Budget proposes change to capital gains and CRA audit and enforcement capabilities
For Christopher Anderson, a tax partner in the Toronto office of Davies Ward Phillips and Vineberg, the 2024 budget contained a few surprises.
Minister of Finance Chrystia Freeland delivered the Liberal Party’s 2024 budget on Tuesday. The Liberals have proposed changes to the capital gains tax, new incentives to enhance housing supply, clean-energy tax incentives, and expanding the Canada Revenue Agency’s audit and enforcement powers.
Ottawa wants to widen the inclusion rate on annually realized capital gains above $250,000 from 50-66.6 percent. This impacts both businesses and individuals. For individuals, the feds said this would affect 40,000 people – 0.13 percent of the population – who average an income of $1,411,000 per year.
“One of the things that's potentially concerning about this budget, from a business perspective, is what the impact of these capital gains tax will have on business investment in Canada,” says Anderson. “Given the choice of investment in Canada or somewhere else, are Canadian companies going to be considering making investments elsewhere.”
The changes could also impact doctors, he says. Doctors typically incorporate their practice through a professional corporation, and the ability to do so helps “level the playing field” between doctors in Canada and those in the US who can make much more. “This change could be quite negative, and I fear it could be very poorly received by doctors thinking about where they want to continue their practice,” he says.
“It was a big surprise, especially given some of the other plans that the government wants to announce in this budget to increase investment.”
The federal government said part of the budget was focused on achieving their goal of seeing 3.87 million new homes built in Canada by 2031. Ottawa said it will “use all tools available” to convert public lands to housing, consider a new tax on residentially zoned vacant land to incentivize construction, and add another $15 billion to the now $55 billion Apartment Construction Loan Program. The budget also includes the proposal to introduce a temporary accelerated capital cost allowance for eligible new purpose-built rental projects, increasing the rate from four to 10 percent. This proposal will help lessen the cost of building rental projects because developers can write off their investments earlier, says Anderson.
New rules came into force earlier this year limiting interest deductibility for tax purposes – called the excess interest in financing expense limitations (EIFEL) rules. Interest cannot be deducted when it exceeds 30 percent of earnings before interest, taxes, and amortization (EBITA).
Anderson says there was “significant concern” that these EIFEL rules would limit real estate investment in highly leveraged sectors of the economy, such as real estate. “So, the government has instituted a very limited sector-specific exception to these rules,” he says.
Real estate investors investing in purpose-built rental housing would be able to deduct their entire interest expense.
“That's a good change, and hopefully that will help to offset some of the negative impacts of the capital gains changes.”
The budget also includes legislative amendments related to the Clean Electricity Investment Tax Credit. This 15-percent tax credit, originally announced in 2022, provided corporations a rebate if they are invested in clean energy projects such as wind, solar, nuclear, hydroelectric, as well as natural gas where sufficient carbon offsets are in place. The budget clarifies that the refundable tax credit is only available for provincial and territorial Crown corporations, municipality- and Indigenous-owned corporations, pension-investment corporations, and taxable Canadian corporations. The credit cannot be claimed by trusts, which, according to Davies’ news bulletin on the budget, was previously the common understanding.
Before the budget, there was concern about the availability of the tax credit for clean energy projects involving partnerships with different types of investors, says Anderson. The problem was that if a partnership contained one ineligible partner, the others could not avail themselves of the credit. He says that the budget provided the guidance that that was not the intention. Each entity can claim their own credit based on their own eligibility.
“That's a great change,” says Anderson. “It’s not surprising. It's definitely the right result. But it is good to get clarification.”
What was surprising, he says, were the stiffer tax administration and enforcement powers.
The budget proposes the introduction of a notice of non-compliance, which the CRA issues to a taxpayer who has failed to fully comply with an audit request or demand. Those issued the notice will be charged $50 per day for as long as the notice is outstanding, up to a maximum of $25,000.
The budget would also introduce an additional penalty of 10 percent of the aggregate tax owed for failure to comply with an audit request, and it proposes giving the CRA the power to expand the limitation period to bring an audit or reassessment in certain situations.
“There were concerns – at least from the CRA side – that people were not providing information in a timely manner, and the clock was running out, and they weren't able to assess on time,” says Anderson. “What these rules will do is in such situations where people are not providing the information in a timely way, the clock stops on any limitation period until the information is provided.”
The budget also includes a proposal to allow the CRA to require taxpayers to provide information under oath or by declaration.
“It's unclear what this rule was for or what they expect to gain that they weren't able to through their existing powers,” says Anderson.
Whenever people provide information under oath, it raises the concerns of fairness and proper representation and whether the tax authorities are looking for an opportunity to create a record in case the matter later goes to tax court, he says.
“Obviously, [taxpayers] should be providing full and complete answers to people that are auditing their tax affairs, but it's just an unusual power that was added, and there's not a lot of clarity as to what problem this is solving.”
