It’s that time again. Time to consider what your 2023 and 2024 tax opportunities, obligations and planning might look like. Here are some highlights for our clients resident or doing business in Canada.
RESP withdrawal limits have increased. The maximum educational assistance payment (EAP) withdrawal within the first 13 weeks of schooling has risen from $5K to $8K for full-time students and from $2.5K to $4K for part-time students. After the first 13 weeks of schooling, any amount of EAP can be withdrawn. As a reminder, the EAP is the portion of the RESP which makes up earnings, appreciation, and government grants, and is taxable to the RESP beneficiary on withdrawal. Encourage your post-secondary students to file a tax return even if they don’t have any income to report in order to accumulate education (credit) amounts to use against their first year (or three) of post-degree earnings.
Capital Gains Inclusion Rate
For years, we have been musing about how it may be astute planning to realize capital gains before the government raises the capital gains inclusion rate back to 2/3 or ¾ as it has been in the past. Since 2001, taxable income for regular income tax purposes has included 50% of net capital gains. The term for this 50% is taxable capital gains. 50% of net capital losses, called allowable capital losses, may be carried back against taxable capital gains in the three years prior to the year of an allowable net capital loss.
The Capital Gains inclusion rate has not been raised for regular income tax purposes. It remains at 50%.
For Alternate Minimum Tax purposes, the inclusion/deduction rate has historically been 80% instead of 50% – an extra 30%. Capital gains exempt from regular tax under the Lifetime Capital Gains Exemption (LCGE) for the sale of shares of Qualifying Small Business Corporations or Qualifying Farming or Fishing Properties were included in Adjusted Taxable Income for AMT purposes at the rate of 30%.
The capital gains inclusion rate for Alternative Minimum Tax purposes will increase for gains realized in 2024 and beyond. There are multiple changes to AMT, so please read on.
Alternative Minimum Tax (AMT)
Alternate Minimum Tax is calculated starting with regular taxable income, adding back a portion of non-taxable income that is considered a preference item like the non-taxable half of capital gains, and limiting certain deductions such as the 50% stock option deduction and the deductions for interest and Capital Cost Allowance on specified passive activities.
As an example, capital gains eligible for the LCGE are 0% includible in regular income and 30% included in Adjusted Taxable Income.
The resulting Adjusted Taxable Income (ATI) has a basic exemption amount (currently $40,000) and tax is applied at the AMT rate (currently 15%). Provincial AMT is generally a percentage of federal AMT except in Quebec where it is calculated independently from the federal system.
You can apply some, but not all, of the non-refundable tax credits to arrive at net AMT. If Net AMT is greater than regular tax, you pay the AMT. The amount by which AMT exceeds regular tax can be recouped as the excess AMT tax is carried forward for seven years to see if there is a recapture possible to offset regular income tax.
The AMT is not new. You may not have been aware of it, but your tax software calculated it in the background and let you know if you were subject to AMT.
Big changes are coming for the 2024 tax year, particularly for taxpayers who have:
- Capital Gains
- Lifetime Capital Gains Exemption (LCGE)
- Stock Option deduction
- Donated Publicly Listed Securities
- Large donations and medical expenses
Starting in 2024, capital gains will be fully taxable for AMT purposes. LCGE capital gains will still be includible at 30%. The Stock Option deduction will be zero. Capital gains on donated publicly listed stocks will be includible in AMT income at 30%. Many deductions previously fully deductible will only be half deductible for AMT and only half of non-refundable tax credits may be used.
The basic exemption will be raised to approximately $173,000 (from $40,000) and the AMT tax rate is raised from 15% to 20.5%.
If any of the above is in the near future for you, speak with your tax professional to see if you will be affected and if there are any items you can accelerate into 2024.
Measures intended to free up more housing units are:
- Through the end of 2024 non-citizen, non-residents of Canada are still restricted from purchasing residential property in Canada.
- Cities with a vacant/empty-home tax currently include Toronto, Vancouver, and Ottawa. The Region of Peel’s is expected to start in 2025.
- C. also has a province-wide Property Transfer Tax and a Speculation and Vacancy Tax that applies to many metro areas, but not to Whistler. Both of these measures are designed to limit foreign ownership of B.C. properties.
- The Underused Housing Tax (UHT) was fully implemented for 2022. An extension of time to file and pay for 2022 was granted through October 31, 2023, to allow more property owners to be in compliance without incurring a penalty. There will not be an extension for the 2023 calendar year. 2023 UHT-2900 declarations and tax (if any) will be due April 30, 2024. It is expected for 2023 onwards that Canadian citizens will now be exempt from UHT filings, but we are awaiting Royal Assent to this change and still advise that you file the 2022 UHT-2900 return to avoid possible non-filing penalties.
FHSA – Custodians are ready to start opening First Home Savings Accounts. Canadian residents, aged 18 through 71, who intend to buy their first home are eligible to contribute up to $8,000 annually to a lifetime maximum of $40,000.
FHSAs are a hybrid between a TFSA and an RRSP and are designed to help first-time home buyers set aside as much as $40,000 plus earnings to acquire a qualifying home. The contributions are tax-deductible and grow tax-free. When a distribution is taken to acquire a qualifying home, either individually or jointly, that withdrawal is not taxable. If a qualifying home is not acquired, the FHSA can be commuted directly to your RRSP or RRIF, without impacting your RRSP contribution room. If you neither buy a home nor transfer the funds from your FHSA to your RRSP/RRIF, any withdrawals will be fully taxable at the time of withdrawal.
If you miss contributing to your FHSA in any year, you can carry your unused contribution room to the next tax year. There is no time limit for making catch-up contributions or for making a withdrawal. However, the FHSA does have an overall time limit. It must be closed at the earliest of the following:
- the 15th anniversary of opening your first FHSA,
- when you turn 71 years of age, or,
- the year after you make your first qualifying withdrawal (purchase a home).
A first-time home buyer is defined as someone who has not lived in a home owned separately or jointly by the taxpayer, their spouse, or common-law partner during the current year or four calendar years prior to opening their account. Qualifying homes are housing units, not time-shares, located in Canada. If you become a non-resident of Canada after opening your FHSA, you cannot make a qualifying withdrawal. Any withdrawal by a non-resident of Canada will be subject to Part XIII withholding tax.
For Canadian resident renters, this is really a no-brainer since you will receive a tax deduction for the contributions, the funds grow tax-free and there is the option to withdraw the funds tax-free to purchase a qualifying home or to transfer the funds tax-free to an RRSP.
Anti-Flipping Rule – The Principal Residence Exemption (PRE) is still in effect. However, be aware that legislation has been in place since 2022 to deny the PRE where the property is sold within 365 days of being placed in service as a principal residence. If you buy and sell real property as a business, perhaps fixing it up before selling it – or not – the property is considered inventory, and the sale is ordinary income. Your personal home is capital property and its sale results in a capital gain. Buying a home and then selling it within the first year makes it look like you were just trying to make a quick profit. In effect you were in business even if this was an isolated incident and the profit (gain) is not eligible for the PRE or for capital gains (50% taxable) treatment. There are ten exceptions to this anti-flipping rule, including death, insolvency, job loss or transfer, illness, and personal safety.
Expanded Trust Reporting
Expanded trust reporting has been in the works for several years. The changes are now law and apply to all trusts which have a tax year ending after December 30, 2023. Since most trusts are calendar year trusts, almost all trusts will have to comply this year (2023) and complete the additional information requested on Schedule 15 (Beneficial ownership information of a trust) to the T3 trust tax return.
The information to be disclosed includes the full name, date of birth, address, country of residence, and tax identification number of all trustees, settlors, beneficiaries, and controlling persons.
First, you would need to determine if you are a party to a trust. According to Keeton & Sheridan, “A trust is the relationship which arises whenever a person (called the trustee) is compelled in equity to hold property, whether real or personal, whether by legal or equitable title, for the benefit of some persons (beneficiaries) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustees, but to the beneficiaries or other objects of the trust”.
The requirement to file a T3 Trust Information and Income Tax return applies to virtually all trusts now, including express trusts and bare trust arrangements. Even if the ‘trust’ may have been exempted from filing a T3 in the past, it may have to complete the return now in order to provide the information requested on Schedule 15. A bare trust is required to file a T3 with Schedule 15 but is not a trust for other purposes of the Act and therefore not subject to income tax.
Business Matters: GAAR and Mandatory Disclosure
The General Anti-Avoidance Rule (GAAR) is an anti-avoidance tool that exists to keep taxpayers from claiming that a duck is really a pheasant, much more elegant, but still a duck. GAAR looks through the form of the transaction to the economic substance and determines if the resulting tax benefit was in the spirit of the tax legislation or whether it misuses or abuses the tax system.
Effective January 1, 2024, the government proposes to amend the economic substance test to add a presumption that a transaction (or series of transactions) that lacks economic substance, as determined by three, more or less objective, tests misuses or abuses the Income Tax Act and will be caught by GAAR.
To continue the duck metaphor, if the transaction does not have valid economic substance, the tax scheme has run a-fowl of the law. These beaks have real bite. The new proposed penalty will be 25% of the incremental tax payable as recalculated with GAAR versus without the application of GAAR, less any applicable gross negligence penalties. The government will have three additional years to reassess a return where they detect a GAAR-able transaction unless the taxpayer has disclosed the transaction under the Mandatory Disclosure Rules.
New Mandatory Disclosure Rules are causing a lot of heartburn in the tax and legal communities. There are three categories of transactions that need to be reported starting from June 22, 2023. These are: Reportable Transactions, Notifiable Transactions, and Reportable Uncertain Tax Treatments. Failure to report proposed and actual transactions on form RC312 within 90 days can result in very serious penalties.
The Canada Revenue Agency has published guidance on the New Mandatory Disclosure Rules on their website.
A Reportable Transaction is any transaction or series of transactions that is a tax avoidance transaction and has one of the following three hallmarks. a) contingent fee, b) contractual protection, or c) confidential protection. Not everything is reportable. We suggest that you look to the guidance in the link above for a list of what is not reportable, and consult with your tax professional.
An avoidance transaction has the same meaning as under GAAR and is any transaction where it can be concluded that one of the main purposes of entering into the transaction was to obtain a tax benefit.
Notifiable transactions are those transactions that are substantially similar to a list published by the CRA on its website.
Taxpayers have always had the prerogative, maybe even the responsibility, to arrange their affairs within the rules to attract the least amount of taxation. In light of Expanded GAAR and the Mandatory Disclosure Rules, business owners and their advisors will need to take another look at tax reduction strategies such as a reorganization commonly referred to as surplus stripping. They will need to ensure that the transaction has a business purpose and clear economic substance in order to pass muster.
Beneficial Ownership Reporting (USA)
If your company does business in the United States and has a U.S. reporting or registration obligation, it may be subject to the new U.S. rules for Beneficial Ownership reporting under the Corporate Transparency Act of 2019 (CTA). Reporting under CTA starts in January 2024. Talk to your Private Wealth Manager to determine whether this may apply to you.
We know we haven’t included all the 2023 Canadian tax news but hope you found at least one of the highlights above interesting or helpful. Cardinal Point Capital Management is a wealth management firm that straddles the Canada – U.S. border. Our firm has expertise in wealth management, planning, and income tax in both countries individually and also in cross-border matters. The information in this newsletter is general in nature and may not address your particular circumstances. Please contact us to discuss your individual situation and objectives.