On April 16, 2024, the Federal Government presented the 2024 Federal Budget. While Budget 2024 did not change the federal personal or corporate income tax rates, there are a number of significant measures that will affect both individuals and businesses, including an increase to the inclusion rate for certain capital gains realized on or after June 25, 2024.
Other areas of changes include an increase to the Lifetime Capital Gains Exemption to $1.25 million per individual, certain revisions to the Alternative Minimum Tax regime for charitable donations, and a temporary tax exemption on up to $10 million in capital gains when a business is sold to an Employee Ownership Trusts (EOTs).
A major focus of the Budget was housing affordability, and several incentives were proposed including the enhanced Capital Cost Allowance for eligible purpose-built rental projects, accelerated Capital Cost Allowance for productivity enhancing assets, an elective exemption from the interest deductibility limitations, and benefits for first-time homebuyers.
We do note that many of the proposed changes and rules do not currently have any drafted legislation (including the changes to the capital gains inclusion rate), and so there is still some uncertainty as to whether they will ultimately be enacted as outlined in the Budget documents as well as the timing of when they will be effective.
Full details of Budget 2024 can be found by clicking here. Summarized below are a few of the items we believe are most relevant to private companies and individuals.
Capital Gains Tax Rate Measures
Capital Gains Inclusion Rate
The budget proposes to increase the capital gains inclusion rate from 50% to 66.67%. This rate is effective for dispositions occurring on or after June 25, 2024 for corporations and trusts for any level of net capital gains, but only applies for individuals that have an excess of an annual net capital gains realized of $250,000. The threshold applies on net capital gains, meaning capital losses, including the Capital Gains Deduction, would reduce it. The threshold will not be pro-rated for individuals in 2024 and the increased inclusion rate will apply only on capital gains incurred on or after June 25, 2024.
At the top marginal tax bracket in British Columbia, this means an effective increase from a tax rate on capital gains for individuals from 26.75% to 35.67%.
For the employee stock option deduction, a 1/3 (33.33%) deduction of the taxable benefit is provided to reflect the new inclusion rate for taxable benefits exceeding $250,000. The deduction would still be ½ (50%) for taxable benefits up to this threshold. Depending on the year incurred, capital losses carried forward would be subject to an adjusted inclusion rate of the capital gains being offset.
Below is an example of the differences in taxes payable at the top marginal tax rate in B.C. for $1,000,000 of capital gains realized by an individual and by a B.C. resident corporation on or after June 25, 2024:
| Taxpayer | Taxes Payable prior to June 25, 2024 | Taxes Payable on or after June 25, 2024 (Up to $250,000 of capital gains) | Taxes Payable or after June 25, 2024 (Over $250,000 of capital gains) | Total Taxes Payable on or after June 25, 2024 | Difference (Increase in taxes payable) |
| Individual | $267,500 | $66,875 | $267,514 | $334,389 | $66,889 |
| Corporation | $253,500 | $84,504 | $253,513 | $338,017 | $84,517 |
Further details will be released at a later time.
Business Tax Measures
Corporate income tax rates
No changes to the corporate income tax rates are proposed (except for the capital gains inclusion rate increase). As such, the income tax rates as of January 1, 2024, will remain as follows:
| BC | Combined (Federal and BC) | |
| General | 12% | 27% |
| Small business1 | 2% | 11% |
Accelerated Capital Cost Allowance (CCA) – Purpose-built rental housing
The budget proposes an accelerated CCA (tax deduction) of 10% for new eligible purpose-built rental projects beginning construction on or after April 16, 2024 and before January 1, 2031, and “available for use” before January 1, 2036. Property eligible for these new rules include projects converting existing non-residential real estate into a residential complex, or changes to an existing building that meet the definition. Purpose-built rental housing includes residential complexes with at least four apartment units, or 10 private rooms or suites, and in which at least 90% of residential units are held for long-term tenants. These rules do not apply to renovations of existing residential complexes.
Interest Deductibility Limits for Purpose-Built Rental Housing
The budget proposes an election to qualify for an exemption from the new excess interest and financing expenses limitation (EIFEL) rules for interest and financing expenses incurred before January 1, 2036 relating to arm’s length financing for purposes of building or acquiring eligible purpose-built rental housing in Canada. This would apply to tax years being on or after October 1, 2023.
Accelerated CCA – Productivity-enhancing assets
The budget includes immediate expensing rules (i.e., a full tax write off) for property acquired on or after April 16, 2024 and available for use before January 1, 2027 in CCA Class 44 (patents or rights to use patents), Class 46 (data network infrastructure equipment and systems software), and Class 50 (general-purpose electronic data-processing equipment and systems software).
Canada Carbon Rebate for Small Businesses
The new Canada Carbon Rebate for Small Businesses provides an automatic refundable tax credit for eligible businesses, which would be Canadian-controlled private corporations (CCPC) that have less than 500 employees in Canada in the calendar year in which the “fuel charge” begins. The tax credit for the 2019-20 to 2023-2024 fuel charge years will be available to a CCPC that files a tax return for its 2023 taxation year by July 15, 2024 (and similar timelines for future fuel charge years). The credit amount is determined for each province in which the eligible corporation had employees in the calendar year the fuel charge year begins and is equal to the number of persons employed by the corporation multiplied by a payment rate specific by the Minister of Finance for the province.
It is unclear whether this rebate would be available for BC based companies as the federal government does not backstop pollution pricing in BC.
Clean economy incentives
The budget proposes a number of new incentives as well as further details to previously proposed tax credits including:
Clean Electricity Investment Tax Credit – tax credit provided for property acquired and available for use on or after March 28, 2023 and before 2034, including property used to generate electricity from natural gas with carbon capture, property used to transmit electrical energy between provinces and territories, and property used to generate electricity from solar, wind, or water energy, nuclear fission, geothermal energy, and other types of energy.
EV Supply Chain Investment Tax Credit – The credit is equal to 10% (reduced to 5% for 2033 and 2034, and 0% after 2034) of the cost of buildings used in Canada in electric vehicle supply chains including vehicle assembly, battery production, and cathode active material production.
Clean Technology Manufacturing Investment Tax Credit – Tax credit for production of qualifying minerals (such as copper, nickel, cobalt, lithium, graphite and rate earth elements) that occur at polymetallic projects (i.e. projects engaged in the production of multiple minerals).
Personal Tax Measures
Personal Income Tax Rates
No changes to the personal income tax rates are proposed except for the capital gains inclusion rate increase. As such, B.C.’s top personal income tax rates for 2024 will be as follows:
| Personal Top Marginal Rates (Income > $252,752) | |
| Interest and regular income | 53.50% |
| Capital gains (regular / over $250,000 threshold) | 26.75% / 35.67% |
| Eligible dividends | 36.54% |
| Non-eligible dividends | 48.89% |
Alternative Minimum Tax (AMT)
The budget included further changes to the AMT regime including an increase of the proposed inclusion rate for the Charitable Donations Tax Credit to 80% instead of 50% which was previously proposed. There were also various additional amendments to allow full deductions as well as exempt Employee Ownership Trusts from the AMT. These amendments start for taxation years beginning on or after January 1, 2024.
Lifetime Capital Gains Exemption (LCGE)
The LCGE will be increased from $1,016,836 to $1.25 million for dispositions occurring on or after June 25, 2024. The LCGE will continue being indexed starting in 2026, in accordance with previous taxation years.
Canadian Entrepreneurs’ Incentive (CEI)
The CEI allows an individual to incur a 1/3 (33.33%) capital gains inclusion rate for dispositions of qualifying shares up to a lifetime limit of $2,000,000 in capital gains per individual, phased in by $200,000 increments per year (reaching $2 million by January 1, 2034). This measure applies to dispositions on or after January 1, 2025.
It is expected that the CEI applies in addition to any available capital gains exemption.
A share is a qualifying share if certain conditions are met, including:
- The shares are that of a “small business corporation” at the time of disposition
- The taxpayer must be a “founding investor” at the time the corporation was initially capitalized and must hold shares that represents more than 10% of the votes and value of the company and own them directly for a minimum of five years before the disposition
- The taxpayer must be “actively engaged on a regular, continuous, and substantial” basis in the business activities through the five-year period before the disposition
- The shares must be that of a “Canadian-Controlled Private Corporation” and more than 50% of the fair market value of the corporation’s assets must be used principally in an active business carried on primarily (50%>) in Canada through the 24-month period before the disposition
- The shares do not represent a direct or indirect interest in certain corporations, including a professional corporation
Employee Ownership Trust (EOT) Exemption
The 2023 Fall Economic Statement proposed to exempt up to $10 million of capital gains realized on the sale of a qualifying business to an EOT, subject to various conditions. Multiple individuals that dispose of shares to an EOT would have to allocate the exemption amongst themselves up to a total of $10 million.
The 2024 Federal Budget introduces the conditions for the tax exemption, which is available to an individual (other than a trust) on the sale where:
- the sale is a qualifying business transfer in which the trust acquiring the shares is not already an EOT or similar trust with employee beneficiaries
- 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
- throughout the 24 months immediately prior to the qualifying business transfer 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 over 50 per cent of the fair market value of the corporation’s assets were used principally in an active business
- 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
- immediately after the qualifying business transfer, at least 90 per cent of the beneficiaries of the EOT are resident in Canada for income tax purposes
If an EOT has a disqualifying event within 36 months of the transfer, the exemption will be retroactively denied. A disqualifying event occurring after 36 months would cause the EOT to be deemed to realize a capital gains equal to the exempted gains. A disqualifying event results where an EOT loses its status as an EOT OR if less than 50% of the fair market value of the shares is attributable to assets used principally in an active business at the beginning of two consecutive years of the corporation.
This exemption would apply to qualifying dispositions of shares between January 1, 2024 to December 31, 2026.
Home Buyers’ Plan
The budget increases the withdrawal limit to $60,000 (from $35,000) for 2024 and subsequent years for withdrawals made after April 16, 2024. The 15-year repayment period has also been temporarily deferred to the fifth year following the year in which a first withdrawal was made (for a first withdrawal between January 1, 2022 and December 31, 2025).
Mineral Exploration Tax Credit
The eligibility period for the credit has been extended for one year for flow-through share agreements entered into on or before March 31, 2025.
Other Tax Measures
Non-compliance with information requests
The budget proposes several amendments to the CRA’s information gathering provisions, including:
- changes to allow the CRA to issue a new type of notice “Notice of Non-compliance” and to levy a monetary penalty (to a maximum of $25,000),
- permitting the CRA to specify that any information provided would be under oath or affirmation,
- impose a penalty of up to 10% of the aggregate tax payable for the relevant years when the CRA obtains a compliance order against a taxpayer, and
- extend the period to reassess the taxpayer in certain circumstances.
These new proposed rules are complex and capture a broad range of situations where there is non-compliance by a taxpayer, and the penalties can be significant.
Avoidance of tax debts
The budget proposes a new specific measure to address tax debt avoidance planning where there has been a transfer of property from a tax debtor to another person; as part of the same transaction or series of transactions, there has been a separate transfer of property from a person other than the tax debtor to a transferee that does not deal at arm’s length with the tax debtor; and one of the purposes of the transaction or series is to avoid joint and several, or solidary, liability. Where these conditions are met, the property transferred by the tax debtor would be deemed to have been transferred to the transferee for the purposes of the tax debt avoidance rule. In addition, a penalty of up to $100,000 can be applied to those that undertake these type of transactions. These measures would apply to transactions or series of transactions that occur on or after April 16, 2024.
Manipulation of bankrupt status
The budget removes the exception to the debt forgiveness rules for bankrupt corporations and the loss restriction rule applicable to bankrupt corporations. Previously, bankrupt taxpayers were generally excluded from the debt forgiveness rules, potentially preserving the losses and other tax attributes so that they can be acquired and used by a profitable corporation. Based on the proposals, the general rules that apply to other corporations whose commercial debts are forgiven would apply to bankrupt corporations, as would other relief available for insolvent corporations. These proposals would apply to bankruptcy proceedings that commence on or after April 16, 2024.
For more information on how any of the proposed changes may have on your business or you, contact your Rise Advisor.
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