On April 16, 2024 (Budget Day), the Government of Canada released its 2024 federal budget (Budget 2024). While the biggest headline item in Budget 2024 is a proposal to increase the capital gains inclusion rate from one-half to two-thirds, Budget 2024 also includes a number of targeted incentives and anti-avoidance rules, as well as a significant enhancement of the Canada Revenue Agency’s (CRA) audit powers. Budget 2024 did not include draft legislation for many of these measures, but it is expected that further details will be released later in the year.
This bulletin analyzes the most significant tax measures included in Budget 2024.
Highlights
There has been speculation for many years that the Government of Canada may increase the tax rate applicable to capital gains on the alleged basis that preferential capital gains rates generally favour wealthier Canadians. Budget 2024’s proposal to increase the capital gains inclusion rate from one-half to two-thirds is nonetheless a very significant shift in Canadian tax policy, as the one-half inclusion rate has remained stable for almost 25 years.
The proposal does not apply to the first C$250,000 of annual capital gains realized by individuals (other than trusts), which will continue to be subject to the existing one-half inclusion rate. Implementation of the increased inclusion rate is proposed to be delayed until June 25, 2024.
This delayed implementation appears to be intended to give taxpayers an opportunity to crystallize capital gains at the current inclusion rate. We expect that many taxpayers will be considering transactions in the near term that will provide them with the flexibility to choose to crystallize capital gains effective prior to June 25 (while preserving the ability to make that choice after June 25), particularly if they expect to realize those gains in the near future.
Other highlights include:
The reintroduction of the alternative minimum tax (AMT) proposals originally released in the 2023 federal budget (Budget 2023) with only minor modifications
The design and implementation details for the Clean Electricity investment tax credit originally proposed in Budget 2023
An increase to the lifetime capital gains exemption (LCGE) limit to C$1.25-million, together with the introduction of a new “Canadian Entrepreneurs Initiative,” which will provide a further reduction to capital gains tax applicable to sales of qualifying shares of Canadian corporations by Canadian entrepreneurs
Various tax incentives to support the construction of purpose-built long-term rental-housing projects
Budget 2024 also reaffirms Canada’s commitment to Pillar One and Pillar Two, with no changes proposed to Canada’s timelines for implementation (including Canada’s plan to implement a domestic digital services tax pending international implementation of Pillar One).
Table of Contents
Expanded Audit Powers and Non-Compliance With Information Requests
Accelerated Capital Cost Allowance and EIFEL Exemption for Purpose-Built Rental Housing
- Crypto-Asset Reporting Framework and the Common Reporting Standard
- Withholding for Non-Resident Service Providers
Personal Income Tax Measures
Increase to Capital Gains Inclusion Rate
The Income Tax Act (ITA) currently includes 50% of capital gains in income. This rate has been in place for almost 25 years, though there has been speculation in recent years that it may be increased. Budget 2024 asserts that the 50% inclusion rate is more favourable than capital gains rates in other G7 countries and disproportionately benefits wealthier Canadians.
Budget 2024 proposes to increase the capital gains inclusion rate for corporations and trusts from 50% to 66.67%. The inclusion rate will also be increased to 66.67% for individuals, subject to a C$250,000 annual threshold below which the 50% inclusion rate will continue to apply. The C$250,000 threshold will apply to capital gains realized by individuals either directly or indirectly through a trust or partnership. This means that capital gains realized by individuals through common pooled investment vehicles, such as mutual fund trusts (MFT), will benefit from the exemption threshold.
For purposes of calculating the C$250,000 threshold, current-year capital losses, capital loss carry-forwards or carry-backs, and capital gains exempted from tax under the LCGE and the proposed employee ownership trust exemption or the Canadian Entrepreneurs’ Incentive may be deducted from capital gains realized in the year.
The inclusion rate for capital-loss carry-forwards will also be adjusted to reflect the inclusion rate that applied to the capital gains being offset. This means that a capital loss realized at a 50% inclusion rate can fully shelter a capital gain realized at the new 66.67% inclusion rate.
Budget 2024 indicates that corresponding changes will be made to the employee stock option deduction rules in the ITA. Where an employee acquires shares on the exercise of an option to which section 7 of the ITA applies and certain other conditions are met, the employee is currently able to claim a 50% tax deduction on the amount of the stock option benefit. This means that the amount that would otherwise be included in the employee's taxable employment income will be reduced by 50%, which effectively applies a capital gains tax rate to the stock option benefit.
For options that qualify for such 50% tax deduction, Budget 2024 proposes to reduce the deduction to 33.33% for any option benefit exceeding C$250,000 in any given year (aggregated with any capital gains realized by the employee in that year) so that the option benefit net of the deduction will replicate the new 66.67% capital gains inclusion rate. An option that does not qualify for the 50% deduction for other reasons will not be affected by these proposals. It is unclear at this stage whether these proposals will apply only to options granted after the new rules come into effect or to all options exercised after such date, irrespective of when the applicable option was granted. (See our bulletin on Budget 2024’s Pensions, Benefits and Executive Compensation measures.)
The increased capital gains inclusion rate is proposed to apply to capital gains realized on or after June 25, 2024, giving taxpayers with accrued unrealized capital gains approximately two months to crystalize those gains at the current 50% inclusion rate. The C$250,000 threshold for individuals will not be pro-rated for 2024 but will be based only on capital gains realized on or after June 25, 2024. The proposed annual C$250,000 exemption threshold for individuals may impact personal tax planning and may factor into the decision of whether to hold investments through a corporation or in an individual capacity.
In addition, the C$250,000 exemption threshold is proposed to apply to capital gains realized by an individual indirectly through a trust or partnership. As such, when trusts and partnerships report capital gains realized in 2024 to investors, presumably they will be required to separate the gains realized before June 25, 2024, from the gains realized on or after June 25, 2024. This may place a significant administrative burden on trustees, managers and general partners.
Proposed legislation for these measures was not included in Budget 2024, so the details with respect to their implementation remain to be seen. It is hoped that consequential changes will be made to other provisions of the ITA, such as the “RDTOH” rules, to at least preserve (if not improve) the level of integration achieved under the current rules.
Lifetime Capital Gains Exemption and Canadian Entrepreneurs’ Incentive
Budget 2024 proposes to increase the LCGE amount to C$1.25-million for dispositions that occur on or after June 25, 2024, with indexing resuming in 2026. The LCGE provides an exemption for capital gains realized on the disposition of qualified small business corporation shares (QSBC Shares) and qualified farm or fishing property. The LCGE amount for 2024 is currently C$1,016,836.
Further, Budget 2024 introduces a new Canadian Entrepreneurs’ Incentive (CEI), which provides for an inclusion rate of one-third (instead of two-thirds) of capital gains on the disposition of qualifying shares (CEI Shares) by an eligible individual, up to a lifetime amount of C$2-million. The CEI will apply on top of the LCGE, meaning that eligible individuals can receive preferential tax rates on the first C$3.25-million of capital gains on dispositions of qualifying shares.
The CEI will be phased in by increments of C$200,000 per year beginning in 2025, with the C$2-million being fully phased in by 2034. This exemption appears to be similar to the qualified small business stock gain exclusion under Section 1202 of the United States’ Internal Revenue Code, although the exemption amount under Section 1202 is equal to the greater of US$10-million or 10 times the aggregate adjusted basis of the stock at the time of issuance.
In addition to meeting the QSBC Share requirements, the eligible individual and the CEI Shares must meet the following additional requirements:
The CEI Shares must have been acquired for fair market value (FMV) consideration.
The eligible individual must have held the CEI Shares for at least five years before the disposition. This lengthy holding period may dissuade founders from selling their business even when other investors may be in a better position to grow the business or where market conditions for a sale are present. This is likely to have a more substantial impact on technology companies, where market conditions can change significantly in a relatively short period.
The eligible individual must have been involved in the business on a regular, continuous and substantial basis throughout the five-year period prior to the disposition of the CEI Shares. This requirement echoes the language used in the tax on split income rules, and we anticipate this CEI Share language will similarly be interpreted.
The eligible individual must be a founding investor at the time the corporation was initially capitalized. This restriction could frustrate business collaboration as future potential investors may choose to fund their own new corporations instead of investing in nascent start-ups.
The CEI Shares must be held directly by the eligible individual. Under the LCGE regime, taxpayers may hold their QSBC Shares through a trust so that each of the trust’s beneficiaries can utilize their LCGE (effectively multiplying the LCGE). However, shares held through a trust would not qualify for the CEI. As such, founders who have utilized family trusts in their initial structures generally will not be eligible for the CEI.
There are restrictions on the types of businesses that are eligible for the CEI. For example, businesses in the financial, insurance, real estate, food and accommodation, and entertainment sectors are not eligible for the CEI. It is presently unclear whether businesses connected to an excluded industry, such as a software corporation creating programs for an excluded industry, would be eligible for the CEI.
At all times, the selling shareholder must own CEI Shares that have more than 10% of each of the votes and the value of the corporation. This requirement could create challenges for founders who operate in capital-intensive industries where there is significant founder dilution.
While the CEI is a welcome incentive for entrepreneurs, the various restrictions on eligibility could significantly limit the number of founders who may benefit from it. Until draft legislation is released, it will be difficult to determine whether this will be a practical incentive for Canadian entrepreneurs.
Alternative Minimum Tax
Budget 2024 reintroduces the amendments to the alternative minimum tax (AMT) that were initially proposed in Budget 2023 (see our Budget 2023 bulletin). Proposed legislation to implement the AMT changes was released in the August 2023 draft legislation (August 2023 Proposals) (see our August 2023 Proposals bulletin), but the AMT changes were notably missing in Bill C-59 released in November 2023.
The amendments proposed in Budget 2024 are largely in keeping with the August 2023 Proposals. This includes increasing the AMT rate from 15% to 20.5% and increasing the inclusion rate for capital gains and employee stock option benefits from 80% to 100%. It also includes disallowing 50% of certain deductions, including interest on funds borrowed to earn income from property, non-capital loss carry-forwards and limited partnership losses of other years.
As discussed in our Budget 2023 bulletin, the AMT generally applies to all individuals (including trusts), with some exceptions. Notably, it does not apply to MFTs, but it does apply to other investment fund trusts that do not qualify as MFTs. Budget 2023 had indicated that the government was examining whether additional types of trusts should be exempt from AMT.
The August 2023 Proposals proposed to expand the categories of trusts that are exempt from AMT to include trusts (1) that qualify as “investment funds” (as defined for purposes of the “loss restriction event” rules in the ITA), (2) of which all classes of units are listed on a designated stock exchange, and (3) of which one or more (but not all) classes of units are listed on a designated stock exchange.
Budget 2024 has retained the exemption in item (1) above but has replaced the exemptions in items (2) and (3) with a new exemption for a unit trust if the total FMV of units of the trust that are listed on a designated stock exchange represents all or substantially all (generally meaning 90% or more) of the total FMV of all units of the trust.
The August 2023 Proposals also proposed to exempt trusts from AMT that meet all of the following requirements: (1) all the beneficiaries are exempt from AMT or are trusts all of the beneficiaries of which are exempt from AMT, (2) at no time can a person that is not exempt from AMT be added as a beneficiary, (3) interests in such trust are “fixed interests”, and (4) such trust is irrevocable (Exempt Trust). Budget 2024 proposes to retain this exemption, with one change to item (1) in this paragraph, so that where a beneficiary is itself a trust, such trust must be an Exempt Trust and not just a trust all of the beneficiaries of which are exempt from AMT.
Budget 2024 also proposes to introduce an exemption from AMT for employee ownership trusts.
The AMT amendments are proposed to apply for taxation years beginning after December 31, 2023, which is the same date proposed in the August 2023 Proposals, without any relief for taxpayers that relied on the scope of the exemptions in the August 2023 Proposals. Query whether it is appropriate for the Department of Finance (Finance) to make substantive changes from the August 2023 Proposals that have the effect of applying retroactively.
As the Exempt Trust exception requires its conditions to be met throughout a taxation year, this appears to mean that any trust that requires an amendment to its declaration of trust to meet these conditions (such as a prohibition on non-exempt beneficiaries being added) may not qualify as an Exempt Trust in 2024 and may need to manage the amended AMT implications this year.
Qualified Investments for Registered Plans
Budget 2024 recognizes that the history of the rules regarding qualified investments for registered plans (such as RRSPs and TFSAs) has involved incremental changes that have resulted in sometimes inconsistent and difficult-to-understand provisions. Examples of such inconsistencies identified in Budget 2024 are as follows: (1) different registered plans have slightly different rules for making investments in small businesses, (2) certain types of annuities are qualified investments only for certain registered plans, and (3) certain pooled investment products are qualified investments only if they are registered with the CRA (known as “registered investments”).
Budget 2024 invites stakeholders to submit comments by July 15, 2024, on how the qualified investment rules can be “modernized” on a prospective basis, including harmonizing the rules for consistency, considering the ongoing value of maintaining a formal registration process for registered investments, and considering whether and how the qualified investment rules could promote Canadian-based investments.
Budget 2024 also invites stakeholders to comment on whether crypto-backed assets should be qualified investments, which suggests that Finance may be considering whether units of investment funds that invest in crypto-assets should be qualified investments. Currently, such units can be qualified investments if the investment fund qualifies as a mutual fund trust or if the units are listed on a designated stock exchange.
Employee Ownership Trust Tax Exemption
Budget 2023 provided for the creation of employee ownership trusts (EOT) (see our Budget 2023 bulletin). The 2023 Fall Economic Statement included a proposal to exempt the first C$10-million in capital gains realized on the sale of the shares of a business to an EOT from taxation. Budget 2024 outlines certain conditions that are intended to apply for purposes of this exemption, including the following:
The exemption will be available only to an individual who, throughout the 24 months preceding the sale, owned the shares either alone or with a related person, or a partnership in which the individual is a member and only if more than 50% of the FMV of the corporation’s assets were used principally in an active business.
Further, the individual or their spouse or common-law partner must, at a time prior to the sale, have been actively engaged in the qualifying business on a regular and continuous basis for a minimum of 24 months.
The C$10-million capital gains exemption must be shared among all individual shareholders participating in the transaction (i.e., each shareholder is not entitled to a separate C$10-million exemption).
The trust acquiring the shares must be a newly constituted EOT, at least 90% of the beneficiaries of which are Canadian residents immediately after the trust acquires the shares.
An exemption will be denied if a “disqualifying event” occurs in the first 36 months after a business is sold to the EOT. An example of a “disqualifying event” is when the EOT ceases to qualify as an EOT or if the majority of the value of the shares is not derived from assets used in an active business at the beginning of two consecutive taxation years of the corporation. If the disqualifying event occurs more than 36 months after the sale of a business, the EOT would be deemed to realize a capital gain equal to the total amount of exempt capital gains.
Business Income Tax Measures
Clean Electricity Investment Tax Credit
Budget 2024 also provides much-anticipated design and implementation details of the refundable clean electricity investment tax credit (Electricity Credit), which was originally announced in Budget 2023.
The Electricity Credit is equal to 15% of the cost of eligible property (including capital expenditures to refurbish existing facilities) that is acquired and becomes available for use on or after Budget Day and before 2035, provided it has not been used for any purpose before its acquisition and is not part of a project that began construction before March 28, 2023.
Eligible Property
Generally, eligible property includes:
Low or non-emitting electricity generation systems using energy from wind, solar, water, geothermal, waste biomass, nuclear or natural gas with carbon capture and storage (i.e., eligible natural gas systems)
Electricity storage systems that do not use fossil fuels in operation, such as batteries and pumped hydroelectric storage
Equipment that is part of an eligible natural gas energy system, including equipment that generates both electrical and heat energy, such as gas turbine generators and carbon capture equipment that prepares or compresses captured carbon for transportation
Eligible interprovincial and territorial electrical transmission property, including cables, switches, towers and lattices
Eligible Entities
In contrast with the other clean energy investment tax credits, which are only available to taxable Canadian corporations, the Electricity Credit is available to a broader range of corporations, subject to certain additional requirements:
Taxable Canadian corporations
Provincial and territorial Crown corporations, subject to certain additional requirements, which include the federal Minister of Finance determining that the relevant province or territory has met certain conditions, such as publicly made commitments to work towards a net-zero electricity grid by 2035
Corporations owned by municipalities
Corporations owned by Indigenous communities
Pension investment corporations
Corporations with a claim to immunity or which are exempt from tax are required to agree to (1) be subject to the provisions of the ITA related to the Electricity Credit, including provisions related to audit, penalties and collections, and (2) not assert any immunity or exemption, as the case may be, in respect of the Electricity Credit.
While the Electricity Credit is available only to Canadian corporations, where eligible property is owned by a partnership, any partners that are eligible corporations generally would be allowed to claim their respective share of the Electricity Credit. Where a property is eligible for both the Electricity Credit and a clean technology investment tax credit, partners could claim their reasonable share of either credit for which they qualified but not claim both credits in respect of the same property.
Labour Requirements
The labour requirements currently before Parliament in Bill C-59 will apply to the Electricity Credit. Where such labour requirements are not met, the Electricity Credit will be reduced to a 5% refundable tax credit (see our September 2023 bulletin and our December 2023 bulletin for a general discussion of these requirements).
Potential Repayment Obligations
Budget 2024 provides that the Electricity Credit will have recapture rules similar to those proposed for the clean technology investment tax credit contained in Bill C-59. This includes scenarios where a property is (1) converted to an "ineligible use" within 10 years (up to 20 years for eligible natural gas systems), (2) exported from Canada, or (3) disposed of without having previously been subject to recapture rules.
Interaction with Other Federal Tax Credits
Budget 2024 confirms that eligible corporations should not be able to claim multiple tax credits on the same eligible property if a particular expenditure is eligible for more than one credit. However, multiple tax credits could be available for the same project, to the extent that the project includes expenditures eligible for different tax credits.
Canada Carbon Rebate for Small Businesses
Budget 2024 proposes a new automatic refundable tax credit to return a portion of the federal fuel charge collected only in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.
The tax credit will be available to eligible corporations for the 2019-20 to 2023-24 fuel charge years, provided that such corporations file a tax return for their 2023 taxation year by July 15, 2024.
To be eligible, a corporation must be a "Canadian-controlled private corporation" with fewer than 500 employees in Canada in the calendar year in which the fuel charge year began.
The tax credit amount for an eligible corporation is determined for each applicable province where the corporation had employees in the calendar year in which the fuel charge year began. The amount of the credit equals the number of persons employed by the eligible corporation in the province during that calendar year, multiplied by a payment rate specified by the Minister of Finance for the province for the corresponding fuel charge year.
Payment rates for the 2019-20 to 2023-24 fuel charge years are forthcoming. The tax credit will return proceeds for the 2024-25 fuel charge year in a similar manner.
Avoidance of Tax Debts
The ITA includes an anti-avoidance rule (section 160) that is intended to prevent taxpayers from avoiding tax liabilities by transferring assets to non-arm’s-length persons for insufficient consideration. Where applicable, this rule causes the transferee and the transferor to be jointly and severally liable for the transferor’s tax debts, to the extent that the FMV of the transferred property exceeds the consideration paid by the transferee for the property at the time of transfer.
Budget 2021 introduced certain measures aimed at preventing complex transactions that have the effect of avoiding joint and several liability under section 160 for tax debts between a transferor and a transferee (see our Budget 2021 bulletin).
Budget 2024 asserts that some taxpayers continue to engage in planning to circumvent these rules, often with the assistance of a planner who earns a significant fee that is effectively funded by a portion of the avoided tax debt. This planning apparently involves the planner or other person acting as an intermediary to convey value (although presumably not the same property) from a potential tax debtor to a non-arm’s-length transferee. This results in circumventing the existing rules that rely on a transfer, even indirectly, of particular property from the transferor to transferee.
Budget 2024 introduces a new anti-avoidance rule that brings into the scope of section 160 transactions in which a transferor transfers property to a person (the planner), and the planner transfers property to a transferee as part of the same transaction or series, if it is reasonable to conclude that one of the purposes for undertaking or arranging the transaction or series is to avoid joint and several, or solidary, liability of the transferee and transferor for an amount payable under the ITA.
Where applicable, the anti-avoidance rule would deem the transferor to have transferred property to the transferee, such that section 160 would apply to the deemed transfer. This kind of attempt to avoid the application of section 160 is also included in the definition of a “section 160 avoidance transaction,” which makes an enhanced penalty potentially applicable.
Expanded Audit Powers and Non-Compliance With Information Requests
Budget 2024 includes a number of proposals to provide the CRA with enhanced information collection and enforcement powers. These measures are intended to enhance the efficiency and effectiveness of tax audits and, ultimately, facilitate the timely collection of tax revenues. Although Budget 2024 directly addresses only the information-gathering powers under the ITA, Budget 2024 also proposes to make analogous amendments to other federal tax statutes administered by the CRA.
To be clear, the CRA already enjoys a wide range of audit powers. Many of those powers can ultimately be enforced by a court order requiring a non-compliant taxpayer to comply with the CRA’s audit demands, upon penalty of contempt of court. However, Budget 2024 observes that obtaining such compliance orders is time consuming and that contempt orders do not impose a material financial cost on the taxpayer that is the subject of the order.
To impose such costs on non-compliant taxpayers, Budget 2024 provides for a new penalty applicable to taxpayers who are the subject of a compliance order. The proposed penalty, equal to 10% of the taxpayer’s aggregate tax payable in respect of the taxation year or years to which the compliance order relates, is intended to better incentivize compliance with information requests in the first instance. If the proposed enactment proceeds as currently drafted, this could lead to very harsh results for some taxpayers as the amount of the penalty may dramatically exceed the amount of tax pertaining to matters under audit or to which the compliance order relates.
Budget 2024 also proposes a series of “stop the clock” rules — new extensions to time limits in the ITA for reassessing a taxpayer. These extensions are applicable while a taxpayer (or a person who does not deal at arm’s length with the taxpayer) is pursuing judicial review of audit requirements issued by the CRA.
Another proposed extension to the reassessment limitation periods would arise in connection with the issuance of a new type of notice announced in Budget 2024, referred to as a “notice of non-compliance” (NONC). The CRA may issue a NONC at any time to a person if the CRA determines the person has not complied, in full or in part, with any of a variety of the CRA audit requirements or notices set out in sections 231.1, 231.2 and 231.6 of the ITA. NONCs will remain outstanding (and the assessment clock stopped) until the person has, to the satisfaction of the CRA, complied with the underlying audit process or demonstrated that they have done everything reasonably necessary to comply with the audit process.
Notably, the proposed legislative amendment would stop the reassessment clock from running with respect to any matter while a NONC remains outstanding, whether or not the non-compliance in question pertains to such matter. As a result, the issuance of a NONC to a taxpayer could lead to a very broad and potentially indefinite extension of time for reassessing the taxpayer. In addition to the time limit extension, taxpayers will also be liable to a daily penalty (up to a maximum of C$25,000) while a NONC is outstanding.
NONCs can be contested by filing a request for review with the CRA within 90 days of issuance, which must be completed by the CRA within 180 days. An application for judicial review of the resulting review decision may be made within 90 days of the review decision. NONCs may be confirmed, varied or vacated at each phase of this review process, and it is expected that the well-established principles of reasonableness review and procedural fairness will continue to apply within those processes. Where the CRA or a reviewing court vacates a NONC, the NONC is deemed to have never been issued.
It is also notable that Budget 2024 specifically contemplates that the CRA may seek a compliance order before or after sending a NONC. Thus, the two enforcement paths are not mutually exclusive, nor is one necessarily reserved as an escalation from the other.
Budget 2024 also proposes a number of additional expansions or technical modifications to the CRA’s audit powers. These include specifically providing that audit powers may be used to support collection activities or Canada’s international agreements or tax treaties; that the CRA may require that answers, information or documents be provided orally, under oath or by affidavit; and explicitly permitting the CRA to require the provision of information or documents under the general audit power in section 231.1 of the ITA.
A further noteworthy change is the proposed drawing into the general audit powers scheme of the CRA’s longstanding power to require the provision of foreign-based information or documents under section 231.6 of the ITA. Historically, such foreign-based information or document requirements were not subject to enforcement by compliance order. Instead, there was a statutory prohibition on the use of materials coming within the requirement in a future civil proceeding if the requirement was not substantially complied with.
The proposed legislative amendments seem to emphasize a positive obligation to comply with such audit requirements and contemplate the possibility of a Canadian judge ordering the provision of foreign-based information or documents. This may be an inherently impractical proposition in many situations, especially where the subject of the order lacks control over the foreign-based materials or in the face of limits on the enforceability of the Canadian court order.
As can be seen above, Budget 2024 proposes to significantly expand and increase the audit and enforcement powers available to the CRA. How the CRA chooses to use these powers is left largely up to administrative discretion and procedure, which is typically guided by the CRA’s internal manuals/protocols and sensitivities to the different levels of delegated authority within the CRA for the exercise of specific ministerial powers. As has been the case historically, the precise contours of these new audit powers may well become fully understood only through future litigation.
Accelerated Capital Cost Allowance and EIFEL Exemption for Purpose-Built Rental Housing
Budget 2024 includes two measures intended to incentivize the production of long-term rental housing. These measures further the policy goal of increasing housing availability reflected in the Enhanced GST Rebate for Newly Built Rental Housing (the GST Rental Rebate) announced in September 2023 (see our September 2023 bulletin).
First, Budget 2024 proposes to allow accelerated tax depreciation for new eligible purpose-built rental projects. By way of background, taxpayers engaged in a business in Canada may generally deduct, as capital cost allowance (CCA), a specified percentage of the cost of capital assets acquired by the taxpayer in the year of acquisition and subsequent years, in most cases on a declining balance basis.
Rental buildings are typically eligible for CCA at the rate of 4%. Under proposals announced in Budget 2024, eligible new purpose-built rental properties will be entitled to CCA at an enhanced rate of 10%. The accelerated CCA rate is proposed to apply to projects that begin construction on or after Budget Day and before January 1, 2031, and that are available for use before January 1, 2036. This accelerated CCA rate will apply to new properties and properties converted from existing non-residential real estate, but not to renovations of existing residential complexes.
Budget 2024 also proposes to provide an elective exemption from the excessive interest and financing expense limitation (EIFEL) rules, which are currently before Parliament as part of Bill C-59, for 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.
For purposes of these proposals and consistent with the GST Rental Rebate, “purpose-built rental housing” is defined as residential complexes with at least four private apartment units or at least 10 private rooms or suites, in which at least 90% of residential units are held for long-term rental.
Immediate Expensing for Productivity-Enhancing Assets
Budget 2024 also proposes to provide enhanced tax depreciation, in the form of a 100% first-year deduction, for new investments in patents, data network infrastructure equipment and software, computers, and other data processing equipment. These asset classes are currently eligible for CCA at the rates of 25% (Class 44), 30% (Class 46) and 55% (Class 50), respectively.
This incentive will be available for property acquired on or after Budget Day and that is available for use before January 1, 2027. Budget 2024 confirms that assets in these classes that become available for use after 2026 (and, therefore, are not eligible for the proposed 100% deduction) but before 2028 will continue to be eligible for the accelerated investment incentive originally announced in the 2018 Fall Economic Statement (see our bulletin on the 2018 Fall Economic Statement).
Mutual Fund Corporations
Mutual funds may generally be structured either as “mutual fund trusts” or “mutual fund corporations” (MFC), each of which is subject to specific qualification requirements under the ITA. For a corporation to qualify as an MFC, one such requirement is that the corporation must have a class of shares that is listed on a designated stock exchange, or that is otherwise qualified for distribution to the public and that satisfies certain minimum distribution requirements. The intention of these conditions according to Budget 2024 is to ensure that MFCs are widely held.
Budget 2024 notes however that a corporation may currently qualify as an MFC even where it is not widely held — for example, where the corporation has a listed class of shares but also one or more other classes of shares that represent all or substantially all of the value of the corporation and are held by a particular taxpayer or group. In such situations, the taxpayer or group may inappropriately benefit from a corporation’s MFC status by, for example allowing capital gains realized by the corporation to flow through to shareholders without being subjected to corporate-level tax.
While Budget 2024 indicates that these situations may be challenged under existing rules in the ITA, it proposes to introduce a new anti-avoidance rule to more directly address these concerns. Under the proposed rule, a corporation will be deemed not to be an MFC at a particular time if, at that time:
More than 10% of the FMV of the corporation’s shares is owned by a person or non-arm’s-length group of persons (a specified person or persons)
The corporation is controlled by or for the benefit of one or more of such specified persons
The use of a 10% value threshold is notable given the rule’s stated objective of preventing the use of MFCs that are not truly “widely held,” where all or substantially all of the value of the MFC is held by the controller or a controlling group. The reference to “all or substantially all” in the Budget 2024 materials would suggest that the rule might apply to a situation where 90% or more of the shares of an MFC are held by specified persons. Accordingly, the proposed application of the anti-avoidance rule to situations when more than 10% of the shares of an MFC are held by specified persons seems inconsistent with (or at least significantly broader than) the mischief described in the budget materials.
In addition, the intended scope of the phrase “for the benefit of” in the control test in the proposed rule is unclear. It is hoped that this phrase will be interpreted to catch only arrangements whereby an MFC is controlled specifically for the benefit of specified persons, and would not catch arrangements whereby an MFC is controlled for the benefit of all its shareholders, such as where a voting trust holds an MFC’s voting shares for the benefit of the MFC’s shareholders.
The proposals may catch a situation where a fund acts as a “feeder” or “fund of funds” that invests in an MFC if the feeder fund holds more than 10% of the shares of the MFC and the MFC and the feeder fund are under common control or the MFC is otherwise considered to be controlled “for the benefit of” the feeder as discussed above. It is unlikely that this is intended as it would be inconsistent with the stated policy objective of the rule to deny the MFC status in such circumstances.
A corporation will be exempt from this rule for the first two years of its existence, provided that the aggregate FMV of the shares of such corporation owned by specified persons does not exceed C$5-million. This exemption is intended to allow an MFC to exceed the control and ownership thresholds noted above in its initial capital-raising stage. However, the C$5-million threshold may be too small to achieve this objective in certain contexts.
This proposal will apply to taxation years beginning after 2024.
Synthetic Equity Arrangements
The synthetic equity arrangement (SEA) rules in the ITA were introduced in 2015 as a specific anti-avoidance measure targeting arrangements (typically involving one or more derivative instruments) under which a corporate taxpayer transfers all or substantially all of a share’s risk of loss and opportunity for gain to a “tax-indifferent investor” (such as a tax-exempt or non-resident person). The SEA rules, which were enacted as an expansion to the dividend rental arrangement (DRA) rules in the ITA, deny the intercorporate dividends-received deduction (DRD) to the dividend recipient where the dividend is received on a share that is the subject of an SEA. This prevents the dividend recipient from achieving an effective double-dip by claiming a DRD and also deducting dividend-equivalent payments made to the tax-indifferent investor under the SEA.
The SEA rules do not deny a DRD to a taxpayer where the taxpayer establishes that the arrangement does not have the effect of transferring all or substantially all of a share’s risk of loss and opportunity for gain to a tax-indifferent investor or affiliated group of tax-indifferent investors. The ITA provides for specific representations that a taxpayer may obtain from a counterparty to comply with this exception. Unlike the more general DRA definition in the ITA, which includes a “main purpose” test connected with the mischief targeted by the rules, the SEA definition is purely mechanical in its application. However, the tax-indifferent investor exception serves a similar function to the purpose test in the DRA definition by limiting the rule’s application to scenarios where the payee under the SEA would not fully recognize dividend-equivalent payments in income.
A separate exception to the SEA rules excludes an agreement that is traded on a recognized derivatives exchange (such as the Montréal Exchange), unless it is reasonable to consider that (1) the agreement is part of a series of transactions that has the effect of transferring all or substantially all of the economics of the share to a tax-indifferent investor, or (2) one of the main reasons for entering into the agreement is to obtain the benefit of a deduction in respect of payments under the agreement.
Budget 2024 proposes to remove the tax-indifferent investor exception and the exchange-traded exception from the SEA rules altogether. The rationales given by Budget 2024 for these changes are to simplify the SEA rules and prevent taxpayers from claiming a DRD for a share in respect of which there is an SEA. It is unclear whether mere simplicity is an appropriate rationale for extending the application of the rules to situations outside of the targeted mischief. Moreover, taxpayers seem to have adapted to the 2015 regime notwithstanding its complexity.
Similarly, the conceptual underpinnings of the second-stated rationale are also not clear. The Budget 2024 materials appear to suggest a concern that arrangements that offend the policy objectives of the SEA rules were being transacted over recognized exchanges in reliance on the exchange-traded exception. However, the Budget 2024 materials do not support this concern with any data. An alternative justification for eliminating the exchange-traded exception may be that once the tax-indifferent investor exception has been removed (thereby eliminating the inquiry as to whether dividend equivalent payments are fully taxable to the recipient), the rationale for the exchange-traded exception falls away.
The elimination of these exceptions appears to represent a material change in policy. Notably, the effects of this change are moot for financial institutions, considering Budget 2023’s proposal to deny the DRD for all dividends paid to a financial institution on shares that qualify as “mark-to-market property.” (Those proposals are discussed in more detail in our Budget 2023 bulletin). Finance’s concerns with respect to the SEA rules may also have been one of the drivers of the Budget 2023 DRD changes. Based on Budget 2024, however, Finance does intend to move forward with the Budget 2023 changes, notwithstanding the new changes to the SEA rules.
This measure is proposed to apply to dividends paid on or after January 1, 2025. Budget 2024 does not currently contemplate any grandfathering for SEAs with a term beyond December 31, 2024, that currently benefit from these exceptions.
Manipulation of Bankrupt Status
In recent years, Finance has expressed interest in transactions involving the manipulation of a taxpayer’s bankrupt status to avoid adverse consequences under the debt forgiveness rules in the ITA.
The debt forgiveness rules apply when a debt owing by a taxpayer is legally settled without full payment, the difference between the amount owing and the amount paid on settlement generally being referred to as the “forgiven amount.” Under these rules, where a “commercial obligation” of a taxpayer is settled, the forgiven amount is applied to reduce the taxpayer’s unused loss carry-forwards, undepreciated capital cost balances and other tax attributes. If any forgiven amount remains after all such attributes have been reduced to zero, the remaining forgiven amount gives rise to an income inclusion (generally at a 50% inclusion rate), subject to an offsetting “insolvency deduction” available to a corporation to the extent that the income inclusion exceeds twice the value of the corporation’s net assets, subject to certain adjustments.
However, the debt forgiveness rules do not apply where the debtor is a bankrupt within the meaning of the Bankruptcy and Insolvency Act (Canada).
Finance has previously expressed concern that certain taxpayers may be entering into arrangements whereby a corporation is temporarily assigned into bankruptcy prior to its debts being settled, and then subsequently released from bankruptcy so that the settlement does not give rise to a reduction of tax attributes or income inclusion under the debt forgiveness rules. (The ITA includes a separate rule to prevent the survival of losses after a corporation has been discharged from bankruptcy, but this rule is narrower in application than the debt forgiveness rules, and Budget 2024 indicates that certain transactions are being structured to avoid the application of this rule as well.)
On November 1, 2023, transactions involving the manipulation of bankrupt status were designated as notifiable under the “notifiable transaction” rules in section 237.4 of the ITA (see our November 2023 bulletin.)
While Budget 2024 indicates that these transactions may be subject to challenge under existing rules in the ITA, it proposes to more definitively prevent this planning by amending the debt forgiveness rules to remove the exception from their application for bankrupt corporations. Budget 2024 notes that bankrupt corporations will continue to have access to the insolvency deduction to ensure that the application of the debt forgiveness rules to a corporation in bankruptcy does not give rise to a cash tax liability. A corresponding amendment will repeal the existing loss restriction rule for bankrupt corporations.
The proposed amendment to the debt forgiveness rules is limited to bankrupt corporations. Individuals will continue to be exempt from the debt forgiveness rules if their debts are settled during bankruptcy.
This measure will apply to bankruptcy proceedings that are commenced on or after Budget Day.
International Tax Measures
Crypto-Asset Reporting Framework and the Common Reporting Standard
Budget 2024 proposes to implement in Canada the OECD’s Crypto-Asset Reporting Framework (CARF), and like the Common Reporting Standard (CRS), it is intended to provide for the automatic exchange of information between tax authorities. Budget 2024 did not include draft legislation to implement this proposal.
This proposal would impose a new annual reporting requirement in the ITA on entities and individuals (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. According to Budget 2024, this would include crypto exchanges, crypto-asset brokers and dealers, and operators of crypto-asset automated teller machines. While not discussed in Budget 2024, the OECD’s CARF materials state that activities of an investment fund investing in crypto-assets do not constitute a service effectuating exchange transactions.
Crypto-asset service providers will be required to report on certain crypto-asset transactions, as well as obtain and report certain information on each of their customers, including controlling persons of customers that are legal entities. Reporting is proposed to be required with respect to both Canadian resident and non-resident customers. Accordingly, unlike CRS, which requires reporting only on non-Canadian clients, Budget 2024 provides that the Canadian implementation of CARF will help ensure that Canadians are properly complying with their Canadian tax obligations in respect of crypto-assets.
Certain changes are also proposed to the provisions in the ITA implementing the CRS, including broadening the scope of the CRS to include specified electronic money products and central banks' digital currencies, which will not be covered under the CARF. These proposed changes will require as-of-yet unspecified additional information to be reported in respect of financial accounts and account holders and strengthening due diligence procedures that financial institutions are required to follow.
The introduction of the CARF and the changes to the CRS will apply in Canada to the 2026 and subsequent calendar years, meaning that the first reporting and exchange of information under the CARF will take place in 2027 with respect to the 2026 calendar year.
Withholding for Non-Resident Service Providers
Budget 2024 provides a new discretionary power for the Minister of National Revenue (Minister) to waive withholding requirements under section 105 of the Income Tax Regulations (Reg 105). Reg 105 requires a person who pays a non-resident in respect of services rendered in Canada to withhold 15% of the payment and remit it to the Minister. Withholdings under Reg 105 are intended to act as a pre-payment of the non-resident’s Canadian tax liability (if any) on the implicit assumption that a non-resident who receives payment for services rendered in Canada may be carrying on business in Canada and, therefore, subject to Canadian income tax on income from that business. The withholding mechanism under Reg 105 acts as a tool for the CRA to more easily collect taxes from non-residents.
However, Reg 105 is broad enough to capture payments to non-residents who, for a variety of reasons, do not owe any Canadian income tax. One example would be a non-resident who is resident in a country with which Canada has a bilateral tax treaty generally and does not carry on any business in Canada through a “permanent establishment” (PE) in Canada within the meaning of the applicable treaty. In these circumstances, Reg 105 can be an unnecessary compliance burden, for both the payer and the non-resident service provider who would then be required to file a Canadian income tax return to claim a refund of amounts withheld.
The CRA has developed an administrative practice to exempt payers from the requirement to withhold on payments to non-resident service providers in these certain circumstances, including by issuing a “treaty-based waiver.” The treaty-based waiver permits a payer not to withhold under Reg 105 where the non-resident is exempt from Canadian income tax under an applicable treaty (e.g., by reason of not having a PE in Canada), provided certain other requirements are met (see the CRA’s guide).
The CRA’s statutory authority to grant such waivers is based on the rule in subsection 153(1.1) of the ITA, which allows the CRA to permit a lesser amount of withholding to avoid undue hardship. The undue hardship context would appear to require a case-by-case payment-specific determination consistent with the CRA’s current waiver policy.
The new discretionary power proposed in Budget 2024 will permit the Minister to waive the requirement to withhold pursuant to Reg 105 in respect of broader categories of payments, specifically, if the Minister is satisfied that the payment is (1) income of a treaty-protected business of the non-resident, or (2) in respect of international shipping activity or the operation of an aircraft in international traffic, the income from which is generally not included in the non-resident’s income for purposes of the ITA.
The Minister will also have the right to establish other conditions that must be met for any such waiver to apply. This new authority may allow the CRA to grant broader waivers in favour of non-residents who can establish the expectation of a full treaty exemption. However, it remains to be seen how the CRA will use this new discretion, what conditions may be imposed in connection with such waivers and whether the CRA will also continue to administer its existing waiver system as currently constituted.
There are also other circumstances than the categories above in which payments to a non-resident may be subject to or may be at risk of withholding under Reg 105 today, and yet, it is clear that the non-resident will have no ultimate Canadian income tax liability. Examples include circumstances where a non-resident subcontracts services to a Canadian service provider (related or unrelated).
In such circumstances, the non-resident generally will not be carrying on business in Canada.
Nevertheless, it is at least arguable that payments made to the non-resident by its clients, who are often not Canadian, may be subject to Reg 105 because a portion of the services being paid for was rendered in Canada by the subcontractor. Cases such as this do not appear to come within the scope of the proposed waiver, as they arguably rely not on a treaty exemption but rather on the non-resident simply not meeting the thresholds for taxation in Canada under the ITA.
It is hoped that Finance will consider expanding this helpful rule to cover such circumstances and others where a Reg 105 compliance burden can be avoided with minimal (if any) risk to the Canadian tax base.
Previously Announced Measures
Budget 2024 reaffirms the government’s intention to proceed with a number of previously announced tax measures, including measures that are part of Bill C-59, which is currently before Parliament. Certain of these measures include the share buyback tax, the modernization of the GAAR, limitations on excessive interest and financing expenses, denial of the dividend received deduction for financial institutions holding shares as “mark-to-market property,” rules for hybrid mismatch arrangements, the digital services tax and Pillar Two, among others.
In respect of Pillar Two, Budget 2024 noted that the government intends to “soon” introduce the new Global Minimum Tax Act in Parliament, following consultations in the summer of 2023 on draft legislative proposals. Budget 2024 reaffirms that the global minimum tax will apply for fiscal years of taxpayers that begin on or after December 31, 2023.
It had been hoped that revised legislation and explanatory notes, which were not included with the draft legislation, for the Global Minimum Tax Act would have been released sooner, given that this new legislation is proposed to be already applicable for many taxpayers.
The current draft legislation contains a placeholder, but no details, for the incorporation of a “UTPR” regime in Canada. A UTPR regime would allocate Pillar Two top-up tax amounts among the participating jurisdictions of a corporate group in circumstances where there is no “ultimate parent” that is subject to a qualifying top-up tax in its jurisdiction. Budget 2023 announced the intention that the UTPR regime would be introduced as a second stage in the implementation of Pillar Two in Canada, to be effective for tax years starting after December 31, 2024, so a draft of those proposals should also be expected to be released shortly for consultation.
For further information, please contact any member of our Tax group.
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