On June 20th, 2024, bills implementing proposals from the 2023 Fall Economic Statement and Federal Budget, as well as proposals from the 2024 Federal Budget received royal assent. The bills amend the Income Tax Act and Underused Housing Tax Act and introduce the Digital Services Tax Act and the Global Minimum Tax Act. Effective dates of these changes vary. Middle market companies will be impacted by these taxation changes.
On June 20th, 2024, Bill C-59 and Bill C-69 received royal assent. The bills contain various material amendments to the Income Tax Act (Act) and the Underused Housing Tax Act (UHTA). These bills additionally introduce new legislation based on areas of concern identified by the Organisation for Economic Co-operation and Development (OECD) - the Digital Services Tax Act and the Global Minimum Tax Act (GMTA).
This article summarizes notable amendments and new legislation impacting the middle market of Canada.
The AMT is a parallel tax calculation that allows fewer deductions and tax credits than the usual progressive rate calculation. An individual pays the higher of AMT and the regular progressive rate calculation. Bill C-69 implements the changes to AMT that were announced in Budget 2023 with further proposed amendments announced in Budget 2024. The following are the implemented changes to AMT effective Jan. 1, 2024.
Under the newly implemented rules, the AMT rate has increased from 15% to 20.5% which will result in more AMT payable for applicable taxpayers. In addition, the increase in the basic AMT exemption amount from $40,000 to $173,000, is to be indexed annually.
Furthermore, the new rules broaden the AMT base by increasing certain inclusion rates resulting in higher taxes for impacted taxpayers:
These new rules notably exempt certain types of trusts from being subject to AMT, namely graduated rate estates and qualifying employee ownership trusts.
Bill C-59 and Bill C-69 introduce four clean economy investment tax credits (ITCs). Taxable Canadian corporations are the only type of taxpayer which qualify for the Clean Hydrogen ITC, Carbon Capture, Utilization and Storage ITC and Clean Technology Manufacturing ITC. Either taxable Canadian corporations or real estate investment trusts (REITs) can qualify for the Clean Technology ITC. Partnerships can allocate proportionate shares of the credits to partners which are eligible claimants.
Clean Technology
The Clean Technology ITC is a refundable ITC for acquisitions of certain clean technology capital property. Generally, eligible property includes equipment that generates or stores renewable energy, as well as non-road zero emission vehicles. The ITC will refund 30% of the cost of eligible property acquired between March 28, 2023 and Dec. 31, 2033 and 15% of the cost of eligible property acquired in 2034. The credit ceases on Jan. 1, 2035.
Carbon capture, utilisation and storage (CCUS)
The CCUS ITC is a refundable ITC for the storage of captured carbon in geological storage and use of captured carbon in producing concrete. The credit will refund between 37.5% and 60% of eligible expenditures (depending on the type of expenditure) incurred after 2021 and before 2031 before being phased out completely by 2041. Taxpayers looking to claim the credit may be subject to additional environmental, social, and governance reporting requirements.
Clean hydrogen
Clean hydrogen is a refundable tax credit that is introduced for eligible investments in clean hydrogen production and applicable to eligible property acquired and available for use after March 28, 2023. The credit will be available at the rate of 15%, 25% or 40%, depending on the assessed carbon intensity of the hydrogen produced. To claim the credit, the eligible property must be used in an eligible project and must be available for use in Canada. The credit will phase out by 50% for property that becomes available for use in 2034 and fully phase out for property that becomes available for use after 2034.
Clean technology manufacturing
Clean technology manufacturing ITC is a refundable tax credit introduced for eligible investments in clean technology manufacturing property that is used in qualified zero‑emission technology manufacturing activities and qualifying mineral activities. The credit will apply to eligible property that is acquired and becomes available for use on or after Jan. 1, 2024. The credit will be available at the rate of 30% of the capital cost of eligible property that is used in all or substantially all eligible activities. The credit will phase out for property that becomes available for use in 2032 and fully phase out after 2034.
Labour requirements
Apart from the Clean Technology Manufacturing ITC, the credit rate for each ITC will be decreased by 10% where the claimant fails to meet labour requirements related to wages and the use of unionized and apprentice labour for positions where the duties are primarily manual or physical in nature.
Bill C-59 implements employee ownership trusts (EOTs) as a vehicle to facilitate the purchase of a business by its employees without requiring them to pay directly to acquire shares of the business. The purpose of an EOT is limited to either holding shares of a qualifying business for the benefit of employees or making distributions to those employee beneficiaries based on legislative criteria. These rules are effective from Jan. 1, 2024.
Bill C-69 adds a $10 million capital gains exemption on the sale of a qualifying business to an EOT provided certain conditions are met. This exemption is applicable on qualifying share dispositions between Jan. 1, 2024, and Dec. 31, 2026.
Bill C-69 enacted the global minimum tax to ensure large multinational corporations (i.e., corporations with more than €750 million in worldwide revenues on a consolidated group basis) pay at least a 15% effective tax rate on their global profits. This comes as a response to the implementation of a coordinated international tax system developed under Pillar Two of the OECD. The GMTA includes modern compliance and enforcement provisions and makes related amendments for effective administration by the Canada Revenue Agency.
A private member’s bill, Bill C-208, amended the surplus stripping rules in section 84.1 with the aim of better allowing for intergenerational business transfers. The surplus stripping rules are intended to prevent a taxpayer from obtaining a tax advantage by distributing assets of a corporation as a capital gain instead of a dividend. Bill C-208 created unintended tax avoidance loopholes. The amendments to section 84.1 contained in Bill C-59 are intended to close these loopholes.
The amendments introduce two types of business transfers:
i. An immediate transfer: Must occur within 36 months after the sale (or within another reasonable period of time)
ii. A gradual transfer: Must occur within 60 months after the sale (or within another reasonable period of time)
After each transfer, the following must occur, albeit within different timeframes depending on the type of transfer.
Child includes grandchildren, nieces/nephews, and grandnieces/grandnephews. Parents can retain economic influence, with certain restrictions, over the transferred corporation only if the gradual transfer type is utilized. Parents cannot maintain legal control over the transferred corporation in either type of transfer.
The new rules will apply to transactions occurring on or after Jan. 1, 2024.
For making housing affordable for Canadians, Bill C-69 enacted various measures including:
Amendments to UHTA
UHTA requires affected owners of residential property in Canada to file an annual return where the residential property (RP) is considered vacant or underused. With the introduction of Bill C-69, specified Canadian partnerships, trusts, and corporations will now be considered “excluded owners,” for the purposes of UHT. Consequently, these taxpayers will be exempted from filing UHT returns for the 2023 calendar year onwards. In addition, certain other amendments were introduced.
Enhancing the Home Buyers’ Plan (HBP)
The HBP withdrawal limit will increase from $35,000 to $60,000 allowing buyers to draw more funds from their registered retirement saving plan (RRSPs) to assist in purchasing their first home. The government is also providing an additional three-year grace period after withdrawals, before repayments to the RRSP is required.
Denial of expenses on short-term rentals
The Federal government has introduced a rule that will deny short-term rental operators from claiming expenses related to the short-term rental earned income in a prohibited province or municipality. For the purposes of this section, “short-term rental” is defined as a residential property with rent periods of less than 90 consecutive days.
Bill C-59 introduces a new category of corporation: Substantive Canadian-Controlled Private Corporations (SCCPCs). This change is in response to planning historically undertaken by taxpayers to access a deferral advantage attributable to non-CCPCs before disposing of capital property
SCCPCs are private corporations which are not Canadian-controlled private corporations that are ultimately controlled, in law or in fact, by Canadian-resident individuals. An SCCPC will be subject to the same refundable tax on investment income as a CCPC. Furthermore, an SCCPC is not entitled to the benefits available to a CCPC, such as the small business deduction, the enhanced scientific research & experimental development credits, and a shorter reassessment period from the CRA (Canada Revenue Agency). These rules are effective for taxation years that ended on or after April 7, 2022.
