On April 16, 2024, Chrystia Freeland, Deputy Prime Minister and Minister of Finance, presented the federal budget amid concerns about the heightened cost of living experienced by Canadians. Given the ongoing economic uncertainties, the budget focuses on specific measures aimed at fostering the availability of more affordable housing, reducing living expenses, and stimulating economic growth. As Canada's economy is facing challenges in growing, the budget estimates a deficit of $39.8 billion for the fiscal year 2024/25. Overall, the budget includes new spending initiatives and tax increase measures.
The budget introduces a plan to raise the capital gain inclusion rate. The increase in the capital gains tax rate could impact people selling their investment properties at lower values. Other initiatives include increasing the annual Canada Mortgage bond limit to $60 billion from $40 billion, enacting a renters' bills of rights and tenant protection fund, standardizing low-rise designs for faster approvals and introducing a tool to verify borrower income for mortgages, potentially reducing mortgage fraud. Furthermore, restrictions are proposed on large corporate investors purchasing existing single-family homes.
Below is a brief summary of some of the new measures detailed in the budget:
Capital Gains Inclusion Rate
The budget suggests increasing the capital gains inclusion rate for corporations, trusts, and individuals earning more than $250,000 from 50% to 66.67% for capital gains made after June 25, 2024. This means a change in how much tax people pay on profits from selling assets. It also adjusts deductions for employee stock options to reflect this change. Losses from previous years can still be used to reduce taxes on gains, but their value will be adjusted. Different rules will apply for gains realized before and after June 25, 2024, requiring transitional rules. The $250,000 threshold for individuals applies only to gains after June 25, 2024, and will not be prorated for 2024. More details will be provided later.
Home Buyers’ Plan (HBP)
HBP lets eligible buyers take money from their RRSPs for their first home or a home for a disabled person without paying tax. The budget suggests raising the withdrawal limit from $35,000 to $60,000. Couples buying together could withdraw up to $120,000. This applies to withdrawals made after April 16, 2024. Repayments start the second year after withdrawal, but the budget proposes to delay this by three years for withdrawals made between 2022 and 2025. This could help couples defer annual repayments by up to $4,667 for three extra years.
Canadian Entrepreneurs’ Incentive
The budget proposes a new incentive called the Canadian Entrepreneurs' Incentive. It lowers the tax rate on capital gains from disposition of qualifying shares for eligible small businesses and farm or fishing property. This incentive means only 33.33% of these capital gains will be taxed, up to $2 million per person over their lifetime. This limit will increase by $200,000 each year, starting from 2025 until it reaches $2 million by 2034. To qualify, the shares must meet specific conditions, including being from a small business and held for at least five years. This measure will start from January 1, 2025, for any sales happening after that date.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) is a backup tax system ensuring more taxation for high-income earners. You pay whichever tax is higher, either the AMT or regular tax. The government proposes changes, including allowing individuals to claim 80% of charitable donations for AMT, deducting certain payments like social assistance, and exempting certain entities from AMT. These changes start on January 1, 2024, along with broader AMT updates.
Accelerated Capital Cost Allowance (CCA)
The Capital Cost Allowance (CCA) system lets businesses claim tax deductions for the cost of their assets over time. Currently, rental buildings get a 4% deduction rate. The budget suggests a temporary increase to 10% for new rental projects starting construction after April 16, 2024, and available for residents before January 1, 2036. This faster deduction means builders can recoup costs sooner, encouraging more investment in new housing. This measure also benefits from the Accelerated Investment Incentive, providing full deductions until 2028.
Anti-Avoidance Rule for Property Transfers
The Income Tax Act (ITA) has rules to prevent people from transferring property to avoid paying taxes, holding both the transferor and transferee responsible for any tax debts. The budget suggests new rules to treat certain transactions as tax avoidance if property is transferred from a taxpayer to a related person. It imposes penalties on those involved in such planning, equal to 50% of the avoided tax or $100,000 plus any planning-related payments. Additionally, taxpayers involved in tax avoidance planning would be held responsible for the full tax debt, including any fees paid to advisors.
Employee Ownership Trust (EOT)
An EOT is a way for employees to own shares in a company through a trust, often used to help them buy the business without paying directly for shares. The exemption, worth $10 million, allows business owners to sell to an EOT without paying tax on capital gains, provided certain conditions are met. However, if a disqualifying event happens within 36 months, the exemption is revoked. The exemption applies to qualifying share sales between January 1, 2024, and December 31, 2026, and includes sales to worker cooperative corporations. Further information on sales to worker cooperatives will be released later.
Charity Donation Receipts
The budget suggests simplifying the process for charities to issue official donation receipts by removing certain requirements. For example, they propose eliminating the need for receipts to include the place of issuance, the appraiser's name and address (if applicable), and the donor's middle initial. Additionally, charities would be allowed to issue receipts electronically as long as they meet certain criteria, such as containing all necessary information and being secure and unalterable. These changes would take effect once they receive royal assent.
E/V Supply Chain Investment Tax Credit
The government plans to introduce a new 10% tax credit for businesses investing in Canada's electric vehicle supply chain. This credit applies to buildings used in three key segments: electric vehicle assembly, battery production, and cathode active material production. It starts from January 1, 2024, but will reduce to 5% in 2033 and 2034, ending after 2034.
The budget affirms the government's intention to continue with previously introduced legislative measures, including:
Underused Housing Tax
Enhancing the Intergenerational Business Transfer Framework
Updating the General Anti-Avoidance Rule (GAAR)
Substantive Canadian Controlled Private Corporations (CCPCs)
Before undertaking any tax strategies, you are advised to seek guidance from an accountant, lawyer or other qualified tax advisor.
Overall, the budget continues the trend of spending more money and raising taxes to cover the shortfall. But while the deficit situation seems stable, there is a missed opportunity to cut back on spending and reduce taxes. This uncertainty about future taxes could create problems for businesses and investors.
To get in touch with a business or real estate lawyer, you can contact us in three easy ways:
Download the ALF One-Stop Client Portal App
Email us at reception@ALFllp.ca
Call us at 905-629-2722
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