As we approach 2024, it's important for employers and employees to grasp the latest tax updates shaping the financial landscape. In this guest blog by Fabio Bonanno and Mark Sherritt, professionals at BakerTilly — the firm is renowned for delivering value-added audit, tax, and advisory solutions with a combination of local expertise and global reach — we'll explore key changes impacting businesses and individuals.
The government has introduced a series of changes, ranging from Canadian business succession planning to alterations in the Alternative Minimum Tax (AMT) rules. In this article, we'll explore some key updates and their implications for businesses and individuals as we head into 2024. Here is the list of some of the key topics we’ll cover:
1. Changes in Canadian Business Succession Planning and Benefits of Employee Ownership Trusts (EOTs)
2. Key Changes in Alternative Minimum Tax (AMT)
3. Updates in Remote Work Tax Deductions
4. Navigating New T4 Reporting and Electronic Filing Changes
5. Prescribed Rate Loans to Employees Amidst Rising Interest Rates
Canadian Business Succession Planning
Canadian business owners seeking to pass on their business face new opportunities in 2024. Budget 2023 introduced rules effective January 1, 2024, to ease the succession process for employees and family members. The introduction of Employee Ownership Trusts (EOTs) offers various benefits, including extended timelines for capital gains reserves, flexible loan repayment terms, and exemptions from certain tax rules.
The rules surrounding EOTs are intricate, primarily tailored for the benefit of employees associated with a Canadian Controlled Private Corporation controlled by a trust and meeting specific criteria.
Key Benefits of EOTs
Extended Timelines for Capital Gains Reserves: Retiring business owners now have an extended period of 10 years, as opposed to the previous five, to claim the capital gains reserve.
Flexible Loan Repayment Terms: EOTs facilitate a more accommodating approach to loan repayment. Any resulting shareholder loan taken by the EOT can be paid back within 15 years, offering a significantly extended timeframe compared to the traditional requirement of repayment by the end of the following calendar year.
Exemptions from Implied Interest Income Inclusion Rules: In the context of shareholder loans, EOTs enjoy an exemption from the implied interest income inclusion rules.
21-Year Deemed Disposition Rule: One notable advantage of EOTs is their exemption from the 21-year deemed disposition rule. This exemption provides continuity and stability, allowing businesses to navigate succession without the pressure of predefined disposition timelines.
Morale Boost and Reduced Turnover Costs: Perhaps beyond the financial aspects, the introduction of employee ownership through EOTs brings about a positive impact on workplace morale. Studies consistently show that employee ownership contributes to a sense of ownership, engagement, and commitment, ultimately reducing turnover costs for the business.
Intergenerational Business Transfers
The recent updates to intergenerational business transfer rules aim to enhance the tax efficiency of family business sales. Historically, third-party sales enjoyed capital gains exemptions, while sales to family members were treated as dividends, lacking such exemptions. The revised rules offer avenues for achieving capital gains treatment on legitimate family business sales. However, due to the intricate nature of these rules, seeking guidance from qualified tax advisors is crucial before initiating any business transition.
In the traditional context, opting for a third-party sale often resulted in a business owner benefiting from a capital gain with specific tax advantages. Under certain conditions, the initial approximately $970,000 of this gain could qualify for a tax exemption, providing a substantial financial advantage. Conversely, selling shares to a family member historically categorized the gain as a dividend, devoid of a corresponding tax exemption to offset the resulting income.
Sales to family members introduce specific tax implications that may compromise the overall tax efficiency of the transaction. The absence of a tax exemption on the gain, as observed in third-party sales, can lead to a significant disparity in the financial outcome for the business owner.
Recognizing the complexities and challenges inherent in intergenerational transfers, new rules have been implemented to address these issues. These rules offer two distinct methods for achieving capital gains treatment on legitimate family business sales, potentially qualifying the transaction for the associated tax exemption. While delving into the technicalities of these rules is beyond the scope of this article, business owners are strongly advised to seek the counsel of a qualified tax advisor before undertaking any transition of their business to a family member or employees.
Navigating Changes in Alternative Minimum Tax (AMT):
The Canadian tax landscape is set to undergo significant shifts with Budget 2023's proposed changes to the Alternative Minimum Tax (AMT) rules.
Key Changes in AMT Rules
Increased Federal AMT Amount and Basic Exemption:
- The federal AMT amount is slated to see a substantial increase, rising from 15% to 20.5%. Simultaneously, the basic exemption amount will experience a noteworthy adjustment, jumping from $40,000 to $173,000. These changes are set to kick in starting in 2024, with subsequent adjustments indexed for inflation.
- One of the pivotal changes is the broadening of the income subject to AMT, now including various sources. The inclusion rate on specific income streams is set to increase, impacting how these components are treated within the AMT framework.
Inclusion Rate Adjustments
Capital Gains: The inclusion rate on capital gains is set to rise significantly, moving from 80% to 100%. This change can have substantial implications for individuals realizing capital gains, potentially altering the overall tax liability associated with such transactions.
Employee Stock Option Benefits: Similarly, the inclusion rate on employee stock option benefits will shift from 80% to 100%. Employees receiving stock options as part of their compensation will need to reassess the tax implications of this benefit, considering the full inclusion in their taxable income.
Donations of Publicly Listed Businesses and Other Property: Another notable adjustment pertains to the inclusion rate on donations of publicly listed businesses, increasing from 0% to 30%. Additionally, the inclusion rate for donations of other property is set to rise from 50% to 100%. Charitable contributions will undergo a shift in their impact on AMT calculations.
Implications and Considerations
The proposed changes in AMT rules demand careful consideration and proactive tax planning from individuals and businesses alike. As the inclusion rates increase, taxpayers must assess the impact on their overall tax liability and explore strategies to optimize their financial position.
Remote Work Tax Deductions:
The landscape of remote work tax deductions has undergone significant changes since the onset of the COVID-19 pandemic. Initially, employees were eligible for a flat-rate deduction of $2 per day worked from home, with a maximum total deduction of $400 in 2020 and $500 in each of 2021 and 2022. However, as we enter 2023, notable adjustments have been introduced, impacting how employees can claim home office expenses.
- End of Flat-Rate Deduction: The familiar flat-rate deduction method, which proved beneficial for many employees during the pandemic, has not been extended into 2023. This marks a shift in the approach to remote work tax deductions.
- Changes for Inherently Work-from-Home Roles: Notably, employees whose roles inherently involve working from home, unrelated to the pandemic, no longer have the option to utilize the flat-rate deduction method. The changes underscore the need for a more detailed and nuanced approach to calculating home office expenses.
- Detailed Method and Form T2200: For the tax years 2023 and onwards, employees eligible to deduct home office expenses must adopt the detailed method for calculation. This approach requires a comprehensive assessment of actual expenses incurred during remote work. Employees seeking to claim these deductions need to obtain a signed Form T2200 from their employer. This form serves as certification that the employee meets specific conditions required for claiming home office expenses.
- Navigating the Transition: As employees transition from the flat-rate method to the detailed method, careful record-keeping becomes crucial. Receipts and documentation supporting home office expenses will play a central role in ensuring accurate deductions. Given the complexities of the updated tax regulations, employees are encouraged to seek professional advice to navigate the changes effectively.
Navigating New T4 Reporting and Electronic Filing Changes
Employers and employees alike are facing notable changes in reporting requirements and electronic filing thresholds. These adjustments, introduced by the government, aim to enhance transparency, streamline processes, and ensure compliance.
New T4 Reporting Requirements
- Dental Benefits Disclosure:
- Employers now have an additional reporting responsibility related to dental benefits. Beginning in 2023, they must disclose whether employees or their family members were eligible to access dental insurance or any coverage from their current or former employment. This includes coverage under health and wellness spending accounts.
- The reporting requirement is not a one-time obligation but a mandatory annual practice. Employers will need to integrate this disclosure into their regular reporting processes for each tax year.
- The T4 slip has been updated to include Box 45 – Employer Offered Dental Benefits. Employers should ensure accurate completion of this box to reflect the relevant dental benefit information.
Additional CPP Contributions and T4 Changes
- Second Additional CPP Contributions in 2024: Starting in 2024, employees earning income in excess of $73,200 will be required to make a second additional 4% CPP contribution, up to a maximum of $188. Employers are obligated to match this contribution.
- Introduction of Box 16A on T4: Reflecting these additional CPP contributions, the new T4 introduces Box 16A to capture the second contributions made during the 2024 taxation year. For the 2023 tax year, employers can leave Box 16A blank if the additional CPP contributions weren't applicable.
Electronic Filing Thresholds
- Thresholds for Electronic Filing: Small businesses must be mindful of new electronic filing thresholds. Starting in 2024, employers filing six or more T4 information returns and slips are required to file electronically. Those filing five or fewer can continue to use paper filing methods.
- Avoiding Penalties: Awareness of these thresholds is crucial for small businesses to avoid penalties. Ensuring timely compliance with electronic filing requirements will contribute to a seamless and penalty-free tax reporting process.
Prescribed Rate Loans to Employees Amidst Rising Interest Rates
As the Bank of Canada aggressively raises interest rates to achieve price stability, a ripple effect is observed in the form of increased prescribed rates by the Canada Revenue Agency (CRA). This shift has significant implications for employers providing interest-free or low-interest loans to employees as part of their employment benefits. Understanding the tax impact is crucial in navigating this evolving financial landscape.
- Unprecedented Rise in Prescribed Rates: The Bank of Canada's efforts to stabilize prices have led to an unprecedented increase in prescribed rates by the CRA. The impact of this rise is profound, especially for employers offering loans to their employees.
- Taxable Benefit Inclusion: Employers need to be cognizant that the CRA generally requires the inclusion of a taxable benefit in the employee's income equivalent to the prescribed rate of interest. This benefit is to be reported on the employee's T4.
- Prescribed Rate Shift from 1% to 5%: In recent years, the prescribed rate has been as low as 1%. However, with the recent changes, the prescribed rate has surged to 5%. This significant increase necessitates a careful review of existing loans and an awareness of the heightened taxable benefit implications.
- Impact on Outstanding Loans: Employers must consider the impact of the increased prescribed rate on loans currently outstanding. The rise in the prescribed rate could result in a higher taxable benefit for employees, affecting their overall financial position.
- Employee Awareness: It is essential for employers to communicate effectively with employees regarding the increased taxable benefit resulting from the higher prescribed rate. Ensuring awareness and transparency in this regard is vital for both parties.
- Home-Purchase Loans Consideration: Some loans, including certain home-purchase loans, utilize the prescribed rate in effect at the time the loan is made, which remains locked-in for a specified period. Employers should carefully assess the terms of such loans and their corresponding tax implications.
The pace of change in our tax laws has accelerated in recent years, leading to growing complexity in tax compliance for both employers and employees. Adapting to these changes is not only about compliance but strategic financial management. Seeking professional advice and staying proactive will empower businesses and individuals to navigate the evolving tax landscape with confidence in 2024 and beyond.