Tax planning is changing in 2024

MaryAnne Loney is a partner specializing in taxation with the Edmonton office of McLennan Ross LLP.

If you are considering a tax motivated transaction, it would be good to complete them by the end of the 2023.

While tax law is always changing, new legislation set to start applying in 2024 may significantly reduce tax planning opportunities. They will, at minimum, complicate and increase the cost of future tax planning for private corporations and their shareholders. Of specific concern:

1. a strengthened General Anti-Avoidance Rule ("GAAR");
2. increased Alternative Minimum Tax ("AMT"); and
3. more complex rules associated with selling private corporations to children.

This article provides key takeaways regarding how these changes will impact tax planning.

We originally explored all these back in two of our budget articles in the spring which can be found here and here.

However, since then, we have gotten draft legislation for the GAAR and AMT changes, and the tax community has had more time to process what is proposed.

GAAR

1. Extra CRA reporting may become standard

The new GAAR rules propose significant new penalties and an extended reassessment period if a transaction is found to be subject to GAAR unless the taxpayer has reported the transaction to the CRA as a reportable or notifiable transaction, or through proposed optional GAAR reporting. None of this reporting means you are conceding anything from a tax perspective. Therefore, while it will likely be a hassle and add some administrative costs, in most cases, it will be worth it to report so as to remove the risk of penalties and an extended reassessment period. That being said, tax practitioners have long leaned towards giving the CRA as little information as possible and generally tried to stay under the CRA's radar. At best, this change will result in giving the CRA significantly more information it can use to draft future tax legislation. At worst, it will increase the risk of audit for taxpayers which do such reporting.

2. The added economic substance test will likely catch a lot of common tax planning

While many of the changes to the GAAR provisions will likely expand the GAAR (lower threshold for avoidance transactions, introduction of explanatory pre-amble, etc.), none of them concern tax practitioners as much as the introduction of an economic substance test.

Under the proposals, a transaction that is "significantly lacking economic substance" other than tax benefits is presumed to meet the "misuse or abuse" test. It appears that this is specifically designed to catch some common transactions which are regularly undertaken by taxpayers to reduce taxes, including notably surplus strips or pipeline transactions, where extractions from private corporations are taxed as capital gains as opposed to dividends.[1]

While the Government's commentary notes this is a rebuttable presumption and that certain Government approved transactions which would appear to be caught by the test should not be, there will still be substantial uncertainty over the next few years as we wait to see how the CRA (and eventually the Courts) choose to apply the test.

Increased AMT

The AMT has existed for a long time, notably often applying when someone claims the lifetime capital gains exemption. Essentially, taxpayers (or their accountants or tax software) were required to calculate AMT each year, and if their regular federal taxes payable were less than AMT, they would need to pay AMT.

Some key changes coming in 2024 are:

• More income included – notably a larger portion of capital gains, employee stock benefits, and donations of publicly traded securities will be included
• Elimination of several deductions and credits – notably the credit for charitable donations and deductions for losses are all cut in half
• Increased rate from 15% to 20.5%
• The exemption will increase for $40,000 to $173,000

Practically, it is likely more people will have to pay more AMT starting in 2024. Notably, this will effectively increase capital gains rates by 4% for large capital gains (since the federal normal rate on capital gains is 16.5%) and reduce the benefit of large donations.

While the increased exemption amount will offset the increased rate and inclusions for individuals in lower tax brackets, this will not assist those who are in higher tax brackets – even if it is just in the year of a major sale.

More complex rules on sales of shares to children

As explored in our budget article, the rules related to selling shares of a private corporation to children are becoming more complex in 2024.

While overall I'm not too upset by these changes — such sales will continue to be possible — the new rules will be more complex and will reduce parents' options as to the end ownership structure

Conclusion

Put together, you should strongly consider completing the following transactions before the end of 2023:

• Any sales which will result in large capital gains if you have flexibility regarding timing
• Sales of private corporation shares to adult children
• Large donations
• Any tax motivated corporate reorganization
• Surplus strips or pipelines

This doesn't mean everyone should undergo these types of transactions. It's important to consider your specific circumstances and whether the transactions make sense to you at this time. But in many cases, completing these transactions in 2023 will make sense.

Footnote

[1] The August 4, 2023 Explanatory Notes to Legislative Proposals Relating to the Income Tax Act and Regulations specifically give the example of a surplus strip on p. 123.

MaryAnne Loney is a partner specializing in taxation with the Edmonton office of McLennan Ross LLP.