the AMT and its calculation, including:
- Allowing individuals to claim 80% (instead of the previously proposed 50%) of the Charitable Donation Tax Credit;
- Full allowance of deductions for the Guaranteed Income Supplement, social assistance, and workers' compensation payments;
- Allowing individuals to fully claim the federal logging tax credit;
- Fully exempting EOTs from the AMT;
- Permitting certain tax credits disallowed under the AMT calculation to be eligible for the AMT carry-forward (including the federal political contribution tax credit, labour-sponsored funds tax credit, and certain investment tax credits); and
- Eliminating the AMT for qualifying trusts of Indigenous groups.
Mineral Exploration Tax Credit Extended
Flow-through shares allow resource companies to renounce exploration tax expenses in favor of deduction by investors. The Mineral Exploration Tax Credit allows a tax credit of 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. This credit was set to expire on March 31, 2024, but will be extended by one year for flow-through share agreements entered into on or before March 31, 2025.
Lifetime Capital Gains Exemption Increased
The Income Tax Act currently allows a lifetime tax exemption for capital gains realized on the disposition of qualified small business corporation shares and qualified farm or fishing property of $1,016,836 in 2024, subject to indexing for inflation.
The budget proposes to increase the lifetime capital gains exemption to $1.25 million of eligible capital gains, applicable to dispositions on or after June 25, 2024, with indexation commencing in 2026.
Canadian Entrepreneurs' Incentive
The government proposes to introduce a new Canadian Entrepreneurs' Incentive (CEI), which will provide for a capital gains inclusion rate that is 50% of the new inclusion rate on up to $2 million in capital gains per individual over their lifetime.
The lifetime limit would be phased in incrementally, at $200,000 per year, beginning on January 1, 2025, before ultimately reaching a value of $2 million on January 1, 2034. Effectively, up to the prescribed limits, the CEI would result in a capital gains inclusion rate of one-third on eligible dispositions of qualifying shares and apply in addition to any available capital gains exemption.
For purposes of the CEI, a share of a corporation is generally a qualifying share if certain conditions are met, including all the following:
- At the time of sale, it was a share of the capital stock of a small business corporation;
- Throughout the 24-month period immediately before the disposition of the share, it was a share of a Canadian-controlled Private Corporation (CCPC) and more than 50% of the FMV of the assets of the corporation were:
- Used principally in an active business carried on primarily in Canada by the CCPC, or by a related corporation;
- Certain shares or debts of connected corporations; or
- A combination of the above 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 from 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 FMV 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); and
- The share must have been obtained for FMV consideration.
Scientific Research and Experimental Development Measures
SR&ED Program Update
On January 1, 2024, the federal government launched a first round of consultations to explore cost-neutral ways to enhance the Scientific Research and Experimental Development (SR&ED) tax credit program. Those consultations closed on April 15, and this year’s budget announced a second round of consultations to hear further views on certain topics, including how Canadian public companies might be made eligible for the enhanced SR&ED tax credit.
The enhanced credit, refundable at a rate of 35% of qualified expenditures up to a corporation’s expenditure limit (maximum of $3 million), is currently only available to small and medium Canadian-controlled Private Corporations (CCPCs). Other corporations are limited to the basic federal SR&ED tax credit, which is non-refundable at a rate of 15% of qualified expenditures. Providing Canadian public companies access to the enhanced credit, if enacted, would represent a significant increase in the value of the credit and improve cash flow for eligible organizations.
In addition, the budget proposes to provide $600 million over four years, starting in 2025–26, for “future enhancements to the SR&ED program.” Feedback received through the second round of consultations will, in part, be used to determine the exact nature of those enhancements and the potential use of the additional funding.
Patent Box Consultations
Parallel to the SR&ED tax credit consultations, the federal government launched consultations on creating a patent box regime. These consultations also commenced on January 1 and closed on April 15, and submissions received are currently under review. The government is seeking to encourage domestic commercialization of intellectual property resulting from Canadian research and development. In a typical patent box scheme, income from certain underlying intellectual property is segregated and taxed at a favourable rate.
Stepping back and looking at Canada’s emerging industrial policy, including various direct and indirect incentives, this budget provides the skeleton of a future framework that has some logic to it. It is expected that the implementation of rules to meet international Base Erosion and Profit Shifting (BEPS) Pillar 2 requirements will likely increase tax revenues by rendering structures that would place intellectual property in a low- or no-tax jurisdiction invalid. These revenues could be channeled to further incentivize research and development in Canada at relatively low levels of taxation while keeping the intellectual property and commercialization of the technology here. Investment tax credit rates could be adjusted higher or lower, depending on where the intellectual property and ultimate taxation resides, to retain wealth creation for Canadians in the long run. This would preserve the cost neutrality of Canada’s industrial policy while addressing Canada’s well-studied challenge of achieving global commercial scale from within.
Commodity Tax Measures
Removal of GST from New Student Residences
This year’s budget proposes to make not-for-profit universities, public colleges, and school authorities providing student residences eligible for the removal of GST on the construction of new student residences through the Enhanced GST Rental Rebate. This relief will be available for student housing construction projects that begin between September 14, 2023, and December 31, 2030, provided construction is completed by December 31, 2035.
To accommodate this change, the Excise Tax Act will be amended to allow these entities to use the regular GST and harmonized sales tax (HST) rules that apply to builders of residential rental housing. Under these rules, a builder pays GST/HST on the FMV of the building when it is suitable to be used as rental housing, with this tax being eligible for the Enhanced GST Rental Rebate. In addition, the conditions for this rebate will be eased so the first use of a unit in the student housing will not need to be used as a primary place of residence of an individual under a lease covering at least 12 months—a condition that otherwise would not be met in many cases, as student housing is typically leased for less than a year.
This change is part of an effort to remove the GST from the cost of construction of new rental housing, as announced on September 14, 2023. Further details on this initiative can be found at Enhanced GST Residential Rental Property Rebate Announced.
Repeal of GST/HST Face Mask and Shield Zero-Rating
The government announced plans to repeal the temporary zero-rating provision established in the fall of 2020 for certain face masks or respirators and face shields, which was introduced because of the COVID-19 pandemic. These previously zero-rated items will become subject to tax at the applicable GST/HST rate when supplied on or after May 1, 2024.
Excise Duty Increases on Tobacco and Vaping Products
The budget proposes to increase the excise duty rate on tobacco by $4 for a carton of 200 cigarettes, effective April 17, 2024. The rates below include the automatic tobacco inflation adjustment equal to $1.49 per cigarette carton, which took effect on April 1, 2024.
As a result, the following equivalent excise duty rates will apply:
- $37.1532 (up from $33.1532) per carton of 200 cigarettes;
- $0.92883 (up from $0.82883) per five cigarettes or fraction thereof;
- $0.18576 (up from $0.16576) per tobacco stick;
- $11.61031 (up from $10.36032) per 50 grams or fraction thereof of manufactured tobacco; and
- $40.43121 up (from $36.07829) per 1,000 cigars, plus the greater of $0.14533 (up from $0.12968) per cigar and 88% of the sale price or duty-paid value.
Certain manufacturers, importers, wholesalers, and retailers are required to take an inventory of tobacco products held at the beginning of April 17, 2024, and remit an inventory tax of $0.02 for each cigarette held at that time.
In addition, the government plans to increase, effective July 1, 2024, the excise duty on vaping products, as follows:
- In non-participating jurisdictions, the rate will increase by 12 cents to $1.12 per 2 millilitres (ml) or fraction thereof for the first 10 ml of vaping substance and for each 10 ml or fraction thereof for amounts over the first 10 ml; and
- In participating jurisdictions, the rate will increase by 24 cents to $2.24 per 2 ml or fraction thereof for the first 10 ml of vaping substance and for each 10 ml or fraction thereof for amounts over the first 10 ml.
It should be noted this rate increase is to take effect on the same day that four new provincial and territorial jurisdictions (Ontario, Quebec, the Northwest Territories, and Nunavut) are set to become participants in the coordinated vaping product taxation regime.
Administration of Excise Duties
This year’s budget includes several proposals aimed at improving the administration of the Excise Act, 2001 (to be effective upon receiving royal assent), including measures to:
- Introduce a new 2500-gram limit on imported packaged raw leaf tobacco for personal use;
- Authorize the Minister of National Revenue to specify the brands of tobacco products for export that are exempt from special excise duty and marking requirements (to replace the existing regulatory process);
- Require prescribed persons who are issued tobacco excise stamps to file monthly information returns; and
- Allow for the sharing of confidential information between the CRA and Health Canada to assist with their administration and enforcement of the Tobacco and Vaping Products Act.
Fuel, Alcohol, Cannabis, and Tobacco Sales Tax Framework
The government has proposed amendments to the First Nations Goods and Services Tax Act (FNGSTA), allowing Indigenous governments to enact a value-added sales tax under their own laws on fuel, alcohol, cannabis, and tobacco (FACT) products, including vaping products. The FACT sales tax would apply at a 5% rate on all FACT products supplied on reserve or settlement lands. Where a FACT sales tax applies to a supply, the GST or federal component of the HST would not apply.
Decisions on whether to levy a FACT sales tax and on which products will be left to Indigenous governments. Further amendments to the FNGSTA are proposed to streamline the administration of FACT sales taxes. Before the implementation of a FACT sales tax, further engagement and negotiation with interested Indigenous governments will be needed.
Previously Announced Measures
Consistent with prior years, the government has expressed its intention to move forward with several previously announced tax and related measures, with introduction dates ranging from 2019 to 2024.
More Information
For information on new and extended government funding initiatives included in this year’s federal budget, please navigate to this blog post.
Further details on the 2024 federal budget may be found on the Government of Canada website.
To read key updates from all of Canada’s 2024 budgets, please visit our Key Changes | 2024 Canadian Federal and Provincial Budgets page.
If you have any questions about how these proposed changes might impact your organization, please do not hesitate to contact the Ryan TaxDirect® line at 1.800.667.1600 or taxdirect@ryan.com.