The federal government could advance key policy initiatives in its 2024 budget, such as the revised alternative minimum tax (AMT), help for retirement savings and corporate tax incentives to boost economic growth.
“We need to do more in terms of encouraging business investment in the country,” said Fred O’Riordan, national leader of tax policy with Ernst & Young LLP in Toronto. Citing scientific research and experimental development as one example, he said investment has been lagging, “and that ultimately has a big impact on labour productivity.”
The Liberal government isn’t expected to decrease personal or business income tax rates when it tables the budget on April 16, as Finance Minister Chrystia Freeland announced Monday.
“They can’t actually afford [such decreases],” said Mahmood Nanji, fellow and executive in residence with the Lawrence National Centre for Policy and Management with Ivey Business School at Western University in London, Ont. And with an election looming this year or next, the Liberal government is unlikely to raise rates either, Nanji said.
In February, Freeland said Ottawa remains committed to meeting its “fiscal guideposts” despite the recent launch of pharmacare.
Federal budget spending will probably be directed to housing and cost-of-living relief, said Brian Ernewein, senior advisor with KPMG LLP in Ottawa.
The tax community also is awaiting resolution on several key issues, as a long list of tax measures hasn’t been substantively enacted even though they came into effect on Jan. 1, O’Riordan said.
Budget implementation Bill C-59, tabled last November, was at second reading in the House of Commons at the beginning of March. Budget 2024 would probably provide updates on existing proposals and could introduce new ones.
The revised AMT — meant to ensure high-income earners pay at least a set minimum rate of tax — is among the measures effective as of Jan. 1; however, enabling legislation was absent from Bill C-59.
“Anybody who does a [large] transaction now is operating with significant uncertainty,” said Justin Mastrangelo, Canadian tax partner with BDO Canada LLP in Oakville, Ont., referring to the potential effect on high-income earners.
The government’s delay is probably over charities’ concerns that the revised AMT would discourage significant donations by exposing big donors to high tax rates. Under the proposed rules, only half of the donation tax credit can be applied against the AMT, down from 100%, and 30% of capital gains on the donation of publicly listed securities are included in adjusted taxable income.
Jacqueline Power, assistant vice-president of tax and estate planning and distribution with Mackenzie Investments in Toronto, suggested the government could reverse its decision to allow only a 50% deduction on donation tax credits for AMT purposes, or it could propose a rate between 50% and 100%. The government also could adjust its proposed inclusion rate of 30% for in-kind donations, up from 0% under the existing rules.
Ernewein suggested the government also could reconsider the four percentage-point hike in the tax rate on capital gains under the AMT — 20.5% relative to 16.5%, or half the top federal rate of 33%.
Ernewein anticipates the government will address any changes to the AMT in the 2024 budget. “They don’t need this to be an off-cycle story,” he said.
There’s a greater chance that revised legislation on the underused housing tax (UHT), proposed in the 2023 fall economic statement, could be released before the budget, Ernewein said. The deadline for filing a UHT return for 2022 and 2023 is April 30 of this year, leaving little time for taxpayers to prepare if the issue isn’t addressed well before then.
Potential tax relief for small businesses could help spur investment and improve productivity. In recent years, the government tightened tax rules for small businesses, including limiting opportunities to split income using private corporations.
The pre-budget submission from the Canadian Federation of Independent Business (CFIB) asked the government to increase the maximum threshold to access the small-business tax rate to $700,000 and index it to inflation. The maximum threshold has been $500,000 since 2009.
“This deduction is valuable to Canadian small businesses, as this lower tax rate enables them to retain a larger part of their after-tax earnings to reinvest in their business or pay down debt,” the CFIB said.
Said Power of CFIB’s recommendations: “There has been a ton of inflation since [2009] and a lot of [tax changes] introduced over the years that have not been advantageous for a lot of small businesses.”
The 2024 budget also may provide more details about a proposal outlined in the 2023 fall economic statement to temporarily exempt up to $10 million in capital gains realized on the sale of a qualifying business to an employee ownership trust, a change that would apply to the 2024 to 2026 tax years. The proposal wasn’t included in revisions to the employee ownership trust regime in Bill C-59.
The federal budget also could introduce ways to help Canadians save for retirement, which could reduce the burden the government faces on payments to seniors amid recent boosts to old age security and the guaranteed income supplement.
For example, the government could raise the maximum RRSP contribution limit to 20% from 18%, and raise the income threshold on which the percentage is calculated to $200,000 and index it, Nanji suggested.
The government may raise the age at which an RRSP must be converted to a RRIF to 75 from 71, Power said: “There are lots of Canadians who are working past 71 and already being required to [convert to a] RRIF, so it’ll be interesting to see if maybe they push that age out a little [in the budget].”
On housing, Nanji said he’d like the government to raise, on an incremental basis, the lifetime limit on the first home savings account (FHSA) — introduced last year — from $40,000 to $50,000 or $60,000. The current limit is too modest, he said, considering the average price of a home is about $660,000. The FHSA annual and lifetime limits are not indexed.
Another hope for the federal budget is the potential launch of what many say is long-overdue tax reform, particularly given the introduction of complex legislation such at the new trust reporting rules and the UHT.
The government “may introduce measures to reduce unintended tax consequences and burden to taxpayers through tax reform,” said a budget preview report from Grant Thornton in February: “We believe that a review of the tax system will provide clarity on newer complex rules that have increased the compliance burden on taxpayers.”
Ernewein said he hopes the government will clarify the new trust reporting rules that were introduced to combat aggressive tax planning and tax avoidance, inside or outside the budget.
“Part of this reporting requirement is very well motivated, but the compliance burden it’s creating is challenging,” Ernewein said.
O’Riordan said he strongly favours a review of Canada’s tax system but believes the government is unlikely to act because “no political appetite” exists for revision.
“It’s easy to get a consensus around the need for tax reform,” he said, “but it’s very difficult to get a consensus around what the new tax system would look like.”
This article appears in the March issue of Investment Executive.