Fall Economic Statement 2024: Everything you need to know about new and previously announced tax measures

December 17, 2024

The 2024 Federal Economic Statement (the 2024 FES) was released on December 16, 2024. However, the 2024 FES was overshadowed by the sudden resignation of the federal Minister of Finance, the Honourable Chrystia Freeland, and replacement by the Honourable Dominic LeBlanc (at least temporarily). Consequently, it is possible that political fallout from Minister Freeland's resignation may result in some or all of the tax proposals contained in the 2024 FES (the Tax Proposals) being revised or abandoned altogether.

As a result, this insight will summarize the Tax Proposals in their current form.

Aside from the Tax Proposals, the 2024 FES confirmed that the budgetary deficit for the 2023-2024 fiscal year ballooned to CA$61.9 billion dollars, well over the guardrail of CA$40.1 billion. The federal government stated that the larger deficit is mainly due to an accounting charge whereby contingent liabilities for indigenous settlements were moved to current expenses. Also adding to the increased deficit was CA$4.7 billion in COVID-19 related costs.

A Tax Break for All Canadians

The 2024 FES reiterates the federal government's intention to give Canadians more money in their pockets. The Tax Break for All Canadians Act, which received Royal Assent on December 12, 2024, provides a two-month (December 14, 2024, to February 15, 2025) GST/HST break for holiday essentials, like groceries, restaurant meals, drinks, snacks, children's clothing and gifts by notably making the following items tax-free:

• Prepared foods, including vegetable trays, pre-made meals and salads and sandwiches;
• Restaurant meals, whether dine-in, takeout or delivery;
• Snacks, including chips, candy and granola bars;
• Beer, wine and cider;
• Pre-mixed alcoholic beverages of not more than 7% ABV;
• Children's clothing and footwear, car seats and diapers;
• Children's toys, such as board games, dolls and video game consoles;
• Books, print newspapers and puzzles for all ages; and,
• Christmas trees and similar decorative trees.

Taxation of Canada Disability Benefit

The Canada Disability Benefit is a new program, which will provide up to CA$2,400 annually to support low-income, working-age Canadians, who qualify for the Disability Tax Credit, beginning in July of 2025. Currently, amounts received under the Canada Disability Benefit would be included in a taxpayer's income, with an offsetting deduction that effectively renders the payments non-taxable. However, this current approach could affect a taxpayer in accessing benefits and programs which rely on an income-based calculation to determine entitlement.

The 2024 FES proposes that for the 2025 taxation year, and in subsequent taxation years, amounts received under the Canada Disability Benefit will be exempt from income under the Income Tax Act. Exempting the Canada Disability Benefit from income will ensure that income-tested benefits and programs which a taxpayer may be eligible for are not reduced as a result of a taxpayer receiving the Canada Disability Benefit.

Canada Carbon Rebate Rural Supplement

The 2024 FES proposes to amend the Income Tax Act to expand eligibility for the Canada Carbon Rebate Rural Supplement, aiming to better target individuals in rural and small communities. Effective for the 2024 taxation year, the 2024 FES proposes that the Canada Carbon Rebate rural supplement eligibility now include individuals residing in census rural areas (populations under 1,000) and small population centres (populations under 30,000) within Census Metropolitan Areas (CMAs), as defined by Statistics Canada. Further, the 2024 FES proposes that eligibility for the rural supplement now be based on the most recent census published before the relevant taxation year. These changes are proposed to be effective for the 2024 taxation year, resulting in the first payments under these proposed rules in April 2025.

Northern Residents Deductions

Currently, individuals who reside in prescribed areas of Canada for at least six consecutive months may claim the Northern Residents Deductions for that taxation year in computing their taxable income. The prescribed areas are broken down into two different zones, a Northern Zone and an Intermediate Zone. Northern Zone residents are eligible for the full amount of the deduction, whereas residents in the Intermediate Zone are eligible for half of the deduction amount.

The 2024 Fall Economic Statement proposes to reclassify the islands of Haida Gwaii from its current Intermediate Zone classification to the Northern Zone. As a result, starting in the 2025 taxation year, residents of the Haida Gwaii islands will be able to claim the full amount of the Northern Residents Deductions when computing their taxable income.

Capital gains rollover for eligible small business corporation shares

The Income Tax Act currently provides for a deferral of the capital gain that would otherwise result where an individual (other than a trust) disposes of "eligible small business corporation" (ESBC) shares and acquires new shares that also qualify as ESBC shares. Currently, ESBC shares are defined as common shares issued from treasury to the seller, and the carrying value of the assets of that corporation and related corporations must not exceed CA$50 million. The rule presently requires the replacement ESBC shares be acquired within the year of the original sale, or 120 days after the year in which the sale occurred.

The 2024 FES proposes to expand the eligibility for the ESBC rollover in three respects. First, preferred shares can now qualify as ESBC shares. As well, the period to acquire a replacement share is expanded to include the year of disposition and the entire next calendar year (which will presumably require an amendment to the seller's tax return if such replacement property is acquired after the previous year's return is filed). Finally, the threshold for status as an ESBC is expanded to corporations whose carrying value of assets is less than CA$100 million, rather than CA$50 million.

Reporting for non-profit organizations

In order to improve transparency in the non-profit organization (NPO) sector, the 2024 Fall Economic Statement has proposed changes to the current limited reporting requirements for NPOs. Such changes will apply to the 2026 and subsequent taxation years:

Changes to the annual return (new threshold for reporting requirements)

An NPO is currently required to file an annual information return if one of the following applies: (1) the total of all passive income in the fiscal period exceeds CA$10,000; (2) the organization's total assets at the end of the preceding fiscal period exceeded CA$200,000; or, (3) an information return was required to be filed by the organization for a preceding fiscal period. The 2024 Fall Economic Statement proposed to amend the Income Tax Act (ITA) to require that NPOs with total gross revenues over CA$50,000 must also file the annual NPO information return.

New filing requirement for small NPOs

The 2024 Fall Economic Statement proposes to amend the ITA to require NPOs that do not meet the thresholds for filing the annual NPO information return to file a new, short-form return that contains basic information about the organization, including:

• Its business number or trust number;
• The name of the organization and its mailing address;
• The names and addresses of the directors, officers, trustees or similar officials;
• A description of the organization's activities, including whether it conducts activities outside Canada;
• The organization's total assets and liabilities and annual revenues; and
• Other prescribed information.

Carbon Tax Rebate for Small Business

The 2024 FES proposes refining the Canada Carbon Rebate for Small Businesses with the attempt to improve its accessibility and equity. The rebate will remain an automatic, refundable tax credit for Canadian-controlled private corporations (CCPCs) with fewer than 500 employees. Beginning with the 2024-25 fuel charge year, the 2024 FES proposes the introduction of a minimum payment guaranteed for businesses with one to 20 employees corresponding to the corporation having 20 employees. Further, the 2024 FES proposes expanding the eligibility criteria for the Canada Carbon Rebate for Small Business to include cooperative corporations and credit unions and allow for adjustments to employee calculations to ensure equitable treatment for businesses operating across multiple provinces. The 2024 FES provides that eligible corporations would have the rebate phase out progressively for businesses with 300 to 500 employees, ultimately reaching zero when the total number of employees across Canada reaches 500 individuals.

Clean Electricity Investment Tax Credit for provincial and territorial Crown corporations

The Clean Electricity Investment Tax Credit (the Clean Electricity ITC) is a refundable tax credit equal to 15% of the taxpayer's capital cost of "clean electricity property" (reduced to 5% if certain labour conditions are not met).

Budget 2024 announced that the Clean Electricity ITC would be available to provincial and territorial Crown corporations for investments made in eligible property situated in "eligible jurisdictions" as designated by the Minister of Finance provided the provincial or territorial government satisfied certain conditions. The 2024 FES describes these conditions in more detail. The key elements of the conditions are:

• Condition 1: Commit to Publish a 2050 Net-Zero Energy Roadmap: The provincial or territorial government must release a written public statement committing to complete an "Energy Roadmap" to achieve "Net-Zero Emissions by 2050," "Inclusive of all Energy Sources," by the end of 2026.
• Condition 2: Request that Crown Corporations Pass on the Benefits of the Clean Electricity ITC: The provincial or territorial government must release a written public request to its Crown corporations expected to be eligible for the Clean Electricity ITC to pass on the "Benefits" of the Clean Electricity ITC to electricity "Ratepayers" in their jurisdiction.

If the conditions are not satisfied by June 30, 2025, then the Clean Electricity ITC will not be accessible by provincial or territorial Crown corporations until the designation is made. In this case, the Clean Electricity ITC would apply to clean electricity property that is acquired and becomes available for use on or after the date the designation is made (for projects that did not begin construction before March 28, 2023). Otherwise, the Clean Electricity ITC would apply to clean electricity property that is acquired and becomes available for use on or after April 16, 2024.

A provincial or territorial Crown corporation that claims the Clean Electricity ITC must publicly report prescribed information on an annual basis, including its annual forecasted "Cost of Service" (with and without the Clean Electricity ITC), the methodology used to determine the Cost of Service, the amount of the Clean Electricity ITC received for the year and cumulatively and an explanation as to how the Clean Electricity ITC benefits the Crown corporation's ratepayers.

Clean Electricity ITC and the Canada Infrastructure Bank

Under the Tax Proposals, the Canada Infrastructure Bank would be eligible to claim the Clean Electricity ITC. Furthermore, financing providing by the Canada Infrastructure Bank will not reduce the cost of eligible property for the purpose of computing the Clean Electricity ITC.

Electric Vehicle Supply-Chain Tax Credit

In Budget 2024, the government proposed to introduce a refundable tax credit intended to stimulate the development of a domestic Canadian electrical vehicle supply-chain (the EV Supply-Chain Tax Credit). The 2024 Fall Economic Statement provides additional details of the proposed EV Supply-Chain Tax Credit. If enacted, the proposed credit will be available at a rate of 10% to taxable Canadian corporations that invest directly in eligible property for years beginning January 1, 2024, and will be phased out by being reduced to 5% between 2033 and 2034.

Under the proposals, certain taxable Canadian corporations will be entitled to a refundable tax credit on the cost of buildings and structures, including their component parts (described in paragraph (q) of capital cost allowance Class I of Schedule II of the Income Tax Regulations. Such property will entitle a qualifying taxpayer to the EV Supply-Chain Tax Credit, provided that all or substantially all of the use of the property consists of one or more of the following segments:

1. Electric vehicle assembly (e.g., final assembly of fully electric vehicles or certain plug-in hybrid vehicles);
2. Electric vehicle battery production (e.g., the manufacture of battery cells used in fully electric vehicles or plug-in hybrid vehicles); or,
3. Cathode active materials production (e.g., the production of cathode active materials that are used in the production of fully electric vehicles or plug-in hybrid vehicles). But excluding preliminary processing activities, such as activities that could generally allow property to qualify for the Clean Technology Manufacturing investment tax credit.

It is important to note that the proposals exclude partnerships or trusts from claiming the EV Supply-Chain Tax Credit. Furthermore, in order to qualify, a corporation (or group of related corporations) must acquire at least CA$100 million of property that has come available for use in each of the three "segments" and that qualifies for the Clean Technology Manufacturing investment tax credit. A particular corporation could hold a maximum of one of these three segments indirectly (with the other two held directly), provided that it has a minority interest in another corporation, through which it is entitled to at least 10% of the votes and 10% of the value of that other corporation.

In addition, the proposals provide that this tax credit will be subject to potential repayment obligations similar to the existing recapture rules for the Clean Technology Manufacturing investment tax credit. Over a 10-year period from the date of acquiring a particular eligible property, the credit could be repayable in proportion to the fair market value of the particular property if it is converted to an ineligible use, exported from Canada, or disposed of.

Methane pyrolysis as a production pathway for the Clean Hydrogen ITC

The 2024 FES proposes to expand the Clean Hydrogen ITC to include methane pyrolysis, a chemical process that separates hydrogen from carbon in methane, as an eligible production pathway of hydrogen. Available as of March 28, 2023, the Clean Hydrogen ITC is a refundable tax credit on the cost of eligible equipment used in the production of clean hydrogen. The amount of the credit varies between 15% and 40% of the cost of purchasing and installing eligible equipment. The Tax Proposals expand the types of equipment that would be eligible for the ITC to include pyrolysis reactors, heat exchangers, separation equipment and purifiers, and compression and on-site storage equipment used to produce hydrogen from methane pyrolysis. The Tax Proposals limit the ITC on the capital costs of a pyrolysis reactor system to CA$3,000 per tonne of annual hydrogen production capacity. Some equipment downstream of the point where hydrogen and solid carbon are separated, such as dryers and pulverizers, would not be eligible. Taxpayers would be required to track the end use of their carbon produced through methane pyrolysis through an "End-Use Plan," which would account for the carbon produced and its end use, for a period of seven years. This requirement would aim to prevent the carbon produced from methane pyrolysis from being converted into carbon dioxide (CO₂) that is subsequently released. The expansion of the Clean Hydrogen ITC to include methane pyrolysis as an eligible production pathway of hydrogen would apply in respect of property that is acquired and becomes available for use in an eligible project on or after December 16, 2024.

Scientific research and experimental development (SR&ED) expenses

The 2024 FES proposes to increase the expenditure limit of the 35% rate for refundable tax credits available to CCPCs from CA$3 million to CA$4.5 million. The taxable capital phase out for the SR&ED refundable tax credit will also be increased from between CA$10 million and CA$50 million, to between CA$15 million and CA$75 million. The 2024 FES proposes to extent the eligibility for the enhanced refundable tax credit to eligible Canadian public corporations for the first time. An eligible Canadian public corporation would be eligible for the enhanced 35% tax credit rate on up to CA$4.5 million of qualifying SR&ED expenditures annually (and 15% on the excess), based on the same rates and thresholds which will be available to CCPCs. Canadian-resident corporations all or substantially all of the shares of the capital stock of which are owned by one or more eligible Canadian public corporations would also be eligible.

Access to the CA$4.5 million expenditure limit for any given tax year would be phased out based on an eligible Canadian public corporation's gross revenue. Specifically, the expenditure limit would be reduced on a straight-line basis when the corporation's average gross revenue over the three preceding years is between CA$15 million and CA$75 million. CCPCs would have the option to elect to have their expenditure limit for the enhanced SR&ED credit determined based on the same gross revenue phase-out structure proposed for eligible Canadian public corporations. The proposed new rules to determine eligibility for the enhanced SR&ED credit would apply for taxation years that begin on or after the date of the 2024 FES.

The 2024 FES proposes to restore the eligibility of capital expenditures for both the deduction against income and investment tax credit components of the SR&ED program. The rules would be generally the same as those that existed prior to 2014. This change would apply to property acquired on or after the date of the 2024 FES and, in the case of lease costs, to amounts that first become payable on the date of the 2024 Fall Economic Statement.

Extension of the Accelerated Investment Incentive and immediate expensing measures

The 2024 FES proposes to fully reinstate the Accelerated Investment Incentive and immediate expensing measures for a five-year period, with a four-year phase-out after 2029.

The Accelerated Investment Incentive provides an enhanced first year capital cost allowance (CCA) deduction for certain eligible property acquired after November 20, 2018. The Accelerated Investment Incentive allowed up to three times the normal rate of CCA to be claimed in the first year (although the total amount of allowable CCA would remain unchanged). A phase-out of the measures was to apply to property acquired after 2023. For example, the enhanced CCA in 2024 was limited to two times the normal rate. The 2024 FES proposes to fully reinstate the Accelerated Investment Incentive for qualifying property acquired on or after January 1, 2025, and that becomes available for use before 2030 with a four-year phase out starting in 2030. Property acquired in 2024 is still subject to the phase out from the original proposals.

The 2024 FES proposes to fully reinstate the enhanced first-year allowance that provided a full deduction for manufacturing or processing machinery and equipment under CCA Class 53 of Schedule II to the Income Tax Regulations, clean energy generation and energy conservation equipment under Class 43.1 (and Class 43.2 for property acquired before 2025), and zero-emission vehicles under Classes 54, 55 and 56. Pursuant to the 2024 FES, these immediate expensing measures would be available for qualifying property acquired on or after January 1, 2025, and that becomes available for use before 2030, with a four-year phase out starting in 2030. The half-year rule would continue to effectively be suspended for property eligible for these measures.

Progress building more homes

The 2024 FES outlines the effort made by the federal government since Budget 2024 and the release of Canada's Housing Plan to rapidly deliver on its commitments, including:

1. Consulting, until December 31, 2024, on the taxation of vacant lands to incentivize landowners to use empty land for building housing, and not speculation.
2. Introducing an accelerated capital cost allowance for eligible new purpose-built rental projects, to allow homebuilders to free up capital for their next project.
3. Consulting, until January 20, 2025, to expand the removal of GST from purpose-built rental housing projects to new student residences built by universities, public colleges, and school authorities.

Cracking down on tax evasion

The 2024 FES proposes to provide CA$451.5 million to the Canada Revenue Agency (CRA) over five years, starting in 2025-26, for additional measures to conclude audits of emergency business subsidy amounts and close major tax compliance gaps. This funding is being directed to: target non-filers, particularly in the high-net worth population and those in the underground economy; complete audits of Canada Emergency Rent Subsidy (CERS) and the Canada Emergency Wage Subsidy (CEWS); promote compliance and target tax avoidance and develop the Trust Filers Verification Program; and protect Crown revenue against tax schemes, and stop unwarranted refunds. It is estimated that these measures will recover CA$2.9 billion in federal revenue over five years, starting in 2025-26. The government is also exploring options to combat carousel schemes, which are a type of fraud designed to syphon GST/HST revenues.

Previously announced measures

The 2024 FES confirms the federal government's intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

1. Legislative proposals included in the notice of ways and means motion tabled on October 29, 2024, related to charities and reproductive services.
2. Legislative and regulatory proposals released on August 12, 2024, including with respect to the following measures:
3. 1. Regulations related to the application of the enhanced (100%) GST Rental Rebate to qualifying co-operative housing corporations;
   2. Technical amendments relating to the GST/HST, excise levies and other taxes and charges announced in the August 12, 2024, release; and
   3. Charities and Qualified Donees.
4. Legislative proposals released on July 12, 2024, related to implementing an opt-in Fuel, Alcohol, Cannabis, Tobacco and Vaping (FACT) value-added sales tax framework for interested Indigenous governments.
5. Legislative and regulatory proposals announced in Budget 2024 with respect to a new importation limit for packaged raw leaf tobacco for personal use.
6. Legislative and regulatory proposals announced in the 2023 Fall Economic Statement with respect to the GST/HST joint venture election rules.
7. Regulatory proposals released on November 3, 2023, to temporarily pause the federal fuel charge on deliveries of heating oil.
8. Legislative proposals released on August 4, 2023, including with respect to the following measures:
9. 1. Technical amendments to GST/HST rules for financial institutions;
   2. Tax-exempt sales of motive fuels for export; and
   3. Revised Luxury Tax draft regulations to provide greater clarity on the tax treatment of luxury items.
10. Legislative proposals released on August 9, 2022, including with respect to remaining legislative and regulatory proposals relating to the GST/HST, excise levies and other taxes and charges announced in the August 9, 2022, release.

For more information on this topic, please reach out to the authors, Mark Jadd, Keith Hennel, Manon Jubinville, Larry Nevsky, Mike Harris, Camille Janvier-Langis, Pamela Shin, Paige Donnelly, Dragann Mallette, Daniel Safi, Hannah Bourgeois, Ben Felsher, Adam Kotlowitz, Nolan Menard, Victor Qian.