Budget 2024: tax highlights

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.

Click below or use the in-page navigation menu for analysis on key measures included in Budget 2024.

Capital gains inclusion rate

Business income tax and GST/HST measures

Clean technology and green energy measures

Housing-related measures

Personal income tax measures

Tax administration and enforcement measures

Status of previously announced tax measures

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.