Canadian families and businesses have remained resilient through economic volatility over the past few years. We anticipate continued challenges for many as the high cost of living—especially in housing and food—continues to put pressure on pocketbooks. However, the aggressive interest rate hikes have likely ended, and the Bank of Canada may begin lowering its key rate as early as the summer.
To support Canadians, the 2023 Fall Economic Statement focused on increasing housing and improving affordability. With affordability challenges continuing to dominate the public discourse and an election right around the corner, we expect Budget 2024 to include additional measures to boost the economy, create more homes, encourage further investment in small businesses, offset the carbon tax, and more. In advance of its release, here’s a closer look at what could be in Budget 2024.
Business tax measures
Budget 2024 may extend temporary incentives to continue encouraging investments by small and medium-sized Canadian businesses.
In its submission, the Canadian Chamber of Commerce advocates to extend the accelerated investment incentive by postponing the phase-out period from 2024 to 2027. The federal government previously implemented temporary measures to incentivize businesses in Canada to invest in more capital assets; however, these measures are set to expire or phase out after 2023. These temporary measures include the immediate expensing rules, which permit Canadian businesses to immediately write-off some costs of certain capital property and the accelerated investment incentive which allows businesses to claim one and a half times CCA on net eligible property additions in the first year of purchase of the property. This allows a larger deduction within the first year of acquiring certain eligible depreciable assets.
We hope to see the federal government extend these temporary investment incentive measures for small and medium-sized businesses. If Budget 2024 includes any additional measures, we can assist in planning for the business's capital asset purchases to maximize the benefits.
Small business deduction
Budget 2024 may include additional relief for small businesses, including changes to the small business deduction.
Many small businesses in Canada have been struggling to overcome inflationary and economic challenges. The Canadian Federation of Independent Businesses provides several recommendations for the government to support small businesses in its pre-budget submission. Some of those recommendations include measures to:
- Increase the small business deduction threshold to $700,000 (from $500,000) and the amount of passive income a business could earn before reducing the small business deduction to $60,000 (from $50,000), and index those thresholds to inflation going forward.
- Lower the federal small business tax rate to 8% (from 9%) for at least the next two years to help businesses address challenges that arose during the pandemic.
- Freeze the carbon tax at its current level and find a way to deliver fuel charge proceeds collected under the federal carbon pollution pricing system back to small businesses.
As small- and medium-sized companies make up nearly 98% of all Canadian businesses, we welcome the introduction of additional measures that will help them thrive and contribute to our dynamic economy.
Businesses could see changes to modernize and simplify Canada’s in Budget 2024.
The Canadian Chamber of Commerce’s pre-budget submission recommends the federal government align the SR&ED tax credit criteria with the Income Tax Act, as the current criteria is more restrictive and discourages business investment and innovation. The federal government previously announced its review of the SR&ED program in Budget 2022—and reaffirmed this intention in Budget 2023—to improve the development, retention, and commercialization of intellectual property, which could include adopting a patent box regime.
We’d like to see Budget 2024 modernize the SR&ED program to increase access for small businesses. Potential measures that allow more small businesses to access the SR&ED program include a lower tax rate on income derived from patents or intellectual property, revised and expanded eligibility criteria, and less red tape.
Housing tax measures
Budget 2024 may introduce additional measures to support the construction sector by cutting red tape and reducing barriers to building new homes faster.
With high interest rates and prices causing housing affordability challenges across Canada, the federal government’s economic plan will likely focus on supporting the construction of new homes, faster. The 2023 Fall Economic Statement introduced measures as part of Canada’s Housing Action Plan and stated that the federal government will continue to take action to accelerate the construction of affordable housing. These measures would add to the government’s recently introduced housing-related measures, such as the Tax-Free First Home Savings Account and enhanced GST rebate on purpose-built rental properties.
Further, in its pre-budget submission, the Canadian Home Builders’ Association recommends that the government reduce the pressure on the rental market by deferring the capital gains tax and the recaptured capital cost allowance on the sale of rental housing if the funds are used to reinvest in rental housing.
We’d like to see further measures announced in Budget 2024 that will provide more incentives—specifically for builders—to increase housing developments and alleviate the housing crisis in Canada.
Other notable tax measures
Budget 2024 may introduce measures to reduce unintended tax consequences and burden to taxpayers through tax reform.
The calls for tax reform in Canada have grown over the last few years, with CPA Canada leading the charge. The Canadian Chamber of Commerce and the Canadians for Tax Fairness have also joined the chorus, recommending that the federal government launch a comprehensive independent review of the tax system to make it fairer and more efficient. It’s been over 50 years since the government conducted a comprehensive tax review and many Canadians believe that the tax system is outdated.
We believe that a review of the tax system will provide clarity on newer complex rules that have increased the compliance burden on taxpayers, such as the underused housing tax rules and the mandatory disclosure rules.
Some individuals and businesses could see additional relief from the federal carbon tax. The federal government stated they have no intention of removing the carbon tax, but they may introduce additional relief measures for some Canadians to address affordability. Some provinces are calling on the federal government to exempt all home heating fuels from carbon tax because of this affordability issue.
Any measures announced in Budget 2024 would be in addition to the federal government’s recently announced carbon price rebate and a temporary carbon price exemption for certain Canadians.
The federal government has previously stated that most households will receive more back in rebates than they pay in carbon pricing. To follow through on this commitment, we’d like to see the federal government take additional measures, like increasing the Climate Action Incentive payments either through a one-time supplementary payment or through additional quarterly amounts beyond those tied to inflation.
Alternative Minimum Tax
Budget 2024 could introduce new changes to the proposed Alternative Minimum Tax (AMT) rules to address unintended tax consequences on charities.
Recently proposed changes to the AMT rules were intended to ensure that Canadians pay their fair share in tax by preventing certain individuals and trusts from claiming exemptions, deductions, and tax credits that would generally be available under ordinary income tax rules. However, under the proposed rules, donors could be subject to unintended tax consequences, which could discourage charitable giving.
It’s possible that the federal government could release a revised version of these rules to address these unintended tax consequences, considering that AMT wasn’t included in Bill C-59 (which included several measures from the 2023 budget and the 2023 fall economic statement).
We hope the federal government revises the proposed changes to AMT to address these concerns; however, if Budget 2024 doesn’t include changes to the rules, we can help donors plan their charitable giving to limit the impact of these rules.
Regulating crypto assets
Budget 2024 may include measures to allow for the collection of information from crypto-asset service providers.
In a joint statement with many countries, Canada has announced its intention to implement the Organization for Economic Cooperation and Development’s (OECD) crypto-asset reporting framework into domestic law to allow for exchange agreements beginning in 2027. To keep up with the rapid growth of crypto assets and Canada’s role in hosting active crypto markets, crypto-asset service providers may begin to see more disclosure requirements to report certain transactions.
The regulation of crypto assets can help protect investors. We welcome additional measures aimed at regulating the evolving and developing crypto market.
Alcohol excise duty
Budget 2024 could extend relief on alcohol excise duties.
Beer Canada’s pre-budget submission recommends that the federal government freeze beer excise duties at the 2023 rates for 2024, and until inflation returns to the Bank of Canada’s target of 2%. Alcohol excise duties are normally indexed to inflation each year, and with current inflation rates, the duties are expected to increase by 4.7% starting April 1, 2024. A large increase was also scheduled for 2023 but the federal government announced a temporary measure to cap the increase at 2% for one year in Budget 2023.
Excise taxes indexed to inflation can provide certainty with respect to tax increases; however, in a high-inflationary environment, indexed taxation—particularly on products—compounds price increases. We hope that the federal government will, at minimum, cap the increase again this year.
Hybrid mismatch arrangements
Budget 2024 may include additional measures to combat certain cross-border tax plans.
The hybrid mismatch rules aim to prevent “double non-taxation" in certain cross-border transactions. The federal government has taken steps to implement legislative proposals that are generally consistent with global recommendations from the OECD and has already released the “first tranche” of hybrid mismatch rules in 2022. There’s a possibility the “second tranche” may be released in Budget 2024 and could include measures to address:
- double deductions (where a taxpayer claims tax deductions in more than one jurisdiction on a single expense),
- branch mismatches (where the country of a taxpayer’s residence takes a different approach than the country of a taxpayer’s branch regarding the allocation of income and expenditures between them),
- reverse hybrid arrangements (where an entity is treated as transparent in the country where it’s established but as opaque by a foreign investor’s country), and
- imported mismatches (where an entity resident in one country deducts a payment and the recipient entity resident in a second country includes the payment in ordinary income, but that ordinary income is set off against a deduction under a hybrid mismatch arrangement between the second entity and an entity resident in a third country).
We hope that the federal government will provide additional commentary on these proposed rules to clarify how they will impact cross-border tax structures.
A transitional year
Canadian families and business will need to be resilient and agile in 2024 as the economy tries to rebalance after years of volatility. We expect that Budget 2024 will extend support to help the taxpayers that need it, but wealthy individuals and large corporations may face higher tax and compliance burdens. Contact your Grant Thornton advisor or reach out to us here to prepare for these incoming rules or to understand how you or your business may be affected.
Visit our Budget 2024 hub to learn more about all federal and provincial budgets.
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.