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July 12, 2023 | Blog
Upcoming 2024 Tax Changes
Budget 2023 announced certain upcoming changes for the 2024 tax year. LetB次元官网网址檚 take a deep dive into them.
From tax expert Gerry Vittoratos
Budget 2023 announced certain upcoming changes for the 2024 tax year. LetB次元官网网址檚 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 . More specifically, the government amended a specific condition of ITA 84.1 (surplus stripping), that these transfers had to be done with non-armB次元官网网址檚 length entities to include armB次元官网网址檚 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 armB次元官网网址檚 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:
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路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; 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:
Proposed Conditions |
Immediate Business Transfer (three-year test) |
Gradual Business Transfer (five to ten-year test) |
|---|---|---|
1) Transfer of Control of the Business |
Parents immediately and permanently transfer both B次元官网网址 and factual* control, including an immediate transfer of a majority of voting shares, and a transfer of the balance of voting shares within 36 months. *Factual control means economic and other influence that allows for effective control of a corporation (for example, economic dependence on a person who also acts as the controlling mind). |
Parents immediately and permanently transfer only B次元官网网址** control, including an immediate transfer of a majority of voting shares (no transfer of factual control), and a transfer of the balance of voting shares within 36 months |
2) Transfer of Economic Interests in the Business |
Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months (It is expected that the transfers of B次元官网网址 and factual control as well as future growth of the business are sufficient to ensure the parents have transferred a substantial economic interest in the business to their child(ren).) |
Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months. In addition, within 10 years of the initial sale, parents reduce the economic value of their debt and equity interests in the business to:
a) 50% of the value of their interest in a farm or fishing corporation at the initial sale time, or b) 30% of the value of their interest in a small business corporation at the initial sale time. |
3) Transfer of Management of the Business |
Parents transfer management of the business to their child within a reasonable time based on the particular circumstances (with a 36-month safe harbour). |
Parents transfer management of the business to their children within a reasonable time based on the particular circumstances (with a 36-month safe harbour). |
4) Child Retains Control of the Business |
Child(ren) retains B次元官网网址 (not factual) control for a 36-month period following the share transfer. |
Child(ren) retains B次元官网网址 (not factual) control for the greater of 60 months or until the business transfer is completed. |
5) Child Works in the Business |
At least one child remains actively involved in the business for the 36-month period following the share transfer. |
At least one child remains actively involved in the business for the greater of 60 months or until the business transfer is completed. |
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:
Calculation element |
Current measure |
Proposed changes |
|---|---|---|
Basic exemption |
$40,000 |
$173,000 |
AMT Rate |
15% |
20.5% |
Capital Gains inclusion rate |
80% |
100% |
Employee stock option benefit |
50% |
100% |
Deductions (Note 1) |
100% |
50% |
Non-refundable tax credits (Note 2) |
100% |
50% |
Capital gains on donations of publicly listed securities |
0% |
30% |
Note 1 - Deductions being limited to 50% include :
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路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; deductions for Canada Pension Plan, Quebec Pension Plan, and Provincial Parental Insurance Plan contributions;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; moving expenses;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; child care expenses;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; disability supports deduction;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; deduction for workers' compensation payments;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; deduction for social assistance payments;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; deduction for Guaranteed Income Supplement and Allowance payments;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; Canadian armed forces personnel and police deduction;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; interest and carrying charges incurred to earn income from property;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; deduction for limited partnership losses of other years;
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; non-capital loss carryovers; and
路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; Northern residents deductions.
Note 2 B次元官网网址 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:
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o it would hold shares of B次元官网网址渜ualifying businessesB次元官网网址 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.
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路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; Beneficiaries must consist exclusively of B次元官网网址渜ualifying employeesB次元官网网址.
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:
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路&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫;&苍产蝉辫; exemption from the 21-year deemed disposition rule;
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This measure applies as of the 2024 tax year.
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