Tax Implications of the Fall Economic Statement: Addressing everyday costs on a day filled with uncertainty

On December 16, 2024, the Leader of the Government in Canada’s House of Commons (Government House Leader), Karina Gould, stepped in at the final hour for the former Minister of Finance and Deputy Prime Minister, Chrystia Freeland, and tabled Canada’s Economic and Fiscal Update 2024 “Reducing Everyday Costs and Raising Wages” (2024 FES). Freeland resigned from the Liberal cabinet in the morning prior to the 2024 FES, as widely reported in the media, leading to uncertainty as to whether the 2024 FES would still be delivered and by whom.

THE CANADIAN ECONOMY

Deficit

The 2024 Fall Economic Statement (FES) outlined the government’s commitment to responsible fiscal management, through targeted investments that will provide shortterm relief, while laying the groundwork for a more productive economy in the years to come.

The 2023-24 deficit of $61.9 billion is projected to drop to $48.3 billion in 2024-25 and will continue upon a downward trajectory for the next five years ($42.2B in 2025-26, $31.0B in 2026-27, $30.4B in 2027-28, $27.8B in 2028-29 and $23.0B in 2029-30).

The federal debt-to-GDP ratio is also anticipated to decline. The 2024 FES projects a federal debt-to-GDP of 41.9% in 2024-25 to fall to 38.6% in 2029-30.

Tax Measures

The 2024 FES confirms the government's intention to proceed with the following previously announced tax and related measures, with adjustments due to subsequent consultations and deliberation. Notably the previously announced changes to the Capital Gains Inclusion Rate and the Lifetime Capital Gains Exemption outlined in the 2024 Federal Budget will be tabled.

Personal Income Tax Measures

As expected, the 2024 FES did not propose changes to federal personal income tax rates for 2024 or 2025. The Canada Revenue Agency (CRA) released the federal 2025 tax brackets and personal amounts last month at an index rate of 2.7% from 2024

The following personal tax measures were addressed in the 2024 FES:

1. Exempting the Canada Disability Benefit from Tax: The Canada Disability Benefit provides up to $2,400 annually to support low-income, working-age Canadians eligible for the Disability Tax Credit, starting in July 2025. Under the current rules, payments are included in income for tax purposes, affecting income-tested benefits, such as the Canada Child Benefit and other programs which rely on income as computed under the Income Tax Act to calculate entitlements.
   • Proposed Change: To amend the Income Tax Act to exempt these payments from income tax to avoid reducing income-tested benefits.
   • Application: Effective from the 2025 taxation year onwards.
2. Canada Carbon Rebate Rural Supplement: The Canada Carbon Rebate returns fuel charge proceeds to Canadians residing in provinces where the charge applies. In addition to a base rebate amount, a 20% rural supplement is available to individuals outside Census Metropolitan Areas (CMA), as designated by Statistics Canada.
   • Proposed Change: The FES proposes to amend the Income Tax Act to expand eligibility to individuals within a CMA residing in census rural areas or small population centres
   • Newly Eligible Areas: Includes small population centres and rural areas in various CMAs across provinces, as listed in Table 2, Tax Measures: Supplementary Information of the 2024 FES.
   • Application: Effective as of the 2024 taxation year, with first payments under the new rules in April 2025.
3. Northern Residents Deductions: The Northern Residents Deduction supports residents in prescribed northern areas with higher living costs. Individuals who live in prescribed northern areas of Canada for at least six consecutive months beginning or ending in a taxation year may claim the deduction in computing their taxable income. Residents of the Northern Zone are eligible for the full amount, and residents of the Intermediate Zone, which currently includes Haida Gwaii, are eligible for half of the amount of the deductions.
   • Proposed Change: Re-classify Haida Gwaii from Intermediate to Northern Zone, allowing for maximum deduction claims.
   • Application: Effective from the 2025 taxation year onwards.
4. Capital Gains Rollover on Investments: Currently, individuals are allowed to defer taxation on capital gains realized on the qualifying disposition of Eligible Small Business Corporation (ESBC) shares to the extent that proceeds from the disposition are used to acquire replacement ESBC shares within the year of disposition, or up to 120 days following that year. To qualify as an ESBC share, a share must be a common share issued by an ESBC to the individual and the total carrying value of the assets of the ESBC and related corporations must not exceed $50 million immediately before and immediately after the share was issued.
   • Proposed Change:
     • Extend period to acquire replacement shares to the entire calendar year following the year of disposition.
     • Include both common and preferred shares as ESBC shares.
     • Increase asset limit for ESBC and related corporations to $100 million.
   • Application: Effective for qualifying dispositions occurring on or after January 1, 2025.

Corporate Tax Measures

The 2024 FES did not propose any changes to federal corporate income tax rates or the $500,000 small business limit for 2024 or 2025.

The following corporate tax measures were addressed in the 2024 FES and apply to small to medium enterprises:

1. Canada Carbon Rebate for Small Businesses: The 2024 FES proposes to modify the tax credit based upon the number of employees and to include cooperative corporations and credit unions for the 2024-25 and later. The 2024-25 fuel charge year corresponds to the 2024 calendar year for the purpose of testing the number of employees.
   • Proposed Change: Modify certain elements of the design of the tax credit for the 2024-25 and later fuel charge years to ensure smaller businesses are receiving the most support.
   • Application: Effective from the 2025 taxation year onwards.
2. Clean Electricity Investment Tax Credit: The 2024 FES further outlined the Clean Electricity Investment Tax Credit previously announced in Budget 2024. It is an investment tax credit equal to 15 per cent of the capital cost of eligible investments in equipment related to low-emitting electricity generation, electricity storage, and the transmission of electricity between provinces and territories.
   • Application: The investment tax credit would apply to eligible property acquired and that become available for use on or after the day of the 2024 FES.
3. Scientific Research and Experimental Development Tax Incentive Program: Under the Scientific Research and Experimental Development (SR&ED) tax incentive programme, qualifying expenditures are fully deductible in the year they are incurred. In addition, these expenditures are generally eligible for an investment tax credit. The rate and level of refundability of the credit vary, depending on the characteristics of the taxpayer, including its legal status and size. The 2024 FES outlines the following measures for CCPCs:
   • A fully refundable enhanced tax credit at a rate of 35 per cent is available on up to $3 million of qualifying SR&ED expenditures annually. The 2024 FES proposes to increase the expenditure limit from $3 million to $4.5 million. As a result, qualifying CCPCs would be able to claim up to $1.575 million per year of the enhanced, fully refundable tax credit.
   • The $3 million expenditure limit for a taxation year is gradually phased out, based on prior-year taxable capital, which applies on the basis of an associated group. The expenditure limit is gradually reduced where taxable capital employed in Canada for the previous taxation year is between $10 million and $50 million. The 2024 FES proposes to increase the phase-out between to $15 million and $75 million.
   • Moreover, instead of determining eligibility based on taxable capital, 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 Canadian public corporations.
     • Proposed Change: Increase the SR&ED expenditure limit to $4.5 million, increase the phase-out based upon taxable capital to $15 million - $75 million, and to allow CCPC’s to elect to have their expenditure limit for the enhanced SR&ED based upon gross revenue to align with Canadian public corporations.
     • Application: 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.
4. Extension of the Accelerated Investment Incentive and Immediate Expensing Measures: The Accelerated Investment Incentive, which provides an enhanced first-year capital cost allowance (CCA) for most depreciable capital property, began phasing out in 2024 and is set to be fully eliminated after 2027. Immediate expensing measures for manufacturing or processing machinery and equipment, clean energy generation and energy conservation equipment, and zero-emission vehicles are also currently phasing out on the same timeline. The 2024 FES proposes to fully re-instate the Accelerated Investment Incentive and immediate expensing measures for a five-year period, with a four-year phase-out after 2029.
   • Proposed Change: Extend the Accelerated Investment Incentive and Immediate Expensing Measures for five years.
   • Application: Re-instate the Accelerated Investment Incentive on qualifying property acquired on or after January 1, 2025, and that becomes available for use before 2030.

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