2024 Canadian Tax Changes New Year, Many New Tax Regulations. Read on to know what to expect

January 2024

Starting in 2024, Canadians will experience the impact of new tax measures and modifications to existing ones. However, tax experts suggest that these changes will have minor effects on the majority of individuals, unless they fall into the high-income bracket.

Some of the upcoming measures in 2024 include adjustments to GST/HST exemptions, the discontinuation of short-term rental deductions, the introduction of new alternative minimum tax rates, and an increased Canada Pension Plan (CPP) contributions.

Important Dates to Remember

  • For the 2023 tax year, the deadline to make contributions to Registered Retirement Savings Plans (RRSPs) is February 29.
  • Employers are required to submit T4, T4A, and T5 slips by February 29. If there are more than five slips, electronic submission is mandatory to avoid penalties.
  • The deadline for filing T3 trust returns, along with Schedule 15 beneficial ownership information, is April 2.
  • Individuals must file their personal income tax returns by April 30. However, self-employed individuals have until June 17 to file their returns (since June 15th is a Saturday) to file their 2023 personal tax returns, but any amounts owing to CRA must still be paid by April 30th

Remember to adhere to the deadlines and ensure timely filing and payment of any taxes owed. This helps avoid penalties and potential issues.

Increased Interest Rates for Late Tax Payments

The interest rate for overdue taxes, Canada Pension Plan contributions, and employment insurance premiums will increase from 9% to 10%. According to John Oakey, the vice-president of taxation at the Chartered Professional Accountants of Canada in Toronto, this interest rate applies to any remaining unpaid personal income tax balance after April 30. We emphasize the importance of paying tax installments and settling income tax balances on time to avoid incurring the interest charge.

Interest rates for the first calendar quarter

The Canada Revenue Agency (CRA) announced the prescribed annual interest rates that will apply to any amounts owed to the CRA and to any amounts owed by the CRA to individuals and corporations. These rates will be in effect from January 1, 2024 to March 31, 2024.

Income tax

  • The interest rate charged on overdue taxes, Canada Pension Plan contributions, and employment insurance premiums will be 10%.
  • The interest rate to be paid on corporate taxpayer overpayments will be 6%.
  • The interest rate to be paid on non-corporate taxpayer overpayments will be 8%.
  • The interest rate used to calculate taxable benefits for employees and shareholders from interest free and low-interest loans will be 6%.
  • The interest rate for corporate taxpayers’ pertinent loans or indebtedness will be 9.16%.

Understanding Home Office Expenses for Tax Purposes

The simplified flat rate of $2 per day for home office expenses, which was implemented by the Canada Revenue Agency (CRA) from 2020 to 2022, is no longer applicable for the 2023 tax year, as stated by John Oakey, Vice President of Taxation at Chartered Professional Accountants of Canada (CPA Canada). Initially introduced to facilitate the deduction of home office expenses during the pandemic, this temporary flat rate method has changed.

For the 2023 taxation year, employees are required to utilize the detailed method and acquire a completed Form T2200, signed by their employer, in order to claim home office expenses, according to the CRA's guidelines.

The CRA's website states that employees who were mandated to work from home may generally be eligible for home office expenses directly associated with their work. However, certain conditions must be met, such as working from home for more than 50% of the time continuously for at least four weeks in the year. It's important to note that home office expenses that have been reimbursed by the employer are excluded from the deduction.

Key Findings on Federal Income Tax Changes

According to a report released in December 2023 by the Canadian Taxpayers Federation, changes to Canada Pension Plan contributions and Employment Insurance premiums will result in increased federal income taxes for almost all Canadians this year. The not-for-profit citizen's group, based in Ottawa, aims to hold the government accountable and advocates for lower taxes.

As per the federation's findings, individuals earning $30,000 can expect an additional $9 in taxes for 2024, while those with incomes of $80,000 or more will see a higher tax burden of $347.

Updates on Income Taxes, EI Premiums, and TFSAs for 2024

Beginning Jan. 1, federal income tax bracket thresholds in Canada will rise 4.7% across all brackets, compared to a 2023 rise of 6.3%. Basic personal exemption amounts have also been adjusted to account for inflation.

Income tax thresholds were increased by 1% in 2021 and 2.4% in 2022.

The annual tax free savings account (TFSA) contribution also rises from $6,500 in 2023 to $7,000 in 2024

Changes to Employment Insurance Contributions

The federal employment insurance (EI) rate and maximum annual insurable earnings have experienced an increase for the year 2024. Previously, in 2023, the rate stood at 1.63% for maximum earnings of $61,500. However, for employees, the rate has now risen to 1.66% for maximum earnings of $63,200 in 2024. As a result, employees are required to pay a maximum annual premium of $1,049.12.

For employers, the EI rate has also seen an increase, moving from 2.28% in 2023 to 2.32% for the current year. Consequently, employers are now obligated to pay a maximum annual premium of $1,468.77.

Since 2017, there has been an increase of $212 in EI premiums for employees and an increase of $298 for employers.

CPP Pension Enhancement: Increased Contributions and Earnings Ceilings

The federal government will implement a second level of Canada Pension Plan (CPP) contributions in the coming year as part of its commitment to enhance CPP payments for retirees, a process initiated in 2019. Previously, in 2023, there was only one pension ceiling: the maximum pensionable earnings amount, which was $66,600. Accounting for the $3,500 exemption, the 5.95% CPP contribution rate was applied to incomes of $63,100 or less.

As of now, the first pension ceiling has increased to $68,500, or $65,000 after the exemption. Consequently, the first CPP contribution maximum for both employers and employees in 2024 is $3,867.50. Previously, individuals earning above the base amount of $3,500 would contribute a fixed portion of their income, up to a gradually increasing maximum amount. This structure remains unchanged for the first tier of earners, where individuals with annual earnings of $68,500 or less will not experience any alterations in their contribution rates for 2024.

Beginning January 1, 2024, a second earnings ceiling of $73,200 is introduced. To calculate the increase from a $3,867.50 annual contribution to $4,045.50, the Canada Revenue Agency (CRA) applies a 4% rate to the income amount over $68,500, up to the $73,200 threshold. In 2024, individuals will only need to pay CPP contributions on a maximum income of $4,700 under the second ceiling, amounting to $188.

John Oakey, VP of CPA Canada, explained that these changes, combined with EI contributions, could result in a significant tax burden for middle-income workers and their employers. Oakey mentioned that hiring an employee with an annual salary of $73,200 in 2024 would cost employers 7.5% in employment taxes. Employees themselves would be paying 7%, resulting in a combined total of 14.5% for CPP and EI contributions, which represents a substantial tax amount and administrative burden.

In conjunction with the annual rise in CPP contributions, the introduction of the second level will result in an annual increase of $302 in CPP payments for employees in 2024. This will raise the maximum CPP payment from $3,754.45 in 2023 to $4,045.50 in 2024.

Employers are required to match their employees' contributions on a dollar-for-dollar basis, meaning that employers will also witness a maximum increase of $302 in CPP contributions per employee.

Since self-employed individuals act as both employers and employees, they are responsible for paying both the employer and employee portions of CPP contributions.

The CRA projects that in 2025, the first CPP income ceiling will rise to $69,700, while the second earnings ceiling is estimated to reach $79,400. This change will result in an increase of the second CPP contribution level from $188 to an estimated $388.

Changes to Alcohol Taxes in Effect

Effective April 1, 2024, the excise tax on beer, wine, and spirits will rise by 4.7% due to the implementation of the alcohol escalator tax. This increase is estimated to result in an additional cost of approximately $100 million for taxpayers in the current and following year.

Gasoline Price Changes on Jan. 1: Manitoba Decreases, Alberta Increases

Effective January 1, adjustments to gasoline prices will be implemented in specific provinces. Manitobans will experience a reduction of 13 cents as the province lowers its gas tax, whereas Albertans will face an increase of at least nine cents in their gasoline expenses.

Increase Expected in Carbon Tax Rates

The federal carbon tax is set to increase from $65 to $80 per tonne in provinces where the federal backstop applies on April 1, 2024. Consequently, the price per litre of gasoline will rise from 14.3 cents to 17.6 cents, and the propane fuel charge will rise from 10 cents to 12 cents per litre. This will result in an additional cost of approximately $12.32 for a family filling a 70-litre minivan.

In provinces utilizing the federal backstop, the carbon price is implemented through fuel charge rates, which vary depending on the type of fuel and the amount of CO2-equivalent emissions generated when burned.

The federal backstop does not apply to Quebec, British Columbia, and the Northwest Territories, as they have their own carbon pricing systems that meet the federal standard.

Furthermore, residents of provinces subject to the federal carbon tax have started receiving carbon pricing rebates from the federal government's Climate Action Incentive payment, which are disbursed every three months. The amount of rebates depends on the household size.

The rebates will vary depending on the province, with the following amounts available:
Alberta: Up to $386
Manitoba: Up to $264
New Brunswick: Up to $184
Newfoundland and Labrador: Up to $328
Nova Scotia: Up to $248
Ontario: Up to $244
Prince Edward Island: Up to $240
Saskatchewan: Up to $340

Carbon Pricing and Rebate Program

Approximately 90% of the government revenues generated from the carbon tax are returned to households through a rebate program. The remaining 10% is allocated to programs aimed at assisting businesses, schools, municipalities, and other grant recipients in reducing their fossil fuel consumption. According to the parliamentary budget officer, the carbon tax rebate program consistently benefits nearly all households, with the rebate exceeding the direct and indirect costs they incur. Only households in the highest income quintile, who tend to consume more, are projected to pay more through the carbon tax than they receive in rebates.

Reporting Requirements for Bare Trusts: A “Sneaky” and Noteworthy Change

When Canadians do their taxes in 2024, they'll be required to report any involvement in "bare trusts." Caitlin Butler, a tax specialist based in Vancouver and the director of tax education and publications at Video Tax News, highlighted the significant impact of the expanded trust reporting rules. According to Butler, these changes will have far-reaching implications for many taxpayers, who may not even be aware that they are required to file a trust return.

One key aspect of the expanded rules, as explained by Butler, is the inclusion of situations where a trust acts as an agent for its beneficiaries, commonly known as a bare trust. In simpler terms, this occurs when the person listed as the owner or holder of an asset is not the true beneficiary, but rather holds the asset on behalf of another party. Butler provided examples, such as a parent being on the title of a child's home to assist with obtaining a mortgage, or shareholders opening a corporate bank account where the corporation is the true owner of the funds. Unlike express trusts, where people seek out a lawyer to create a trust, bare trusts happen almost accidentally when a parent cosigns a mortgage for a child and becomes partial owner, or when an aging parent puts their kids down as partial owners of their house in anticipation of an impending death.

In those cases, the bare trust does not earn any money for the trustee to report in a given tax year. In 2024, CRA will for the first time require that Canadians fill out a T3 return for the previous year naming the trustees, beneficiaries and settlers of each trust.

This change has been described as "sneaky" because even though Canadians are not going to be taxed on a trust's value, failing to report they are a member of a bare trust could result in a fine of $2,500, or 5% of the value of all property in the trust, whichever is higher.

Butler emphasized the importance of individuals determining whether they are on title or holding an asset as a non-beneficial owner. Factors to consider include whether they receive the benefits of the asset, such as proceeds from its sale, and whether they are responsible for costs and risks associated with the asset, including property taxes.

If a person is on title but not the true beneficial owner, it likely constitutes a bare trust arrangement, which may necessitate filing a trust return by April 2, 2024, according to Butler. She highlighted the substantial compliance challenge posed by these new rules, with the risk that many individuals and businesses may unknowingly fail to comply with the law. Once again, this non-compliance could result in penalties of $25 per day for each day the returns are overdue, up to a maximum of $2,500.

Butler noted that while many affected individuals and businesses may not owe additional taxes, they will incur compliance costs. This can include hiring a professional advisor to complete and file the trust return.

Impact of Short-Term Rental Deduction Elimination

Effective January 1, the Fall Economic Statement introduced the elimination of certain deductions for short-term rentals. Individuals running short-term rental properties in jurisdictions where such rentals are prohibited or those who fail to meet local requirements will no longer be eligible to claim any expenses related to their properties.

The federal government justified this decision by highlighting the significant number of homes used for short-term rentals in Montréal, Toronto, and Vancouver that could otherwise be utilized for permanent housing in 2020, an estimate of 19,000 homes operated as short-term rentals.

To incentivize owners to return these units to the long-term rental market, several municipalities implemented bans or restrictions on short-term rentals. However, despite these measures, some property owners continued to rent out their properties.

In an attempt to increase the availability of long-term rentals, the province of British Columbia implemented legislation in November to restrict short-term rentals in numerous cities across the region. This move aims to encourage the return of thousands of units to the long-term rental market.

In such cases where rentals are prohibited by the province or municipality, the federal government now requires individuals to pay taxes on the income generated from these activities. Ameer Abdulla, a partner with EY Private, explained that if owners persist in renting out properties in banned areas, they are liable for taxation on those earnings.

The federal government has decided to eliminate income tax deductions for expenses related to short-term rentals in provinces or municipalities where such rentals are banned. This means that operators of short-term rentals in these areas will no longer be able to claim tax breaks for their expenses.

Additionally, even in provinces where short-term rentals are permitted, operators who fail to comply with local regulations and laws will also be denied the income tax deduction.

While the intention behind this change is commendable, John Oakey, Vice President of Taxation at Chartered Professional Accountants of Canada (CPA Canada), cautioned that it could potentially lead to the emergence of unregulated or "underground" short-term rental operations, thereby creating additional challenges.

Alternative Minimum Tax: Impact and Revised Rates

In the 2023 federal budget, the Canadian government announced significant revisions to the alternative minimum tax (AMT) rate.

The AMT serves as a safeguard to prevent high-income taxpayers from excessively reducing their tax bills through deductions and other means. Since 1986, the AMT has ensured that individuals must pay a minimum of 15% tax on income exceeding $40,000, regardless of available deductions or tax measures. Although the enabling legislation is yet to be passed, the Liberal government has proposed an increase in the alternative minimum taxable income threshold to $173,000, accompanied by a higher tax rate of 20.5% on income above that threshold.

While the measure primarily targets high-income earners, there is a possibility of ordinary Canadians being affected. This can happen if someone with an income below the threshold experiences a temporary spike in earnings due to factors such as selling rental property or liquidating stocks.

Ameer Abdulla, a partner at EY Private, explained that provisions exist to recover the AMT over the subsequent seven years for individuals who have a temporary income increase followed by reduced earnings in subsequent years.

It is essential to note that these proposed changes are aimed at ensuring tax fairness and preventing excessive tax reductions for high-income individuals.

Implementation of Digital Services Tax

According to the Canadian Taxpayers Federation, the introduction of a new three percent digital services tax aims to ensure that tech giants like Amazon, Uber, and Facebook pay their fair share of taxes. This tax is expected to result in higher prices for consumers. It would be applicable to businesses with annual worldwide revenues of at least 750 million Euros and annual Canadian digital services revenue exceeding $20 million.

While the timing of this change has not been confirmed by the Deputy Prime Minister's Office at the time of publication, the Liberals' spring budget indicated their intention to implement the tax.

The federation suggests that businesses would likely pass on the tax burden to consumers. Referring to a report from the Tax Foundation, they estimate that approximately 55% of the total tax burden would be transferred to consumers, 40% to online vendors, and only five percent to digital companies.

Changes in GST Exemptions: Positive Impact for Psychotherapy and Rental Housing

In the Fall Economic Statement (FES), the federal government unveiled its decision to exempt "professional services rendered by psychotherapists and counseling therapists" from the Goods and Services Tax (GST) and Harmonized Sales Tax (HST). This change aims to enhance affordability of mental health care for Canadians.

The Parliamentary Budget Officer estimates that over a five-year period, the measure will result in a revenue loss of $64 million. Daniel Rogozynski, co-director of the Master of Accounting program at the University of Waterloo, suggests that the government's intention is to utilize the income tax system to incentivize socially beneficial activities.

Rogozynski acknowledges that making services more affordable can lead to increased demand. However, he highlights the challenge of meeting the rising demand for mental health services in Canada, as the supply often falls short.

In addition to the GST exemption for psychotherapy services, the federal government expanded the initiative started in November, which removed GST from the construction of new rental apartments. The latest announcement in the FES extends this exemption to new co-op rental housing, aiming to stimulate the development of affordable housing options