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Changes to Rules on Eligible Deductions for Short-Term Rental Properties: What you Need to Know

February 19, 2025

The Canada Revenue Agency (CRA) has introduced significant changes to the rules for eligible deductions from short-term rental income, effective for tax years after 2023. These changes primarily affect non-compliant short-term rentals and aim to ensure proper regulation and taxation of this growing sector (source: https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/changes-rules-eligible-deductions-short-term-rental-income.html).

Effective January 1, 2024, expense deductions for short-term rentals (as defined below) will be denied if the property is deemed non-compliant.

What qualifies as a short-term rental?

According to the CRA, a short-term rental is defined as a residential property that is rented or offered for rent for a period of less than 90 consecutive days. This definition applies to various types of residential properties, including houses, apartments, condominium units, cottages, mobile homes, trailers, and houseboats located in Canada (source: https://www.cpacanada.ca/business-and-accounting-resources/taxation/blog/2024/february/non-compliant-short-term-rentals).

It’s important to note that some municipalities may have their own specific definitions for short-term rentals:

  • In Alberta, a short-term rental is a residential property rented or offered for rent for less than 90 consecutive days.
  • In Calgary as of April 1, 2025, short-term rentals will include stays up to 180 consecutive days.

Generally, rentals that are leased to a single tenant for 31 consecutive days or more are not considered short-term rentals. The CRA’s definition of less than 90 consecutive days is the primary federal standard for tax purposes, but local regulations may impose additional requirements or restrictions on short-term rental operations.

Changes to the rules for eligible deductions

The following tax rules surrounding short-term rentals are effective January 1, 2024:

  1. Definition of short-term rental: A residential property rented or offered for rent for less than 90 consecutive days.
  2. Non-compliant short-term rentals: Properties that either operate in locations where short-term rentals are prohibited or fail to comply with provincial or municipal registration, licensing, and permit requirements.
  3. Expense deduction restrictions: The new rules deny income tax deductions for expenses related to non-compliant short-term rentals. This includes costs such as mortgage interest, property taxes, insurance, repairs, and maintenance. For a full list of rental expenses you can deduct, refer to CRA’s website here (source: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/rental-income/completing-form-t776-statement-real-estate-rentals/rental-expenses-you-deduct.html)
  4. Non-compliant amount calculation: For partially non-compliant rentals, deductions are prorated based on the number of non-compliant days using the formula: A × B ÷ C, where:
    1. A = the total deductible expenses
    2. B = the number of non-compliant days, and
    3. C = the total rental days in the tax year.
  5. Transition relief for 2024: Property owners had until December 31, 2024, to ensure compliance with all local licensing, registration, and permit requirements. If compliant by this date, they will be deemed compliant for the entire 2024 tax year and can deduct eligible expenses.
  6. Increased tax liability: Non-compliant rentals may face a substantial increase in taxable income due to the inability to deduct expenses.
  7. Record-keeping requirements: Taxpayers must maintain accurate records to report rental income and claim eligible expenses, including documentation confirming compliance with local regulations.

These new rules apply to individuals, corporations, and trusts operating short-term rental properties. Property owners are advised to familiarize themselves with these regulations to avoid potential tax implications and penalties for non-compliance.

How can I apply for transitional relief?

To apply for transitional relief for your short-term rental property, you don’t need to submit a specific application. Instead, you need to ensure your property is compliant with all applicable provincial or municipal registration, licensing, and permit requirements by December 31, 2024. Here are the steps to take:

  1. Research local regulations: Understand the specific short-term rental laws in your municipality or province.
  2. Obtain necessary licenses and permits: Apply for and secure all required licenses, registrations, or permits to operate your short-term rental legally.
  3. Maintain compliance: Ensure your property meets all local requirements, such as zoning laws, safety standards, and operational guidelines.
  4. Keep thorough records: Maintain detailed documentation of your compliance efforts, including copies of all registrations, licenses, and municipal correspondence.
  5. Continue normal tax reporting: Report your rental income and expenses as usual on your tax return for 2024.

If you meet all compliance requirements by December 31, 2024, your short-term rental will be deemed compliant for the entire 2024 tax year, allowing you to deduct eligible expenses for the full year. This transitional relief applies to individuals, corporations, and partnerships for the 2024 tax year only.

Remember, while no formal application is required, it’s crucial to act promptly to ensure compliance before the deadline. Consulting with a tax professional can help you navigate this process effectively.

Conclusion

The recent changes to eligible deductions for short-term rental properties in Alberta represent a significant shift in the taxation landscape for property owners. The denial of expense deductions for non-compliant rentals introduces the potential for substantially increased tax liabilities and can directly impact the profitability of these rental properties.

While the transitional relief period in 2024 offers a window of opportunity for owners to achieve compliance and retain full deductions, the onus is now firmly on property owners to ensure they meet all local regulations and maintain thorough records.

If you have any questions regarding these changes and how they can impact your corporate or personal tax returns, please contact our office.

Capital Gains Tax Changes Deferred to 2026: What You Need to Know

February 12, 2025

After months of uncertainty, Canada’s Department of Finance announced on January 31, 2025, that the date for increasing the capital gains inclusion rate will be deferred from June 25, 2024, to January 1, 2026. (source: https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/update-cra-administration-proposed-capital-gains-taxation-changes.html)

Under the most recent proposal:

  1. For individuals:
    • Capital gains up to CA$250,000 annually would be taxed at the current one-half inclusion rate.
    • Capital gains above CA$250,000 annually would be taxed at the two-thirds inclusion rate, starting January 1, 2026.
  2. For corporations and most types of trusts:
    • All capital gains would be subject to the two-thirds inclusion rate as of January 1, 2026.

However, until (and unless) this proposal is passed into law, the currently enacted rate of one-half continues to apply to all capital gains. Below is a concise overview of the key points, including related measures and administrative guidance from the Canada Revenue Agency (CRA).

Reverting to the One-Half Inclusion Rate

In light of the government’s deferral, the CRA has confirmed that it has reverted to administering the currently enacted one-half inclusion rate for all capital gains realized before January 1, 2026. This means:

  • Individuals and trusts:
    • CRA forms will be updated in the coming weeks to reflect the one-half rate for the 2024 and 2025 tax years.
    • Relief from late-filing penalties and arrears interest is available for affected taxpayers:
      • Until June 2, 2025, for T1 individual filers.
      • Until May 1, 2025, for T3 trust filers.
  • Corporations:
    • Can continue filing using the one-half inclusion rate.
    • For those corporations that already filed based on the original proposal’s June 25, 2024 effective date, the CRA will coordinate corrective reassessments to revert any applied two-thirds rate back to one-half.

Lifetime Capital Gains Exemption Increase Still on Track

Despite the deferral of the capital gains inclusion rate increase, the proposed increase in the Lifetime Capital Gains Exemption (LCGE) to $1.25 million remains scheduled for June 25, 2024. This enhancement applies to:

  • Eligible small business corporation shares
  • Qualified farming or fishing property

The CRA has confirmed that it will continue to administer the proposed LCGE increase on dispositions occurring on or after June 25, 2024. Additionally, indexation of the LCGE is set to resume in 2026.

Introduction of the Canadian Entrepreneurs’ Incentive

Another measure included in the government’s 2024 budget announcement—the Canadian Entrepreneurs’ Incentive—will proceed on its original timeline and come into effect starting in the 2025 tax year. Details on this new incentive are still emerging, but it is designed to encourage and reward entrepreneurs who invest in and grow Canadian businesses.

Practical Implications and Considerations

  1. Delayed Filing of 2024 Returns:
    • Accountants and taxpayers may experience delays as CRA forms are being updated to reflect the reverted one-half inclusion rate for 2024.
    • This may affect software updates and filing practices, so stay tuned for official CRA announcements.
  2. Future Legislative Uncertainty:
    • The proposed changes to the capital gains inclusion rate still require legislative approval.
    • If a new government takes office before or in 2025, there is always the possibility that these proposals could be amended or dropped entirely.
  3. Corporations That Filed Under the Proposed Rate:
    • If your corporation followed earlier CRA guidance and used the two-thirds rate for dispositions after June 24, 2024, be prepared for corrective reassessments. The CRA has said it will work with these taxpayers to reverse any additional tax collected based on the unenacted rate.
  4. Employee Stock Options:
    • An increase in the capital gains inclusion rate often has flow-through effects on certain stock option deductions. While not explicitly detailed in some announcements, such ancillary measures could also be deferred or reconsidered.
    • Keep an eye out for further clarification from Finance Canada.

Conclusion

The shifting timelines and ongoing legislative process regarding Canada’s capital gains inclusion rate have created additional complexity for taxpayers and advisors alike. While the date for increasing the rate to two-thirds has been pushed to January 1, 2026, there is no guarantee that the proposal will ultimately become law—or remain in its current form.

For now, all capital gains realized before January 1, 2026, will be subject to the one-half inclusion rate, and the CRA has extended penalty and interest relief for certain late filers. The increase to the Lifetime Capital Gains Exemption (effective June 25, 2024) and the Canadian Entrepreneurs’ Incentive (effective for the 2025 tax year) are both expected to proceed as planned.

If you have any questions regarding these developments, or would like assistance navigating your tax obligations, please contact our office.

 

Updates to Bare Trust Reporting Rules for 2024

January 23, 2025

The Department of Finance and the Canada Revenue Agency (CRA) have announced that bare trusts will be exempt from filing T3 tax returns including Schedule 15 for 2024, unless the CRA makes a direct request for the filing.

This is welcome news, though some uncertainty remains regarding the specific filing exemptions that will apply in the future.

Proposed Updates to Bare Trust Reporting Rules for 2025

In August 2024, the Canadian government released draft legislation proposing updates to bare trust reporting rules. These changes aim to reduce the number of bare trusts required to file compared to the original legislation. Notably, the draft legislation proposes an expansion of exemptions. Here’s a comparison of the current legislation and the proposed changes:

Proposed Changes – 2025  Current Legislation 
Under the proposed rules, certain arrangements will be labelled “deemed trusts.” This means if one person (the “trustee”) holds property entirely for someone else’s benefit, that arrangement may be treated as a trust for tax purposes. 

 

Once it’s a deemed trust, it generally must file a T3 return and Schedule 15, unless it fits under a specific exemption in the legislation. 

 Under current legislation, there is no explicit statutory definition of a bare trust in the Income Tax Act. However, the Canada Revenue Agency (CRA) generally considers a bare trust to exist when:

  • The trustee just holds the property for the beneficiaries.
  • The trustee cannot do anything without the beneficiaries telling them what to do.
  • The trustee’s only role is to hold legal title; the beneficiaries get all the benefits and control.
Exempt if the fair market value (“FMV”) of all assets is $50,000 or less  Exempt if holding less than $50,000 in cash, government debt obligations, and listed securities.
Exempt if all the following criteria are met: 

  • All trustees and beneficiaries are individuals. 
  • Each beneficiary is related to each trustee. 
  • The total FMV of certain assets (e.g., cash, debt obligations, mutual funds, or personal-use property) is $250,000 or less. 
 No comparative
Exempt if all legal owners of real property are related individuals and the property can be designated as the principal residence of at least one owner. 

i.e.: Parents have co-signed their adult children’s mortgage for financing purposes.  

 No comparative

(*FMV: Fair Market Value)

Common “Deemed Trust” Exemption Situations

These proposed changes could provide significant relief for certain common arrangements as no T3 Return and Schedule 15 would have to be filed, including:

  • Co-signing Arrangements: Most co-signing arrangements for mortgages and estate planning could be exempt from filing requirements.
  • Child on Title Scenarios: Cases, where a child is listed on title for a parent’s bank accounts and investments (under $250,000), might also qualify for exemptions.
  • Joint Ownership for Bank Accounts or Other Property: When property is held jointly (e.g., a joint bank account) by individuals who all share in its use or benefit.
  • Spouses and Principal Residence: When spouses (or common-law partners) jointly occupy a family home, but only one spouse is on title, and the property could be designated as that spouse’s principal residence.
  • Partnerships: When property is held for the use or benefit of a partnership, and each legal owner is a general partner (not a limited partner), and the partnership files its own information return.
  • Court Order: When someone holds property solely because of a court order (e.g., as part of a legal settlement).
  • Non-Profit Organizations (NPOs) Holding Government Funds: When property (funds) is exclusively held by an NPO or a charity that has received these funds from the federal or provincial government for the use or benefit of other qualifying NPOs or charities.

Other Exemptions

Below are new scenarios in which a trust would not have to file Schedule 15, and in some cases, would not need to file a T3 return:

  1. Trusts Created to Meet a Legal Requirement
  1. A trust established specifically to comply with a Canadian or provincial law (e.g., a legal requirement for a particular purpose).
  1. Lawyer’s Separate Trust Account
  1. A lawyer’s separate trust account, provided its assets do not exceed $250,000 in the year.
  1. (Note: A lawyer’s general trust account continues to be exempt without any dollar limit.)

Looking Ahead

While the 2024 filing exemptions offer some breathing room, many trusts active in 2025 will still have filing obligations due by March 31, 2026. This deadline will approach quickly, so it’s crucial to stay informed and prepared.

Follow us for updates as the situation evolves.

Alberta Child and Family Benefit

December 3, 2024

The Alberta Child and Family Benefit (ACFB) is a tax-free financial program that supports low- and middle-income families with children under 18 years old.

How It Works:

The ACFB combines a base component and a working component to offer families additional financial assistance.

  • Base Component: Available to all eligible families with children under 18 whether or not they earn employment income.
  • Working Component: Additional support for families with employment income that exceeds $2,760/year.  This amount grows by 15% for every additional dollar of income earned over this threshold until the maximum benefit is reached

 Eligibility:

  • be a parent of one or more children under 18
  • be a resident of Alberta
  • file your annual tax return
  • meet the income criteria:
    • household income under $27,024 for a full benefit
    • household income under $45,285 for a partial benefit

 How Much Can You Get:

For July 2024 to June 2025, the payments include:

  • Base Component (per year):
    • $1,469 ($122.41 per month) for the first child
    • $735 ($61.25 per month) for the second, third, and fourth child each
  • Working Component (per year):
    • $752 for the first child
    • $685 for the second child
    • $410 for the third child
    • $135 for the fourth child

Payment Schedule:

Payments are issued quarterly in August, November, February, and May.

How to Apply:

To apply for the Alberta Child and Family Benefit (ACFB), simply file your tax return annually.  The benefit is automatically calculated by the Canada Revenue Agency (CRA) based on your income and family details. Ensure your marital status, address, and banking information are up-to-date to avoid delays. No separate application is required; eligibility is determined when you meet the income thresholds as an Alberta resident.

Conclusion

The Alberta Child and Family Benefit (ACFB) offers targeted financial support to help reduce child poverty and promote stability. By providing tax-free payments tailored to income and family size, the ACFB empowers Alberta families to better manage expenses and invest in their children’s futures.

Whether you’re navigating rising costs or planning for the next stage of family growth, the ACFB can make a meaningful difference in creating a more secure and balanced life. Filing your tax return on time ensures you can access this valuable support.

 References:

  1. Alberta Child and Family Benefit

https://www.alberta.ca/alberta-child-and-family-benefit#jumplinks-5

  1. CRA-administered Alberta programs

https://www.canada.ca/en/revenue-agency/services/child-family-benefits/provincial-territorial-programs/province-alberta.html

Understanding Federal and Provincial Child Care Subsidies in Alberta

October 10, 2024

Child care is a crucial aspect of family life and significantly impacts parents’ ability to work, study, and engage in their communities. In Alberta, both federal and provincial governments provide childcare subsidies to alleviate financial burdens and support families. This blog post aims to clarify the details of these subsidies, their eligibility criteria, and how they benefit families across the province.

The Federal Child Care Subsidy

The Government of Canada has enhanced support for families through the introduction of the Affordability Grant in 2022. The aim for this grant is to reduce fees by an average of 50%, up to $500 per month for full time care, significantly offsetting the costs of licensed child care.

Key Features of the Federal Child Care Subsidy:

  1. Monthly Payments: Eligible families can benefit from a reduction of up to $500 per month (deducted from their childcare fees).
  2. Universal Accessibility: The program is designed to be accessible for nearly all families with children under six, making it an essential resource for many.
    • The child care facility receives this grant from the federal government and passes it on to parents by reducing their childcare fees. There is no need for parents to apply for this and it is not income dependent.
    • The subsidy continues through parental leaves, such as maternity leave.

Provincial Child Care Subsidies in Alberta

In addition to federal support, Alberta has its own childcare subsidy program aimed at making licensed childcare more affordable for families. The Alberta Child Care Subsidy (ACCS) is designed to assist families with the costs associated with child care, particularly for those who require care for children aged 0 to 12.

Key Features of the Alberta Child Care Subsidy:

  1. Income-Based Assistance: Similar to the CCB, the ACCS is income-based. Families with lower incomes receive higher subsidy amounts, allowing for equitable access to child care.
  2. Coverage for Various Care Settings: The subsidy applies to various licensed care settings, including daycares, family day homes, and out-of-school care programs.
  3. Child Care Providers: Families can select from a range of licensed child care providers, ensuring they find suitable care that meets their needs.

Eligibility Criteria for the Alberta Child Care Subsidy:

To qualify for the ACCS, families must meet specific criteria, including:

  • Residency: Applicants must be residents of Alberta.
  • Income Thresholds: The subsidy is available to families whose combined annual income does not exceed $180,000 for children aged 0-kindergarten-age (in kindergarten and also attending child care during regular school hours) and $90,000 for those in kindergarten to grade 6 in a licensed program outside of regular school hours.
  • Licensing: The child care facility must be licensed under Alberta’s Child Care Licensing Act.
  • Work or school: Both parents must be working, looking for work, enrolled in an educational program, have special needs, or a child with special needs to be eligible. When a parent goes on parental leave, the subsidy ceases until the parent returns to work or school.

Application Process

Families interested in applying for the Alberta Child Care Subsidy can do so through the province’s website. The application process is straightforward, requiring families to provide details about their income, the number of children needing care, and the chosen child care provider.

The Impact of Subsidies on Alberta Families

The combined efforts of federal and provincial subsidies significantly reduce the financial burden of child care, allowing families to invest more in their children’s development and education. These programs not only support working parents but also contribute to the overall economy by enabling more individuals to participate in the workforce.

Conclusion

Federal and provincial child care subsidies in Alberta play a vital role in supporting families. By making child care more affordable and accessible, these programs foster an environment where children can thrive, and parents can pursue their professional and personal goals without undue financial stress.

For families navigating the complexities of child care costs, understanding and leveraging these subsidies is essential. As policies continue to evolve, staying informed about available resources will ensure that families can maximize their benefits and secure quality care for their children.

For more information, visit the Government of Alberta’s website or the Canada Revenue Agency’s site for details on how to apply for these vital programs.

References:

  1. Government of Canada. (2023). Child Care Subsidy Overview.
  2. Government of Alberta. (2023). Child Care Subsidy.

Note: The information and content provided to you may include contributions from ChatGPT, an AI language model. It has been reviewed to ensure accuracy and relevance.

Forensic Accounting

August 7, 2024

What is forensic accounting?

Forensic accounting uses accounting, auditing, and investigative skills to examine the finances of a business or individual. Forensic accountants analyze financial information that could be used as legal evidence and often testify in court as a key witness. They must also be able to identify fraud with minimal details, identify the scheme, and use procedures to prove if it exists. The most common industries forensic accountants work in are insurance, financial institutions, and law enforcement agencies.

Duties of a forensic accountant

Some of the responsibilities that fall under the forensic accountant include:

  • Insurance claim investigation: obtain records related to insurance claims and look into whether the payments made by insurance meet policy conditions.
  • Trial testimony: forensic accountants may be asked to appear and testify in court. They find evidence of any fraud, embezzlement, or tax evasion. They may also testify for a plaintiff or defendants.
  • Bookkeeping investigation: includes gathering and analyzing transactions to find any fraudulant or incorrect items. They are looking for any fraud, embezzlement or misappropriation.

How to become a forensic accountant

 The path to becoming a forensic accountant is similar to a traditional accountant. It is still required to complete a bachelor’s degree in accounting. Once that is complete, the candidate must also complete the Chartered Professional Accountant (CPA) program to become designated. Once designated, accountants can complete the Certified in Financial Forensics (CFF) credential. After the CFF credential is completed, they can pursue careers in this field.

Differences in forensic accounting vs traditional accounting

 Both careers require the same education and CPA designation but the duties performed vary.

Traditional accounting analyzes routine transactions, prepares financial information as well as ensures the correct accounting standards and follows regulations. Careers in accounting normally fall within organizations which normally include, audit, tax, financial planning and budgeting.

Forensic accounting takes the financial information to identify and uncover any potential fraud then uses procedures to prove whether or not fraud does exist. Skills that are required to perform these careers include attention to detail, strong investigative skills as well as integrity.

Conclusion

 While the underlying education is the same as becoming a CPA, the major difference between a forensic accountant and a traditional accountant is that they have to conduct investigations to uncover information, identify anything unusual, track and recover fraudulent activities and report their findings in a way that anyone can understand.

References

 https://www.accounting.com/careers/forensic-accountant/

https://www.investopedia.com/terms/f/forensicaccounting.asp

https://financialcrimeacademy.org/forensic-accountant-responsibilities/

https://integrityforensic.com/forensic-accounting-vs-traditional-accounting-whats-the-difference/

 

 

Changes to Capital Gains Inclusion Rates

June 18, 2024

Capital Gains Inclusion Rate Proposed Change

On April 16th, 2024, the 2024 federal budget proposed to increase the capital gains inclusion rate from 50% to 66.67% for corporations and trusts and from 50% to 66.67% on capital gains in excess of $250,000 for individuals beginning on June 25th, 2024. (Chapter 8: Tax Fairness for Every Generation | Budget 2024, 2024).

What is a capital gain, and how can it affect your taxes? 

A capital gain can occur through the disposition of capital property. The Government of Canada website defines capital property as “Depreciable property, and any property, which, if sold, would result in a capital gain or a capital loss. You usually buy it for investment purposes or to earn income. Capital property does not include the trading assets of a business, such as inventory” (Capital Gains – 2023, 2024). Some common examples of capital property are land, buildings, vehicles, equipment used for rental operations or business purposes, and second homes such as vacation properties or cottages.

A capital gain occurs when the proceeds received from the disposition of the disposed asset are greater than the adjusted cost base (cost of the asset plus any expenses incurred to acquire it). A capital gain is calculated by taking the proceeds of disposition less the assets adjusted cost base and any expenses that were incurred to sell the property.

At this time, the inclusion rate is 50%, meaning that only 50% of any capital gain is taxable to an individual, corporation or trust.

What this can mean for Corporations and Trusts:

Prior to June 25, 2024, only 50% of a capital gain is included when calculating the corporation or trust’s net income for tax purposes.  The 2024 budget proposes that as of June 25th, 2024, 66.67% of the capital gain will be included when calculating your net income effectively resulting in a higher taxable income and higher taxes on the sale of capital property. For example, if a corporation sold land that had originally cost the corporation $200,000 for $300,000, with the 50% inclusion rate, only $50,000 of this amount would be taxable (($300,000-$200,000)*50%). With the new proposed inclusion rate of 66.67%, $66,670 of the capital gain will be taxable.

What this can mean for Individuals: 

For individuals, as of June 25th, 2024, the current 50% inclusion rate will increase to 66.67% for any capital gain in the year that exceeds the limit of $250,000. This means that if your capital gains realized in the year are under the $250,000 limit, the 50% inclusion rate will still apply; but for any amount over $250,000, the 66.67% inclusion rate applies.  The legislation does not allow for the averaging of capital gains over multiple years to stay under the $250,000 threshold or any carry-over of any unused threshold.

It is important to note that, the principal residence exemption remains unchanged, meaning that capital gains that arise when selling your principal residence, such as your house, remain exempt from tax and are unchanged.

For individuals, common examples where capital gains could apply are the sale of a second house such as a cottage or rental property, vehicles, and investments.

 Summary and Other Considerations:

With the proposed change to the capital gains inclusion rate for all capital gains realized after June 24th, 2024, from 50% to 66.67% for corporations and for capital gains over $250,000 for individuals, we recommend reviewing your investments to determine if you have any unrealized gains. For most individuals, it will be important to manage these gains from year to year to ensure that you can keep them under $250,000 to avoid additional tax.  But for corporations and trusts with accrued unrealized capital gains, it may be prudent to speak with your investment broker and tax advisors to determine if triggering some of these gains before June 25, 2024, to minimize the impact on your taxes on the eventual sale makes sense for you.

Note that there is no provision at this time for a deemed disposition election to trigger gains before the new rate applies.  The actual disposition must occur.

Capital Gains Reserves

Capital gains reserves will enter into income on the first day of the taxation year, meaning those starting before June 25, 2024, will be subject to the 50% inclusion rate.  Later years will follow the prevailing rate of 66.67%.  If you have a capital gains reserve that you are bringing into income, it will be important for you to discuss with your tax advisor the implications of continuing it going forward or realizing the remaining amount in 2024.

Employee Stock Options

Under current rules, if you receive a stock option benefit, the full amount of that benefit is taxed as employment income in the year it is received; however, the employee may claim a deduction of 1/2 the stock option benefits if they meet certain conditions.  Under the proposed changes, the stock option deduction will change from 1/2 to only 1/3 of the stock option benefit for any options exercised after June 24, 2024, with the $250,000 limit applied to the combined total of stock option benefits and capital gains.

Allowable Business Investment Losses (ABILs)

When a taxpayer incurs a business investment loss from the disposition of shares or debts from a small business corporation or the deemed disposition of bad debts or shares of a bankrupt small business corporation, they have been able, under the current rule, to deduct 50% of that loss against other income (such as employment, business and property income) and carry it back 3 years or forward 10 years.  Beginning June 25, 2024, ABILs will be deductible at 66.67% even if the amount is carried back to a period prior to June 25, 2024.

Transitionary Rules for the New Inclusion Rate

For 2024, the tax year will be split into two periods for applying different inclusion rates:

  • Period 1:  Up to June 24, 2024, taxed at 50%
  • Period 2: From June 25, 2024, taxed at 66.67%.

Taxpayers will need to net capital gains against capital losses for each period to determine the applicable inclusion rates.

 

If you would like us to review your investment portfolio or if you have further questions regarding the capital gains inclusion rate changes, please contact our office.

 

*The information contained in this post reflects the proposed change at the date posted and may or may not be relevant at future dates

 References

Capital Gains – 2023. (2024, January 23). Canada.ca. Retrieved June 7, 2024, from https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html

Chapter 8: Tax Fairness for Every Generation | Budget 2024. (2024, April 16). Canada.ca. Retrieved June 7, 2024, from https://budget.canada.ca/2024/report-rapport/chap8-en.html

How do you calculate capital gains and capital losses? (2024, January 23). Retrieved June 7, 2024, from https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/publicly-traded-shares-mutual-fund-units-deferral-eligible-small

Tax Fairness for Every Generation. (2024, April 16). Canada.ca. Retrieved June 7, 2024, from https://www.canada.ca/en/department-finance/news/2024/04/tax-fairness-for-every-generation.html

2023 Trust Reporting Requirements (T3 Return)

February 23, 2024

 

 The federal government recently released new federal trust reporting requirements that will be effective for taxation years ending after December 30, 2023 (which means that taxation years ending December 31, 2023, will be affected). These changes will have an impact on many trusts, including those previously exempt from reporting obligations.

Expanded Reporting for Trusts

The new rules significantly broaden the scope of trusts required to file an annual Trust Income Tax and Information Return (“T3”). This includes most personal trusts resident in Canada, even those without income tax liability or distributions during the year. Notably, bare trusts, often used in joint ventures, real estate holdings, or probate planning, may now also be subject to these new reporting requirements.

What Could Constitute a Trust?

  • Co-Signing or Being on a Property Title: If you have co-signed a loan or are on a property title to help someone (like a child) acquire a property, with the understanding that the benefit, profits, or control are theirs.
  • Estate Planning: Holding, controlling, or being named on assets that are intended to be passed on or utilized by others in the future.
  • Asset Management: Managing assets, be it money, bank accounts, property, or investments, with clear instructions (usually in writing) about who benefits or how the assets should be managed or distributed (this can include bank accounts held in more than one person’s name with a balance of $50,000 or more).

Trusts created for holding personal-use assets for estate planning or asset protection, such as those above, which may have previously qualified for the filing exception, will no longer be exempt under the new rules.

 

New Obligations and Requirements

Expanded T3 Return Filing Obligations

  • Previously, certain trusts, especially those with no activity or income tax payable (like those holding a vacation property), were exempt from filing a T3.  This exemption will no longer apply to most of these trusts starting in 2023.

For supporting information from Canada Revenue Agency, click the link below
CRA Media Release

 

Expanded T3 Return Reporting Requirements – Beneficial Ownership Information of a Trust:

  • Express trusts, non-resident trusts and bare trust arrangements may now be required to file a T3 return and must also report additional detailed information.
  • The new Schedule 15 in the T3 is now required to be completed and filed with all T3’s to report more the additional disclosures.
  • Schedule 15 requires the name, address, date of birth, jurisdiction of residence, and taxpayer identification number (SIN, BN, ITN) for each settlor, trustee, beneficiary, and any person with influence over trustee decisions.

To download the Schedule 15 form, click on the link below
Schedule 15

 

Exemptions from the expanded requirements

The following trusts are exempt from filing a T3 return:
  • Trusts that hold assets with a maximum fair market value (“FMV”) of $50,000 throughout the year (these assets are limited to deposits, government debt obligations, and listed securities)
  • Trusts that have been in existence for less than three months
  • Qualified disability trusts
  • Trusts governed by registered plans (including registered retirement savings plans and tax-free savings accounts)
  • Mutual fund trusts, segregated funds, and master trusts
  • Employee life and health trusts
  • Cemetery care trusts and trusts governed by eligible funeral arrangements
  • Lawyers’ general trust accounts
  • Graduated rate estates
  • Trusts, all the units of which are listed on a designated stock exchange
  • Trusts that qualify as non-profit organizations or registered charities
  • Certain government-funded trusts

Additionally, information subject to solicitor-client privilege is exempt from these new reporting requirements.

 Filing Deadline

  • The T3 return along with Schedule 15 must be filed within 90 days of the end of its fiscal year. Most of these trusts have a December 31, 2023, fiscal year-end and will be due by March 30, 2024

 

Non-Compliance Penalties

  • The penalty for non-compliance  is the greater of $2,500 or 5% of the trust’s maximum fair market value during the year. 
  • These are in addition to existing penalties for failing to file a T3 return, which also carries a maximum penalty of $2,500, meaning trusts could incur multiple penalties.
  • Standard late-filing penalties may also apply.

 

Conclusion

The new trust reporting rules mark a significant shift in the transparency and disclosure requirements for trusts in Canada. It is essential for trustees and relevant parties to understand these changes to ensure timely compliance. Our team at Fulcrum Group is here to assist you in navigating these new requirements so please feel free to reach out for further clarification or any assistance you may need in filing your T3s.

Government Proposes Changes to Underused Housing Tax (UHT) for 2023

January 4, 2024

In Budget 2021, the Canadian government introduced the Underused Housing Tax (UHT), a 1% annual tax on the value of non-resident, non-Canadian-owned vacant or underused residential real estate. In response to feedback on the onerous filing, the government is proposing significant changes to streamline compliance. These changes have not yet been passed with federal legislation but are expected to be passed and enacted in the coming months.

 

One notable proposal is the elimination of filing requirements for certain owners. “Specified Canadian corporations,” partners of “specified Canadian partnerships,” and trustees of “specified Canadian trusts” are slated to become “excluded owners,” relieving them of UHT reporting obligations. The government aims to expand these definitions to include a broader range of Canadian ownership structures, reducing the compliance burden for eligible entities starting from the 2023 calendar year. 

 

This means that most Canadians should not have to file a UHT return in 2023.  

 

To further ease the transition, the government is also suggesting a reduction in minimum failure-to-file penalties. The minimum penalties for individuals and corporations for late filing UHT returns are proposed to decrease from $5,000 to $1,000 and from $10,000 to $2,000, respectively, beginning in 2022. 

 

The requirement to file UHT returns for 2022 under the original legislation will continue and the deadline has been extended to April 30, 2024. If you have not filed your UHT returns yet or are unsure if you have a filing obligation, please contact Fulcrum Group.  

 

*The information contained in this post reflects the standards and rules applicable at the date posted and may or may not be relevant at future dates

Contact

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Fax: 780-532-4947
Toll Free: 1-800-422-6093
Email: office@fulcrumgroup.ca

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T8V 0R6

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