2024 Year End Newsletter

Please Note Our Holiday Shutdown

The offices of Ward & Uptigrove will be closed from 4:00 pm on Tuesday, December 24th and reopening in the New Year on Thursday, January 2nd.

During the 2024 year, we saw significant proposed changes to the taxation of capital gains in Canada. To understand these changes, it is important to understand what a capital gain is. A capital gain is the growth in the value of capital property from the original tax cost. Assets that are generally considered capital property for income tax purposes include the following:

• Share of a corporation
• Real estate property
• Goodwill (i.e. intangible value of a business)
• Bonds and other similar investments

Proposed Increase to the Capital Gains Inclusion Rate

In the 2024 federal budget, held mid-April 2024, the federal government announced that they would be increasing the capital gains inclusion rate from 50% to 66.67%, effective for dispositions on or after June 25, 2024.

The last capital gains inclusion rate change occurred 24 years ago!

This rate change effectively increases the amount of tax payable on capital gains by 33.33%.

The proposed tax changes include a carve-out for individuals on the first $250,000 of capital gains. This carve-out means that on the first $250,000 of capital gains, the 50% inclusion rate will remain. This limit is per individual and per calendar year, with no proration for the 2024 year.

Proposed Increase to the Lifetime Capital Gains Exemption

As the name may suggest, dispositions of certain capital property may be exempt from income tax. The types of property that qualify for the lifetime capital gains exemption (“LCGE”) are qualifying farming and fishing property and shares of a qualified small business corporation. This exemption has a lifetime limit which the government changes from time to time. 

Also included in the 2024 federal budget, the federal government announced that they would be increasing the lifetime capital gains exemption limit to $1,250,000 effective for dispositions on or after June 25, 2024.

With the proposed increase to the capital gains inclusion rate, tax savings when using the full $1,250,000 capital gains exemption could be over $446,000!

Proposed Introduction of the Canadian Entrepreneurs Incentive

Like the other proposed measures, the 2024 federal budget introduced the Canadian Entrepreneurs Incentive (“CEI”). This incentive will reduce the capital gains inclusion rate to 1/3 subject to annual and lifetime limits. See section below for more details.

Businesses specifically excluded from this incentive include professional practices, businesses that provide consulting services, financial services, real estate and property management services, rental businesses and developers, hotels foods and accommodation, and arts and entertainment.

The proposed rules currently set the maximum lifetime incentive available for the 2025 taxation year at $400,000 with increases of $400,000 per year until the lifetime limit reaches $2,000,000 in the year 2029.

In Ontario, this would lower the income tax rate on eligible capital gains from the top rate of 35.68% to 17.85%. The tax savings when using the full $2,000,000 lifetime limit is $356,800!

Capital Gains Rates for 2025

With all the recent proposed tax changes to the taxation of capital gains, there is even more variation on the effective tax rate on capital gains, as summarized in the chart below:

On December 16, 2024, the federal government presented the Fall Economic Statement 2024. Some key highlights of the proposed measures are the following:

Accelerated Investment Incentive & Immediate Expensing

Proposes to reinstate the accelerated investment incentive (AII) and immediate expensing measures for qualifying property acquired on or after January 1, 2025 and that become available for use before 2030.

Regarding the AII measure, the government has proposed to increase the first-year CCA to three times the normal first-year deduction if the property is normally subject to the half-year rule, and one-and-a-half times the normal first-year deduction if the property is not normally subject to the half year rule.

Regarding the immediate expensing measure, it will be applicable only for manufacturing and processing machinery and equipment included in class 53, clean energy equipment included in class 43.1, and zero-emission vehicles included in classes 54, 55 and 56.

Canada Carbon Rebate for Small Businesses Changes

Proposes to change the design of the Canada Carbon Rebate program, effective for the 2024-25 and later fuel charge years. The proposal includes the following two changes to the calculation of the tax credit:

• A minimum payment for eligible corporations with up to 20 employees; and
• A phase-out for eligible corporations that have between 300 and 500 employees.

Also, proposes to expand the eligibility for the Canada Carbon Rebate rural supplement to individuals who reside in certain rural areas or small population centres, effective as of the 2024 taxation year. 

Scientific Research and Experimental Development (SR&ED)

Proposes various enhancements to the SR&ED program and it indicated that further enhancements to the SR&ED program may be coming in the 2025 federal budget.

Other Announcements

1. Automatic personal tax filing – announced measures to simplify and automate individual tax filing in Canada, beginning as soon as the 2025 taxation year.
   
   
2. Reporting for non-profit organizations (NPOs) – proposes to require NPOs with total gross revenues exceeding $50,000 to file an annual information return, and requires NPOs that do not meet the $50,000 filing threshold to file a new, short-form return that contains basic information about the organization. These measures would apply for the 2026 and subsequent taxation years. 

CRA Delays with Processing Ontario Tax Credits

Ontario corporations applying for tax credits including the Ontario Regional Opportunities Investment Tax Credit, as well as the Ontario Made Manufacturing Investment Tax Credit may be experiencing much longer than normal assessment processing times. The targeted processing time for corporate tax returns is normally six weeks. However, the CRA appears to have put a hold on processing such corporate returns that are claiming these Ontario tax credits. In certain instances, we have some clients that have been waiting for as long as a year.

The CRA has informed us that the primary cause for these delays is the high volume of returns applying for these credits. However, an interesting recent article posted by CBC may shed some light as to what could actually be behind the delays. The CRA has yet to provide an official response.

Ward & Uptigrove will continue to follow up with CRA, however, there is little that can be done to improve the processing time.

Canada Carbon Rebate for Small Businesses

In our summer 2024 newsletter, we provided details on the new Canada Carbon Rebate for Small Businesses. At that time, the date of when the CRA would pay these rebates was uncertain. The CRA has been paying these rebates during the month of December 2024. Also, although not law yet, recent announcements say the intention is for these rebates to be non-taxable. See section below for more details.

Proposed Reporting for Bare Trusts – Deferred

On October 29, 2024, the CRA announced that they will not require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information for a Trust) for the 2024 tax year, unless the CRA makes a direct request for these filings. This was a continuation of the exemption from the trust reporting requirements that was issued for bare trusts for the 2023 tax year.

Short-Term Rental – Income Tax & HST Implications

There have been two significant developments regarding short-term rental arrangements, such as those on the Airbnb or Vrbo platforms:

1. On the income tax side, in the 2023 Fall Economic Statement, the federal government proposed to deny the deduction of expenses incurred in the year on non-compliant short-term rentals. The effective date for this measure is January 1, 2024, and as such this measure will impact 2024 personal income tax returns.

A non-compliant short-term rental is a residential property that is offered for rent for a period of less than 90 consecutive days that is either:

(a) Located in a province or municipality that does not permit the operation of a short-term rental; or

(b) Non-compliant with any of the registration, licensing, and permit requirements in the area in which the property is located.

To determine the amount of non-deductible expenses, you must first determine the portion of the year that your residential property is considered a non-compliant short-term rental. For the 2024 tax year only, as a transitional relief measure, if you are compliant with all the local registration, licensing and permit requirements on December 31, 2024, you will be deemed to be compliant for all of 2024.

2. On the GST/HST side, a Tax Court of Canada case found that the sale of a used condo unit was subject to GST/HST. This case involved a taxpayer that had rented the condo unit on long-term leases for approximately nine years before renting the property on short-term rentals for a period of 14 months after which time the unit was sold to an arm’s-length purchaser. 

It will be interesting to see what actions the CRA takes after this case. Short-term rentals have gained in popularity over the last 5 years and it is unlikely many of these taxpayers have considered the GST/HST implications in operating these short-term rentals.

Tax Depreciation (Capital Cost Allowance) on Purpose-Built Rental Buildings

The 2024 federal budget proposed to increase the tax depreciation rate from the normal 4% to 10% for new eligible purpose-built rental projects that begin construction on or after April 16, 2024, and before January 1, 2031, and are available for use by January 11, 2036.

In an effort to make registration easier, CRA has implemented an immediate identity verification option. A photo of your Canadian passport, driver’s license or provincial/territorial photo ID card can be used. Taxpayers not wishing to use this service can still verify their identity by receiving a security code through the mail.  

New options have been added to MyAccount, taxpayers can now make an online request to:

• Transfer available payments or installments within their own account
• Request a refund of available payments or installments
• Request payment tracing
• Request a statement of account

Choice of Estate Trustee

The person who will deal with your estate after you die is called an estate trustee (often also called executor).

Estate trustees have various responsibilities such as accounting for all your assets, applying for probate, looking after tax filings and distribution of estate assets. 

In choosing an estate trustee, you may want to evaluate potential candidates based on the following criteria:

• Trustworthiness
• Organized, responsible and dependable
• Financial knowledge
• Residence, it can be easier if the estate trustee lives closer to be able to deal with your estate. If your estate trustee does not live in Canada, they might have to pay a bond
• Likelihood to live longer than you
• If you have a complicated estate, you may want to consider choosing a professional, such as a lawyer, accountant or trust company

Many people choose their spouse, family member, or friend to be their estate trustee. You should talk to the person you chose to make sure they agree to be your estate trustee before naming them in your will.

Dual Will Planning

Where you hold shares or loans of private corporations, a common probate planning strategy is to have two or dual wills. The first, often called primary will, consists of all your assets except those in your secondary will. The secondary will is generally comprised of all shares and loans in private corporations. The benefit of these dual wills is that probate fees may be avoided with assets listed in the secondary will.

Testamentary Trusts to Consider Creating in your Will

#1 Testamentary Spousal Trust

The most common situation we see is that on the death of the first spouse, all the assets are transferred to the surviving spouse. This transfer generally occurs on tax-deferred basis. However, if you have certain assets in your name that you eventually want to go to a particular person, such as your child, it may make sense to create a testamentary spousal trust in your will. A testamentary spousal trust would provide the same tax-deferred transfer; however, you would have more certainty on who will receive your particular assets once your spouse has also passed away.

Let us look at an example. Mr. A owns a particular capital property (Prop#1). Mr. A wants his son, Mr. B to eventually receive Prop#1 once he and Mrs. A have passed away. If Mr. A simple leaves Prop#1 to Mrs. A in his will, he would be relying on Mrs. A to transfer Prop#1 to his son, Mr. B. Mrs. A would have no obligation to transfer Prop#1 to Mr. B upon her death. If Mr. A wants certainty that Prop#1 would go to Mr. B upon the death of both Mr. and Mrs. A, Mr. A can create a testamentary spousal trust in his will. 

#2 Henson Trust Planning

If you have a family member that has been diagnosed with a disability and you will be leaving significant funds for their care, a common plan is to set-up what is known as a Henson Trust in your will. A Henson Trust is a trust that provides the trustee with the absolute discretion to distribute income and capital from the trust to the beneficiary, thus making it invisible to government income support payments such as the Ontario Disability Support Program. There are various rules, requirements, limits and tax planning opportunities available. 

During the 2023 tax year, CRA requested that issuers (including employers and pension plan administrators) of T4 or T4A's needed to report on the slip whether on December 31st of that taxation year an employee or any of their family members were eligible to access dental insurance, or dental coverage of any kind including health spending and wellness accounts due to their current or former employment.  If this was not reported in 2023 the CRA defaulted the reporting to code 1 which was no access to any.

This should have been reported on the following boxes:

• Box 45 on all T4 slips
• Box 015 on all T4A slips

For the current year and going forward, those boxes noted above on the T4 or T4A are MANDATORY. As such if those boxes have nothing in it when the slips are submitted, the CRA has indicated that they will reject the T4 and T4A submission requiring corrections which may result in penalties.

When filling out the T4 or T4A, employers must select one of the following 5 codes to report the situation that applies to their employees:

• Code 1 - No Access to any dental care insurance, or coverage of dental services of any kind
• Code 2 - Access to any dental care insurance or coverage of dental services of any kind for on the employee 
• Code 3 - Access to any dental care insurance or coverage of dental services of any kind for employee, spouse and dependents
• Code 4 - Access to any dental care insurance or coverage of dental services of any kind for only the employee and their spouse
• Code 5 - Access to any dental care insurance or coverage of dental services of any kind for only the employee and dependents

Note - If the employee has access to dental care insurance or coverage and has chosen to decline it for any reason the employer CAN NOT report Code 1.

Workplace Safety & Prevention Services is offering a free Health and Safety Orientation Handbook Generator for small businesses. If you are interested, follow the link: WSPS Safety Orientation Handbook

Be cautious that this is not a health and safety handbook but can be used as a starting point for small businesses.  It is important for employers to customize their handbooks to align with their safety policies, ensure it meets all the legislative requirements based on their business and unique circumstances and provide training to staff.

If you are looking for an efficient method for employee training that meets legislative requirements, our team offers virtual programs that are engaging and support employer due diligence. Contact our Health and Safety Team for more information: HRresults@w-u.on.ca.