ARTICLE | January 16, 2024

Executive summary:

Significant tax updates in the pipeline

Late 2023 offered a host of various Canadian tax developments, including the progression of Bill C-59 and moving forward various initiatives introduced in the 2023 Fall Economic Statement.

Canadian tax developments in 2023 you might have missed over the holidays

Important Canadian tax updates in late 2023 to keep in mind during 2024

2023 was an uncharacteristic year for the Ministry of Finance and the Canada Revenue Agency (CRA) from a tax policy and enforcement perspective. Both government bodies pushed forward extensive tax legislation and tax administration measures during the latter months of 2023, on top of impactful changes in tax jurisprudence.  A summary of the key tax developments over the past few months are as follows:

Tax legislation updates

Bill C-59

Bill C-59 is currently before the House of Commons and contains significant draft legislative updates. Once Bill C-59 makes its way through the House of Commons and the Senate, these measures will receive royal assent and enter into law. RSM will be issuing dedicated articles on certain topics in Bill C-59 in coming months, but some recent legislative changes include:

• Canada’s new Digital Services Tax (DST): Proposed to be effective Jan. 1, 2024 with retroactive application to 2022, DST is Canada’s stop-gap measure to tax digital services offered to Canadians by large corporations. While the Organisation for Economic Co-operation and Development (OECD) is working towards a more permanent solution with Pillar One, this measure is an interim approach for Canada to minimize the erosion of the Canadian tax base for large corporations that do not have an actual physical presence in Canada.
• New intergenerational transfer rules: For dispositions occurring on or after Jan. 1, 2024, there are new rules to better accommodate the transfer of active businesses to the next generation. Historically, making these transfers were often met with unexpected tax consequences, prompting tax practitioners to utilize other methods to introduce family members as owners of the business. While some practitioners were undertaking this planning starting from over two years ago, relying on enacted legislation under Private Member’s Bill C-208, this new legislation was drafted by the Ministry of Finance.
• New employee ownership trusts (EOTs): Starting Jan. 1, 2024, as originally discussed in Budget 2023, taxpayers can consider selling their business to an EOT, which is a specially designed ownership vehicle to allow for employees of a business to participate in the ownership of the business. For taxpayers that are contemplating exit strategies, Bill C-59 offers some tax benefits to using an EOT, such as increased capital gains deferral. 

2023 Fall Economic Statement

The federal government’s 2023 Fall Economic Statement offered a slew of tax changes that the government is intending to make as well as demonstrating their commitment to proceed with certain previously announced measures. Some legislative changes being considered include:

• Updates to EOTs: The government intends to make business transfers using EOTs to be more enticing, such as including a $10 million capital gains exclusion during the 2024 to 2026 taxation years.
• Concessional loans: Following a recent court case that concluded certain government loans could be considered “government assistance”, resulting in potential taxable income inclusions, the proposed updates include an exclusion for bona fide concessional loans with reasonable repayment terms from the ambit of government assistance. This measure received draft legislation in December.
• Short-term rental expense denial: In addition to municipalities and provinces restricting certain short-term rental arrangements, the government proposes to deny expenses incurred in the process of earning non-compliant rental income. This measure received draft legislation in December.
• Goods and services tax (GST)  relief on new rental housing: As an expansion to the government proposing to remove GST on new purpose-built rental housing, co-operative housing corporations providing long-term rentals are proposed to also benefit from the exemption.

New trust reporting rules

Historically, many trusts in Canada did not need to worry about filing a tax return. Trusts are used or encountered by many taxpayers in their day-to-day life, for example, utilizing a bare trust to hold legal title of real estate, receiving money from escrow on the sale of an asset, estates arising on death, etc. For taxation years 2023 and onwards, many of these trusts will now be required to file a tax return, despite not needing to in the past.

Additionally, beginning with taxation years 2023 and onwards, all trusts may also be subject to significant information disclosure under new Schedule 15 concerning the trustees, beneficiaries, settlors, and protectors of the trust, absent certain exceptions. These disclosure rules can extend to contingent beneficiaries and would even require disclosure of terms of the trust regarding unknown parties, such as unborn children.

The information required to be disclosed will include:

• Name;
• Address;
• Date of birth;
• Country of residence; and,
• Tax Identification Number 

Given this new requirement, the CRA administratively offered filing relief for bare trusts that are subject to these new rules. Trust tax returns for bare trusts will have certain penalties waived if they are filed after the 2023 due date of April 2, 2024. 

Green tax credits

The federal government has been introducing more tax credits to encourage clean technologies and investment in renewable resources. Bill C-59 and the 2023 Fall Economic Statement, following proposals discussed in Budget 2023, introduce and refine various green tax credit initiatives, related to:

• The clean technology investment tax credit;
• The carbon capture, utilization and storage investment tax credit;
• The clean hydrogen investment tax credit (currently has updated draft legislation released in December);
• The clean electricity investment tax credit; and,
• The clean technology manufacturing investment tax credit (currently has updated draft legislation released in December).

Tax administration updates

CRA crackdown on personal services businesses

There are negative tax implications for taxpayers that are “incorporated employees”, namely the decision to use a corporate vehicle to earn income from a source that resembles an employee-employer relationship rather than that of an independent contractor. These corporations are called personal services businesses (PSBs).

The CRA launched a pilot project to crack down on corporations that are considered a PSB in 2022. The first stage of the project was to identify businesses that hired potential PSBs. The second stage of the project, which started in October 2023, was to start identifying potential PSBs, with the third stage to come into play to assist with the compliance for PSBs sometime in the future. 

This enforcement measure should serve as a valuable reminder to ensure business relationships are legally drafted with the intention of the parties but also resemble that relationship as a matter of fact.

General anti-avoidance rule since Deans Knight

Deans Knight Income Corp. v. Canada, a Supreme Court decision released in May 2023, significantly influenced subsequent court decisions involving the general anti-avoidance rule (GAAR) over the past few months. In the decision, the taxpayers narrowly avoided significant negative tax consequences because they structured an acquisition of a business in a particular way. 

While often touted as a “provision of last resort”, the GAAR is a rule that generally allows for the disregard of a certain tax outcome if it is concluded that the tax outcome was arrived at in an abusive way. This decision broadened this rule and made it such that finding whether a transaction or series of transactions was abusive easier than it used to be.

Two notable decisions have come out since the Deans Knight decision and follows suit, finding abuse under similar circumstances. In Canada v. MMV Capital Partners decided in November 2023, the Federal Court of Appeal overturned the Tax Court of Canada’s decision in light of the conclusions found in Deans Knight, finding that GAAR applied. In the Tax Court of Canada’s decision in December 2023, Madison Pacific Properties Inc. v. The King, the judge also found the GAAR applied in a similar scenario.

These court cases highlight that staying within the technical letter of the law may not really cut it anymore and taxpayers need to be cautious about “creative” tax planning.

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