Federal Budget 2024 – What you need to know

On April 16, Federal Budget 2024 was tabled by the Deputy Prime Minister and Minister of Finance, Chrystia Freeland. Below we have highlighted some of the more salient tax measures for your consideration.

Personal measures

Capital gains inclusion rate changes

One of the most noteworthy measures to come from Budget 2024 is a proposed change to the capital gains inclusion rate. Until now, the capital gains inclusion rate has been held steady since 2001, when it was set at 50 per cent.

Starting on June 25, 2024, the inclusion rate on capital gains will increase from 50 per cent to 66.67 per cent for trusts and corporations.

For individuals, capital gains in excess of $250,000 annually will also be subject to the new 66.67 per cent inclusion rate as of June 25, while capital gains up to $250,000 will continue to be subject to the existing 50 per cent inclusion rate. As a transitional measure for 2024, only the capital gains realized by individuals on or after the effective date of June 25 that are above the $250,000 threshold will be subject to the increased inclusion rate.

Further changes to Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) is designed to target high income individuals and prevent them from making disproportionate use of tax preferential treatments. AMT is calculated alongside the regular taxable income, while using a different set of assumptions to arrive at an adjusted taxable income for AMT purposes. For example, it involves adding back specifically targeted deductions to taxable income that are allowed under the regular method and excluding certain tax credits otherwise available.

Last year, we blogged about proposed changes to the AMT calculations in Budget 2023 (see section titled “Alternative Minimum Tax (AMT) for high-income individuals”). Budget 2024 proposes further changes to the tax treatment of charitable donations, allowing individuals to claim 80 per cent (instead of the previously proposed 50 per cent) of the Charitable Donation Tax Credit when calculating the AMT.

Additionally, the following changes are proposed when calculating the AMT:

• Allow full deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments.
• Allow individuals to fully claim the federal logging tax credit.
• Fully exempt Employee Ownership Trusts from the AMT.
• Allow certain disallowed credits under the AMT to be eligible for the AMT carry-forward (i.e., the federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit).

These changes came into effect on January 1, 2024, the same day as the broader AMT amendments.

Budget 2024 also proposes to exempt certain trusts that benefit the indigenous groups from the AMT. The government is seeking feedback on these proposed exemptions until June 28, 2024.

Registered retirement savings plan (RRSP): Home buyers’ plan (HBP)

HBP is a federal program that allows individuals to “borrow” from their own registered retirement savings plans (RRSPs) and use the proceeds toward buying or building a qualifying home without paying tax on the withdrawal. Amounts withdrawn under the HBP are expected to be repaid to the individual’s RRSPs over a period of up to 15 years, starting the second year following the year of first withdrawal. Any amounts not repaid as required would be taxed as income to the individual in a particular tax year.

In recognition of today’s rising real estate market and the higher down payments required, Budget 2024 proposes the following changes to the HBP:

• Increase in HBP withdrawal limit: The HBP withdrawal limit is proposed to increase from $35,000 to $60,000 in recognition of the higher downpayments required in today’s real estate market. This measure applies to withdrawals made after Budget Day in 2024 and subsequent tax years. Together with the first home savings account (FHSA), the increased withdrawal limit is expected to help Canadians afford their first home purchase.
• An additional 3-year grace period on HBP repayment: Budget 2024 proposes to delay the first repayment under the HBP by another 3 years for first-time home buyers who utilize the HBP from January 1, 2022, to December 2025 (i.e., the repayments will start 5 years after the year of HBP withdrawal).

Registered Education Savings Plans (RESPs)

Expanding on some of the positive RESP enhancements from last year, Budget 2024 proposes to enact changes that would auto-enroll children born in 2024 or later for the Canada Learning Bond (CLB). Additionally, starting in 2028-29, all eligible children who do not have an RESP opened by the time they are 4 years old will have an RESP automatically opened for them with eligible CLB payments auto-deposited. The proposals will permit an auto-RESP enrollment for CLB payments for eligible children born before 2024, though, in these situations, a specific request must be made to Employment and Social Development Canada (ESDC). Further, Budget 2024 proposes to increase retroactive CLB claims of eligible children who are currently 20 years of age to 30 years of age.

Generally, the CLB provides an initial $500 when the beneficiary is first eligible, with additional annual $100 payments made for each eligible year up to the year the child turns 15. The maximum lifetime CLB total is $2,000, though the claim requires an application. The CLB amount is paid into an RESP with the authorization of the primary caregiver and does not affect the lifetime RESP contribution limit. The auto-enrollment would ensure that once an RESP is opened, accrued CLB entitlements (if any) would be made into RESP plans for eligible children. Eligibility is linked to the Canada Child Benefit, which is net family income tested and dependent on the number of children of the primary caregiver. No RESP contributions are required to receive CLB, though authorization from the primary caregiver via application is currently required.

Qualified investments for registered plans

Certain registered plans, including registered retirement savings plans (RRSPs), registered education savings plans (RESPs), registered retirement income funds (RRIFs), registered disability savings plans (RDSPs), first home savings accounts (FHSAs), and tax-free savings accounts (TFSAs) are required to limit their investments to “qualified investments.“ Common qualified investments include mutual funds, segregated funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates (GICs).

Since its original introduction in 1966, the suite of qualified investments has increased to include more than 40 types of assets and apply to newly introduced registered plans (e.g., FHSA). However, the incremental development of qualified investments also resulted in inconsistencies or difficulties for taxpayers to understand.

Budget 2024 seeks consultation on ways to modernize the qualified investment rules for more clarity and coherence in the registered plans regime. The federal government invites opinions on various issues, such as the investment in small businesses and annuities as qualified investments, whether conditions for certain pooled investment products to qualify as qualified investments are appropriate, and whether crypto-backed assets are appropriate as qualified investments.

Stakeholders are invited to submit comments to the CRA by July 15, 2024.

Canada Child Benefit

Under the current rules, a Canada Child Benefit (CCB) recipient becomes ineligible for the CCB the month after the child’s death. Budget 2024 proposes to extend the eligibility for the CCB in respect of a child for 6 months after the child’s death, as long as that child would have been eligible for the CCB during the “extended period.” The CCB entitlement during each month of the extended period would be based on the child’s age in that particular month as if they were still alive. The CCB recipient would be required to notify the Canda Revenue Agency (CRA) of their child’s death before the end of the month following the month of their child’s death. The measure would be effective for deaths that occur after 2024.

Disability Supports Deduction

Budget 2024 proposes to expand the list of expenses recognized under the Disability Supports Deduction. The expanded list includes the cost of bed positioning devices, mobile computer carts, alternative input and digital pen devices for computer use, navigation devices for low vision, and memory or organizational aids, all subject to specific conditions based on the type of impairment.

Additionally, Budget 2024 will allow service animals, as defined by the Medical Expense Tax Credit (METC) rules, to be eligible for the Disability Supports Deduction. Individuals can choose to claim these expenses under either the METC or the Disability Supports Deduction.

This measure would apply to the 2024 and subsequent tax years.

Volunteer Firefighters Tax Credit and the Search and Rescue Volunteer Tax Credit

Budget 2024 proposes to double the Volunteer Firefighters Tax Credit and the Search and Rescue Volunteer Tax Credit, increasing from $3000 to $6000 starting in 2024 and providing a tax saving of up to $900 a year. 

Indigenous settlement income not taxable

Budget 2024 proposes to amend the Income Tax Act to make the income of trusts established under the First Nations Child and Family Services, Jordan’s Principle, and Trout Class Settlement Agreement tax-exempt. It also ensures that payments to class members as trust beneficiaries are not taxed for federal income tax purposes. This measure would take effect in 2024 and future tax years.

Business measures

Lifetime Capital Gains Exemption (LCGE)

The current LCGE limit exempts capital gains on the sale of qualifying small business shares, including farm and fishing property. The current LCGE limit stands at $1,016,836 and results in tax-free capital gains. Budget 2024 proposes to increase the LCGE limit to $1,250,000 effective June 25, 2024 and will be indexed to inflation from 2026 onward.

Currently, the LCGE applies to dispositions of qualifying property and must generally meet three major tests:

• The 24-month ownership test: The individual, relatives, or a partnership of the individual must own the business for at least 24 months prior to the LCGE claim.
• The 90 per cent test: Eligible property must be using 90 per cent of its assets in an active business within Canada at the time of sale.
• The 50 per cent test: At least 50 per cent of the assets of the business must have been used in active business activities for the 24 months prior to the sale.

Eligible LCGE claims are limited to Canadian residents.

Canadian Entrepreneur's Incentive (capital gain inclusion reduction)

To encourage entrepreneurship, the government is proposing a targeted lifetime capital gains inclusion reduction called the Canadian Entrepreneurs’ Incentive. This incentive will reduce the capital gains inclusion rate to 33.3 per cent from the current 50 per cent on a lifetime maximum of $2,000,000 in eligible capital gains. The lifetime maximum will be rolled out over the next 10 years in $200,000 annual increments, starting in 2025 and ending in 2034.

To qualify for the incentive, certain conditions need to be met. A few of these conditions require that at the time of sale, the qualifying share was that of a small business corporation owned directly by the founding individual and that the shares were held for a minimum of 5 years prior to the sale. The founding individual must have been actively engaged in the business on a regular, continuous, and substantial basis. The individual must directly own more than 10 per cent of the fair market value of the issued and outstanding capital stock of the corporation. Additionally, throughout the 24-month period prior to the sale, the shares must be that of a Canadian-Controlled Private Corporation (CCPC), and more than 50 per cent of the fair market value of the corporation was used principally in an active business carried on primarily in Canada by the CCPC or any related corporations. Importantly, the shares must not represent a direct or indirect interest in a professional corporation or a corporation whose business is based on the reputation or skill of one or more employees, including business in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector, including businesses that provide consulting or personal care services.

Tradespeople’s travel expenses

Budget 2024 seeks to consider a private member’s bill (Bill C-241) that removes the cap on certain travel expenses of tradespeople in the construction industry. Currently, certain tradespeople and apprentices in the construction industry are eligible to deduct a maximum of $4,000 in qualifying travel and relocation expenses on an annual basis via the labour mobility deduction.

Bill C-241 proposes an uncapped travel expense claim where individuals are employed as a qualified tradesperson or apprentice in a construction activity at a job site that is located at least 120 km away from their ordinary place of residence and the expenditures relate to travelling to and from the job site. Further, the payment of travel expenditures must be required under the contract of employment, the individual did not receive an allowance in respect of those expenses that are not included in computing the taxpayer’s income for the year, and the individual does not claim those expenses as a deduction or a tax credit under any other provision of the Income Tax Act.

Budget 2024 will consider amendments that provide a harmonized single deduction for eligible tradespeople.

Other notable measures

Housing support measures

One of the major focuses of Budget 2024 was the addition of support to housing for new homebuyers, existing homeowners, and renters through a variety of measures and programs. Some of the major items include:

For new homebuyers:

• Extending the maximum amortization period for insured mortgages on newly constructed homes from 25 to 30 years. This will increase the accessibility of mortgages for some homebuyers by decreasing the monthly payments, though it comes with the tradeoff of more money spent on mortgage interest over the term of the loan.

For existing homeowners:

• Amortization relief for mortgage holders. Some homeowners facing increasing mortgage payments due to rising interest rates may be able to mitigate those added expenses by increasing the amortization period on their mortgages on a permanent basis. The idea behind this policy is to help existing homeowners who may otherwise be unable to meet their mortgage payments keep their homes during periods of high interest rates.

For renters:

• A new Canadian Renters’ Bill of Rights, which will include transparency measures that will entitle prospective renters to the historical rental prices of properties for listed for rent. A standardized lease agreement will also be implemented nationally.
• On-time rental payments will positively affect credit scores. 

In addition to the above, significant sums have been committed to new and existing programs geared towards the construction of additional homes for sale and rent nationwide.

Notably, a new initiative named Canada Builds was announced. Canada Builds will incentivize provincial and territorial governments to construct additional rental housing by offering access to $55 billion in potential funding under the existing Apartment Construction Loan Program, subject to certain conditions. In order for provincial governments to access funding under Canada Builds, the general expectation will be that they contribute funding of their own, reduce red tape, create affordable rental units, and contribute other novel solutions to facilitate a smoother approach to rental construction in their jurisdictions.

The creation of a new Housing Design Catalogue was also announced. Under this initiative, a catalogue of pre-approved blueprints will be drafted for modular homes, row houses and fourplexes. Though a relatively modest $11.6 million was committed to this project, it has the potential to significantly reduce approval and construction times for new builds.

Crypto-Asset Reporting Framework and the Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) is a global standard developed by the Organization for Economic Cooperation and Development (OECD) for the automatic exchange of financial information between national revenue agencies to combat tax evasion. The OECD has developed a new framework, known as the Crypto-Asset Reporting Framework (CARF), which provides for the automatic exchange of tax information for transactions in crypto-assets.

Budget 2024 plans to:

• Implement CARF in Canada, which would introduce new reporting requirements for crypto-asset service providers operating in or from Canada.
• Require crypto-asset service providers to disclose customer and transaction information to the CRA, including crypto-asset transfers, exchanges involving fiat currencies, and exchanges between other crypto-assets.
• Require crypto-asset service providers to obtain and report information on each of their customers, including their name, address, date of birth, jurisdiction(s) of residence, and taxpayer identification numbers for each jurisdiction.
• Amend the CRS rules, which would make electronic money products and central bank digital currencies reportable under CRS.

These measures will take effect from 2026 onward.

Non-compliance with information requests (CRA)

Budget 2024 proposes several amendments to the information-gathering provisions of the Income Tax Act. These amendments are meant to enhance the efficiency and effectiveness of tax audits and facilitate the collection of tax revenues on a timelier basis. Specifically, Budget 2024 proposes the following:

• Amend the Income Tax Act to allow the CRA to issue a new type of notice, known as a notice of non-compliance, to taxpayers who have not complied with a requirement or notice to provide assistance or information issued by the CRA. Furthermore, if a notice of non-compliance is left outstanding, the budget proposes to impose a penalty of $50 for each day, up to a maximum of $25,000.
• Allowing the CRA to specify that any required information (oral or written) or documents be provided under oath or affirmation.
• Amend the Income Tax Act to impose a penalty of 10% of the taxpayer’s aggregate tax payable when the CRA obtains a compliance order against them, incentivizing compliance with information requests from the CRA. The penalty will only be enforced if the tax owed for any of the taxation years covered by the compliance order exceeds $50,000.
• Extend the “stop the clock” rules to cover scenarios where a taxpayer seeks judicial review of any requirement or notice issued by the CRA, ensuring that the reassessment period is extended until the resolution of the review process. This amendment aims to provide the CRA adequate time to review obtained information before the reassessment period expires, promoting fairness in the audit process.

These amendments will come into force on royal assent of the enacting legislation.

Foreign qualified donees status extension

Budget 2024 proposes to extend the period during which a foreign charity can register as a qualified donee from 24 months to 36 months if the charity receives a gift from His Majesty in right of Canada and pursues activities in Canada's national interest (e.g., urgent humanitarian aid or disaster relief). In addition, these charities would need to submit an annual information return (including the total amount of receipts issued to Canadian donors and the total amount of gifts received from qualified donees) to the CRA, which would be publicly accessible.

Free financial advice for low to moderate-income Canadians

Budget 2024 proposes to provide $60 million over 5 years, starting in 2024-25, to Prosper Canada (a national charity) to expand the community-delivered financial help services to reach one million low to moderate-income Canadians. Free services include financial advice on managing/improving qualified individuals’ financial situations, filing taxes, and applying for benefits.

Free contraceptives and diabetic medication

The federal government has tabled the Pharmacare Act to start a national pharmacare plan that will provide free contraceptives and diabetic medication.

Youth Mental Health Fund

Budget 2024 proposes to invest $500 million in a new Youth Mental Health Fund to support the increasing mental health care needs of young Canadians.