A Closer Look at Canada’s New Tax Measures for 2024

Before diving in to the details of the new tax measures in Canada, here are the key highlights you need to know:

• Employee ownership trusts (EOTs): EOTs are becoming more accessible, helping employees purchase the businesses they work for without having to pay directly to acquire the shares.
• Intergenerational business transfers: The eligibility rules in this area have expanded to nieces, nephews, grandnieces, and grandnephews.
• General anti-avoidance penalties: These types of penalties have increased by 25%.
• Share repurchases: Canadian companies that repurchase shares will pay a new 2% tax.
• Alternative minimum tax (AMT) rates: AMT tax rates have increased, as has the minimum income to trigger the AMT.
• Corporate dividends: Financial institutions can no longer deduct dividends received on market-to-market property.
• New Canada Dental Benefit: This interim financial measure—available until June 30, 2024—lowers dental costs for eligible families in Canada.

While we aren’t covering the new tax brackets in 2023, there are a slew of tax changes that may affect you, your employer, or your business. Here’s more detail on what to look out for.

What is an employee ownership trust (EOT) and how have the tax exemptions changed?

An employee ownership trust (EOT) is a trust that holds shares of qualifying businesses for the purpose of passing ownership to the employees of the business. As the baby boomer generation continues to age into retirement, 3 out of 4 business owners are expected to exit their businesses in the next 10 years. These owners will need succession plans, and for those hoping to pass their businesses on to their employees, an EOT could be the answer.

EOTs are only for qualifying small- and medium-size businesses and allow employees to finance the purchase of the business with a longer repayment period. This helps employees who may not otherwise have access to financing or personal savings to buy the business outright. Qualifying businesses must meet these criteria:

• It must be a Canadian-controlled private corporation (CCPC) controlled by a trust.

• It must have no more than 40% of its directors owning 50% or more of its debt or shares before it became controlled by the trust.
• It must not have affiliation or partnership with anyone who owned half or more of its debt or shares before it became controlled by the trust.

What’s changing: The EOT updates in Bill C-59, Fall Economic Statement Implementation Act, 2023, came into effect on January 1, 2024. These changes include temporarily exempting up to $10M in capital gains from the sale of a business, as long as certain conditions are met. This change makes it more appealing for business owners to sell their businesses to their employees.

What is succession planning and can intergenerational business transfers help?

Succession planning is the process of planning to pass leadership or ownership down to another employee or group of employees. For Canadians with small businesses, family farms, or fishing corporations, succession planning is essential—and the process is getting easier. For those wondering how to transfer a business to family members, an intergenerational business transfer (IBT) is often a good choice.

The current IBT rules were introduced in 2021, and they allow small business owners to transfer shares of their business to a corporation controlled by the owner’s child or grandchild. These transfers are treated similarly to a third-party sale, and the gains are treated as capital gains, which are 50% taxable as compared with dividends.

What’s changing: The definition of “child” is being expanded to include adult nieces, nephews, grandnieces and grandnephews, and the business owner no longer needs to hold a majority controlling interest in the business to be eligible for an IBT. These new changes came into effect on January 1, 2024, so transfers completed in 2023 are still subject to the old rules.

General anti-avoidance penalties are increasing

While it’s common to look for ways to minimize your taxes owing, if Canadian individuals, corporations, or trusts stray outside of the prescribed rules by the Canada Revenue Agency (CRA) when it comes to tax planning, you may find your tax benefits denied under the general anti-avoidance rule (GAAR).

GAAR is a measure that prevents Canadians from benefiting from abusive tax planning. Currently, GAAR applies when:

• A tax benefit is derived from a transaction
• The transaction is considered an avoidance transaction
• The transaction results in a misuse or abuse of the provisions in the Income Tax Act

What’s changed: Several changes to GAAR have taken effect in January 2024. The biggest one relates to the penalty for tax avoidance. Taxpayers who receive a tax benefit from deemed to be abusive tax planning strategies will have to pay a penalty equal to 25% of the increase in taxes payable, in addition to being denied the tax benefit and having to pay interest on any overdue taxes. Second, the threshold for a transaction to be considered an avoidance measure under the purpose test will be lowered, and any transaction for which “one of the main benefits” is to get a tax benefit could be considered tax avoidance.

Explaining the new share buyback tax in Canada

A new share buyback tax in Canada came into effect on January 1, 2024. While this tax measure won’t apply to most Canadians (in fact, it applies only to publicly traded corporations and real estate investment trusts), it will impose a tax on Canadian businesses that repurchase shares.

What’s changing: Publicly traded Canadian companies that repurchase shares will pay 2% of the value of repurchased equities over the course of one year.

Alternative minimum tax hike in Canada

The alternative minimum tax (AMT) was introduced in 1986 to ensure that Canadians with a high net worth and high gross income paid a minimum income tax—even if they have enough “tax preference items” (like capital gains exemptions or tax credits for political donations) to bring their taxes payable to zero. In these cases, an accountant or tax expert would perform a complex tax calculation that compares the amount the individual would have paid to the alternative minimum tax, and they will need to pay the greater of the two.

What’s changing: The basic exemption amount for the AMT rose from $40,000 to $173,205, and the minimum tax rate used in the AMT calculation is now 20% (versus 15%). Is this a tax hike in Canada? For some, yes, the effect of these changes is that middle-class Canadians won’t have to worry about AMT, but individuals with high net worth may pay more tax.

How corporate dividends are changing

Corporations are also affected by tax changes to dividends in 2024. Starting this year, these organizations will no longer be able to deduct dividends received from financial institutions on certain types of assets that fluctuate in value based on market conditions. Instead, they must claim these dividends as property income and pay tax accordingly.

What does this mean for Canadians? Certain financial products might become more expensive as financial institutions are expected to pay an additional $3.15B over the next 5 years, due to the removal of this deduction.

What’s changing: Starting in 2024, corporations must now pay tax on dividends received on market-to-market property.

New Canada Dental Benefit now available to qualifying families

Dental care in Canada is not part of the universal health-care system, and families generally have to pay out of pocket for care or use employer insurance. Now, the Federal government has introduced a new interim Canada Dental Benefit that is intended to lower the dental costs for families. Eligible families must earn less than $90K per year, and children under 12 years of age without private dental insurance are eligible.

What’s changed: This all-new benefit is available to families who earn less than $90K per year, and, depending on your net income, payments of $260, $390, or $650 may be available to your eligible children. Up to 2 payments per child are available.