2024 Federal Budget – Major Income Tax Changes Announced

Published by Jonathan Longcroft & Elliott Simpson & Alexander Demner

Yesterday (April 16, 2024), the Department of Finance Canada published its 2024 federal budget (“Budget 2024”). Several major tax proposals were announced. This blog post briefly outlines those relating to income tax.

1. Increased Capital Gains Inclusion Rate 

Budget 2024 announced the Federal Government’s intention to amend the Income Tax Act (Canada) (the “Act”) to increase the taxable portion of capital gains from one-half to two-thirds in respect of:

  1. capital gains realized by an individual in a year exceeding $250,000, and
  2. capital gains of any amount realized by a trust or a corporation in a year.

The inclusion rate on capital gains realized by an individual in a year equal to or less than $250,000 is to remain at one-half. Capital losses realized in the same year or carried over from another year will apply to reduce that amount. Capital loss carryforwards will also be adjusted, such that a capital loss realized before the enactment of the new inclusion rate will fully offset a capital gain of equivalent absolute value after its enactment.

The new inclusion rate proposals would be effective for gains realized on or after June 25, 2024. Transitional rules would apply to years which begin before and end after that date.

Budget 2024 does not mention whether the $250,000 threshold for individuals will be indexed to inflation. In addition, it is unclear whether certain deemed dispositions – such as the deemed disposition of capital property upon an individual’s death – will be partially or wholly exempted. 

2. Increased Lifetime Capital Gains Exemption

Section 110.6 of the Act provides a lifetime deduction in computing taxable income for Canadian-resident individuals in connection with dispositions of qualified small business corporation shares and qualified farm or fishing property – colloquially referred to as the “lifetime capital gains exemption” or “LCGE”. Prior to the Budget, the LCGE limit for the 2024 taxation year was set at $1,016,836.

Budget 2024 proposes to increase the LCGE to exempt $1,250,000 of eligible capital gains. The new limit is to become effective for dispositions occurring on or after June 25, 2024, and will be annually indexed to inflation starting again in 2026.

3. Canadian Entrepreneurs’ Incentive

Budget 2024 proposes to introduce the Canadian Entrepreneurs’ Incentive (“CEI”). In essence, the CEI would reduce the taxable portion of a finite, lifetime amount of eligible capital gains to one-half of the inclusion rate otherwise applicable (i.e., 25% on eligible capital gains realized by an individual under $250,000, and 33⅓% for gains above that amount). The CEI will be gradually phased-in starting in 2025, with an initial limit of $200,000. That limit would increase by $200,000 each taxation year, capping out at $2,000,000 in 2034.

It is stated that the CEI “will be available to founding investors in certain sectors who own at least 10 per cent of shares in their business, and where the company has been their principal employment for at least five years.”

The CEI will only apply to capital gains realized from the disposition of certain qualifying shares. The qualification conditions resemble those used to determine whether a share is a “qualified small business corporation share” (“QSBC share”) for the purpose of the LCGE. In particular, a qualifying share for the CEI:

  • must be a share of a small business corporation at time of the disposition;
  • must, throughout the 24-month period immediately before the disposition of the share, be a share of a Canadian-controlled private corporation, more than 50% of the fair market value of the assets of which were:

(i) used principally in an active business carried on primarily in Canada by the corporation or a related corporation;

(ii) certain shares or debts of connected corporations; or

(iii) any combination of (i) and (ii); and

  • must not be a share of a corporation carrying on a “personal services business” or “specified investment business”.

In addition, however, and unlike the test for determining a QSBC share, to qualify for the CEI a share must be disposed of by a person who:

  • was “a founding investor at the time the corporation was initially capitalized and held the share for a minimum of five years prior to the disposition”;
  • held shares representing more than 10% of the votes and more than 10% of the value of the corporation throughout the period the commences on the initial share subscription and ends immediately before the disposition; and
  • was actively engaged on a regular, continuous and substantial basis in the activities of the business carried on by the corporation throughout the five-year period immediately before the disposition.

Additionally, the share must not represent a direct or indirect interest in a professional corporation, must have been acquired for fair market value consideration, and must not be a share of a corporation that carries on business of operating in the financial, insurance, real estate, food and accommodation, arts, recreation or entertainment sector, providing consulting services or providing personal care services.

4. Alternative Minimum Tax

The Alternative Minimum Tax (“AMT”) is contained in sections 127.5 to 127.55 of the Act. Originally effective for tax years commencing in 1986 onward, the 2023 federal budget (“Budget 2023”) proposed extensive amendments to the AMT (discussed in a previous blog post) for effect starting January 1, 2024. As of the date of this post, those proposed amendments have yet to be enacted or contained in a Bill before Parliament.

Budget 2024 proposes to revise the AMT proposals first announced in the Budget 2023 by:

  • increasing the amount claimable by individuals in respect of charitable donations from 50% to 80% for the purpose of determining AMT payable;
  • fully allowing deductions for the guaranteed income supplement, social assistance and workers’ compensation payments for the purpose of determining AMT payable;
  • allowing individuals to fully claim the federal logging tax credit for the purpose of determining AMT payable;
  • fully exempting Employee Ownership Trusts from the application of the AMT;
  • allowing certain credits disallowed for the purpose of determining AMT payable to be eligible for the AMT carryforward;
  • fully exempting certain trusts for the benefit of an Indigenous group, community or people; and
  • making various further technical amendments to the AMT legislative proposals.

Budget 2024 confirms that the proposed AMT amendments, including those previously announced, would apply to taxation years beginning on or after January 1, 2024. As such, the AMT proposals would apply to Canadian-resident individuals for the entirety of the current calendar year. 

5. Employee Ownership Trusts

Budget 2023 introduced the concept of Employee Ownership Trusts (“EOTs” or an “EOT”), a succession planning option for business owners (discussed in our previous blog post). The Federal Government subsequently announced that it would revise those rules to provide that an individual selling qualifying shares to an EOT would be exempt on the first $10,000,000 of capital gains realized on the sale.

Budget 2024 outlined further details regarding the proposed conditions for the availability of that exemption. In particular:

  • the corporation, shares of which are transferred, must not be a professional corporation;
  • the trust to which shares are transferred must not already be an EOT or a similar trust with employee beneficiaries;
  • throughout the 24-month period immediately before the disposition of the shares:
    • the shares must not be held by any person other than the transferor individual, a person related to the transferor individual or a partnership in which the transferor individual is a member, and
    • the shares must be shares of a corporation, more than 50% of the fair market value of the assets of which were used principally in an active business;
  • the transferor individual, or his or her spouse or common-law partner, is or was actively engaged in the qualifying business carried on by the corporation on a regular and continuous basis for any 24-month period; and
  • immediately after the transfer, 90% or more of the beneficiaries of the EOT must be resident in Canada.

If a disqualifying event occurs within 36 months of the transfer, the exemption would be retroactively deemed unavailable. Such disqualifying event could occur where a trust ceased to be an EOT, or where the shares transferred fail to satisfy certain conditions. The EOT (and any corporation owned by the EOT that acquired the transferred shares) and the individual would need to elect to be jointly and severally liable for any tax payable by the individual as a result of the exemption being denied. Finally, if the disqualifying event occurs more than 36 months after a qualifying business transfer, the EOT would be deemed to realize a capital gain equal to the total amount of exempt capital gains. 

6. Accelerated CCA on Eligible Rental Housing

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

Eligible property would consist of 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.

Projects that convert existing non-residential real estate, such as an office building, into a residential complex would be eligible if the above conditions are met. The accelerated CCA would not apply to renovations of existing residential complexes. However, the cost of a new addition to an existing structure would be eligible, provided such addition meets the conditions above.

7. Elimination of Exemption from Debt Forgiveness Rules for Bankrupt Corporations

The Act currently contains a set of debt forgiveness rules that apply where a commercial debt is settled for less than its principal amount. These rules generally reduce certain tax attributes by the amount of debt that is forgiven and, where such tax attributes have been fully reduced, an income inclusion may arise equal to half of the remaining forgiven amount. The Act also contains a rule that entitles an insolvent corporation to a corresponding deduction to offset all or part of an income inclusion from the debt forgiveness rules.

Bankrupt taxpayers are generally not impacted by those debt forgiveness rules. Instead, a separate loss restriction rule applies to extinguish the losses of bankrupt corporations that have received an absolute order of discharge.

Budget 2024 proposes to modify the debt forgiveness rules by subjecting bankrupt corporations to those rules and repealing the separate loss restriction rule applicable to bankrupt corporations. Such a change would subject bankrupt corporations to the same debt forgiveness rules that apply to other corporations whose commercial debts are forgiven.

Budget 2024 confirms that the bankruptcy exception to the debt forgiveness rules would remain in place for individuals. Further, it provides that insolvent corporations would still be entitled to claim the deductions provided under the existing regime for insolvent corporations.

These proposals would apply to bankruptcy proceedings that are commenced on or after Budget Day.

8. EIFEL Exemption for Arm’s Length Financing used to Build/Acquire Eligible Rental Housing

The 2021 federal budget announced an “earnings stripping” measure that limits the amount of net interest and financing expenses that may be deducted by certain taxpayers in computing taxable income. Legislative proposals to implement this measure – the excessive interest and financing expenses limitation (“EIFEL”) rules – are currently before Parliament in Bill C-59. Among other things, the EIFEL proposals provide 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 that exemption to include an 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.

Eligible purpose-built rental housing would be a residential complex that meets the same criteria described above for the accelerated CCA proposal. In particular, the complex must be one:

  • 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 (the same proposed effective date as the broader EIFEL amendments).

9. Audit Compliance Measures

Budget 2024 proposes several significant amendments to the CRA’s information gathering powers set out in the Act. We intend to release a further blog post on these proposals in due course. The following is a high-level summary of the most notable such measures.

Notice of Non-Compliance

Budget 2024 proposes to amend the Act 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. The issuance of a notice of non-compliance would be reviewable by the CRA, on request of the person, with further statutory rights of review by the Federal Court.

Where a notice of non-compliance has been issued to a 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 during which the notice of non-compliance remains outstanding. In effect, the limitation period for reassessing the subject taxpayer could be extended indefinitely.

Further, Budget 2024 proposes that a penalty would be imposed on a person that has been issued a notice of non-compliance. The amount of that penalty would be $50 for each day that the notice is outstanding, to a maximum of $25,000. The 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 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 or by affidavit.

Compliance Orders

A “compliance order” is an order from the Federal Court that directs a taxpayer to comply with an outstanding information request from the CRA. The CRA is generally entitled to seek such an order where information or documentation requested has not been provided in a timely manner.

Budget 2024 proposes to amend the Act to impose a penalty when the CRA obtains a compliance order against a taxpayer. The penalty would be equal to 10 per cent of the aggregate tax payable by the taxpayer in respect of the taxation year or years to which the compliance order relates. The penalty 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 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.