On 16 April 2024, Deputy Prime Minister and Federal Finance Minister, Chrystia Freeland, tabled the federal budget for 2024–25. The budget features tax adjustments impacting individuals, trusts and corporations, including an increase in the capital gains inclusion rate. We are mindful of the potential impact on approaches to investing within registered plans, pension plans and other arrangements. Here are the highlights:
Registered plans
Home Buyers' Plan (HBP):
The home buyers' plan (HBP) helps eligible home buyers save for a down payment by allowing them to withdraw from a registered retirement savings plan (RRSP) to purchase or build their first home, or a home for a specified disabled individual, without having to pay tax on the withdrawal.
- Limit Increase – The budget proposed an increase in the withdrawal limit from $35,000 to $60,000 for eligible home buyers accessing their Registered Retirement Savings Plan (RRSP) under the HBP, without subjecting the withdrawal tax, to buy or build a qualifying home (i.e. a first home or a home for a specified disabled individual). This allows for tax-free withdrawals to facilitate home purchases, effective for withdrawals made after April 16, 2024.
- The CRA expects financial institutions to implement the change in the Home Buyers’ Plan (HBP) withdrawal limit immediately. The canada.ca/home-buyers-plan content as well as the Form T1036, Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP, will be updated shortly to reflect this change. The updated Form T1036 should be available online on or before May 10, 2024. Until the updated form is available, financial institutions can use the existing version to process withdrawal requests exceeding the current $35,000 limit.
- Temporary Payment Relief - The budget proposes to temporarily defer the start of the 15-year repayment period by an additional three years for participants making their first withdrawal between January 1, 2022, and December 31, 2025. Accordingly, the 15-year repayment period would start the fifth year following the year in which a first withdrawal was made. Otherwise, amounts due for repayment within a specific year are taxable as income for that year.
Qualified Investments for registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs):
- Qualified investments for registered plans feedback- Introduced in 1966, the qualified investment rules have been incrementally expanded to include more than 40 types of assets and to reflect the introduction of new types of registered plans (including TFSAs in 2009 and FHSAs in 2023). The incremental approach has resulted in inconsistent or difficult to understand rules. Budget 2024 invites stakeholders to provide suggestions on how the qualified investment rules could be modernized on a prospective basis to improve the clarity and coherence of the registered plans regime.
- Stakeholders are invited to provide suggestions, by 15 July 2024, on how the qualified investment rules could be modernized on a prospective basis to improve the clarity and coherence of the registered plans regime.
Specific issues under consideration may include:
- Whether and how the rules relating to investments in small businesses could be harmonized to apply consistently to all registered savings plans.
- Whether annuities that are qualified investments only for RRSPs, RRIFs, and RDSPs should continue to be qualified investments.
- Whether the conditions that certain pooled investment products must meet to be a qualified investment are appropriate, including the ongoing value of maintaining a formal registration process for registered investments.
- Whether and how qualified investment rules could promote an increase in Canadian-based investments.
- Whether crypto-backed assets are appropriate as qualified investments for registered savings plans.
Give your feedback here.
Retirement Compensation Arrangements:
The budget plans to move forward with the previously proposed amendments to the Income Tax Act (ITA) so that fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for a Retirement Compensation Arrangement (RCA) that is supplemental to a registered pension plan (RPP) will not be subject to the refundable tax. Draft legislation released in August 2023 expanded this to include fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for an RCA that is
- supplemental to an RPP, a deferred profit sharing plan, a pooled registered pension plan, or any combination of these plans, or
- under an arrangement that would, but for the pension adjustment limits and defined benefit plan maximum benefit limits under the ITA and the regulations thereunder, meet all or substantially all of the criteria to be a registered pension plan.
This change would apply to fees or premiums paid on or after March 28, 2023. The 2023 budget also proposed allowing employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit (or surety bonds) by RCA trusts, based on the retirement benefits that are paid out of the employer’s corporate revenues to employees that had RCA benefits secured by letters of credit (or surety bonds). This change would apply to retirement benefits paid after 2023.
Pension plans
Working Group on Catalyzing Greater Domestic Investment Opportunities for Canadian Pension Funds
Disclosure of Pension Fund Investments:
The budget proposes further amendments to the Pension Benefits Standards Act, 1985 to enable and require the Office of the Superintendent of Financial Institutions to publicly disclose information on the investments of large federally regulated pension plans. Ensuring a simple uniform format for disclosure is to be determined in regulation but may include the distribution of plan investments by jurisdiction and by asset class within each jurisdiction.
Other
Capital Gains Changes (includes Trusts)
- Capital gains inclusion rate – The Budget proposes to increase the capital gains inclusion rate from one half (50%) to two thirds (66.7%) for trusts and corporations, and from one half to two thirds on the portion of capital gains realized in the year that exceed $250,000 for individuals, for capital gains realized on or after 25 June 2024.
- The $250,000 threshold will effectively apply to capital gains realized by an individual (either directly or indirectly via a partnership or trust) net of any (i) current-year capital losses, (ii) capital losses of other years applied to reduce current-year capital gains, and (iii) capital gains in respect of which the lifetime capital gains exemption, the proposed employee ownership trust exemption or the proposed Canadian entrepreneurs’ incentive is claimed.
- Transitional rules The annual $250,000 threshold will not be prorated for 2024 and will be required to separately identify capital gains and losses realized before 25 June 2024 and those realized on or after that date.
- Employee stock option deduction – Claimants for stock option deductions would be would be entitled to a deduction of one half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.
- Lifetime capital gain exemption – The lifetime capital gains exemption will be increased to apply on up to $1.25 million (from $1,016,836 in 2024) of eligible capital gains for dispositions that occur on or after 25 June 2024. Indexation of the exemption will resume in 2026. Lifetime capital gains exemption applies to certain eligible small business corporations.
Proposed income tax measures
- Mutual fund corporations – For taxation years that begin after 2024, a corporation will be precluded from qualifying as a mutual fund corporation where it is controlled by or for the benefit of a corporate group (including a corporate group that consists of any combination of corporations, individuals, trusts and partnerships that do not deal with each other at arm’s length). Exceptions will be provided to ensure that the measure does not adversely affect mutual fund corporations that are widely held pooled investment vehicles.
- Previously announced tax changes – The budget confirms that Finance intends to proceed with certain previously announced tax measures, as modified by recent consultations and deliberations. These measures include:
- Employee Ownership Trusts
- Excessive Interest and Financing Expenses Limitations in relation to corporations (limitation on interest deductibility within the corporation in certain situations)
For further insights on how these budget updates may affect your investment strategies, refer to our previous blog “Budget Implementation Act Changes That May Affect Investment Strategies” here.
Questions or Comments?
As always, we'd love to hear from you. If you have any questions or would like to discuss your accounts with us, please contact us to discuss your specific needs.