Recent legislative amendments for Canadian taxes

Alternative Minimum Tax (AMT)

Background

Significant changes to the AMT were first introduced in Budget 2023. The AMT is essentially a second tax calculation, without the benefit of certain deductions and credits. If the tax amount is higher under this second calculation, the additional tax is payable. This additional amount is included in a pool which may be recovered in the subsequent seven years after payment.

Budget 2023 proposed to increase the amount of capital gains income included in the second calculation and decrease the stock option deduction allowed. It also proposed to restrict several deductions to 50 percent of what was paid — including interest paid on borrowed money, moving expenses, childcare and employment expenses. It also proposed to restrict some losses to 50 percent and limit tax credits to 50 percent of actual.

Subsequently, some adjustments were made to these proposals, restoring some expenses to their full deductibility for AMT purposes, and partially restoring charitable donations to 80 percent allowable for determining AMT.

August 2024 update

Proposed amendments mainly relate to allowing deductions for resource expenses in full, including interest on borrowed funds related to these investments. However, the Department of Finance also proposes amendments providing that 50 percent of the fees paid for investment counsel will be disallowed for AMT purposes.

Canadian Entrepreneurs’ Incentive

Background

This incentive program was first introduced in Budget 2024 and is intended as an add-on to the lifetime capital gains exemption on the disposition of certain qualifying corporation shares. When first introduced, several limiting conditions were in place, including:

1. the claimant was a “founding investor”
2. the claimant owned more than 10 percent of the votes and value of the corporation at all times for at least five years before disposition, and
3. the claimant was actively engaged on a regular, continuous, and substantial basis in the business activities of the corporation.

Essentially, the incentive reduces the enacted capital gains inclusion rate by one-half, with a lifetime maximum of $2 million. If the capital gains inclusion rate increases to two-thirds as proposed, this would mean an inclusion rate on qualifying gains of one-third. This $2 million lifetime maximum was originally proposed to be phased in beginning in 2025 at $200,000 per year, with the full amount of $2 million being reached in 2034.

August 2024 update

The original restrictions have been somewhat lessened in the new proposals. Eligibility has been extended to include a qualified small business corporation share or all qualified farm or fishing property. However, this does not apply to excluded businesses — including most incorporated professionals, consultants, financial services, insurance companies, real estate companies, businesses that derive most of their value from goodwill and many other service-related businesses.

Additionally, the founding investor requirement has been eliminated, the ownership percentage reduced to five percent, and the involvement in the business activity has been reduced from five years to any combined three-year period at any time since the founding of the business. The proposed amendments have also accelerated the annual availability to $400,000, with the full $2 million amount reached in 2029.

These proposals will apply to dispositions that occur on or after January 1, 2025. The government is seeking comments from a public consultation on these proposed amendments by September 11, 2024.

Trust tax measures

Trust reporting

Background

This has been a rather contentious issue for tax preparers and taxpayers alike since it was first introduced in 2018. Revised rules were enacted on December 15, 2022, which applied to trusts with taxation years ending after December 30, 2023, including bare trusts. Tax preparers and taxpayers both faced significant uncertainty and questioned the practicality and benefit of filing these returns. As a result, on March 28, 2024, the Canada Revenue Agency provided an administrative exemption from the T3 Trust return filing requirement for bare trusts for the 2023 taxation year.

August 2024 update

The recently released amendments contain several positive proposed changes. The overly broad legislation has been modified to contain more narrow circumstances where a trust will be required to file a return or be subject to beneficial ownership reporting requirements. Bare trusts will not be required to file returns for taxation years ending December 31, 2024.

New wording has been introduced to more concisely define a bare trust for beneficial ownership reporting. It is now deemed to be any arrangement under which one or more persons have legal ownership of property that is held for use of, or benefit of, one or more persons or partnerships, and the legal owner can reasonably be considered to act as agent for those parties. 

While the new wording can catch many different arrangements, certain exceptions are also outlined in the new amendments, including:

• joint bank accounts
• parents on the title for mortgage purposes
• joint occupation of family homes by spouses where only one is on title
• general partners holding property for a partnership and property held pursuant to a court order
• and others.

To allow taxpayers and their advisors sufficient time to consider their circumstances, the revised amendments will apply to taxation years that end on December 31, 2025.

The government is also seeking comments from a public consultation on these proposed amendments by September 11, 2024.

Carrying back losses from an estate to a final return

Background

When an individual dies, they are deemed to dispose of their assets at fair market value and a final tax liability is determined. However, when assets pass to an estate after death (i.e., a GRE) there can sometimes be a decline in the value of those assets before they are disposed of.

A provision of the Income Tax Act allows the GRE to carry back this loss to the final terminal return to recover some of the tax liability that was paid. Currently, this must be done within one year and an amended terminal return must be filed.

August 2024 update

The amendments recently released now reference the first three years of the GRE. This means that the GRE has three years to carry back losses to the terminal return. In addition, the requirement to file an amended terminal return has been modified to filing a prescribed form. This is a welcome change that provides executors with a longer time frame to consider this planning and a more simplified process.

Other measures

• Rules for substantive CCPCs — Proposed technical amendments regarding CDA balances, general rate income pool (GRIP) and foreign income.
• Purpose-built rental housing — Accelerated capital cost allowance proposed for buildings/part of buildings used for multi-unit residential rentals.
• Productivity-enhancing assets — Accelerated capital cost allowance proposed for certain technology assets.
• Expansion of tax credits and investment tax credits for clean economy, clean technology, clean hydrogen and clean technology manufacturing asset investments.
• Non-compliance with information requests — Technical amendments introduced to aid the Minister in obtaining information from taxpayers when they are not complying with requests to provide it.
• Charities — Proposed amendments regarding fundraising expenses, foreign charities obligations, and to exempt any taxpayer who is a registered charity throughout the year from filing an income tax return.