Upcoming 2024 Tax Changes

Budget 2023 announced certain upcoming changes for the 2024 tax year. Let’s take a deep dive into them.

Intergenerational transfers [ITA 84.1]

As mentioned in a previous blog article, the federal government announced changes to specific anti-avoidance rules related to intergenerational transfers of family corporations under Bill C-208. More specifically, the government amended a specific condition of ITA 84.1 (surplus stripping), that these transfers had to be done with non-arm’s length entities to include arm’s length individuals such as children or grandchildren of the taxpayer who are 18 years of age or older (grandchildren and nephews and nieces are also included) [ITA 84.1(2)(e)]. For this new interpretation of arm’s length to apply, the purchaser corporation cannot dispose of the shares within 60 months of their purchase [ITA 84.1(2)(e)].

Budget 2023 will amend the 60-month condition above, and will now require the transferor and transferee to jointly elect to transfer through two options:

·        an immediate intergenerational business transfer (three-year test) based on arm's length sale terms; or

·        a gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics.

Here are the conditions of both transfer options reproduced from the 2023 budget:

The major distinction between both options is that the transferee remains implicated economically and management-wise in the business for a longer period of time under the gradual method.

The rules introduced by Bill C-208 that apply to subsequent share transfers by the Purchaser Corporation and the lifetime capital gains exemption are proposed to be replaced by relieving rules that would apply upon a subsequent arm's length share transfer or upon the death or disability of a child. There would be no limit on the value of shares transferred in reliance upon this rule (originally the lifetime exemption would be reduced if taxable capital was above 10 million and eliminated at 15 million).

A capital gains reserve of 10 years would be allowed for these types of intergenerational transfers.

The amendments take effect for transfers occurring on or after January 1, 2024.

Alternative Minimum Tax (AMT) [ITA 127.5]

Important changes will be made to the AMT calculation. The table below summarizes these changes:

Note 1 - Deductions being limited to 50% include :

·        employment expenses, other than those to earn commission income;

·        deductions for Canada Pension Plan, Quebec Pension Plan, and Provincial Parental Insurance Plan contributions;

·        moving expenses;

·        child care expenses;

·        disability supports deduction;

·        deduction for workers' compensation payments;

·        deduction for social assistance payments;

·        deduction for Guaranteed Income Supplement and Allowance payments;

·        Canadian armed forces personnel and police deduction;

·        interest and carrying charges incurred to earn income from property;

·        deduction for limited partnership losses of other years;

·        non-capital loss carryovers; and

·        Northern residents deductions.

Note 2 – Almost all non-refundable tax credits would be reduced to 50% under this new measure subject to certain exceptions. The Special Foreign Tax Credit would continue to be allowed in full, and would be based on the new AMT rate.

The proposed AMT would continue to use the cash (i.e., not grossed up) value of dividends and fully disallow the Dividend Tax Credit.

Some non-refundable credits that are currently disallowed would continue to be disallowed in full: the Political Contribution Tax Credit, the Labour Sponsored Venture Capital Corporations Credit, and the non-refundable portion of investment tax credits.

Trusts currently exempt from AMT, such as mutual fund trusts, master trusts and employee life and health trusts will continue to be exempt.

This measure applies as of the 2024 tax year.

Employee Ownership Trusts (EOT)

A new form of personal trust is being proposed in Budget 2023, Employee Ownership Trusts (EOT), that will facilitate transfers of business from the owner to the employees.

 The qualifying conditions to being an EOT are as follows:

·        The trust must be a Canadian resident trust;

·        Two purposes:

o   it would hold shares of “qualifying businesses” for the benefit of the employee beneficiaries of the trust;

o   it would make distributions to employee beneficiaries, where reasonable, under a distribution formula that could only consider an employee's length of service, remuneration, and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.

·        Would be required to hold a controlling interest in the shares of one or more “qualifying businesses”. All or substantially all of an EOT's assets must be shares of “qualifying businesses”;

·        Trustees must be residents of Canada (excluding deemed residents). Trust beneficiaries (age 18 and older) would elect the trustees at least once every five years;

·        Beneficiaries must consist exclusively of “qualifying employees”.

A qualifying business would be a Canadian Controlled Private Corporation (CCPC) and in which all or substantially all of the fair market value of its assets are attributable to assets used in an active business carried on in Canada.

Qualifying employees would include all individuals employed by a qualifying business and any other qualifying businesses it controls, with the exclusion of employees who are significant economic interest holders or have not completed a reasonable probationary period of up to 12 months.

EOTs would be subject to the highest marginal tax rates for any income not distributed directly to beneficiaries. However, it will get the benefit of certain tax relief measures, such as:

·        extension of the five-year capital gains reserve to a ten-year reserve for qualifying business transfers to an EOT. A minimum of ten per cent of the gain would be required to be brought into income each year, creating a maximum ten-year deferral period;

·        exemption from the 21-year deemed disposition rule;

·        introduction of a new exception to extend the repayment period from one to 15 years for amounts loaned to the EOT from a qualifying business to purchase shares in a qualifying business transfer (shareholder loans).

This measure applies as of the 2024 tax year.