Engaging in effective tax planning with the professionals at Bateman MacKay is often a multi-year endeavour. As 2024 nears its close, assessing and refining your tax strategies for both the current and future years is essential to optimizing your tax position by December 31, 2024. This article highlights key income tax changes and Canada Revenue Agency (CRA) policy updates, along with various tax planning opportunities. Should you have any questions about these changes or potential strategies, please reach out to your Bateman MacKay Business Advisor for tailored guidance specific to your circumstances.

2024 Tax Planning Highlights

• Capital Gains Changes and Planning Opportunities – The 2024 Federal Budget introduced substantial changes to the taxation of capital gains.
• Canadian Entrepreneurs Incentive – A strategic tool to reduce capital gains tax for founding shareholders.
• Alternative Minimum Tax (AMT) – Further adjusted in 2024 to target high income earners.
• Bare Trusts – Many bare trusts are now exempt from T3 filing, with non-exempt trusts deferred until the 2025 tax year.
• Accelerated Capital Cost Allowance – An accelerated capital cost allowance rate became available in 2024 for eligible property.

Corporate and Individual Tax Planning

Capital Gains Planning

Significant changes to capital gains taxation introduced in 2024, outlined further below, offer multiple tax planning opportunities. Many of the opportunities below require expert guidance from a seasoned tax professional. Additionally, consider revisiting estate and succession plans, including strategic use of the lifetime capital gains exemption to help minimize capital gains tax.

• Employee Ownership Trusts (EOTs) can exempt the first $10 million of capital gains realized on sales to an EOT before 2027.
• Canadian Entrepreneurs Incentive (CEI) reduces the inclusion rate from 2/3 to 1/3 on up to $2 million in capital gains per individual.
• Capital Gains Reserve allows a five-year reserve for capital gains realized on property sales involving deferred payments.
• Small Business Corporation Shares – Capital gains from eligible small business corporation shares sold in 2024 can be deferred if sale proceeds are reinvested into another eligible small business by April 30, 2025.
• Annual Gains Threshold – Individuals realizing capital gains of up to $250,000 in 2024 could benefit from the lower inclusion rate for gains under this threshold.

Action: Review your capital gains strategy to optimize your overall capital gains taxation including use of the capital gains reserve, optimizing yours and your family’s annual gains threshold, maximizing future capital gains exemptions, CEI and EOT opportunities. For more detailed guidance, view our recent webinar.

Accelerated Capital Cost Allowance

An accelerated CCA rate of 10% for new eligible purpose-built rental projects that begin construction on or after April 16, 2024, and before January 1, 2031, would be provided. Eligible property would be residential complexes with at least four private apartment units or 10 private rooms or suites. At least 90% of the units must be held for long-term rental. The residential complex must be available for use before 2036.

In addition, immediate 100% CCA expensing for new additions of property in respect of the following three classes would be provided if the property is acquired on or after April 16, 2024, and becomes available for use before January 1, 2027: Class 44 (patents or the rights to use patented information for a limited or unlimited period); Class 46 (data network infrastructure equipment and related systems software); and Class 50 (general-purpose electronic data-processing equipment and systems software).

Action: Identify eligible rental or technology investments to capitalize on accelerated CCA rates and consult a tax advisor to optimize timing and classification of assets.

Changes to Alternative Minimum Tax (AMT)

The updated AMT rules, effective 2024, may impact deductions and planning strategies.

Action: Review the potential personal income tax implications related to charitable donations, share sales, and other high-deduction activities with your tax advisor. Consider having your tax advisor run pro-forma AMT related calculations. Webinar details are available here.

Salary/Dividend Mix

Determine the most beneficial mix of salary and dividends for you and your family members. Consider all relevant factors including personal tax rates, corporate tax rates, RRSP and CPP contributions, provincial deductions and taxes, and available tax credits. Reasonable salaries can be paid to spouses or children who provide services to the business, which also allows for CPP, RRSP and other deductions.

Action: Consider a salary of $175,333 which will provide the maximum $31,560 in RRSP room for 2024.

Tax on Split Income (TOSI)

Consider paying dividends to a lower income family member who is a shareholder of the company. However, the TOSI may be applicable which would frustrate such tax planning and the dividend income paid to the lower income shareholder would then be taxed at the highest marginal tax rate. The family member who receives such dividends often is required to be actively engaged in the company to avoid TOSI.

Action: Contact a Bateman MacKay tax advisor as tailored professional tax advice is crucial to navigate the TOSI rules.

Corporate Withdrawals

If corporate withdrawals are required, make sure to consider strategies to reduce the effective tax rate of these withdrawals.

Action: Discuss using potential options including the company’s capital dividend account, repaying shareholder loans or paying tax-effective dividends.

Immediate Expensing of up to $1.5 Million

Sole proprietors and Canadian partnerships (where all members of the partnership are individuals) can still immediately expense for tax purposes the purchase of depreciable assets as long as they are available for use at the end of the year. Preponing such investments may entitle your business to be eligible to immediately expense up to $1.5 million per tax year and/or take advantage of the Accelerated Investment Incentive.

Action: Evaluate any planned purchases of eligible depreciable assets before year-end to take advantage of immediate expensing limits up to $1.5 million.

Income Timing

If you expect to be in a lower tax bracket next year and may receive a year-end bonus, consider deferring the receipt of your bonus to early 2025. You may also request the bonus, or a portion of the bonus, to be transferred directly into your RRSP to prevent the withholding of taxes provided you have sufficient unused RRSP deduction room in the year of the transfer.

Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) & First Home Savings Account (FHSA) Contributions

You have until March 1, 2025, to contribute to your RRSP or a spousal RRSP to be able to deduct the amount on your 2024 return. If you have contribution room, (18% of earned income up to a maximum of $31,560) contributing before December 31, 2024, helps to maximize the tax-deferred growth in your plan.

Contributions of up to $7,000 for 2024 (an annual increase of $500) and any unused contribution room from 2009-2023 can be made to the TFSA. The TFSA allows for tax-free investment income including interest, dividends and capital gains, which may result in higher growth compared to a regular taxable account. Tax-free withdrawals can be made at any time, but caution that any amount withdrawn is not added back to your contribution room until January 1 of the following year.

The FHSA allows individuals saving for their first home to contribute up to $8,000 annually (plus carryforward room) with a lifetime limit of $40,000. Contributions are tax-deductible, grow tax-free, and qualifying withdrawals are also tax-free. Contributions must be made by December 31, 2024, to claim the deduction for 2024. Investment income earned within a FHSA happens on a tax-deferred basis. If a qualifying withdrawal is made, the withdrawal occurs on a tax-free basis similar to a withdrawal from a TFSA.

Action: Open an FHSA if eligible, and ensure contributions are made by year-end to maximize benefits.

Relevant Tax Changes for Business Owners

Capital Gains

The 2024 Federal Budget has proposed to increase the inclusion rate from 50% to 66.7% for dispositions of capital property occurring on or after June 25, 2024. For businesses and trusts, this rate applies to all capital gains. However, individuals will retain the 50% inclusion rate on the first $250,000 of capital gains per year. The lifetime capital gains exemption limit will be increased to $1,250,000 (from $1,016,836) effective for qualifying dispositions on or after June 25, 2024. Beginning in 2026 this amount will be indexed for inflation.

Action: Explore the timing of dispositions and utilize exemptions like the lifetime capital gains exemption to mitigate tax under the updated 2024 inclusion rate rules.

Canadian Entrepreneurs Incentive (CEI)

Beginning in 2025, the capital gains inclusion rate on certain shares will be eligible for a halved capital gains inclusion rate. Stringent requirements apply regarding share ownership as well as the types of businesses eligible for the incentive.  Individuals will accrue a $400,000 incentive limit per year until January 1, 2029, when the incentive is fully implemented at $2,000,000. If all criteria are met, this would allow individuals to shelter $1,250,000 of gains utilizing the capital gain exemption, with a further $2,000,000 of gains having only 1/3 inclusion rate.

Action: Confirm eligibility for the reduced inclusion rate under the CEI and collaborate with your tax advisor to plan dispositions that align with the incentive’s strict requirements.

Intergenerational Business Transfer (IBT) and Employee Ownership Trusts (EOT)

Legislation introduced in 2021 was designed to facilitate the transfer of family businesses to the next generation. This legislation allowed for parents to utilize the lifetime capital gains exemption or simply receive capital gain treatment on the disposition of their shares in a Canadian Controlled Private Corporation (CCPC), and enjoy the same tax benefits available on a sale to unrelated third parties. However, CRA concerns arose for inappropriate tax advantage where there was no factual transfer of a business to the next generation. For share sales occurring on or after January 1, 2024, amendments to these rules were proposed to ensure that they apply only where a genuine Intergenerational Business Transfer (IBT) takes place.

Employee Ownership Trusts (EOTs) are a Canadian-resident trust that holds shares of qualifying businesses for the benefit of employees to facilitate and promote employee ownership of small and medium-sized businesses. EOT legislation came into effect on January 1, 2024, and, in certain circumstances, can exempt the first $10 million of capital gains realized on the sale of a business.

Action: Both the IBT and EOT should be reviewed with your Bateman MacKay tax advisor as possible key tools for the implementation of a tax-effective succession plan.

Relevant Tax Changes for Individuals

Trust Reporting

Originally announced in 2018 and delayed several times, updates to trust reporting intend to apply for 2024 T3 trust returns (due in 2025). Notably, in 2024 the list of trusts exempt from reporting was expanded to remove several variations of bare trusts. Any bare trusts not exempt from reporting will not be required to file a T3 Trust tax return until the 2025 taxation year (2026).

Action: Understand your reporting and filing requirements for the updated trust reporting requirements that will apply for the 2025 taxation year.

2024 Canada Pension Plan (CPP) Changes

The second phase of the Canada Pension Plan (CPP) enhancement continues in 2025. The first phase gradually increased the contribution rate over 2019 to 2023. The second phase introduced a second, higher earnings limit in 2024. For 2025, when a taxpayer surpasses the maximum annual pensionable earnings of $71,300 (including the basic exemption amount of $3,500), they will pay 4% CPP on earnings between $71,300 and $81,200 (the additional maximum annual pensionable earnings) for a maximum additional contribution of $396 for employees (doubled from last year).

Action: Plan for this deduction to increase again in 2025.

Underused Housing Tax

The Federal Underused Housing Tax (UHT) of 1% of the value of the home, which may apply to vacant or underused residential property, was paid and filed for the first time in 2024 for the 2022 and 2023 tax years. 2024 UHT filings and payments are due April 30, 2025. In general, residential properties that are vacant for more than half of the year must pay this tax. Additionally, residential properties owned by trusts or private corporations must file this return regardless of any tax owed.

Action: Determine whether your residential property is subject to UHT, and file your return and payment by April 30, 2025, to avoid penalties.

Vacancy Tax

Several Canadian municipalities are implementing or considering a vacant residential property tax, in addition to the Federal Underused Housing Tax (UHT). In cities like Toronto, Ottawa, and Vancouver, all residential homeowners must file an annual return, which may result in a tax if the property is not their primary residence. Toronto’s 2024 Vacancy Tax rate increased to 3% and Ottawa remains at 1% of the property’s value, with varying deadlines for filing and payment. Windsor introduced a Vacancy tax of 3% beginning in 2024. Hamilton and Sault Ste. Marie have approved a Vacant Home Tax starting in 2025.

Action: Determine if any of the vacancy taxes are applicable to your residential property and prepare to file and pay applicable taxes.

Short Term Rental Municipal Compliance and HST

Many municipalities and townships throughout Canada have implemented stricter regulations for short-term residential rentals (residential properties rented for 30-90 days or less depending on the municipality) including bans or mandatory registration requirements. These regulations vary by location, and many include owner registration of short-term rental properties, annual renewal of registration, collection and remittance of a municipal accommodation tax and fees and penalties for non-compliance. The Federal Government is aligned with local authorities and will deny any expenses claimed on illegal rental operations. Additionally, if a cottage or vacation property is rented out more than 50% of the time and over 90% of the rentals are for periods under 60 days, the property could be subject to HST upon sale.

Action: Confirm compliance with your municipality’s regulations for short-term rentals by visiting their official website and completing any required registrations by December 31, 2024. If your short-term rental revenue exceeds $30,000 annually, ensure you register for and remit HST.

Home Office Deductions

The Canada Revenue Agency (CRA) ended the use of the simplified method to claim an income tax deduction for home office expenses in the 2023 taxation year. Employees looking to claim home office expenses must be required to work from home by their employer for more than 50% of the time. Employees must also only use the workspace to earn employment income, and on a regular and continuous basis, for meeting clients, customers, or other people in the course of their employment duties.

Action: Confirm eligibility under CRA’s home office rules and ensure you have supporting documentation, including employer-provided forms and expense receipts.