Ciccone McKay Report: Federal Budget 2024

By Steven Bicego Advisor, Client Relationship Manager - B.Comm

Budget 2024 outlines a series of proposed changes aimed at reshaping Canada’s fiscal landscape. The budget’s focus is on taxation, social benefits, housing, pension plans, and business incentives. The changes designed to enhance fairness, support, and economic growth are intended to reflect the government’s commitment to addressing key challenges and ensuring greater opportunities for prosperity.

In the following, we provide an overview of the key proposals set forth in Budget 2024. We highlight the budget’s objectives and implications for individuals, families, businesses, and the broader Canadian economy.

 

Executive Summary

Measures Impacting Individuals

Capital Gains Inclusion Rate:

• The inclusion rate would increase from one-half to two-thirds for corporations, trusts, and individuals with capital gains exceeding $250,000 annually, effective June 25, 2024.
• The $250,000 threshold would apply to net capital gains after accounting for losses and exemptions.
• Transitional rules would apply for the tax years spanning before and after June 25, 2024.
• Amendments would be introduced for employee stock option deductions and net capital losses of prior years.

 

Lifetime Capital Gains Exemption (LCGE):

• The lifetime capital gains exemption would be raised to $1.25 million for eligible capital gains effective June 25, 2024.
• Indexation of LCGE would resume in 2026.

 

Canada Child Benefit (CCB):

• Eligibility would be extended for six months after a child’s death, with benefits calculated based on the child’s age during the extended period.
• Would be applicable to deaths occurring after 2024.

 

Expanding the Disability Supports Deduction (DSD):

• Eligible expenses would be broadened to include service animals, alternative computer input devices, and ergonomic aids, effective 2024.

 

Automatic Enrollment in the Canada Learning Bond (CLB):

• Automatic enrollment in the Canada Learning Bond for eligible children without a Registered Education Savings Plan (RESP) by age four, starting in 2028-29.
• Extension of claim age for the CLB from 20 to 30 years.

 

Strengthening the Canada Pension Plan (CPP):

• Technical amendments proposed for Canada Pension Plan legislation would enhance death benefits, partial children’s benefits and eligibility criteria for disabled contributors.

 

Numerous housing measures:

• Home Buyers’ Plan withdrawal limit would increase to $60,000, with a temporary deferral of the repayment period.
• 30-year mortgage amortizations to be introduced for first-time buyers of newly constructed homes.
• Accelerated capital cost allowance proposed for rental projects.
• Exploration of a tax on vacant lands and provision of loans for secondary suite construction.
• Intention to restrict single-family home purchases by large corporate investors.

 

Measures Impacting Businesses

Canadian Entrepreneurs’ Incentive:

• Proposal to introduce a reduced capital gains inclusion rate for qualifying shares to be phased in gradually until 2034.

 

Other Measures

Alternative Minimum Tax (AMT):

• Charitable donation credits would be revised along with expanded deductions and exemptions.
• Would be applicable to taxation years starting January 1, 2024.

 

Tougher Measures for Avoidance of Tax Debts:

• Supplementary rule proposed to strengthen anti-avoidance provisions.
• Penalties would be extended to cover proposed rules with joint liability for tax debt participants.
• Measures would be applicable to transactions post-Budget Day.

 

The federal government says the above proposed changes aim to enhance various aspects of taxation, social benefits, housing, pension plans, and business incentives. The goal is to foster fairness, support, and economic growth across Canada.

 

Detailed report on Federal Budget 2024

Measures impacting individuals

Proposed changes to the capital gains inclusion rate

As proposed in Budget 2024, the capital gains inclusion rate would undergo significant changes. These changes would include increasing the inclusion rate from one-half to two-thirds for corporations and trusts, as well as for individuals on the portion of capital gains exceeding $250,000 in a year, effective June 25, 2024.

For individuals, the inclusion rate would remain at one-half for capital gains up to $250,000 annually. However, any capital gains realized beyond this threshold would be subject to the increased inclusion rate.

This threshold of $250,000 would apply to capital gains realized directly by an individual, or indirectly through partnerships or trusts. This would be after adjusting for various factors, including: current-year capital losses; capital losses from previous years; and capital gains eligible for exemptions or incentives.

Under the new proposal, claimants of employee stock option deductions would see changes in their taxable benefits. Claimants would receive a one-third deduction to align with the increased inclusion rate. And, they would be entitled to a deduction of one-half of the taxable benefit, with a combined limit of $250,000 for both employee stock options and capital gains.

Moreover, net capital losses from prior years would remain deductible against taxable capital gains in the current year, adjusting for the new inclusion rate. This would ensure that capital losses realized before the rate change could offset equivalent capital gains realized afterward.

Transitional rules would apply for tax years beginning before and ending on or after June 25, 2024, necessitating the identification of capital gains and losses before and after the effective date. The $250,000 threshold for individuals would be fully available in 2024, applying solely to net capital gains realized in the latter period.

Additional amendments would be made to accommodate the new inclusion rate. Further details are expected to be released in the forthcoming months.

Lifetime capital gains exemption (LCGE)

The income tax system offers individuals a lifetime tax exemption for capital gains arising from the sale of qualified small business corporation shares, and from eligible farms or fishing properties. As of 2024, the LCGE is set at $1,016,836 and adjusts with inflation.

Budget 2024 proposes to enhance the LCGE, raising it to $1.25 million for eligible capital gains. This adjustment would come into effect for dispositions made on or after June 25, 2024. Furthermore, indexation of the LCGE would resume in 2026, ensuring its alignment with the changing economic landscape over time.

Canada child benefit (CCB)

Under proposed Income Tax Act amendments, eligibility for the Canada child benefit would extend for six months after a child’s death, referred to as the “extended period.” For instance, if a child passes away in July, their primary caregiver could still receive the CCB for August through January, provided all eligibility criteria are met.

During the extended period, the CCB entitlement for each month would be calculated based on the child’s age as if they were still alive, considering other family circumstances such as marital status. However, any CCB overpayments unrelated to the child’s death would still require repayment.

To ensure accurate administration, CCB recipients would have to notify the Canada Revenue Agency (CRA) of their child’s death within the month following the child’s passing. This measure would also extend to the child disability benefit, which accompanies the CCB for children eligible for the disability tax credit.

Effective for deaths occurring after 2024, this measure aims to provide continued support to families during a challenging time while maintaining the integrity of the benefit system.

Expanding the disability supports deduction (DSD)

The disability supports deduction provides a valuable opportunity for individuals facing physical or mental impairments to deduct specific expenses aiding them in earning income or pursuing education.

To broaden the scope of eligible expenses for the DSD, Budget 2024 introduces an amendment to the Income Tax Act. The amendment would allow additional expenses, subject to specific conditions, including:

• a) Service animals trained to perform essential tasks for individuals with severe impairments.
• b) Alternative computer input devices, encompassing assistive keyboards, braille displays, digital pens and speech recognition devices.
• c) Ergonomic work chairs and bed positioning devices, along with related assessments.

This expansion would take effect from the 2024 taxation year onwards.

Automatic enrollment in the Canada Learning Bond (CLB)

In a bid to streamline access to educational savings, Budget 2024 introduces a proposal to amend the Canada Education Savings Act. The amendment would implement automatic enrollment in the Canada Learning Bond for eligible children who lack a Registered Education Savings Plan (RESP) by the time they reach four years of age.

Starting in the 2028-29 academic year, all qualifying children born in 2024 or later would have an RESP automatically established for them. Consequently, CLB payments eligible for these accounts would be deposited automatically. Note: Obtaining a Social Insurance Number (SIN) is a prerequisite for opening an RESP and accessing its benefits.

To ensure inclusivity across all age groups, caregivers of eligible children born before 2024 would also have the option to request the opening of an RESP by Employment and Social Development Canada, with CLB payments being auto-deposited accordingly, starting in 2028-29.

Additionally, Budget 2024 outlines the government’s intention to extend the claim age for the CLB from 20 to 30 years. This extension aims to accommodate individuals pursuing postsecondary education later in life, enabling them to leverage the government’s contributions to their educational savings.

A reinforced Canada Pension Plan (CPP)

In a collaborative effort with provincial counterparts, Budget 2024 unveils the federal government’s plan to enact technical revisions to the CPP legislation. These amendments encompass:

• a) Enhancing the death benefit for specific contributors.
• b) Implementing a partial children’s benefit tailored for part-time students.
• c) Extending eligibility for the children’s benefit to disabled contributors when a parent reaches age 65
• d) Terminating eligibility for a survivor pension for individuals legally separated after division of pensionable earnings.

The government says these changes would refine and optimize the CPP framework, ensuring CPP remains responsive to the evolving needs of Canadians while upholding its foundational principles of social security and support.

 

Measures impacting housing

Home Buyers’ Plan (HBP)

Budget 2024 proposes a significant enhancement to the Home Buyers’ Plan by increasing the withdrawal limit from $35,000 to $60,000. This updated limit would apply to withdrawals made after Budget Day in 2024 and in subsequent calendar years.

Additionally, Budget 2024 suggests a temporary deferral of the 15-year repayment period for participants who made their first withdrawal between January 1, 2022 and December 31, 2025. As a result, the repayment period would begin five years after the year of the initial withdrawal.

30-year amortizations for first-time buyers

Budget 2024 would bolster the Canadian Mortgage Charter, allowing 30-year mortgage amortizations specifically for first-time homebuyers purchasing newly constructed homes. This new, insured mortgage product would become available on August 1, 2024. Further regulatory amendments to implement this proposal will be forthcoming in the following months.

Accelerating the capital cost allowance

The budget proposes a temporary accelerated capital cost allowance, increasing the rate from 4% to 10% for eligible new purpose-built rental projects. These projects would have to start construction on or after Budget Day and before January 1, 2031, with occupancy available to residents before January 1, 2036. The measure aims to expedite the deduction of depreciation expenses, enabling homebuilders to recover their costs more swiftly and reinvest in new housing projects.

Taxing vacant lands

Budget 2024 announces the government’s consideration of introducing a new tax on residentially zoned vacant land. Consultations on this matter are scheduled to begin later this year.

Adding additional suites to single-family homes

To promote housing affordability, Budget 2024 allocates $409.6 million over four years, starting in 2025-26, to the Canada Mortgage and Housing Corporation. This funding would facilitate the launch of a new Canada Secondary Suite Loan Program, enabling homeowners to access up to $40,000 in low-interest loans for adding secondary suites to their residences. More detailed information to come in the next months.

Confronting the financialization of housing

Budget 2024 addresses concerns surrounding the financialization of housing, that is, treating housing as an asset for financial investment. The budget outlines the government’s intention to restrict the purchase and acquisition of existing single-family homes by large corporate investors. Further details on this initiative will be provided through consultations and in the 2024 Fall Economic Statement.

 

Measures impacting businesses

Canadian Entrepreneurs’ Incentive

Budget 2024 unveils the Canadian Entrepreneurs’ Incentive, a significant proposal aimed at bolstering entrepreneurship in Canada. This incentive is designed to lessen the tax burden on capital gains from the sale of qualifying shares by eligible individuals.

Here’s how it would work:

• a) Reduced tax rate: The incentive would offer a reduced capital gains inclusion rate, set at half the prevailing rate, applicable to up to $2 million in capital gains per individual over their lifetime.
• b) Phased implementation: The lifetime limit would be gradually phased in, increasing by $200,000 per year starting from January 1, 2025, until reaching the maximum value of $2 million by January 1, 2034.
• c) Impact of the proposal: Under Budget 2024’s proposed two-thirds capital gains inclusion rate, qualifying dispositions would benefit from an inclusion rate of one-third, in addition to any available capital gains exemption.

Qualifying conditions:

For a share of a corporation to be considered qualifying, it would have to meet several conditions, including:

• a) Direct ownership: The share must be directly owned by the claimant as a part of the capital stock of a small business corporation at the time of sale.
• b) Active business requirement: During the 24-month period leading to the share’s disposition, it must be part of a Canadian-controlled private corporation where more than 50% of its assets are used predominantly in an active business conducted primarily in Canada.
• c) Founding investor: The claimant must have been a founding investor, holding the share for a minimum of five years before its sale.
• d) Substantial engagement: The claimant must have been actively engaged, on a regular, continuous and substantial basis, in the business activities for at least five years leading up to the share’s disposition.

Moreover, the share must have been acquired for fair market value consideration. The share should not represent an interest in certain types of corporations, including professional corporations or those operating in specific sectors.

Implementation timeline:

This measure would take effect for dispositions occurring on or after January 1, 2025, providing entrepreneurs with enhanced opportunities for capital gains tax relief.

 

Other measures

Alternative Minimum Tax (AMT)

Following the revisions proposed in Budget 2023 and subsequent consultations, Budget 2024 introduces further adjustments to the Alternative Minimum Tax calculations. The aim is to refine the AMT’s application and impact.

Firstly, Budget 2024 suggests a revision in the treatment of charitable donations concerning AMT calculations. Under this proposal, individuals would now be able to claim 80% of the Charitable Donation Tax Credit, contrasting with the previously proposed 50%.

In addition to the charitable donations adjustment, Budget 2024 puts forth several other amendments to the AMT framework:

• a) Expanded deductions: Individuals would now have full access to deductions for the Guaranteed Income Supplement, social assistance and workers’ compensation payments.
• b) Federal logging tax credit: The proposal allows individuals to fully claim the federal logging tax credit under the AMT.
• c) Exemption for employee ownership trusts: Employee ownership trusts would be fully exempt from the AMT under the proposed changes.
• d) Eligibility of disallowed credits: Certain credits initially disallowed under the AMT, including the federal political contribution tax credit, investment tax credits and labour-sponsored funds tax credit, would now be eligible for AMT carry-forward.

These amendments, as outlined in Budget 2024, would take effect for taxation years starting on or after January 1, 2024. The amendments’ goal is to provide clarity and fairness in the AMT framework, while ensuring its alignment with broader tax objectives.

Avoidance of tax debts

Within the framework of the Income Tax Act is a crucial provision aimed at preventing taxpayers from sidestepping their tax obligations by transferring assets to non-arm’s-length parties. This anti-avoidance rule dictates that if a taxpayer transfers property to another person and the value of the transferred property exceeds the consideration given, the transferee becomes jointly and severally liable with the transferor for the latter’s tax debts.

Budget 2024 introduces a supplementary measure to fortify this anti-avoidance provision. This enhancement targets situations where:

• a) There’s a transfer of property from a taxpayer with tax debts to another party.
• b) Simultaneously, or in a related series of transactions, property is transferred from a non-arm’s-length person to a transferee.
• c) One of the intents behind these transactions is to dodge joint and several liabilities.

Moreover, the Income Tax Act imposes penalties on those involved in tax-debt-avoidance planning. Budget 2024 proposes an extension of this penalty to encompass instances falling under the proposed rule. Specifically, individuals engaged in such planning could face penalties equivalent to 50% of the avoided tax or $100,000, plus related planning activity benefits.

Furthermore, to address situations where planners profit from facilitating tax debt avoidance, Budget 2024 proposes making taxpayers participating in such schemes jointly and severally liable for the entire avoided tax debt, including any portion retained by the planner. These measures would apply to transactions occurring after Budget Day, aiming to curtail tax avoidance practices and uphold fairness in tax compliance.