On April 16, 2024 (Budget Day), Finance Minister Chrystia
Freeland tabled her fourth budget in the House of Commons (Budget 2024). The commentary in this bulletin
focuses on measures in Budget 2024 to amend the Income Tax
Act (Canada) (Tax Act).
What you need to know
- Capital gains inclusion rate. Budget 2024
proposes to increase the capital gains inclusion rate from one-half
to two-thirds for capital gains realized by corporations or trusts
on or after June 25, 2024. Capital gains earned by individuals on
or after June 25, 2024 in excess of $250,000 will also be subject
to the higher two-thirds inclusion rate. Budget 2024 notes that
additional design details, including transitional rules and other
consequential amendments, will be released in the coming
months. - Clean technology and green energy measures.
Budget 2024 continues the push to introduce clean energy tax
measures intending to incentivize various types of clean energy
projects, including presenting details regarding the previously
announced 15% clean electricity investment tax credit (ITC),
expanding eligibility for the clean technology manufacturing ITC to
include certain property used in connection with polymetallic
projects, and announcing a new 10% electric vehicle supply chain
ITC on the cost of buildings used in key segments of electric
vehicle manufacturing. - Non-compliance with information requests.
Budget 2024 proposes many tax audit amendments with particular
significance to corporate taxpayers, including new “notices of
compliance” with penalty consequences, a new power to compel
answers to audit inquiries under oath or affirmation, new powers to
compel answers to foreign-based information requirements, new and
significant penalties if audit inquiries are disputed and the
Canada Revenue Agency (CRA) succeeds in court, and the potential
suspension of limitation periods for entire corporate groups if any
member contests an audit-related inquiry in court. - Personal income tax measures. Key proposals in
Budget 2024 relating to personal income tax measures include
increasing the lifetime capital gains exemption (LCGE) to a
lifetime maximum of $1.25 million, amendments to the alternative
minimum tax (AMT) rules of a relieving nature, and a one-year
extension of the 15% mineral exploration tax credit for specified
mineral expenses incurred in Canada and renounced to flow-through
share investors. - Consultation. Budget 2024 invites stakeholders
to provide input by July 15, 2024 on how to modernize the
“qualified investment” rules in an effort to improve the
clarity and coherence of the registered plan regime. - Other coverage of Budget 2024. See also our discussion on key measures that will be of
interest to employers and pension plan administrators.
Capital gains inclusion rate
Currently, only one-half of capital gains are included in
taxable income. As a general rule, capital gains or losses arise
any time a taxpayer disposes of property (aside from property that
was purchased for the purpose of resale) and incurs a gain or loss.
A capital gain or loss will only arise where a disposition of
property has occurred (e.g., the property is sold, or the
provisions of the Tax Act deem a disposition to have occurred); in
other words, gains or losses are generally only subject to tax once
they have been realized. Common examples of transactions that may
generate capital gains or losses include the sale of tangible
assets (e.g., land) or securities (e.g., shares).
Budget 2024 proposes to increase the capital gains inclusion
rate from one-half to two-thirds for capital gains realized by
corporations and trusts on or after June 25, 2024 (Transition
Date). Notably, this measure is proposed to apply to all types of
corporations, including Canadian-controlled private corporations,
and Budget 2024 does not contemplate a de minimus exception for
taxpayers that are corporations or trusts. The inclusion rate for
capital gains realized by an individual (directly or indirectly
through a partnership or trust) on or after the Transition Date is
also proposed to increase from one-half to two-thirds, with an
exception for the first $250,000 of capital gains realized in a
year. In other words, for individuals, capital gains realized in
the year up to the $250,000 annual threshold would continue to be
subject to the current one-half inclusion rate. The $250,000
threshold is applicable to the net capital gains of the individual
after the application of capital loss carryforwards (discussed
below), the LCGE (discussed under the heading “Personal income
tax measures” below), and the newly proposed employee
ownership trust exemption and Canadian entrepreneur’s
incentive. Budget 2024 notes that the full $250,000 threshold would
be available for individuals in 2024 without any proration to
account for the Transition Date being part way through the
year1.
With respect to capital losses, under the Tax Act, taxpayers are
permitted to carry forward unused net capital losses from prior
years and use them to offset capital gains earned in the current
year. Budget 2024 states that the inclusion rate for prior
years’ net capital losses carried forward will be adjusted to
enable a full offset of an equivalent amount of taxable capital
gains realized after Transition Date. For example, a $100 capital
loss that was incurred in a prior year would currently be
deductible as a net capital loss of $50. Following the Transition
Date, that capital loss would be permitted to be carried forward
for use as a net capital loss of $66.
Draft legislation implementing these proposals was not released
with Budget 2024. Budget 2024 acknowledges that transitional rules
will be required to separately identify capital gains and losses
realized before the Transition Date (subject to the one-half
inclusion rate) and after the Transition Date (subject to the
two-thirds rate). In addition, Budget 2024 did not expressly
comment on grandfathering rules for binding obligations that
taxpayers have entered into prior to the Transition Date to dispose
of capital property after the Transition Date, so it remains to be
seen whether this type of grandfathering will be addressed in the
draft legislation.
Budget 2024 also notes that consequential amendments to other
provisions of the Tax Act will be made to reflect the new inclusion
rate. For example, Budget 2024 provides that claimants of the
employee stock option deduction (i.e., the Division C deduction
generally available when employee stock options are exercised
“in the money”) will be entitled to deduct an amount
equal to one-half the taxable benefit included in employment income
up to a combined limit of $250,000 for both employee stock options
and capital gains, and an amount equal to one-third of the benefit
for amounts in excess of the $250,000 limit.
The change to the capital gains inclusion rate is proposed to
apply to capital gains realized on or after the Transition Date,
some ten weeks after the Budget Date. Consequently, taxpayers
holding capital property with accrued gains may wish to consider
whether realizing capital gains prior to the Transition Date is
suitable in their particular circumstances, including, for example,
the acceleration of taxes payable on such capital gains (including
for individuals, AMT).
Business income tax and GST/HST measures
Mutual fund corporation status
As per Budget 2024, a mutual fund is a type of collective
investment vehicle that allows investors to pool their money and
invest in a portfolio of investments without purchasing the
investments directly. Under current rules, a mutual fund can be
organized as a corporation and still qualify for certain conduit
treatment under the Tax Act, if it satisfies the conditions in the
“mutual fund corporation” (MFC) definition. For example,
capital gains realized by an MFC, when distributed as dividends,
are generally taxed as capital gains realized by its investors. In
addition, an MFC can elect capital gains treatment on the
disposition of Canadian securities.
One of the conditions to qualify as an MFC is that the
corporation is a “public corporation” for purposes of the
Tax Act, which, according to the government, is premised on the
idea of an MFC being “widely held”. In Budget 2024,
however, the government observed that a corporation can be a public
corporation by having a class of its shares listed on a designated
stock exchange in Canada, even if all other shares are held by a
corporate group and represent all or substantially all of the value
of the corporation’s shares. According to the government, this
could allow the corporate group to access the special rules
available to an MFC in an unintended manner.
Budget 2024 introduces a restriction in proposed subsection
131(8.2) of the Tax Act, which precludes a corporation (other than
a prescribed labour-sponsored venture capital corporation (LSVCC))
from qualifying as an MFC if it is controlled by or for the benefit
of one or more “specified persons” that own in the
aggregate shares having a fair market value of more than 10% of the
fair market value of all the corporation’s shares. A
“specified person” is a person (which can include an
individual, a trust or a corporation), a partnership or any
combination of persons or partnerships that do not deal at
arm’s length with each other for purposes of the Tax Act.
Pursuant to a proposed “seed money” exception, the
restriction in proposed subsection 131(8.2) of the Tax Act will not
apply to a corporation in the first two years following its
incorporation, if shares owned by specified persons do not have a
fair market value exceeding $5,000,000.
The proposed changes will apply to taxation years that begin
after 2024.
Synthetic equity arrangements
A synthetic equity arrangement in respect of a share includes
agreements which provide all or substantially all of the risk of
loss and opportunity for gain or profit (the economic exposure) in
respect of the share to another person. Generally speaking, where a
taxpayer enters into a synthetic equity arrangement in respect of a
share, the intercorporate dividend deduction will be denied on
dividends received by the taxpayer on the share, subject to certain
exceptions. One such exception applies when the taxpayer can
establish that no “tax-indifferent investor” (generally
meaning a non-resident or tax-exempt entity) has all or
substantially all of the economic exposure. A related exception is
applicable to agreements that are traded on a “recognized
derivatives exchange”, unless the taxpayer knows or ought to
know such agreement is part of a series of transactions that has
the effect of providing substantially all of the economic exposure
to a tax-indifferent investor or an anti-avoidance provision
applies.
Budget 2024 proposes to remove the tax-indifferent investor
exception and the recognized derivatives exchange exception to the
rule that denies the deduction for dividends received on shares
subject to a synthetic equity arrangement.
This proposal is likely to be of limited application. Financial
institutions were the target of the synthetic equity arrangement
rules. However, as a result of a budget measure from the March 28,
2023 federal budget (Budget 2023), financial institutions are now
subject to a general prohibition on deducting dividends on shares
(other than preferred shares) held as mark-to-market property. The
synthetic equity arrangement rules do not often apply to other
taxpayers.
Budget 2024 did not release draft legislation for this measure
but indicated that it would apply to dividends received on or after
January 1, 2025.
Manipulation of bankrupt status
The Tax Act contains a number of debt forgiveness rules that
apply where a commercial debt is settled for less than its
principal amount. Bankrupt taxpayers are generally excluded from
such rules, and instead are subject to a separate loss restriction
rule.
On November 1, 2023, the Minister of National Revenue (Minister)
designated transactions that are the same, or substantially similar
to, “bankruptcy manipulation” transactions as notifiable
transactions under section 237.4 of the Tax Act. Notifiable
transactions include transactions that the government has found to
be abusive, or otherwise identified as “transactions of
interest” that require more information in order to determine
if such a transaction is abusive. The government describes a
bankruptcy manipulation transaction as one where a taxpayer enters
into arrangements in which the taxpayer is temporarily assigned
into bankruptcy prior to settling or extinguishing a debt
obligation in order to reduce a forgiven amount in respect of the
debt obligation to nil. As a result, there is no reduction in the
taxpayer’s tax attributes and no income inclusion even though
the bankruptcy is subsequently reversed.
From the time of designating these transactions as notifiable
transactions until Budget 2024, the government determined that
these transactions were abusive. Accordingly, Budget 2024 proposes
to repeal the exception to the debt forgiveness rules for bankrupt
corporations and the loss restriction rule applicable to bankrupt
corporations. Consequently, bankrupt corporations would be subject
to the general rules that apply to other corporations whose
commercial debts are forgiven. Although bankrupt corporations would
now be subject to the reduction of their loss carryforward balances
and other tax attributes, they could qualify for relief from the
debt forgiveness income inclusion rule under the existing deduction
for insolvent corporations. These changes would not apply to
bankrupt individuals.
Budget 2024 did not release draft legislation for these
proposals but indicated that the changes would apply to bankruptcy
proceedings commenced on or after Budget Day.
Clean technology and green energy measures
Below is a brief overview of certain clean technology and green
energy ITC measures included in Budget 2024.
Clean electricity investment tax credit
Budget 2024 continues the government’s push to enact tax
incentives promoting Canada’s clean economy by providing design
and implementation details with respect to the 15% clean
electricity ITC (Clean Electricity ITC), which was previously
announced in Budget 2023. Budget 2024 did not include draft
legislation for this measure.
The Clean Electricity ITC will be available only to certain
eligible Canadian corporations including taxable Canadian
corporations, provincial and territorial Crown corporations
(subject to additional requirements), corporations owned by
municipalities, corporations owned by Indigenous communities and
pension investment corporations.
To receive the Clean Electricity ITC, tax-exempt eligible
corporations must agree to be subject to certain provisions of the
Tax Act related to the Clean Electricity ITC, including those
related to audit, penalties and collections. With respect to
provincial and territorial Crown corporations, Budget 2024 sets out
that the Clean Electricity ITC will only be available for
investments in eligible property situated in “designated
jurisdictions”. This is an important clarification of the
scope of this proposed condition, as there was some uncertainty
following previous announcements whether this condition would apply
more broadly than only to provincial and territorial crown
corporations (e.g., other tax-exempt entities hoping to invest in
projects situated in jurisdictions outside “designated
jurisdictions”).
Budget 2024 clarified that where a particular property acquired
by a partnership is eligible for both the Clean Electricity ITC and
the previously announced clean technology ITC, partners can claim
their reasonable share of either credit for which they qualify (but
cannot claim both credits in respect of the same property).
Budget 2024 set out detailed rules with respect to the Clean
Electricity ITC for eligible natural gas energy systems and
specified that certain interprovincial and territorial electrical
transmission property should be eligible for the Clean Electricity
ITC.
Expansion of clean technology manufacturing investment
tax credit for polymetallic extraction and processing
Recognizing the complexity involved in mineral extraction, where
multiple minerals may be extracted (including non-qualifying
materials) from a project, Budget 2024 proposed modifications to
the clean technology manufacturing ITC (CTM ITC) to broaden its
scope to allow certain polymetallic projects to access the CTM ITC.
This change reduces the requirement that eligible property be used
in qualifying mineral activities that are expected to produce
“all or substantially all” qualifying materials
to those that are expected to produce
“primarily” qualifying materials (generally
meaning that 50% or more of the financial value of the output comes
from qualifying materials).
Recognizing the potential effect of price volatility on the
application of the applicable recapture rules, Budget 2024 proposes
a safe harbour rule that allows the specified five-year historical
average mineral prices determined at the time the CTM ITC is
claimed to be used in determining whether the “primarily”
standard has been satisfied over the recapture period.
These changes are proposed to apply for property that is
acquired and becomes available for use on or after January 1,
2024.
New electric vehicle supply chain investment tax
credit
Budget 2024 announced the government’s intention to
introduce a new 10% electric vehicle supply chain ITC (EV ITC) on
the cost of buildings used in key segments of the manufacturing of
electric vehicles. This measure is designed to complement electric
vehicle manufacturers’ ability to claim the previously
announced 30% CTM ITC in respect of qualifying investments in new
machinery and equipment and, where certain conditions are met, is
proposed to be available with respect to the cost of buildings that
are acquired and become available for use on or after January 1,
2024, that are used in electric vehicle assembly, electric vehicle
battery production and cathode active material production.
Canada carbon rebate for small businesses
The federal backstop pollution pricing fuel charge is currently
applied in the provinces of Alberta, Saskatchewan, Manitoba,
Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and
Newfoundland and Labrador (Non-Agreeing Provinces). The government
redistributes over 90% of the proceeds from this charge to
individuals in these provinces through the Canada carbon rebate.
Budget 2024 introduced the Canada carbon rebate for small
businesses (CCR Tax Credit), aiming to return a portion of fuel
charge proceeds from Non-Agreeing Provinces to small and
medium-sized businesses in those regions.
With respect to the 2019-2020 to 2023-2024 fuel charge years,
the CCR Tax Credit is proposed to be available to a
Canadian-controlled private corporation that files a tax return for
its 2023 taxation year by July 15, 2024.
The CCR Tax Credit is proposed as an automatic, refundable tax
credit for eligible corporations, sized in proportion to the number
of persons they employ in the province. To qualify for the credit
related to a specific fuel charge year, the corporation must not
have exceeded 499 employees throughout Canada in the calendar year
corresponding to the start of that fuel charge year. For example, a
corporation’s eligibility for a credit for the 2022-2023 fuel
charge year is determined by the number of employees it had during
the 2022 calendar year.
The payment is automatic. Corporations eligible for the CCR Tax
Credit will not need to apply to receive the credit. With respect
to eligible corporations with operations in multiple provinces, for
each Non-Agreeing Province where the corporation had employees in
the relevant calendar year, the credit amount will be determined
based on the number of employees multiplied by a payment rate set
by the Minister for the corresponding fuel charge year.
Payment rates for the 2019-2020 to 2023-2024 fuel charge years
will be established by the Minister once data from the 2023
taxation year becomes available. This model will extend to future
fuel charge years, including 2024-2025, ensuring consistent support
for eligible corporations.
Accelerated capital cost allowance for
productivity-enhancing assets
Although no draft legislation was provided, Budget 2024 proposed
immediate expensing for new additions of Class 44, 46, and 50
properties, providing a 100% first-year deduction if the property
is acquired on or after Budget Day and becomes available for use
before January 1, 2027. These classes generally include certain
patents, data network infrastructure equipment and systems
software, and general-purpose electronic data-processing equipment
and systems software.
Property that is not new property when acquired by the taxpayer
will be eligible only if:
- neither the taxpayer nor a non-arm’s-length person
previously owned the property; and - the property has not been transferred to the taxpayer on a
tax-deferred “rollover” basis.
Where the short taxation year rule applies, the accelerated
first-year deduction will apply on a prorated basis and will not be
available in the following taxation year for the same property.
Housing-related measures
Accelerated capital cost allowance for purpose-built
rental housing
Budget 2024 proposes a temporary increase in the capital cost
allowance (CCA) rate for new eligible purpose-built rental housing
from 4% to 10%, provided that project construction commences on or
after Budget Day and before January 1, 2031, and the rental housing
is available for use before January 1, 2036. Budget 2024 did not
provide detailed legislation on this proposal.
Eligible properties must meet specific criteria, including being
a residential complex having at least four private apartment units
(or ten private rooms or suites) in which at least 90% of the
residential units are held for long-term rentals. Conversions of
non-residential real estate (e.g., office space) and additions to
existing structures are eligible for the accelerated CCA rate.
However, renovations of existing residential properties will not
qualify.
The Accelerated Investment Incentive rules will also continue to
apply with respect to eligible purpose-built rental housing
projects, meaning that the half-year rule will not apply if
construction commences on or before Budget Day, and is completed on
or before December 31, 2027.
Exception under excessive interest and financing
expenses rules for purpose-built rental housing
The excessive interest and financing expenses limitation (EIFEL)
rules propose to limit the amount of net interest and financing
expenses that may be deducted by certain taxpayers in computing
taxable income. Legislative proposals to implement the EIFEL rules
are contained in Bill C-59 and provide an exemption for interest
and financing expenses incurred in respect of arm’s length
financing of certain public-private partnership infrastructure
projects.
In line with other notable tax measures contained in Budget 2024
to promote the development of rental housing, Budget 2024 proposes
to add an elective exemption from the EIFEL rules 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.
Mirroring eligibility requirements under the proposed
accelerated CCA proposal for purpose-built rental housing discussed
above, the elective exemption to the EIFEL rules would apply to
financing for residential complexes that have at least four private
apartment units or ten private rooms or suites, and where at least
90% of the residential units are being held for long-term
rentals.
This exemption would apply to taxation years that begin on or
after October 1, 2023, consistent with the general
coming-into-force date of the EIFEL rules.
Extending GST relief to student residences
As part of incentivizing construction of rental homes in Canada,
the government announced a temporary measure on September 14, 2023,
to eliminate GST from the cost of new purpose-built residential
complexes. This incentive is implemented through an enhanced GST
rental rebate (Enhanced GST Rebate) that provides a 100% GST rebate
for new qualifying purpose-built rental housing projects that begin
construction after September 13, 2023, and before 2031 and that are
completed before 2036.
One of the requirements for eligibility under the Enhanced GST
Rebate is that rental units in the residential complexes are for
long-term rental; therefore, universities, public colleges, and
school authorities are often ineligible for the rebate due to the
temporary nature of student housing. These educational entities are
also subject to special GST/HST rules where they only incur GST/HST
on their construction inputs, which means there is no final tax
amount to which the Enhanced GST Rebate can be applied.
Budget 2024 proposes amendments to the Excise Tax Act
that will allow universities, public colleges and school
authorities to apply the normal GST/HST rules that apply to other
builders (i.e., paying GST/HST on the final value of the building)
in respect of new student housing projects. Further, Budget 2024
proposes to relax the Enhanced GST Rebate conditions for new
student housing provided by universities, public colleges, and
school authorities operating on a not-for-profit basis so that they
can qualify for the rebate. Consistent with the timing requirements
of the Enhanced GST Rebate, the Budget 2024 measures will apply to
student residences that begin construction after September 13, 2023
and before 2031, and that complete construction before 2036.
Personal income tax measures
Lifetime capital gains exemption
The lifetime capital gains exemption (LCGE) enables individuals
to dispose of qualified small business corporation shares and
qualified farm or fishing property without incurring capital gains,
up to a lifetime maximum of $1,016,836 in 2024 (indexed to
inflation). Budget 2024 proposes to increase the LCGE to a lifetime
maximum of $1.25 million of eligible capital gains, which increase
approximates the $250,000 threshold for capital gains realized by
an individual that will continue to be subject to the current
one-half inclusion rate. Indexation of the LCGE will resume in
2026. This measure will apply to dispositions that occur on or
after June 25, 2024. Draft legislation implementing this proposal
has not yet been released.
Alternative minimum tax
Alternative minimum tax (AMT) applies to individuals (including
certain trusts) and is aimed at ensuring that high-income earners
pay a minimum amount of tax notwithstanding the availability of
deductions, exemptions and tax credits in calculating ordinary
income tax levied under general rules and the progressive tax rate
structure. Extensive proposals to amend the AMT calculation were
made in Budget 2023 (see our discussion of the 2023 changes). Draft
legislation for those proposals was released on August 4, 2023. The
draft proposals were to be effective as of January 1, 2024.
Budget 2024 proposes additional changes to the AMT. The Budget
2024 proposals will have retroactive effect to January 1, 2024 to
accommodate for the fact that some of the Budget 2024 proposals
replace provisions in the draft legislation released in respect of
the Budget 2023 proposals.
The proposed changes to the AMT in Budget 2024 are generally
relieving in nature and include:
- allowing individuals to claim 80% of the charitable donation
tax credit when calculating AMT, rather than 50% as was previously
proposed; - allowing individuals to claim the federal logging tax credit
when calculating AMT; - exempting employee ownership trusts from the AMT; and
- allowing certain disallowed credits (the federal political
contribution tax credit, ITCs, and labour-sponsored funds tax
credit) under the AMT to be eligible for the AMT
carry-forward.
Budget 2024 also proposes to exempt certain trusts established
for the benefit of Indigenous groups from the application of the
AMT and invites consultation on this proposed exemption until June
28, 2024.
Extension of mineral exploration tax credit
Further to previous announcements, Budget 2024 confirms the
intention to extend the 15% mineral exploration tax credit for
specified mineral exploration expenses incurred in Canada and
renounced to flow-through share investors for an additional year.
The tax credit’s proposed extension will apply to flow-through
share agreements executed on or before March 31, 2025.
Consultation for qualified investments for registered
plans
Budget 2024 invites input from stakeholders regarding how to
modernize the “qualified investment” rules, which
determine what type of investments registered plans (such as
registered retirement savings plans, registered retirement income
funds, tax-free savings accounts, first home savings accounts and
registered education savings plans) can make. As the government
notes, the incremental expansion of these rules over the years has
resulted in the rules being inconsistent among plans or difficult
to understand in some cases. In an effort to improve the clarity
and coherence of the registered plan regime, the government is
seeking input, among other considerations, on:
- whether the rules relating to investments in small businesses
should be harmonized; - whether the conditions imposed on pooled investment products to
be a qualified investment are appropriate; - how the qualified investment rules could help increase
Canadian-based investments; and - whether it is appropriate for qualified investments to include
crypto-backed assets.
Changes to the registered plan regime could result in an
expansion of the qualified investment rules and provide registered
plans with a wider range of investment products. Submissions are
due by July 15, 2024.
Tax administration and enforcement measures
Non-compliance with information requests
Budget 2024 proposes to amend the tax administration process in
significant ways, including new powers to compel production of
information and documents, new financial penalties and expanded
suspensions of limitation periods for corporate groups who contest
audit inquiries. These amendments will come into force on Royal
Assent. According to the government, these amendments are intended
to enhance the efficiency and effectiveness of tax audits and
facilitate the collection of tax revenues on a timelier basis.
New notice of non-compliance
Budget 2024 proposes to allow the CRA to issue a “notice of
non-compliance” to persons who, according to the CRA, have not
complied with a requirement or notice to provide assistance or
information. The notice of non-compliance will impose a daily
penalty of $50 on the person while the notice is outstanding (up to
a maximum of $25,000). The penalty will be vacated if the notice of
non-compliance is ultimately vacated, as described below.
If one member of a corporate group receives a notice of
non-compliance, limitation periods may be suspended for the whole
corporate group. According to the amendments, the issuance of a
notice of compliance suspends the limitation period for the person
who is the recipient, and any person who does not deal at arm’s
length with the taxpayer.
A notice of non-compliance would be outstanding from the day it
is sent or served until the person has complied with, or
demonstrated that they have done everything reasonably necessary to
comply with, the requirement or notice underlying the notice of
non-compliance, to the CRA’s satisfaction.
A person who receives a notice of non-compliance may ask the CRA
to review the notice within 90 days after the day on which the
notice is sent or served. Upon review, the CRA has 180 days to
vacate the notice of non-compliance if it is unreasonable or the
person did everything reasonably necessary to comply with the
requirement or notice underlying the notice of non-compliance. A
person may apply to the Federal Court for a judicial review of the
CRA’s decision within 90 days of being notified of the
decision. Notably, if the Federal Court vacates the notice of
non-compliance, the reassessment period is still suspended for the
period between the commencement of the judicial review application
and its final disposition.
Requirement to provide response under oath or
affirmation
For many years, corporate taxpayers generally provided answers
to tax audit inquiries in writing. The April 19, 2021 federal
budget (Budget 2021) previously authorized oral interviews of
employees during audits of corporate taxpayers.
Budget 2024 goes further, allowing the CRA to issue an audit
query, domestic requirement or foreign-based requirement requiring
the recipient to provide any answers to questions, information or
documents sought by the CRA orally, under oath or affirmation, or
by affidavit.
Expanded power to issue compliance
orders
Budget 2024 proposes to allow the CRA to apply to Federal Court
for a compliance order for foreign-based information and documents.
Under current legislation, the compliance-order power is limited to
domestic audit queries and domestic requirements.
Foreign-based requirements generally apply in respect of
information and documents situated outside of Canada. Under
existing legislation, if a taxpayer fails to “comply
substantially” with a foreign-based requirement, a competent
court (generally the Tax Court of Canada in an appeal of a tax
assessment) must prohibit the introduction by the recipient of any
foreign-based information or document covered by that notice, upon
a motion by the opposing party. Budget 2024 instead provides the
CRA with the power to ask the Federal Court to order a taxpayer to
produce foreign-based information or documents.
Existing legislation defines “foreign-based information or
document” to include any information or document available or
located outside Canada that may be relevant to the administration
or enforcement of Canadian tax legislation. Budget 2024 proposes to
amend the definition to include information and documents that may
be relevant to the administration or enforcement of a listed
international agreement or tax treaty with another country.
Penalty in respect of compliance
orders
Budget 2024 proposes to impose a penalty where the courts grant
an application by the CRA for a compliance order. The penalty would
be equal to 10% of the aggregate amount of tax payable by the
taxpayer for each taxation year of the taxpayer in respect of which
the order relates, provided such amount is $50,000 or more.
According to the government, the penalty is intended to incentivize
taxpayers to comply with the original request for information or
assistance.
The constitutionality of this penalty may one day be tested,
particularly where the dispute surrounds solicitor-client privilege
claims.
The potential impact of this penalty on large business is
substantial, because the penalty appears to apply to the aggregate
tax payable for affected taxation years, as opposed to an amount of
tax in dispute.
Pausing the reassessment limitation
clock
Current legislation provides that the reassessment period is
suspended while a taxpayer seeks judicial review of a requirement
or audit query, until the judicial review is finally resolved.
Budget 2024 proposes to suspend limitation periods more broadly
when audit inquiries are contested. In particular, limitation
periods are proposed to be suspended where:
- a taxpayer, or a person who does not deal at arm’s length
with the taxpayer, applies for judicial review of an audit query,
notice, requirement, foreign-based requirement or a notice of
non-compliance; or - the CRA brings an application for a compliance order against a
taxpayer, or a person who does not deal at arm’s length with
the taxpayer, that is opposed.
Budget 2024 proposes analogous amendments to other tax statutes
administered by the CRA, such as the Excise Tax Act and
the Excise Act, 2001.
Avoidance of tax debts
Section 160 of the Tax Act provides an anti-avoidance rule that
prevents taxpayers from avoiding payment of their tax liabilities
by transferring assets to a non-arm’s length person for less
than fair market value consideration. The current rules make the
transferee receiving such assets jointly and severally, or
solidarily, liable for the transferor’s tax debts to the extent
that the fair market value of the transferred property exceeds the
fair market value of the consideration given for the property.
Budget 2024 proposes to add a supplementary rule to the tax debt
anti-avoidance rule in section 160 of the Tax Act to target
scenarios where intermediaries are utilized in the process of
transferring assets from a tax debtor to a non-arm’s length
person. This measure would ensure that the tax debt anti-avoidance
rule would apply in situations where property is transferred from a
tax debtor to an intermediary who then transfers the property to a
non-arm’s length person of the tax debtor as part of the same
transaction, or series of transactions, with the purpose of
avoiding their tax liability. In such situations, the property
transferred by the tax debtor to the intermediary will be deemed to
have been transferred to the non-arm’s length transferee for
the purposes of the avoidance rule.
Budget 2024 also proposes to extend the tax debt anti-avoidance
rule penalty in subsection 160.01(2) of the Tax Act to include the
tax debt avoidance planning targeted by the supplementary
anti-avoidance rule.
Case law has held that taxpayers who engage in tax debt
avoidance planning are normally not liable for the portion of the
tax debt that was retained by the planner as a fee paid for
assisting the tax debtor to implement the avoidance planning.
Budget 2024 proposes that taxpayers who participate in tax debt
avoidance planning will now be jointly and severally, or
solidarily, liable for the full amount of the avoided tax debt,
including any portion that has effectively been retained by the
planner.
Budget 2024 also states that similar amendments would be made to
comparable provisions in other federal statutes (e.g., the
Excise Tax Act, the Excise Act, 2001, the
Select Luxury Items Tax Act and the Underused Housing
Tax Act).
Budget 2024 includes draft legislation to implement these
measures. These measures would apply to transactions, or a series
of transactions, that occur on or after Budget Day.
Withholding for non-resident service
providers
Section 105 of the regulations under the Tax Act (Regulation
105) requires a person paying a non-resident for services provided
in Canada to withhold and remit 15% of the payment to the CRA. This
withholding tax is intended to act as a pre-payment of Canadian tax
payable by a non-resident. However, many non-residents providing
services in Canada will not ultimately be liable for tax in Canada
since they do not have a permanent establishment in Canada under an
applicable tax treaty. The existing waiver process allows
non-residents to obtain an advanced waiver of the withholding
requirement for a specific planned transaction when certain
criteria are met. Budget 2024 proposes a new Regulation 105 waiver
process for non-residents providing services in Canada, allowing
the CRA to waive the Regulation 105 withholding requirement for
multiple transactions with a single waiver where (i) the
non-resident would not be subject to income tax on the payments
under an applicable Canadian income tax treaty, or (ii) the income
is exempt income from international shipping or operating an
aircraft in international traffic.
Budget 2024 notes that obtaining the waiver is subject to any
conditions and information requirements necessary to reduce
compliance risks but no further detail on such requirements has
been provided. The Minister may revoke a waiver if the Minister is
no longer satisfied that the conditions outlined above are met.
This amendment will come into force on Royal Assent.
Reportable and notifiable transactions
penalty
Under section 238 of the Tax Act, a person who fails to file or
make a return as when required under the Tax Act is liable upon
summary conviction to a fine of up to $25,000 or the fine and
imprisonment for up to a year.
Budget 2024 proposes to exempt information returns that are
required to be filed under the mandatory reporting rules for
reportable and notifiable transactions from the general penalty
provision in section 238 of the Tax Act. Budget 2024 states that
the rationale for this change is that specific penalties for
failure to file an information return for reportable and notifiable
transactions are already provided for in the mandatory disclosure
rules of the Tax Act, making the application of the general penalty
unnecessary.
This measure would come into force on June 22, 2023, the same
date that the revised reportable transactions rules and notifiable
transaction rules became effective.
Crypto-asset reporting framework and the common
reporting standard
The Common Reporting Standard (CRS), developed and endorsed by
the Organisation for Economic Cooperation and Development (OECD),
is the global standard for implementing the automatic exchange of
financial information for tax purposes. In August 2022, the OECD
approved the Crypto-Asset Reporting Framework (CARF) to
provide for the automatic exchange of tax information related to
crypto-asset transactions.
Implementation of the crypto-asset reporting
framework
The CRS does not currently require reporting of offshore
crypto-assets such as stablecoins, derivatives issued in the form
of a crypto-asset and certain non-fungible tokens that can be
transferred or held without interacting with traditional financial
intermediaries.
To ensure appropriate reporting, Budget 2024 proposes to
implement the CARF in Canada. The CARF will impose a new annual
reporting requirement on entities or individuals that are resident
or carry on business in Canada that 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 (referred to as
crypto-asset service providers).
Crypto-asset service providers will be required to obtain and
report certain identifying information on each of their Canadian
and non-resident customers. More specifically, crypto-asset service
providers will be required to report to the CRA in respect of each
customer and in respect of each crypto-asset, the following
information: (i) the annual value of exchanges between
crypto-assets and fiat currencies, (ii) exchanges of crypto-assets
for other crypto-assets, and (iii) transfers of crypto assets. This
will include information in respect of a customer of a merchant
where the crypto-asset service provider processes crypto-asset
payments on behalf of the merchant for goods or services with a
value exceeding US$50,000. Reportable crypto-assets will not
include digital representations of fiat currencies, such as central
bank digital currencies and specified electronic money
products.
Amendments to the common reporting
standard
Budget 2024 also proposes to implement OECD-endorsed amendments
to the CRS that will broaden the scope of the CRS to include
central bank digital currencies and specified electronic money
products, introduce measures to ensure effective coordination
between the CARF and the CRS and to avoid duplicative reporting
between the two regimes, require additional information to be
reported in respect of financial accounts and account holders, and
strengthen the due diligence procedures imposed on financial
institutions.
In response to the Global Forum on Transparency and Exchange of
Information for Tax Purposes, Budget 2024 proposes to remove LSVCCs
from the list of non-reporting financial institutions and treat a
non-registered account held in an LSVCC as an excluded account
provided that annual contributions to the account do not exceed
US$50,000. This would generally align the treatment of
non-registered accounts currently available to registered accounts
(e.g., registered retirement savings plans, which already qualify
as excluded accounts).
Budget 2024 also proposes to clarify that the anti-avoidance
provision of the CRS applies to an individual or any entity who
engages in an arrangement or practice if it can reasonably be
considered that the primary purpose is to avoid an obligation of
any person under the CRS.
These measures will apply to the 2026 and subsequent calendar
years, such that the first reporting obligation under the CARF and
the amended CRS will take place in 2027 with respect to the 2026
calendar year. Draft legislation implementing these proposals has
not been released.
Status of previously announced tax measures
International tax measures
In Budget 2024, the government reaffirms its commitment to
proceed with the domestic implementation of the Inclusive
Framework’s proposed two-pillar model of international tax
reform that aims to address tax challenges caused by the
digitization of economies. For a detailed overview of the mechanics
of the two-pillar model, see our commentary to the April 7, 2022 federal budget and Budget 2023.
Pillar One and the digital services
tax
Pillar One is intended to ensure that the largest and most
profitable multinational enterprises (MNEs) pay a fair share of tax
in the countries where their users and customers are located. It
provides jurisdictions in which consumers and users are located
with a new taxing right over a portion of the residual profits of
those MNEs. It will reallocate taxing rights over MNEs that conduct
significant value-generating activities in jurisdictions where
their customers and users are located and that might not otherwise
have been taxed based on traditional physical business presence
nexus rules.
Budget 2024 indicates that due to delays in implementing an
international multilateral convention, the government is moving
ahead with a domestic digital service tax (DST). Legislation
implementing the DST is currently before Parliament in Bill C-59.
Consistent with Budget 2021, the intent is for the DST to be
imposed as of January 1, 2024, with that first year covering
taxable revenue earned since January 1, 2022.
Pillar Two
Pillar Two is intended to impose a global minimum tax of at
least 15% on large MNEs. Draft domestic legislation to implement
the Pillar Two regime in Canada was released in August 2023. Budget
2024 indicates that the government intends to proceed with these
measures on a modified basis.
Other tax measures
In Budget 2024, the government confirmed its intention to
proceed with a number of other proposals that were previously
announced, as modified to take into account consultations and
deliberations since their release, including in particular:
- legislative proposals released on December 20, 2023 with
respect to clean technology and green energy initiatives, including
tax credits for clean hydrogen and clean technology manufacturing
and processing; - legislative and regulatory proposals announced in the November
21, 2023 Fall Economic Statement in respect of which legislative
proposals have not yet been released, including the proposed
expansion of eligibility for the clean technology and clean
electricity ITC and measures relating to the GST/HST joint venture
election; - legislative proposals released on August 4, 2023 in respect of:
- the ITC for carbon capture, utilization and storage;
- the ITC for clean technology;
- labour requirements related to certain ITCs;
- enhancing the reduced tax rates for zero-emission technology
manufacturers; - flow-through share treatment (and expansion of the critical
mineral exploration tax credit) for lithium from brine; - employee ownership trusts;
- strengthening the intergenerational business transfer
framework; - AMT tax for high-income individuals;
- tax on repurchases of equity;
- modernizing and strengthening the general anti-avoidance
rule; - providing relief in relation to the GST/HST treatment of
payment card clearing services; and - EIFEL limitations;
- legislative proposals released on August 9, 2022 in respect of
substantive Canadian-controlled private corporations; - legislative amendments to implement the hybrid mismatch
arrangements rules announced in Budget 2021; and - regulatory proposals released in Budget 2021 related to
information requirements to support input tax credit claims under
the GST/HST.
Footnote
1. The Province of Québec recently announced it
will incorporate the changes to the capital gains inclusion rate
proposed in Budget 2024 into its provincial income tax
system.
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