The Minister of Finance (Canada), the Honourable Chrystia Freeland, presented the Government of Canada's (the "Federal Government") 2024 Federal Budget ("Budget 2024") on April 16, 2024 ("Budget Day"). Budget 2024 contains significant proposals to amend the Income Tax Act (Canada) (the "ITA") and the Excise Tax Act (the "ETA") while also providing updates on previously announced tax measures and policies.

Significant Budget 2024 proposals and updates include:

  • increasing the capital gains inclusion rate from one-half to two-thirds for corporations (all capital gains) and individuals (for capital gains in excess of $250,000);
  • increasing the lifetime capital gains exemption to $1.25 million and introducing a new 1/3 inclusion rate for up to $2 million of certain capital gains realized by entrepreneurs;
  • revising the employee ownership trust rules to facilitate the acquisition and ownership of company shares;
  • providing further details of the clean electricity investment tax credit;
  • changing the alternative minimum tax to mitigate the impact of charitable donations;
  • expanding the information gathering powers for the Canada Revenue Agency (the "CRA"); and
  • amending or updating various sales and excise tax measures.

Selected proposals and tax measures are detailed below:

  • Personal Income Tax Measures
  • Business Income Tax Measures
  • International Tax Measures
  • Sales and Excise Tax Measures
  • First Nations Tax Measures
  • Investments in the Canada Revenue Agency
  • Consultations
  • Previously Announced Tax Measures

Personal Income Tax Measures

Lifetime Capital Gains Exemption

The ITA provides for a capital gains exemption which allows an individual (other than a trust who was resident in Canada throughout a taxation year) to shelter gains on the disposition of certain qualified small business corporation shares or qualified farm or fishing properties in the year or a preceding year. The deduction is subject to a cumulative lifetime limit (otherwise known as the "Lifetime Capital Gains Exemption" or "LCGE") which is currently set at $1,016,836 for 2024 and is indexed to inflation.

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

Canadian Entrepreneurs' Incentive

Budget 2024 proposes to introduce a new Canadian Entrepreneurs' Incentive ("CEI"), which would reduce the tax rate on capital gains on the disposition of qualifying shares by an eligible individual. In addition to any capital gains exemption already available under the ITA, the CEI would provide a capital gains inclusion rate that is one half of the prevailing inclusion rate, on up to $2 million in capital gains per individual over their lifetime (the "lifetime limit"). As an example, under the two-thirds capital gains inclusion rate proposed in Budget 2024 (see "Personal Income Tax Measures – Capital Gains Inclusion Rate" below) this measure would result in an inclusion rate of one-third for qualifying dispositions.

This measure would apply to dispositions that occur on or after January 1, 2025, and the lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025, and reaching a value of $2 million by January 1, 2034.

A share of a corporation would be a qualifying share if, at the time of sale, it was a share of the capital stock of a small business corporation owned directly by a founding investor (the "claimant") for a minimum of five years prior to disposition. During 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. Other qualifying conditions include the following:

  • throughout the 24-month period immediately before the disposition of the share, the share was a share of a Canadian-controlled private corporation ("CCPC") and more than 50% of the fair market value of the assets of such 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 these two types of assets.
  • at all times since the initial share subscription until the time that is immediately before the sale of the shares, the claimant directly owned shares amounting to more than 10% of the fair market value of the issued and outstanding capital stock of the corporation and giving the individual more than 10% of the votes that could be cast at an annual meeting of the shareholders of the corporation.
  • the share must have been obtained for fair market value consideration.

Finally, to qualify for the CEI, the share will not be permitted to 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, 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 a corporation providing consulting or personal care services.

Capital Gains Inclusion Rate

Currently, 50% of a capital gain and 50% of a capital loss are included in computing a taxpayer's income.

For capital gains realized on or after June 25, 2024, Budget 2024 proposes to increase the capital gains inclusion rate:

  • from 50% to 66.7% for corporations and trusts, and
  • from 50% to 66.7% on the portion of capital gains realized annually that exceeds $250,000 for individuals.

The inclusion rate for capital gains up to $250,000 realized annually by individuals will continue to be 50%.

Accordingly, individuals should consider whether they wish to realize $250,000 in capital gains annually from 2024 onwards in order to engage the 50% rate rather than be subject to the 66.7% rate. Individuals who sell a property for which the principal residence exemption is not available, or a business, subject to the availability of the LCGE, may find themselves above the $250,000 threshold.

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

  • current-year capital losses;
  • capital losses of other years applied to reduce current-year capital gains; and
  • capital gains in respect of which the LCGE, the proposed Employee Ownership Trust ("EOT") Exemption, or the proposed CEI is claimed.

The LCGE allows every eligible individual (other than a trust) to claim a deduction to their taxable income for capital gains realized on the disposition (or deemed disposition) of qualified small business corporation shares (as defined in the ITA). The amount of the LCGE is $1,016,836 in 2024. As noted above, Budget 2024 proposes to increase the LCGE to apply to up to $1.25 million of eligible capital gains. Presumably, under the proposed 66.7% inclusion rate, the cumulative capital gains deduction would be increased to 66.7% of the LCGE.

If the conditions for the proposed EOT exemption are satisfied, an individual vendor (other than a trust) would be able to claim an exemption for up to $10 million in capital gains from the sale.

Net capital losses of prior years would continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This means that a capital loss realized prior to the rate change would fully offset an equivalent capital gain realized after the rate change.

For tax years that begin before and end on or after June 25, 2024, two different inclusion rates would apply. For example, individual taxpayers would be subject to the higher inclusion rate in respect of the portion of their net gains arising on or after the effective date that exceed the $250,000 threshold, to the extent that these net gains are not offset by a net loss incurred before the effective date or in any other taxation years.

The annual $250,000 threshold for individuals would be fully available in 2024 (i.e., it would not be prorated) and would apply only in respect of net capital gains realized in Period 2.

Impact on Employee Stock Options

Currently, the employee stock option deduction is 50% of the taxable benefit, subject to the annual vesting limit of $200,000 for options in respect of certain non-qualified securities. Budget 2024 proposes that claimants of the employee stock option deduction would be provided a 33.3% deduction of the taxable benefit to reflect the new capital gains inclusion rate but would be entitled to a deduction of 50% of the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

Holders of employee stock options with that have vested and are significantly "in-the-money" (i.e. has large accrued gains in the underlying shares) should consider whether to exercise their options before June 25, 2024 in order to benefit from the 50% inclusion rate. Additionally, it is unclear how employers will deal with their withholding obligations on exercised options where an employee's entitlement to a 50% deduction may be reduced by an employee's realized capital gains in the year given that under the current rules employers are generally allowed to take into account the 50% deduction in determining the amount of payroll withholdings.

The Federal Government stated that other amendments to legislation would be made to reflect the new inclusion rate, and additional details would be released in the coming months.

Mineral Exploration Tax Credit

The Mineral Exploration Tax Credit (the "METC") provides an additional income tax benefit for individuals that invest in mining flow-through shares. The METC is equal to 15% of the specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.

The METC was last renewed in 2019 for a five-year period and was to expire on March 31, 2024. As previously announced on March 28, the Federal Government proposes to extend eligibility for the METC for one year. The extension to the 15% METC does not affect the Federal Government's parallel 30% tax credit in respect of exploration for "critical minerals", which was announced in the 2022 Budget and is currently in effect until March 31, 2027.

Alternative Minimum Tax

The ITA imposes an alternative minimum tax ("AMT") on an individual to the extent that their Part I tax otherwise payable (under the ITA) for a taxation year is less than the amount determined, in respect of the individual, under the alternative minimum tax rules. The AMT rules effectively prevent certain individuals (and certain trusts) from reducing their tax payable below a certain threshold amount by claiming certain deductions and credits under the ITA.

Budget 2023 announced new changes in respect of the calculation of the AMT. In 2023, the Department of Finance also released draft legislative proposals in respect of the announced changes to the AMT. The proposals provided for an increase of the AMT rate from 15% to 20.5% and several changes to the calculation of adjusted taxable income (used to calculate AMT), among various other changes.

Budget 2024 proposes various additional changes to the AMT rules. The new proposed rules would allow for (among other items):

  1. An individual to claim 80% of the charitable donation tax credit for purposes of calculating AMT (versus 50%, as previously proposed);
  2. An individual to fully deduct Guaranteed Income Supplement, social assistance, and workers' compensation payments for purposes of calculating AMT;
  3. An individual to fully claim the federal logging tax credit for purposes of calculating AMT; and
  4. Particular disallowed credits to be eligible for the AMT carry-forward.

Budget 2024 also proposes exemptions from the AMT for employee ownership trusts and certain trusts for the benefit of indigenous groups.

The proposed changes will be applicable to taxation years that begin after December 31, 2023.

Employee Ownership Trust Tax Exemption

Last year, Budget 2023 included new proposed provisions for the establishment of employee ownership trusts ("EOTs") as a means of transitioning ownership of a business to employees in a tax-efficient manner. As part of the 2023 Fall Economic Statement, the Federal Government proposed an exemption for the first $10 million in capital gains realized on a sale of a business to an EOT, subject to certain conditions.

Budget 2024 includes further details on the proposed EOT rules and conditions to which the rules will be subject.

Details on Qualifying Conditions

Budget 2024 provides details and clarifications on the qualifying conditions for the EOT exemption. Namely, the exemption will be available to an individual (other than a trust) on the sale of shares to an EOT provided the following conditions are satisfied:

  1. 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;
  2. The transaction is a qualifying business transfer (as is defined in the proposed EOT measures that are still before Parliament) in which the trust acquiring the shares is not already an EOT or a similar trust with employee beneficiaries;
  3. Throughout the 24 months immediately prior to the qualifying business transfer (in a similar manner to the requirements for claiming the lifetime capital gains exemption):
    1. 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
    2. over 50% of the fair market value of the corporation's assets were used principally in an active business;
  4. At any time prior to the qualifying business transfer, the individual (or their spouse or common-law partner) has been actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months; and
  5. Immediately after the qualifying business transfer, at least 90% of the beneficiaries of the EOT must be resident in Canada.

The proposals that formed part of Budget 2023 made it clear that the EOT must be resident in and administered from Canada by local Canadian trustees.

Provided the above conditions are satisfied, Budget 2024 confirms that the individual in question would be able to claim the $10 million exemption from capital gains in respect of the sale. Budget 2024 further clarifies that if multiple individuals dispose of their shares of a business to an EOT as part of a qualifying business transfer (and so long as the conditions outlined above are met), each individual may claim the exemption, but the total exemption in respect of the qualifying business transfer cannot exceed the aggregate $10 million limit.

Budget 2024 provides that the individuals will need to agree on how to allocate the exemption amongst themselves. No further details are provided on how any such allocations would be practically carried out and implemented.

Details on Disqualifying Conditions

Budget 2024 further provides that if a disqualifying event occurs within 36 months of an otherwise qualifying business transfer, then the EOT exemption would not be available and would be retroactively denied for an individual who claimed the exemption. Taxpayers should be cautious of this for the 36 month period after a qualifying business transfer. More specifically, a disqualifying event would occur if the EOT loses its status as an EOT or if less than 50% of the fair market value of the qualifying business' shares is attributable to assets used principally in an active business at the beginning of two consecutive taxation years of the corporation.

If a disqualifying event occurs more than 36 months after a qualifying business transfer, the EOT would be deemed to realize a capital gain that is equal to the total amount of exempt capital gains.

Additional Considerations and Details

Budget 2024 further provides that the capital gains exempted through the EOT rules would be subject to an inclusion rate of 30% for the purposes of the alternative minimum tax. This is, once again, similar to the treatment being provided for individuals claiming the lifetime capital gains exemption.

Further administrative details have also been provided that, in order for an individual to claim an exemption on the sale to an EOT, 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, or solidarily, liable for any tax payable by the individual as a result of the exemption being denied due to a disqualifying event within the first 36 months after a qualifying business transfer. Budget 2024 also proposes to extend the normal reassessment period of an individual for a taxation year in respect of the EOT exemption by three years.

New Proposal for Worker Cooperatives

Budget 2024 announces an expansion of qualifying business transfers for the purposes of the EOT exemption to include the sale of shares to a worker cooperative corporation. Such a worker cooperative would generally need to meet the definition set out under the Canada Cooperatives Act. So long as the applicable requirements are satisfied, the proposed expansion of would allow an individual to claim an exemption on selling a business to a worker cooperative.

As announced in Budget 2023, a qualifying business transfer to a worker cooperative would also be eligible for the 10-year capital gains reserve and the 15-year exception to the shareholder loan and interest benefit rules.

Coming Into Force and Comments

The EOT-related measures announced in the 2024 Budget would apply to qualifying dispositions of shares that occur between January 1, 2024 and December 31, 2026.

A key concern of the EOT rules is that they do not provide business owners who are looking to transition their businesses to employees with the same level of tax benefits as are available in other jurisdictions globally. Another concern is the complexity of the rules and the associated requirements (including as outlined in Budget 2024), which may well dissuade many business owners from pursuing EOT planning. While we will continue to follow developments with the EOT rules (including the expansion of the rules to include worker cooperatives), neither has the 2023 Fall Economic Statement, nor has Budget 2024 fully addressed these concerns.

Business Income Tax Measures

Clean Electricity Investment Tax Credit

Budget 2024 provides additional details regarding the previously-announced Clean Electricity Investment Tax Credit (the "CEITC"), a refundable tax credit that would be available to the following types of Canadian corporations:

  • taxable Canadian corporations;
  • provincial and territorial Crown corporations;
  • corporations owned by municipalities;
  • corporations owned by Indigenous communities; and
  • pension investment corporations

Canadian corporations that are members of a partnership may also be eligible to claim their share of the CEITC.

The CEITC is a 15% refundable tax credit for eligible investments in:

  • certain equipment used to generate electricity from solar, wind, or water energy;
  • certain concentrated solar energy equipment;
  • certain equipment used to generate electricity, or both electricity and heat, from nuclear fission;
  • certain equipment used for the purpose of generating electricity, or both electricity and heat, solely from geothermal energy;
  • certain equipment that is part of a system used to generate electricity, or both electricity and heat, from specified waste materials;
  • certain stationary electricity storage equipment and equipment used for pumped hydroelectric energy storage, but excluding equipment that uses any fossil fuel in operation;
  • certain equipment that is part of an eligible natural gas energy system (a system that uses fuel, all or substantially all of which is natural gas solely to generate electricity, or both electricity and heat, and uses a carbon capture system to limit emissions to an intensity no greater than 65 tonnes of carbon dioxide per gigawatt hour of energy produced, with captured carbon dioxide being stored appropriately); and
  • certain equipment and structures used for the transmission of electricity between provinces and territories.

Eligibility for the full 15% credit would be subject to certain labour requirements, which are generally met (i) by paying "covered workers" in accordance with a collective agreement, or by paying amounts that similar workers are paid under a collective agreement, and (ii) by ensuring that at least 10% of the labour performed by workers in Red Seal trades is performed by registered apprentices. Taxpayers that do not elect to meet the labour requirements could claim the CEITC at a reduced rate of 5%.

The CEITC would also be subject to potential repayment obligations if the eligible property has been converted to an ineligible use, exported from Canada or disposed of within 10 years (or 20 years, in the case of an eligible natural gas energy system).

Eligible corporations, whether directly or through a partnership, would be able to claim only one of the CEITC, the Clean Technology investment tax credit, the Carbon Capture, Utilization, and Storage investment tax credit, the Clean Hydrogen investment tax credit, the Clean Technology Manufacturing investment tax credit (all previously announced), and the newly-announced Electric Vehicle Supply Chain investment tax credit (as described below). Multiple tax credits could be available for the same project. For Crown corporations, certain conditions (such as a public commitment to work towards a net-zero grid by 2035 and a public commitment to pass on the value of the CEITC to ratepayers) may be imposed, following consultation with the provinces and territories.

The CEITC would be available for eligible property that is acquired and becomes available for use on or after Budget Day and before 2035, provided the property has not been used for any purpose before its acquisition, and provided it is not part of a project that began construction before March 28, 2023. Modified rules may apply for Crown corporations.

Electric Vehicle Supply Chain Investment Tax Credit

Budget 2024 announces the Federal Government's intention to introduce a new Electric Vehicle Supply Chain investment tax credit on the cost of buildings used in the electric vehicle supply chain, including:

  • electric vehicle assembly;
  • electric vehicle battery production; and
  • cathode active material production.

Details are to be provided in the 2024 Fall Economic Statement.

Clean Technology Manufacturing (Polymetallic Extraction and Processing)

Budget 2024 clarifies that the previously-proposed Clean Technology Manufacturing investment tax credit will be available in the context of certain polymetallic projects (projects engaged in the production of multiple metals).

Accelerated Capital Cost Allowance

Purpose-Built Rental Buildings

A purpose-built rental building is one with at least four private apartment units (with separate kitchen, bathroom, and living areas), or 10 private rooms or suites, and in which at least 90% of residential units are held for long-term rental. The current capital cost allowance (CCA) rate for purpose-built rental buildings is 4%. Budget 2024 proposes that the CCA rate will be increased to 10% for new eligible purpose-built rental projects that begin construction on or after Budget Day and before January 1, 2031, and are available for use before January 1, 2036.

Projects that convert existing non-residential real estate, such as an office building into a residential complex that meets the requirements of a purpose-built rental will also be eligible.

Productivity-Enhancing Assets

Budget 2024 proposes to allow for immediate expensing of patents or similar rights (Class 44), data network infrastructure equipment and related systems software (Class 46), and general-purpose electronic data-processing equipment and systems software (Class 50). Restrictions may apply if the property is acquired from a non-arm's length person or if the property is acquired on a tax-deferred "rollover" basis.

Canada Carbon Rebate for Small Business

Budget 2024 proposes that CCPCs will be eligible for the new Canada Carbon Rebate for Small Businesses, a refundable tax credit for taxation years beginning in 2019, provided tax returns are filed within the applicable deadline. The tax credit is based on the payment rate specified for each applicable province for each year, multiplied by the number of persons employed by the corporation in the year. An eligible corporation need not apply for the tax credit, and the Canada Revenue Agency will automatically determine the amount of the credit and pay it to eligible corporations.

Interest Deductibility Limits – Purpose-Built Rental Housing

Budget 2021 introduced an "earnings stripping" rule, the excessive interest and financing expenses limitation ("EIFEL") rule, that limits the amount of net interest and financing expenses that may be deducted by certain taxpayers in computing taxable income. The currently proposed EIFEL rules 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 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 defined to be a residential complex: (i) 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 (ii) in which at least 90% of residential units are held for long-term rental.

The requirements are intended to be consistent with eligibility under the temporary enhancement to the GST New Residential Rental Property Rebate and the proposed Accelerated Capital Cost Allowance for Purpose-Built Rental Housing included in Budget 2024.

This change would apply to taxation years that begin on or after October 1, 2023.

Non-Compliance With Information Requests

The CRA's audit powers in sections 230 to 232 of the ITA are expansive. Recent amendments to the ITA have included additional reporting provisions which have the effect of increasing the proactive disclosures required from Canadian taxpayers.

Budget 2024 proposes to add several new measures to the ITA (and other tax statutes) that will further extend the CRA's audit powers and will require additional disclosure and responsiveness from taxpayers under audit. The proposed amendments would come into force on royal assent of the enacting legislation.

Notice of Non-Compliance

Budget 2024 introduces a new type of audit notice in proposed section 231.9. Under the proposed new provision, a "Notice of Non-Compliance" may be issued by the CRA where the taxpayer has not complied (in full or in part) with an audit query or requirement issued under the various audit provisions in the ITA. The Notice is outstanding from the date of issuance to the date the CRA determines the taxpayer has complied with, or made reasonable efforts to comply with, each audit query or requirement in respect of which the Notice was issued. A taxpayer who has been served with a Notice of Non-Compliance is subject to a penalty of $50 for each day the Notice is outstanding, to a maximum of $25,000. Additionally, a taxpayer may challenge the Notice within 90 days of issuance, following which the CRA may confirm, vary or vacate the Notice. A further application for review of the Notice may be made to the Federal Court. While the Notice of Non-Compliance is outstanding, the normal reassessment period (or any extended reassessment period) does not run.

Questioning Under Oath

Budget 2024 proposes to add new section 231.41, which would authorize the CRA to require a taxpayer to respond to an audit query or requirement either orally, under oath or affirmation, or by affidavit.

Compliance Orders

Budget 2024 proposes to amend section 231.7 to add a new penalty provision. Section 231.7 contains the rules regarding the Federal Court's authority to grant a compliance order, which is typically sought by the CRA where a taxpayer may be refusing to disclose certain information or documents. Failure to comply with a court's compliance order is contempt of court, and punishable by fine or imprisonment. Budget 2024 proposes to add a penalty equal to 10% of the aggregate tax payable by the taxpayer for the year or years to which the compliance order relates. The proposed penalty would not apply where the tax payable in the year is less than $50,000.

Reassessment Deadlines

Various provisions in the ITA extend the normal reassessment period – i.e., the period of time in which the CRA may issue any reassessment of a taxpayer's tax year – upon the occurrence of certain events, typically certain court or review processes that may interrupt or delay the audit. However, certain procedural matters do not "stop the clock" on the reassessment deadline. Budget 2024 proposes consequential amendments to section 231.8 to expand the application of the "stop the clock" rules to apply in situations where the taxpayer seeks judicial review of a CRA requirement or during the time that a Notice of Non-Compliance is outstanding.

Avoidance of Tax Debts

Section 160 of the ITA is a collections provision that, in certain circumstances, allows the CRA to recover a taxpayer's unpaid tax liability from a non-arm's length person to whom the tax debtor has transferred property for less than fair market value consideration.

Some taxpayers had utilized certain multi-step tax structuring or transaction strategies to comply with the provisions of section 160, including transfers to multiple arm's length and non-arm's length parties, with the effect that section 160 did not apply to certain payments or transfers made when a taxpayer involved in the structuring or transaction had a tax debt. The courts have held that the general anti-avoidance rule could apply in respect of this type of structuring, and where the parties act in concert they may be considered not to be at arm's length for the purposes of section 160. Additionally, recent amendments to section 160 have expanded its scope.

Budget 2024 proposes to further expand section 160 to introduce a new rule that would operate to deem certain transfers to be "tax debt avoidance planning" – namely, certain multi-step tax structuring or transactions where it is reasonable to conclude that one of the purposes for undertaking the transaction or series of transactions was to avoid the application of section 160.

Budget 2024 also proposes to (i) expand the application of the existing penalty provision in section 160.01 to apply to the deemed tax debt avoidance planning, and (ii) expand the application of section 160 to include full liability for any taxpayer who participates in tax debt avoidance planning, including any tax planners who may receive fees in the course of the transaction or series that is the subject of section 160.

The proposed amendments to section 160 would apply to a transaction or series of transactions that occur after April 15, 2024.

Reportable and Notifiable Transactions Penalty

The mandatory disclosure rules under the ITA require taxpayers, advisors, and promoters (of certain arrangements, plans or schemes) to file an information return, with the CRA, in respect of certain reportable transactions and notifiable transactions.

The ITA prescribes specific penalties for taxpayers, advisors, and promoters who fail to file the required information return as and when required by the ITA in respect of a reportable or notifiable transaction.

In addition, section 238 of the ITA provides that any person who has failed to file or make a return as and when required by the ITA is guilty of an offence and liable on summary conviction (i) for a fine between $1,000 to $25,000 and (ii) imprisonment for a term not exceeding 12 months. Under the current rules, a taxpayer, advisor, or promoter who fails to file a required information return in respect of a reportable/notifiable transaction will be both (i) guilty of this general offence; and (ii) liable for the specific penalties in respect of reportable/notifiable transactions.

Budget 2024 proposes an exemption in respect of returns in respect of reportable and notifiable transactions from section 238 of the ITA. This means that a taxpayer, advisor, or promoter who fails to file a required information return in respect of a reportable/notifiable transaction will still be liable for the specific penalties relating to the failure to file the required returns for reportable/notifiable transactions, but will not be guilty of the general offence under section 238 of the ITA. The proposed change will be deemed to have come into effect on June 22, 2023.

Mutual Fund Corporations

Most public investment funds are structured to qualify under the ITA as a "mutual fund trust" as opposed to a "mutual fund corporation." This has been the case since the ITA was amended in 2017 to eliminate the main tax advantage of a mutual fund corporation – namely, the ability of a shareholder to switch between different classes of shares of a mutual fund corporation on a tax-deferred basis. Nonetheless, multi-fund mutual fund corporations continue to exist and new single fund mutual fund corporations are created for certain investment strategies.

The ITA contains tax relieving rules that apply to mutual fund trusts and mutual fund corporations with the policy objective of achieving tax neutrality so that the tax consequences of investing in securities directly or indirectly through a mutual fund trust or corporation are similar. The rules are meant to apply to widely held investment vehicles.

Budget 2024 introduces a proposal that will exclude a corporation from qualifying as a "mutual fund corporation" that is effectively a captive investment vehicle despite meeting the existing rules in the ITA that require, among other things, that a mutual fund corporation qualify as a "public corporation." The Federal Government expressed concern in Budget 2024 that some corporate groups are creating mutual fund corporations where the group holds shares that represent most of the fair market value of the issued shares of the mutual fund corporation and could permit the corporate group to defer or avoid income taxes.

The Notice of Ways and Means Motion included in the Budget 2024 proposals provide that a corporation is deemed not to be a mutual fund corporation and will be taxed as a non-mutual fund corporation if (a) a person or partnership, or any combination of persons or partnerships that do not deal with each other at arm's length ("specified persons"), own, in the aggregate, shares of the capital stock of the corporation having a fair market value of more than 10% of the fair market value of all of the issued and outstanding shares of the capital stock of the corporation; and (b) the corporation is controlled by or for the benefit of one or more of such specified persons.

An exception to the deeming rule applies at a particular time if (a) the corporation was incorporated not more than two years before the particular time, and (b) the aggregate fair market value of the shares of the capital stock of the corporation owned by specified persons does not exceed $5,000,000. Presumably, this exception is meant to provide a newly-formed smaller mutual fund corporation time to have the value of its shares be dispersed among arm's length investors.

The 10% value threshold in the deeming rule is relatively low, but it is tempered by the requirement that the corporation be controlled by or for the benefit of the specified persons. Many mutual fund corporations have a special class of voting shares that are held (in one form or another) by the manager of the underlying investment fund while the retail class of shares issued to the public are non-voting. Those structures should not be impacted by this proposal since the voting shares are structured to have a nominal value and in many structures those shares are held for the benefit of the retail shareholders not for any "specified persons."

These proposed rules are another example of the Federal Government seeking to limit any potential tax advantages for taxpayers who form closely-held mutual funds. For example, the Federal Government successfully reassessed a taxpayer who held almost all the value of the units of a mutual fund trust through a RRSP (see Grenon v. The Queen, 2021 TCC 30, under appeal Court File A-137-21).

These proposed rules apply to taxation years that begin after 2024.

Synthetic Equity Arrangements

A "synthetic equity arrangement" ("SEA") involves a corporation that receives dividends of a Canadian corporation tax-free because such corporation is entitled to claim a deduction under section 112 of the ITA equal to the amount of the dividends received (the inter-company deduction).

An SEA is a financial arrangement where a corporate taxpayer retains the legal ownership of a share of a Canadian corporation but the opportunity for gain and the risk of loss in respect of the share is transferred to a counterparty using an equity derivative. Under the terms of the equity derivative, the corporate taxpayer is obliged to pay to the counterparty amounts equal to the economic benefit of any dividends received on the shares. In these circumstances, the corporate taxpayer realizes a loss for Canadian tax purposes because the receipt of dividends on the shares is not taxed in the hands of the corporate taxpayer (because of the inter-company dividend deduction) and such taxpayer also claims a deduction for the amount of the "dividend equivalent payments" paid to the counterparty.

The dividend rental arrangement rules apply to deny the inter-company dividend deduction under section 112 where it can reasonably be considered that the main reason for the arrangement is to enable the shareholder to receive a dividend on a share and someone other than the dividend recipient bears the risk of loss or opportunity for gain or profit in any material respect.

The dividend rental arrangement rules are specific anti-avoidance provisions applicable to SEAs that are intended to ensure the denial of the tax benefits of an SEA, subject to certain exceptions. One of these exceptions applies where a taxpayer can establish that no tax-indifferent investor or group of tax-indifferent investors has all or substantially all of the risk of loss or opportunity for gain or profit (the "No TII Exception"). Another exception applies to certain agreements that are traded on a recognized derivatives exchange (the "Exchange Traded Exception").

Budget 2024 proposes to eliminate both the No TII Exception and the Exchange Traded Exception on the basis that such amendments to the ITA will simplify the dividend rental arrangement rules and ensure that no inter-company dividend deduction is available in respect of an SEA.

These proposed amendments will apply in respect of dividends received on or after January 1, 2025.

Manipulation of Bankrupt Status

The debt forgiveness rules in the ITA generally apply where a commercial debt is settled for less than its principal amount. The consequences can be the reduction of tax attributes by the amount of the forgiven debt and, where tax attributes have been fully reduced, the rules cause an inclusion equal to half of the remaining amount. An insolvency deduction may be available to offset all or part of an income inclusion from the debt forgiveness rules. Taxpayers that are bankrupt are generally exempt from the debt forgiveness rules, but certain loss restriction rules may be applicable.

Budget 2024 proposes a specific legislative measure to address Federal Government's concern regarding the manipulation of the bankrupt status of an insolvent corporation with the view to benefitting from the exception in the debt forgiveness rules while also avoiding the loss restriction rule applicable to bankrupt corporations.

Budget 2024 proposes to repeal the exception to the debt forgiveness rules for bankrupt corporations and the loss restriction rule applicable to bankrupt corporations. Bankrupt corporations would be subject to the general rules that apply to other corporations whose commercial debts are forgiven. The bankruptcy exception to the debt forgiveness rules would remain in place for individuals. Bankrupt corporations would be subject to the reduction of their loss carryforward balances and other tax attributes on debt forgiveness. However, as insolvent corporations they could qualify for relief from the debt forgiveness income inclusion rule provided under the existing deduction for insolvent corporations.

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

International Tax Measures

Crypto-Asset Reporting Framework and Common Reporting Standard

Currently, crypto-assets (including stablecoins, derivatives issued in the form of a crypto-asset, and certain non-fungible tokens) do not need to be reported under the Common Reporting Standard (CRS). Budget 2024 proposes that the OECD's Crypto-Asset Reporting Framework (CARF) for automatic tax information exchange on crypto transactions be implemented in Canada by imposing in the ITA mandatory annual reporting by entities and individuals (crypto-asset service providers) who:

  1. are resident in Canada, or carry on business in Canada; and
  2. provide business services effectuating exchange transactions in crypto-assets including crypto exchanges, crypto-asset brokers and dealers, and operators of crypto-asset automated teller machines.

Under CARF, crypto-asset service providers must report two types of information:

  1. Information on Crypto Asset Transactions: including exchanges between crypto-assets and fiat currencies, exchanges for other crypto-assets, and transfers of crypto-assets exceeding US$50,000 in value for goods or services. Certain assets like central bank digital currencies and specified electronic money products are excluded from this reporting.
  2. Information on Customers: including name, address, date of birth, jurisdiction(s) of residence, and taxpayer identification numbers. For corporate customers, information on natural persons exercising control over the entity is required. Reporting is mandatory for both Canadian and non-resident customers.

Budget 2024 proposes to make the following amendments to the CRS:

  1. Expand its coverage to include specified electronic money products and central bank digital currencies not covered by CARF.
  2. Labour-Sponsored Venture Capital Corporations (LSVCCs) would be removed from the list of non-reporting financial institutions. Non-registered accounts in LSVCCs will be treated as excluded accounts if annual contributions are under US$50,000. This would generally extend the same treatment to non-registered accounts currently available to registered accounts.
  3. The anti-avoidance provision of the CRS will be amended to ensure it covers arrangements or practices that can reasonably be considered to have their primary purpose as avoiding an obligation of any person under the CRS.

Both the CARF implementation and CRS amendments would apply to the 2026 and subsequent calendar years. This would allow the first reporting and exchange of information under the CARF and amended CRS to take place in 2027 with respect to the 2026 calendar year.

Withholding for Non-resident Service Providers

Budget 2024 proposes to provide the CRA with legislative authority to waive the withholding requirement of 15%, over a specified period, for a person who pays a non-resident for services provided in Canada if either of the following conditions are met:

  • a tax treaty exists which exempt the non-resident from Canadian income tax on the payments; or
  • the income from providing the services is exempt income from international shipping or from operating an aircraft in international traffic.

A single waiver could cover multiple transactions under certain conditions to reduce compliance risks. This measure takes effect upon royal assent.

Pillar Two and the Global Minimum Tax

Pillar Two proposes a global minimum tax applicable to large multinational entities ("MNEs") with annual revenues of €750 million or more. A minimum tax of 15% would be required to apply on profits of in-scope MNEs in each jurisdiction in which the MNE operates.

The Federal Government has confirmed in Budget 2024 that it is moving ahead with legislation to implement Pillar Two in Canada, following consultations in 2023 on draft legislative proposals for the new Global Minimum Tax Act.

The Federal Government intends to soon introduce this legislation in Parliament. The global minimum tax will apply for fiscal years of taxpayers that begin on or after December 31, 2023.

Sales and Excise Tax Measures

Extending GST Relief to Builders of Student Residences

On September 14, 2023, the Federal Government announced proposed legislation to enhance the Goods and Services Tax ("GST") Rental Rebate on new purpose-built rental housing such as apartment buildings, student housing, and senior residences built specifically for long-term rental accommodation.

The existing GST Rental Rebate generally provided a builder a rebate of 36% of the 5% GST self-assessed on the value of the rental unit at the time of substantial completion and at least one individual has moved into a unit in the complex.

The enhanced GST Rental Rebate increased the existing rebate from 36% to 100% of the 5% GST self-assessed by the builder.

However, universities, public colleges, and school authorities are not eligible for an enhanced GST Rental Rebate in respect of new student housing they provide given that: (i) such rentals are not made under a lease for a period of at least 12 months; and (ii) GST/HST is not payable based on the final value of a newly constructed residential complex due to special rules for such not-for-profit builders.

Budget 2024 proposes to modify the conditions to qualify for the enhanced GST Rental Rebate to allow universities, public colleges, and school authorities that operate on a not-for-profit basis to become eligible for such rebate in respect of new student housing, by making the following changes: (i) GST/HST is payable based on the final value of the building projects; and (ii) the rental unit does not need be used as a primary place of residence of an individual under a lease for a period of at least 12 months as long as it is primarily for the purpose of providing a place of residence for students.

The proposed measures would apply to student residences that begin construction after September 13, 2023 and before 2031, and that complete construction before 2036.

Please note that in November 2023 (and as part of the Ontario Budget 2024), the Ontario government has announced an enhanced Ontario rental rebate to provide a 100% rebate of the provincial portion of the harmonized sales tax on new purpose-built rental housing in Ontario. This enhanced Ontario rebate regime mirrors the GST Rental Rebate. The proposed amendments in Budget 2024 are currently not announced to apply to the Ontario rebate regime, but we would expect that similar amendments would follow with respect to the Ontario rebate in due course.

Tobacco and Vaping Product Taxation

Excise Duty on Tobacco

Budget 2024 announces the Federal Government's intention to increase the tobacco excise duty rate by $4 per carton of 200 cigarettes along with corresponding increases to the excise duty rates for other tobacco products.

Inventories of cigarettes held by certain manufacturers, importers, wholesalers and retailers at the beginning of the day after Budget Day would be subject to an inventory tax of $0.02 per cigarette to account for the $4 increase.

This measure would come into force on the day after Budget Day.

Importation Limit for Packaged Raw Leaf Tobacco for Personal Use

Budget 2024 proposes to provide a new prescribed limit of up to 2500 grams of packaged raw leaf tobacco that can be imported for personal use on an unstamped basis. Budget 2024 also proposes to amend the definition of "packaged" for raw leaf tobacco to ensure the proper enforcement of the new limit for importation, and to better reflect current business practices.

This measure would come into force on the first day of the month following royal assent to the enabling legislation.

Process for Prescribing Tobacco Products

Budget 2024 proposes to implement a revised process for the Minister of National Revenue to specify the brands of tobacco products for export that are exempted from the special excise duty and marking requirement.

This measure would come into force on the first day of the month following royal assent to the enabling legislation.

Requiring Information Returns from Tobacco Prescribed Persons

Budget 2024 proposes to require prescribed persons who are issued duty stamps for tobacco to file information returns for tobacco excise stamps.

This measure would come into force on the first day of the month following royal assent to the enabling legislation.

Excise Duty on Vaping Products

Budget 2024 announces the Federal Government's intention to increase the vaping product excise duty rate.

Sharing of Confidential Information

Budget 2024 proposes to amend the Excise Act to allow the CRA to share confidential information for the purposes of the administration or enforcement of the Tobacco and Vaping Products Act.

This measure would come into force upon royal assent to the enabling legislation.

First Nations Tax Measures

Fuel, Alcohol, Cannabis, and Tobacco Sales Tax Framework

The First Nations Goods and Services Tax ("FNGST") is a tax that may be imposed by a band council or other governing body of a First Nation on the lands that it governs as provided under the First Nations Goods and Services Tax Act ("FNGSTA"). FNGST at 5% applies to most supplies of property and services made on these lands.

Budget 2024 proposes to amend the FNGSTA to enable First Nation governments to enact a value-added sales tax, under their own laws, on fuel, alcohol, cannabis, tobacco, and vaping products ("FACT") within their reserves or settlement lands. The FACT sales tax would be analogous to the FNGST, including applying at the same 5% GST rate, but would be limited to fuel, alcohol, cannabis, tobacco, and vaping products.

Under the proposed amendments, First Nation governments would have the choice to levy FACT sales taxes and would have the flexibility to choose which FACT product(s) to tax. These taxes would be implemented through negotiated tax administration agreements between the Federal Government and interested First Nation governments. FACT sales taxes would apply to all persons buying the taxed FACT products sold on the lands of an opt-in First Nation government. On products for which a FACT sales tax applies, the federal GST, or federal component of HST, would not apply.

Investments in the Canada Revenue Agency

Budget 2024 proposes to provide the following amounts of funding to the Canada Revenue Agency ("CRA"):

  • $51.6 million over five years, starting in 2024-25, and $7.3 million per year ongoing to the CRA for the implementation and administration of initiatives to expand transparency in crypto-transactions;
  • up to $90.9 million over 11 years, starting in 2024-25, to administer the new major economic investment tax credits1 along with additional funding to Natural Resources Canada and the Department of Finance;
  • $73.1 million over five years, starting in 2024-25, and $14.7 million per year ongoing to the CRA to continue addressing tax non-compliance in real estate transactions; and
  • $336 million over two years, starting in 2024-25, to the CRA to maintain and improve the efficiency of its call centres.

Consultations

Budget 2024 announces the following consultations and examinations:

  • consultation with the mortgage industry on making available a tool through the CRA to complement the existing strategies of financial institutions to verify borrower income for mortgages;
  • a second phase of consultations to modernize and improve the Scientific Research and Experimental Development (SR&ED) tax incentives including exploring how Canadian public companies could be eligible for an enhanced credit;
  • consultation on a new tax on residentially-zoned vacant land to incentivize construction; and
  • consultation on the qualified investment rules for registered plans including potential new rules relating to investments in small businesses, Canadian-based investments and crypto-backed assets.

Previously Announced Tax Measures

Budget 2024 confirms the Federal Government's intention to proceed with previously announced tax and related measure as modified in response to consultations and deliberations:

  • legislative proposals released on March 9, 2024 in respect of certain beer, wine and spirit excise duties;
  • legislative proposals released on December 20, 2023, including with respect to clean hydrogen investment tax credit and clean technology manufacturing investment tax credit;
  • legislative and regulatory proposals announced in the 2023 Fall Economic Statement;
  • legislative and regulatory amendments to implement the enhanced GST Rental Rebate for purpose-built rental housing announced on September 14, 2023;
  • legislative proposals released on August 4, 2023 with respect to various tax measures;
  • legislative amendments to implement changes discussed in the transfer pricing consultation paper released on June 6, 2023;
  • tax measures announced in Budget 2023 including the Dividend Received Deduction by Financial Institutions;
  • legislative proposals released on August 9, 2022 with respect to various tax measures;
  • legislative proposals released on April 29, 2022 with respect to hybrid mismatch arrangements; and
  • the income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletic trusts maturing in 2019 by one year, from eight years to nine years.

Budget 2024 reaffirms the Federal Government's commitment to move forward as required with technical amendments to improve the certainty and integrity of the tax system.

Footnote

1. These are the Carbon Capture, Utilization, and Storage investment tax credit, the Clean Technology investment tax credit, the Clean Technology Manufacturing investment tax credit, the Clean Hydrogen investment tax credit, the Clean Electricity investment tax credit and the EV Supply Chain investment tax credit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.