Federal Budget 2024: Personal Measures

Capital Gains Inclusion Rate

Currently, one half of capital gains are included in a taxpayer’s income. Budget 2024 proposed to increase this inclusion rate to two thirds of the actual gain, effective for capital gains realized on or after June 25, 2024. Similarly, the deduction available for some employee stock option benefits will be reduced from one half to one third of the benefit. This adjustment to the inclusion rate will also apply to capital losses applied to offset capital gains.

Only half of the first $250,000 of capital gains (net of gains offset by capital losses, the lifetime capital gains exemption and the proposed employee ownership trust exemption and Canadian entrepreneurs’ incentive) realized by an individual will be included in their income each year. Two thirds of capital gains in excess of this amount will be included in their income. Other taxpayers, such as trusts and corporations, will be required to include two thirds of all capital gains realized on or after June 25, 2024 as income.

For taxation years that straddle June 25, 2024 (calendar 2024 for individuals), capital gains will be segregated between gains realized on or before June 24, 2024 (one half included in income) and gains realized on or after June 25, 2024 (two thirds will be income). For individuals, only half of the first $250,000 realized on or after June 25, 2024 will be included in their income.

Budget 2024 estimated that this change will impact only 0.13% of individual taxpayers and 12.6% of corporations.

Lifetime Capital Gains Exemption

Individuals are eligible to offset up to $1,016,836 (2024; indexed for inflation annually) of capital gains on qualified small business corporation shares and qualified farm or fishing property. Budget 2024 proposed to increase this lifetime limit to $1,250,000 for dispositions taking place on or after June 25, 2024. This amount would be indexed for inflation commencing in 2026.

Canadian Entrepreneurs’ Incentive

Budget 2024 proposed to reduce the capital gains inclusion rate on capital gains realized on the disposition of qualifying shares by an eligible individual. The inclusion rate would be halved, resulting in one third of such gains being taxable under the inclusion rates proposed in Budget 2024. This reduced inclusion rate would apply to gains not offset by the lifetime capital gains exemption.

There would be a lifetime limit on gains eligible for this reduced rate, set at $200,000 commencing in 2025, and increasing by $200,000 annually until reaching a total of $2 million in 2034.

To be eligible for this reduced inclusion rate, several conditions would be required to be met, including the following:

the shares were directly owned by the taxpayer at the time of sale;
the shares meet the asset tests required to be qualified small business corporation shares (generally, at the time of sale, all or substantially all assets were used in an active business carried on in Canada, and throughout the 24 months preceding the sale, more than 50% of the assets were so used);
the taxpayer was a founding investor at the time the corporation was initially capitalized;
the shares were held by the taxpayer for a minimum of five years prior to the sale;
at all times from the initial share subscription until immediately before the sale, the taxpayer directly owned shares accounting for more than 10% of the votes and 10% of the fair market value of the corporation;
throughout the five years immediately preceding the sale, the taxpayer was actively engaged on a regular, continuous and substantial basis in the activities of the business; and
the shares were acquired for fair market value consideration.

This incentive would not be available where the shares sold represented a direct or indirect interest in any of the following types of corporations:

a professional corporation (that is, a corporation that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor);
a corporation whose principal asset is the reputation or skill of one or more employees;
a corporation that carries on a business operating in the financial, insurance, real estate, food and accommodation, arts, recreation or entertainment sector; or
a corporation providing consulting or personal care services.

Employee Ownership Trust (EOT) Tax Exemption

Last year, Budget 2023 proposed tax rules to facilitate the creation of EOTs. An EOT is a form of employee ownership where a trust holds shares of a corporation for the benefit of the corporation’s employees. EOTs can be used to facilitate the acquisition by employees of their employer’s business, without requiring them to pay directly to acquire shares. These proposed rules are currently before Parliament in Bill C-59.

The 2023 Fall Economic Statement proposed to exempt the first $10 million in capital gains realized on certain sales of a business to an EOT from taxation. Budget 2024 provided further details on this proposed $10 million exemption.

The exemption would be available in respect of capital gains realized by an individual (whether directly, as a beneficiary of a trust, or as a partner in a partnership) on the sale of shares to an EOT where the following conditions are met:

the corporation is not a professional corporation;
the sale is a qualifying business transfer (QBT; meeting several requirements in the proposed rules for EOTs discussed below);
the trust acquiring the shares is not already an EOT or a similar trust with employee beneficiaries;
throughout the 24 months immediately prior to the QBT (the holding period), the shares were owned by the individual, a related person or a partnership in which the individual is a partner;
throughout the holding period, over 50% of the fair market value of the corporation’s assets were used principally in an active business;
at any time prior to the QBT, the taxpayer, or their spouse or common-law partner, was actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months;
immediately after the QBT, at least 90% of the beneficiaries of the EOT were resident in Canada; and
no disqualifying event (see below) occurs within 36 months of the QBT.

If the above conditions are satisfied, an exemption for up to $10 million in capital gains from the QBT would be available. If multiple individuals disposed of shares to an EOT as part of a QBT and met the conditions described above, they would be required to share the $10 million exemption. The taxpayers would be required to agree on how to allocate the exemption.

The exemption would be available for dispositions that occur between January 1, 2024 and December 31, 2026.

Qualifying business transfer (QBT)

The rules proposed in Budget 2023 require both the EOTs themselves and the QBTs by which they acquire businesses to meet numerous complex requirements. These subsections describe the general rules that would apply to EOTs.

A QBT would occur when a taxpayer disposes of shares of a qualifying business for proceeds that do not exceed fair market value. The shares must be disposed of to either a trust that qualifies as an EOT immediately after the sale or a corporation owned 100% by the EOT. The EOT must own a controlling interest in the qualifying business immediately after the qualifying business transfer. At the time of transfer, all or substantially all of the fair market value of the qualifying business’s assets must be attributable to assets used in an active business carried on in Canada. The business cannot be carried on through a partnership.

A qualifying business would be required to be a Canadian-controlled private corporation. No more than 40% of the corporation’s directors can be individuals that were significant owners of the qualifying business prior to the QBT, or were related to, or otherwise not dealing at arm’s length with, such owners.

Employee ownership trusts (EOT)

To be an EOT, a trust would be required to be resident in Canada and have only two purposes. First, it would hold shares of qualifying businesses for the benefit of the employee beneficiaries of the trust. Second, 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.

At least one third of the trustees would be required to be employees of a qualifying business controlled by the trust. Trustees of the EOT would generally be elected by the beneficiaries every five years. If any trustee is appointed (other than by such an election), no more than 40% of all trustees can be persons that sold shares of a qualifying business to the EOT (or be related to, or otherwise not act at arm’s length with, such individuals).

Trust beneficiaries would be limited to, and include all, qualifying employees (potentially including former employees and the estates of deceased employees). A qualifying employee would be an employee of a qualifying business controlled by the EOT. Employees could be excluded as beneficiaries until they complete a reasonable probationary period. Individuals, and persons related to, or otherwise not acting at arm’s length with, them who hold, or held prior to the QBT, a significant economic interest in the qualifying business would be excluded from being qualifying employees, and therefore could not be beneficiaries of the EOT.

Disqualifying event

If a disqualifying event occurs within 36 months of the QBT, the exemption would not be available. Where the individual has already claimed the exemption, it would be retroactively denied.

A disqualifying event would occur if an EOT loses its status or if less than 50% of the fair market value of the qualifying business’ shares is attributable to assets used principally in an active business at the beginning of two consecutive taxation years of the corporation.

If a disqualifying event occurs more than 36 months after a QBT, the EOT would be deemed to realize a capital gain equal to the total amount of capital gains in respect of which the vendors claimed the exemption. The normal reassessment period of an individual for a taxation year in respect of this exemption is proposed to be extended by three years, so CRA would have six years from the date of initial assessment to reassess in respect of any exemption claims under these proposals.

A claim for this exemption would require the EOT (and any corporation owned by the EOT that acquired the transferred shares) and the individual to elect to be jointly and severally liable for any tax payable by the individual as a result of the exemption being denied due to a disqualifying event within the first 36 months after a QBT.

Other matters

Under the proposed amendments to the alternative minimum tax (AMT), 30% of capital gains eligible for this exemption would be included in income for AMT purposes.

Budget 2024 also proposed to expand QBTs to include the sale of shares to a worker cooperative corporation. The worker cooperative would generally need to meet the definition set out under the Canada Cooperatives Act. Provided the relevant requirements are met, this would allow access to the same tax benefits as a QBT to an EOT, including the $10 million exemption. Budget 2024 indicated that additional details on this proposal will be released in the coming months.

Alternative Minimum Tax (AMT)

Individuals will owe AMT if the tax amount calculated under the AMT regime is greater than the tax calculated under the ordinary progressive tax rate regime. Under the legislated rules, the calculation of AMT allows fewer deductions, exemptions and tax credits than under the ordinary income tax rules. In 2023, the government proposed changes to AMT that would focus on high-income individuals and certain trusts by amending the following:

the AMT rate would be increased from 15% to 20.5%;
the exemption would be increased from $40,000 to the start of the fourth tax bracket (for 2024, this is $173,205); and
the AMT base would be broadened by further limiting tax preferences (i.e., exemptions, deductions and credits).

Budget 2024 proposed to make further changes to the AMT regime, such as the following:

to allow 80% of the donation tax credit (the 2023 proposals only provided for a 50% claim);
to fully allow deductions for the guaranteed income supplement, social assistance, and workers’ compensation payments;
to fully exempt employee ownership trusts from the AMT; and
to 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).

Budget 2024 also proposed to provide exemptions for certain trusts established for the benefit for various Indigenous groups. Interested parties can send comments to the Department of Finance Canada, Tax Policy Branch at consultation.legislation@fin.gc.ca by June 28, 2024.

All proposed AMT amendments would apply to taxation years that begin on or after January 1, 2024 (that is, the same day as the 2023 AMT amendments).

There were no broad-based changes to address concerns that many smaller trusts would be subject to AMT under the 2023 proposals. There was also no change to the 2023 proposal that only 50% of interest and financing costs incurred to earn income from property would be deductible for AMT purposes.

Volunteer Firefighters and Search and Rescue Volunteers Tax Credits

Budget 2024 proposed to double the credit amount for the volunteer firefighters tax credit and the search and rescue volunteers tax credit to $6,000. This would increase the maximum tax relief to $900. This enhancement would apply to the 2024 and subsequent taxation years.

Mineral Exploration Tax Credit

As announced on March 28, 2024, the government proposed to extend eligibility for the mineral exploration tax credit for one year to flow-through share agreements entered into on or before March 31, 2025.

Canada Child Benefit (CCB) – Death of a Child

Budget 2024 proposed to extend eligibility for the CCB for six months after the child’s death (the “extended period”) if the individual would have otherwise been eligible for the CCB in respect of that particular child. The extended period would also apply to the child disability benefit, which is paid with the CCB in respect of a child eligible for the disability tax credit. This measure would be effective for deaths that occur after 2024.

Disability Supports Deduction

The disability supports deduction allows individuals who have an impairment in physical or mental functions to deduct certain expenses that enable them to earn business or employment income or to attend school.

Budget 2024 proposed to expand the list of expenses recognized under the disability supports deduction, as follows:

where an individual has a severe and prolonged impairment in physical functions, the cost of an ergonomic work chair, a bed positioning device and purchasing a mobile computer cart;
where an individual has an impairment in physical or mental functions, the cost of purchasing an alternative input device to allow the individual to use a computer and purchasing a digital pen device to allow the individual to use a computer;
where an individual has a vision impairment, the cost of purchasing a navigation device for low vision; and
where an individual has an impairment in mental functions, the cost of purchasing memory or organizational aids.

Budget 2024 also proposed that expenses for service animals would be recognized under the disability supports deduction. Taxpayers would be able to choose to claim an expense under either the medical expense tax credit or the disability supports deduction.

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

Home Buyers’ Plan

Budget 2024 proposed to increase the withdrawal limit from the home buyers’ plan from $35,000 to $60,000. This measure would apply to the 2024 and subsequent calendar years for withdrawals made after Budget Day.

Budget 2024 also proposed to temporarily defer the start of the 15-year repayment period by an additional three years for participants making a first withdrawal between January 1, 2022, and December 31, 2025. Accordingly, the 15-year repayment period would start the fifth year following the year the first withdrawal was made.

Qualified Investments for Registered Plans

Budget 2024 invited stakeholders to suggest how the qualified investment rules could be modernized on a prospective basis. Issues under consideration include the following: whether and how the rules relating to investments in small businesses could be harmonized to apply consistently to all registered savings plans; whether annuities that are qualified investments only for RRSPs, RRIFs, and RDSPs should continue to be qualified investments; whether and how qualified investment rules could promote an increase in Canadian-based investments; and whether crypto-backed assets are appropriate as qualified investments for registered savings plans.

Stakeholders are invited to submit comments to QI-consultation-PA@fin.gc.ca by July 15, 2024.

Indigenous Child and Family Services Settlement

Budget 2024 proposes to exclude the income of the trusts established under the First Nations Child and Family Services, Jordan’s Principle, and Trout Class Settlement Agreement from taxation. This would also ensure that payments received by class members as beneficiaries of the trusts would not be included when computing income for federal income tax purposes.

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

Deduction for Tradespeople’s Travel Expenses

Eligible tradespeople and apprentices in the construction industry can currently deduct up to $4,000 in eligible travel and relocation expenses per year under the labour mobility deduction for tradespeople. A previously tabled proposal provided for an alternative deduction for certain travel expenses of tradespeople in the construction industry, with no cap on expenses, retroactive to the 2022 taxation year.

Budget 2024 announced that the government will consider bringing forward amendments to provide a single, harmonized deduction for tradespeople’s travel that respects the proposal.