2024/2025 Tax Changes

Corporate income tax rates

No changes proposed to the general or small-business corporate income tax rates or to the $500,000 small-business limit of a Canadian-controlled private corporation (CCPC).

General anti-avoidance rule (GAAR)

Budget 2024 proposes to amend the GAAR by

(1) introducing a preamble;

(2) lowering the avoidance transaction standard;

(3) introducing a “lack of economic substance” test; and

(4) introducing a 25% penalty and extending the reassessment period by three years.

1. The proposed preamble explains that the GAAR (a) applies to deny a tax benefit if a transaction misuses or abuses the Income Tax Act, but allows tax benefits contemplated by the Act, (b) balances a taxpayer’s need for certainty and the Government’s need to protect the tax base and “the fairness of the tax system,” and (c) can apply regardless of whether a tax strategy is foreseen.
2. The avoidance transaction threshold would be reduced. Currently, GAAR does not apply if a transaction was undertaken primarily for bona fide reasons other than to obtain a tax benefit. Now a transaction will be an avoidance transaction if “one of the main purposes” was to obtain a tax benefit.
3. A transaction will tend to misuse or abuse if it “is significantly lacking in economic substance.” The legislation includes a list of non-exhaustive factors that “tend” to indicate a significant lack of economic substance, including no change in opportunity for gain, profit or risk of loss, the value of the tax benefit exceeding the non-tax economic return, and the transaction being substantially undertaken to obtain the tax benefit.
4. GAAR transactions will now be subject to a 25% penalty and a three-year extension to the normal reassessment period, unless the transaction has been voluntarily or mandatorily disclosed to the Canada Revenue Agency (CRA).

The Crown will still bear the burden of establishing the underlying object, spirit and purpose of the provisions or scheme of the Act. The 9 August 2022 consultation paper had proposed shifting this burden to the taxpayer.

A consultation period will remain open for comments until 31 May 2023, following which the Government intends to publish revised legislative proposals and announce the application date of the amendments.

Tax measures for individuals and trusts

Personal income tax rates

There are no personal income tax rate or tax bracket changes in this budget. The brackets will continue to be indexed for inflation.

See the Appendix for the top combined marginal rates by province and territory.

Federal personal income tax rates

	2023
Up to $53,359	15.0%
$53,360 to $106,717	20.5%
$106,718 to $165,430	26.0%
$165,431 to $235,675	29.0%
Over $235,675	33.0%

Minimum tax for top earners

Following the Government’s commitment announced in Budget 2022 to examine a new minimum tax regime to ensure all wealthy Canadians pay their fair share of tax, Budget 2023 proposes several changes to broaden the AMT regime, effective for tax years beginning after 2023, as follows:

• Increasing the AMT rate from 15% to 20.5% of adjusted taxable income (calculated for AMT purposes)
• Amending the calculation of adjusted taxable income by:
  • Increasing the AMT capital gains inclusion rate from 80% to 100% and including 100% of the benefit associated with employee stock options in the AMT base. Capital loss carryforwards and allowable business investment losses would apply at a 50% inclusion rate.
  • Including 30% of capital gains on donations of publicly listed securities in the AMT base, mirroring the AMT treatment of capital gains eligible for the lifetime capital gains exemption.
  • Disallowing 50% of several types of deductions, including deductions for CPP, QPP, and PPIP contributions, moving expenses, childcare expenses, interest and carrying charges incurred to earn income from property, non-capital loss carryovers, employment expenses (other than those to earn commission income), and the deduction for workers’ compensation and social assistance payments. Certain other deductions are also subject to the 50% limitation.
• Disallowing 50% of non-refundable tax credits that are currently fully available to reduce the AMT. The special foreign tax credit calculated for AMT purposes will continue to be allowed in full (based on the new AMT rate). Non-refundable credits that are currently disallowed would continue to be disallowed in full, including the political contribution tax credit, the labor sponsored venture capital corporations credit, the non-refundable portion of ITCs and the dividend tax credit.
• Increasing the basic exemption from $40,000 to an amount corresponding to the lower threshold amount of the fourth federal income tax bracket (expected to be approximately $173,000 in 2024). The basic exemption will be indexed annually to inflation.

Grocery Rebate

Budget 2023 proposes a one-time payment to eligible individuals as targeted inflation relief known as the Grocery Rebate. It will be paid as soon as possible once the corresponding legislation is enacted, through the Goods and Services Tax Credit (GSTC) system, by increasing an eligible individual’s entitlement for the January 2023 payment. Specifically, eligible individuals will receive an additional GSTC amount equal to twice the current credit amount received for January. The rebate remains non-taxable and income-tested in accordance with the GSTC system, and the existing income thresholds are unchanged.

Deduction for tradespeople’s tool expenses

Budget 2023 proposes to increase the deduction available to a tradesperson for the purchase of eligible new tools from $500 to $1,000 effective for 2023 and subsequent years. This increased deduction allows a tradesperson to claim up to $1,000 of the amount by which the total cost of eligible new tools acquired in a tax year as a condition of employment exceeds the amount of the Canada employment credit ($1,368 in 2023). The total amount deducted may not exceed the total employment income earned as a tradesperson and any apprenticeship grants received to acquire the tools and included in income.

As a result of the increase in the deduction for tradespeople’s tool expenses, the calculation of the separate deduction for the purchase of tools by eligible apprentice vehicle mechanics will be similarly amended to equal the cost in excess of the greater of $1,000 (increased from $500) plus the Canada employment credit, and 5% of the employee’s total income for the year from being an eligible apprentice mechanic.

Registered education savings plans

Budget 2023 proposes to increase certain limits on educational assistance payments (EAPs) that may be withdrawn from a registered education savings plan (RESP) to assist with a beneficiary’s post-secondary education-related expenses. Effective 28 March 2023, the proposed new withdrawal limit will increase from $5,000 to $8,000 in respect of the first 13 consecutive weeks of enrollment in a 12-month period for RESP beneficiaries who are full-time students, and from $2,500 to $4,000 per 13-week period for beneficiaries enrolled in part-time programs. Individuals who have already withdrawn EAPs may be permitted to withdraw an additional amount up to the new limit, subject to the terms of their plan, which may need to be amended by promoters to allow for this proposal.

Budget 2023 also proposes to allow divorced or separated parents to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter, effective 28 March 2023.

Registered disability savings plans

Budget 2023 proposes to extend an existing temporary measure that is legislated to expire on 31 December 2023, allowing a qualifying family member who is a parent, spouse or common-law partner to open a registered disability savings plan (RDSP) and be the plan holder for an adult beneficiary whose capacity to enter into an RDSP contract is in doubt and who does not have a recognized legal representative. The proposal extends this temporary measure by three years, to 31 December 2026. A qualifying family member who becomes a plan holder before the end of 2026 could remain the plan holder after 2026.

Budget 2023 also proposes a broadening of the definition of “qualifying family member” to include a brother or sister of an adult beneficiary whose capacity to enter into an RDSP contract is in doubt and who does not have a recognized legal representative. This proposal will also be in effect until 31 December 2026.

Other personal tax measures

The following additional personal tax measure was announced:

Taxpayer information sharing for the Canadian Dental Care Plan

Budget 2023 proposes amendments to the Income Tax Act (as well as to the Excise Tax Act and Excise Act, 2001) to allow the CRA to share taxpayer information with Health Canada and Employment and Social Development Canada for the purpose of delivering the Canadian Dental Care Plan.

Employee ownership trusts

An employee ownership trust (EOT) is a form of employee ownership where a trust holds shares of a corporation for the benefit of the corporation’s employees. A key appeal of an EOT is that it can be used to facilitate the purchase of a business by its employees without employees having to pay directly to acquire the shares. Typically, the underlying business will loan funds to the EOT, which then uses the funds to acquire a controlling interest in the business. The business is held in the EOT for the benefit of employees, and the loan is repaid out of earnings generated by the business.

An EOT is defined as a Canadian-resident trust that holds a controlling interest in a qualifying business where shares held for the benefit of employee beneficiaries and distributions are made to employee beneficiaries under a distribution formula that can only consider an employee’s length of service, remuneration and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.

All or substantially all the assets of the trust must be shares of a qualifying business, which is defined as a corporation that is a CCPC where all or substantially all of the fair market value of its assets is attributable to assets used in an active business carried on in Canada. Beneficiaries of the trust must consist exclusively of qualifying employees, which is defined as individuals employed by a qualifying business or a qualifying business that it controls.

Budget 2023 introduces several measures to provide efficacy to the EOT regime.

1. 10-year capital gains reserve

• The EOT regime is premised on the idea that the shares acquired by the EOT are paid for over time from earnings generated by the business.
• Recognizing that it can take time for the business to generate sufficient earnings to enable the EOT to pay the purchase price, Budget 2023 proposes to extend the capital gains reserve from 5 years to a maximum of 10 years in the case of a qualifying business transfer to an EOT.

2. New exception to shareholder loan rules

• Recognizing that it will take EOTs longer to repay loans from earnings, Budget 2023 proposes to introduce a new exception to extend the repayment period from 1 to 15 years for amounts loaned to the EOT from the qualifying business to purchase shares.

3. Exception to 21-year deemed disposition

• Since an EOT is intended to allow for shares to be held indefinitely, the 21-year deemed disposition could create a significant tax liability for the EOT.
• Budget 2023 proposes to exempt EOTs from the 21-year deemed disposition rule.

The EOT amendments would apply as of 1 January 2024.

Retirement compensation arrangements (RCA)

A letter of credit (LOC) is a common way to secure employee retirement benefits. Where a LOC has been used, the arrangement was considered “funded,” thereby triggering the obligation to remit refundable tax.

Since the LOC is only security to the employees and payment of retirement benefits is made from general company revenues, no mechanism to receive a return of refundable tax existed. Effective as of 28 March 2023, a LOC fee will no longer attract refundable tax requiring the remittance of refundable tax.

Starting in 2024, it will be possible to obtain a refund of refundable tax held by the CRA in respect of arrangements secured by a LOC. Where payment secured by a LOC is made in 2024 and later years, employers will be eligible for a refund of 50% of the payments made up to the amount of the refundable tax remitted to the CRA in respect of the LOC fee.

Sales and excise tax legislative amendments

GST/HST measures

GST/HST treatment of payment card clearing services: In light of a recent Federal Court of Appeal decision, Budget 2023 proposes to amend the GST/HST definition of “financial service” to clarify that payment card clearing services rendered by a payment card network operator (e.g., payment processing and messaging services) are excluded from the definition to ensure that such services generally continue to be subject to the GST/HST (addition of new paragraph (r.6) in the definition of “financial service”).

This measure would apply to a service rendered under an agreement for a supply if any consideration for the supply becomes due, or is paid without becoming due, after 28 March 2023.

Furthermore, this measure would also apply to a service rendered under an agreement for a supply if all of the consideration for the supply became due, or was paid, on or before 28 March 2023, except in certain situations, generally being where the following two conditions were both met:

• The supplier did not, on or before 28 March 2023, charge, collect or remit any amount as or on account of tax in respect of the supply.
• The supplier did not, on or before 28 March 2023, charge, collect or remit any amount as or on account of tax in respect of any other supply that is made under the agreement and that includes the provision of a payment card clearing service.

As such, a recipient who was charged by the supplier an amount as or on account of tax in respect of a payment card clearing service on or before 28 March 2023 should be viewed as having acquired a taxable supply and not an exempt supply of financial service.

Appendix

Maximum combined personal marginal income tax rates for 2023/2024

	Ordinary income			2023
	2022	2023	Increase (decrease)	Eligible dividends	Ordinary dividends	Capital gains
	%	%	%	%	%	%
Federal only	33.00	33.00	0.00	24.81	27.57	16.50
BC	53.50	53.50	0.00	36.54	48.89	26.75
Alberta	48.00	48.00	0.00	34.31	42.30	24.00
Saskatchewan	47.50	47.50	0.00	29.64	41.82	23.75
Manitoba	50.40	50.40	0.00	37.78	46.67	25.20
Ontario	53.53	53.53	0.00	39.34	47.74	26.76
Québec	53.31	53.31	0.00	40.11	48.70	26.65
NB	53.30	52.50	(0.80)	32.40	46.83	26.25
NS	54.00	54.00	0.00	41.58	48.27	27.00
PEI	51.37	51.37	0.00	34.22	47.04	25.69
NL	54.80	54.80	0.00	46.20	48.96	27.40
NWT	47.05	47.05	0.00	28.33	36.82	23.53
Nunavut	44.50	44.50	0.00	33.08	37.79	22.25
Yukon	48.00	48.00	0.00	28.92	44.05	24.00

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2022/2023 Tax Changes

• After two years of various COVID-19 measures, there were no modifications or extensions to existing government plans, such as the Canada Emergency Wage Subsidy (CEWS) or the Canada Emergency Rent Subsidy (CERS).

• Furthermore, many tax measures announced in Budget 2022 were in the form of launching consultations rather than proposed legislation. Detailed rules on Canada’s implementation of international tax agreements, known as Pillar One and Pillar Two, were also not released. Many items were explicitly deferred until the fall economic update.

A surprise tax break was announced for many mid-market Canadian private businesses. Canadian-controlled private corporations (CCPCs) benefit from a reduced rate of federal tax of 9% (vs 15%) on the first $500,000 of taxable income, which is subject to a full elimination where taxable capital exceeds $15 million.

Going forward, the small business deduction will be eliminated when taxable capital exceeds $50 million, although the phase out will continue to start once taxable capital exceeds $10 million. Continuing a multi-year trend of increasing Canada Revenue Agency (CRA) resources, additional funding of $1.2 billion over the next 5 years was announced.

Specific focus areas included larger entities and non-residents engaged in aggressive tax planning. The increased funding aligns with further commitments on modernizations to the general anti-avoidance rule (GAAR) by the end of 2022, which were previously signaled. In a specific tax measure expected to raise $4.2 billion over 5 years, proposals to prevent the partial deferral of taxation on investment income by private corporations were announced. These rules seek to ensure that integration – the concept that the taxation of investment income should be the same when realized personally or through a private corporation – remains intact. While detailed legislation is forthcoming, the measures may impact relatively common planning techniques used to enhance the tax attributes of an acquired entity. Furthermore, an enhanced minimum tax on high income earners was committed in the 2022 Fall Economic and Fiscal Update, to correct a concern that, in 2019, an estimated 28% of taxpayers with over $400,000 of gross income paid less than 15% federal tax. Further details on tax measures Private corporations and high net worth individuals

There were no broad increases to personal or corporate tax rates, no increases in goods and services tax (GST) or harmonized sales tax (HST), and no new taxes on wealth, inheritance or capital. The capital gains inclusion rate remains at 50%.

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For 2020, the basic personal credit is $12,298,  For 2019, it’s $12,069. (Note that the newly re-elected federal Liberal government promised to raise the basic personal amount over four years to reach $15,000, phasing out the benefits of the increase at incomes over $147,667.)

Clients may be able to claim up to $2,000 if they reported eligible pension, superannuation or annuity payments.

The maximum RRSP contribution for 2019 is $26,500; for 2020, $27,230.

In 2020, the annual TFSA limit is $6,000, for a total of $69,500 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009. The annual limit for 2019 is $6,000, for a total of $63,500 in room available in 2019 for someone who has been eligible since 2009.

For the 2020 tax year medical expense threshold, the maximum is 3% of net income or $2,397, whichever is less. For 2019, the max is 3% or $2,352, whichever is less.

For 2020, the maximum pensionable earnings is $58,700 ($57,400 in 2019), and the basic exemption amount remains $3,500 for 2019 and 2020.

The maximum annual insurance earnings (federal) for 2020 is $54,200; for 2019, $53,100.

After March 20, 2013, the first-time donor super credit is 25% for up to $1,000 in donations, for one tax year between 2013 and 2017. This program has now expired.

This non-taxable benefit was effective July 1, 2016, and replaced the universal child care benefit. In 2020, the maximum CCB benefit is $6,765 per child under age six and up to $5,708 per child aged six through 17. In 2019, those amounts are $6,639 per child under age six and up to $5,602 per child aged six through 17.

As of 2018, the maximum child care expense deduction limit amounts that can be claimed are $8,000 for children under age seven, $5,000 for children aged seven through 16, and $11,000 for children who are eligible for the disability tax credit.

If you have a dependent who is physically or mentally impaired, you may be able to claim up to an additional $2,182 in calculating certain non-refundable tax credits.

The disability amount for 2020 is $8,576 (non-refundable credit; $8,416 in 2019), with a supplement up to $5,003 for those under 18 (the amount is reduced if child care expenses are claimed; $4,909 in 2019).

The child disability benefit is a tax-free benefit of up to $2,886 (2020) for families who care for a child under age 18 with a severe and prolonged impairment in physical or mental functions. For 2019, the amount is $2,832.

The lifetime capital gains exemption is $883,384 in 2020 and $866,912 in 2019.

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Announced on July 18, 2017

The Canadian federal Finance Minister, Bill Morneau, the release of a consultation paper and with a draft legislation which, will have a dramatic impact on the taxation of Canadian private corporations and business structures that Canadian entrepreneurs have had in place for decades if enacted.

The governments proposals which target (1) income splitting strategies, (2) access to the lifetime capital gains exemption, (3) the tax treatment of passive investment income earned in a private corporation and (4) strategies to convert income into capital gains.

Income splitting

It is common for entrepreneurs who control private Canadian corporations to make use of ownership structures involving multiple family members. This can be achieved by either having family members hold corporation shares directly or through a family trust. Under these structures, family members (or the family trust) often hold different classes of shares which allow for dividends to be paid to the different family members at the discretion of the corporations directors or the family trusts trustees. This share structure permits dividends to be paid to family members who are in a lower tax bracket than the family member who controls the business. This is referred to as income splitting or dividend sprinkling in order to reduce the overall tax burden of the family.

The proposals to address income splitting strategies with private corporations also expand the application of the TOSI to include (1) income from certain debt obligations, (2) capital gains from the sale of shares the income from which is subject to the TOSI and (3) compound income on property that is the proceeds from income previously subject to the TOSI rules or the income attribution rules. However, this third type of income will only apply to individuals under the age of 25.

The new anti-income splitting rules are to be effective starting in 2018.

Lifetime capital gains exemption

Since 1988, Canadians have been able to shelter capital gains from the disposition of qualified small business corporation shares from tax up to a lifetime limit. The government has identified concerns with common ownership structures that allow multiple family members to make use of their capital gains exemption on the sale a of a family-owned business. Under the proposals, the capital gains exemption will be denied in the following circumstances:

1. individuals under the age of 18 will not be allowed to make use of the capital gains exemption;
2. beneficiaries of trusts will no longer be permitted to make use of the capital gains exemption with respect to gains on the value of shares that accrue during the period in which the trust holds the shares; and
3. individuals who are subject to the TOSI with respect to a share will not be able to make use of the capital gains exemption on the sale of such shares.

These new rules are to be effective starting in 2018. However, the proposals include a transitional rule that will allow an election to be made by the end of 2018 to crystallize a capital gain and claim the capital gains exemption so as to increase the adjusted cost base of the qualified small business corporation shares. Making such an election will reduce the individuals capital gain on a subsequent sale of the shares.

Passive investment income

The consultation paper identifies a concern with respect to a potential advantage that arises from earning business income through a corporation rather than individually. Corporations are taxed at a much lower rate than individuals on business income. As a result, more after-tax dollars are available for investment if earned through and retained in a corporation. This is an intentional tax policy decision to encourage reinvestment of business profits to broaden the tax base and increase employment. However, the government has expressed concern that this fact of the Canadian corporate tax system is unfair if the surplus funds are used for passive investment rather than reinvestment in the business.

Converting income into capital gains

Intended to allow a shareholder to extract retained earnings from a private corporation as a capital gain rather than as a dividend. This is beneficial to the shareholder, as capital gains are taxed at a lower rate than dividends. Amendments are proposed to the anti-surplus stripping rule in section 84.1 of the Income Tax Act to shut down this type of planning. These changes would apply on or after July 18, 2017.

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2016

The federal government is ending four child tax credits this year: arts, fitness, education and textbooks in 2017. Parents of children under the age of 16 can pre-pay 2017 arts and fitness programs to claim them on 2016 tax returns as long as total spending for 2016 does not exceed $250 and $500 limits, respectively

It is also cancelling income splitting for families, a tax reduction measure that allowed someone to transfer up to $50,000 of income to a spouse with lower income if they had a child under 18 years of age. The tax credit for income splitting was capped at $2,000.

Offsetting those changes are the Canada Child Benefit and changes to Employment Insurance benefits introduced in 2016.

“High income earners in most provinces will pay more but for the majority of Canadians, these two changes will mean more money in their pockets.

Several other changes at the federal level will affect life insurance, business owners selling their companies and some mutual funds.

Business owners, large and small, will gain less from the sale of their operations as assets such as goodwill and trademarks will become fully taxable as investment income. Currently, half of the proceeds can be distributed tax-free as a dividend.

Investors will also no longer be able to re-balance their non-registered mutual fund investments in corporations structured as “switch funds” on a tax-deferred basis. As of the new year, capital gains from such moves will be taxed in the same way as equities

Finally, various tax amounts — including maximum RRSP contributions, tax brackets and maximum amounts of various credits — will increase in 2017 to reflect inflation but the tax-free savings account limit remains at $5,500.

2014 and 2015

Higher Taxes in BC – The province has introduced a new temporary tax bracket on income over $150,000 or higher in 2014 and 2015.  The provincial tax rate on this income will climb from 14.7% to 16.8% meaning that all income above 150K will be taxed at a new and higher combined provincial and federal tax rate of 45.8% (currently 43.7%).

Dividends vs. Salary for Business Owners – Effective Jan 1, 2014, business owners benefitting from the small business deduction will lose the benefit of choosing dividends over salary income.  As there has been a 2%-3% tax advantage in electing dividends vs. salary payments, the 2013 Federal Budget introduced this change in order to improve the tax integration rules.  With the change, business owners will pay the same rate of tax regardless of which option is chosen.

Safety Deposit Boxes – The cost of renting a safety deposit box from your corner bank will no longer be a permitted deduction.  The rationale here is that more Canadians are storing personal items such as jewelry in the boxes rather than share certificates.

Lifetime Capital Gains Exemption – the exemption rate has climbed from 750K to 800K.  Owners of CCPCs (Canadian Controlled Private Corporations) will be exempt from paying tax on up to 800K of any realized capital gain from the sale of their business.  Certain rules apply,  If you’re interested in finding out how you can multiply the capital gains exemption with family members with the use of a family trust, drop me a line.

Children’s Tax Credits – there are a number of tax credits which parents can access but time is running out for 2013 if you haven’t incurred the expense already.  These include the Children’s Fitness Tax Credit, and the Children’s Art Tax Credit.

Charitable Donations – as with the above, qualified donations should be made by year end.  Here’s a quick tax planning tip: You can make a donation in kind, meaning you can donate stocks or mutual funds showing a capital gain.  No tax will be payable on the capital gain and the donor will receive a tax credit calculated on the full value of the donation.