Intergenerational business transfers
Surplus stripping rules prevent a taxpayer from lowering their taxable income by distributing a corporation’s assets as a capital gain instead of a dividend and can apply inadvertently in circumstances where taxpayers are looking to transfer their business to the next generation. To accommodate this, intergenerational business transfers (IBTS) are exempt from the surplus stripping rules as long as they meet certain criteria. The new rules will apply to transactions occurring on or after Jan. 1, 2024.
There are two types of exempted IBTs:
- An immediate IBT: Takes place over three years
- A gradual IBT: Takes place over five to ten years
For both types of exempted IBTs, the following must occur, albeit within different timeframes depending on the type of transfer:
- Management must be transferred
- The children must retain legal control
- At least one child must remain actively involved in the business
- Each relevant business of the transferred corporation must be carried on as an active business
The IBT rules, despite their restrictions, offer a significant benefit for taxpayers who are looking to transfer their business to the next generation without triggering adverse tax consequences.
Employee ownership trusts
Employee ownership trusts (EOTs) have been introduced to allow for the purchase of a business by its employees without requiring direct payment. Certain benefits arise from the use of EOTs include an extended timeframe the seller can claim a capital gains reserve and an exemption from the 21-year rule, which otherwise generally deems certain trusts to have disposed of their property every 21 years. These rules are effective from Jan. 1, 2024.
Additionally, for qualifying share dispositions between Jan. 1, 2024, and Dec. 31, 2026, there is a $10 million capital gains exemption on the sale of a qualifying business to an EOT, provided certain conditions are met, providing exiting owner-managers with a compelling tax-beneficial avenue to explore.
Alternative minimum tax
The alternative minimum tax (AMT) is a parallel calculation of tax owing that has special computation rules. For individuals and trusts, if the tax balance determined under AMT exceeds the tax balance computed under the regular income tax calculation using graduated rates, the taxpayer pays the AMT amount.
Effective Jan. 1, 2024, the basic AMT exemption amount is increased from $40,000 to the second highest marginal tax rate threshold, which is currently $173,205 for 2024 and will be indexed annually. The AMT inclusion rate was increased on most types of capital gains as well as employee stock options, and certain expenses and credits are being limited to 50 per cent deductibility. The AMT rate is also increased from 15 per cent to 20.5 per cent. Certain types of trusts are now exempted from being subject to AMT, namely graduated rate estates and qualifying employee ownership trusts.
All changes above have received royal assent and are now in law. However, the August 2024 draft legislation introduces some further minor changes to the above amendments, including special computation rules for the capital gain earned on flow-through shares and resource expenditures, and expanding the 50 per cent expense denial to fees paid to investment counsel.
AMT can now apply to many high net worth individuals engaging in certain types of tax planning when they previously did not, especially for the 2024 tax year.
Underused housing tax
The Underused Housing Tax Act requires owners of residential property in Canada, except excluded owners, to file an annual return. Effective Jan. 1, 2022, if the property is considered vacant or underused and is not otherwise exempted, the owner is liable for tax on the property. For calendar year 2023 onward, specified Canadian partnerships, trusts and corporations will be considered “excluded owners” and will no longer be required to file an underused housing tax return.
Amendments to trust legislation
New draft legislation released August 2024 provides amendments to the enhanced trust reporting rules that were otherwise enacted for the 2023 tax year. The enhanced reporting rules were broad and comprehensive, including expanding filing requirements to bare and informal trusts as well as requiring detailed disclosure details about trustees, beneficiaries and settlors. Additionally, the amendments provide an extension to the loss carryback election, which allows an estate to carryback capital losses incurred to the deceased taxpayer’s terminal return.
The proposed amendments include:
- Expansion of trusts that are exempt from the enhanced reporting requirements
- Exempting bare trusts from the enhanced reporting requirements for 2024
- Expansion of the ability to claim the loss carryback election from only the first taxation year of the estate to the first three years of the estate
These changes are welcome changes for taxpayers, as they aim to reduce the filing burden for many trusts as well as introduce some added flexibility.