Recent legislative amendments for Canadian taxes

The Department of Finance released several legislative proposals for public consultation on August 12, 2024. These proposals implement most of the remaining tax measures from Budget 2024, along with other previously announced tax measures. While some of the changes impact specific taxpayers, others will have broad application to many Canadian taxpayers.

Read on to learn about some of the key income tax changes and who these may affect.

Individual tax measures

Capital gains inclusion rate

Background

 Budget 2024 proposed that the current capital gains inclusion rate of 50 percent would be increased as of June 25, 2024, to two-thirds, or 66.67 percent. The applicable rate for a taxation year that includes this date will be either 50 percent, 66.67 percent, or a blended rate if capital gains/losses are realized in the two periods both before and after this date.

For individuals, graduated rate estates (GREs) and qualified disability trusts, the first $250,000 of capital gains will be eligible for an inclusion rate of 50 percent after June 25, 2024. Essentially, all gains will be included at the new rate of two-thirds, with an additional one-sixth deduction for capital gains up to and including $250,000 annually. Additionally, the lifetime capital gains exemption is also proposed to increase to $1.25 million as of June 25, 2024.

Additional amendments are proposed to provisions dealing with stock option benefits and the associated deduction from income, which is currently one-half of the employment benefit included in income. The stock option deduction is proposed to decrease from one-half to one-third, which effectively provides for a two-thirds inclusion for the benefit deemed received after June 25, 2024. There is relief for those taxpayers who have a combined total of capital gains and stock option benefits less than $250,000, as noted above; an additional deduction of one-sixth will be available.

August 2024 update

 The original legislation created many questions, including how this would impact a corporations’ capital dividend account (CDA) and how available net capital losses of other years would be applied. The August 12 amendments cleared up some of these issues by removing the blended inclusion rate that was previously proposed. Instead, a deemed inclusion rate of one-half of the capital gain (or capital loss) realized before June 25, 2024, and two-thirds of a capital gain (or capital loss) realized after June 24, 2024, will be applied to calculate the CDA balance at a point in time. A further adjustment to the CDA at the end of the straddle year will maintain integration where the corporation’s inclusion rate for the year calculated under the transitional rules differs from the deemed inclusion rate used to compute the corporation’s CDA during the year. The remaining provisions are substantively as previously released.

The government is seeking comments through a public consultation on this legislation, with feedback due September 3, 2024.

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 after December 30, 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.