Tax Insights: 2024 Federal Fall Economic Statement – Tax highlights

Issue 2024-34

In brief

On December 16, 2024, the federal government presented its 2024 Fall Economic Statement (economic statement). The economic statement does not change corporate or personal income tax rates, but does:

• re-instate the Accelerated Investment Incentive and the immediate write-off for newly acquired manufacturing and processing (M&P) and specified clean energy equipment and zero-emission vehicles
• significantly enhance the Scientific Research & Experimental Development (SR&ED) program by expanding SR&ED investment tax credit (ITC) refundability and restoring eligibility for capital expenditures  
• expand eligibility for the Clean Electricity and Clean Hydrogen ITCs
• provide design and implementation details of the Electric Vehicle (EV) Supply Chain ITC
• modify the Canada Carbon Rebate for Small Businesses

This Tax Insights discusses these and other tax initiatives proposed in the economic statement.

In detail

Business tax measures

Accelerated Investment Incentive (AII)  

The economic statement proposes to fully re-instate the AII, which was being phased out up to 2027, but will now provide an enhanced first-year capital cost allowance (CCA) deduction for qualifying property acquired after December 31, 2024 and that becomes available for use before 2030. As with its predecessor, the AII will apply to all capital property subject to the CCA rules, except M&P and specified clean energy equipment and zero‑emission vehicles (see below).

For property that becomes available for use before 2030, the AII will provide a maximum first year CCA deduction on the net additions to a CCA class that is 1.5 times the standard CCA deduction for that class, subject to a maximum of 100% (effectively suspending the half-year rule and providing a CCA deduction that is up to three times the usual first‑year maximum).

For example, a class 8 property eligible for CCA at a maximum annual rate of 20% – normally reduced to 10% in the first year – acquired after December 31, 2024 will now be eligible for CCA of up to 30% in the first year it becomes available for use. The maximum annual CCA in respect of the property for subsequent years will continue to be 20% on a declining‑balance basis.

The AII will be phased out for property that becomes available for use after 2029 and will be fully eliminated for property that becomes available for use after 2033.

Immediate expensing  

The economic statement also reinstates immediate expensing for M&P and specified clean energy equipment and zero‑emission vehicles (which was being phased out up to 2027), proposing to provide a 100% CCA deduction in the first year for such property acquired after December 31, 2024 and that becomes available for use before 2030. The enhanced CCA deduction will be gradually phased out for property that becomes available for use after 2029 and before 2034.

Scientific Research and Experimental Development (SR&ED)  

The economic statement proposes to enhance the SR&ED tax incentive program by:

• increasing the annual expenditure limit, under which Canadian-controlled private corporations (CCPCs) are entitled to earn an enhanced 35% refundable investment tax credit (ITC), from $3 million to $4.5 million, and extending eligibility for this enhanced 35% ITC to eligible Canadian public corporations;* this means that qualifying CCPCs and eligible Canadian public corporations would be able to claim up to $1.575 million annually (for CCPCs, up from $1.050 million) of this refundable ITC
• for CCPCs, raising the prior‑year taxable capital phase-out thresholds (on an associated basis) for the enhanced ITC from $10 million and $50 million, to $15 million and $75 million, respectively; this means that a CCPC’s $4.5 million expenditure limit in respect of the 35% ITC would be reduced by $0.075 for every $1 of its previous year’s taxable capital employed in Canada above $15 million up to $75 million
• for eligible Canadian public corporations, providing for a gross-revenue phase-out structure that would reduce the company’s $4.5 million expenditure limit in respect of the 35% ITC by $0.075 for every $1 of its average gross revenue (on the consolidated financial statements for a group in which the corporation is included, at the highest level of consolidation, with access to the expenditure limit shared among corporations in that group, or on its GAAP‑based annual financial statements presented to shareholders, otherwise) over the three preceding years that exceed $15 million up to $75 million
• introducing an election for CCPCs to determine their eligibility for the refundable ITC based on the same gross revenue phase‑out structure proposed for Canadian public corporations (see above), instead of taxable capital
• restoring the eligibility of capital expenditures for both the deduction against income and the ITC components of the SR&ED program; the rules would be generally the same as those that were in effect before 2014 and would apply to property acquired (or for lease costs, to amounts that first become payable) after December 15, 2024

* An eligible Canadian public corporation must, throughout the taxation year:
- be resident in Canada
- have a class of shares listed on a designated stock exchange (or has elected or been designated by the Minister of National Revenue to be a public corporation)
- not be controlled, directly or indirectly in any manner whatever, by one or more non-resident persons
Canadian‑resident corporations, all or substantially all the shares of which are owned by one or more eligible Canadian public corporations, would also be eligible for the refundable ITC.

The SR&ED enhancements are proposed to be effective for taxation years that begin after December 15, 2024, unless otherwise specified. Corporations should re-evaluate their eligibility for SR&ED ITC refundability in light of these proposals.

Clean economy incentives  

The economic statement:

• provides details on eligibility and reporting requirements for provincial and territorial Crown corporations in relation to the Clean Electricity ITC (CE ITC)
• effective December 16, 2024, includes the Canada Infrastructure Bank (CIB) as an eligible entity for the CE ITC; also introduces an exception for financing provided by the CIB, so that it does not reduce the cost of eligible property for purposes of the CE ITC
• expands the Clean Hydrogen ITC to include the pyrolysis of natural gas and other eligible hydrocarbons (i.e. methane pyrolysis) as an eligible hydrogen production pathway, with certain requirements, for property that is acquired and becomes available for use in an eligible project after December 15, 2024
• provides the design and implementation details of the EV Supply Chain ITC, as follows:
  • Eligible corporations – taxable Canadian corporations that invest directly in eligible property; cannot be claimed by partnerships or trusts
  • Eligible property – buildings and structures, including their component parts, that are described in paragraph (q) of CCA Class 1 of Schedule II of the Income Tax Regulations; all or substantially all of the property’s use would have to be in one or more of the three qualifying EV supply chain segments (EV assembly, EV battery production, cathode active material production)
  • Machine and equipment investment requirement – a corporation must invest at least $100 million (by itself or as part of a related group) in property eligible for the Clean Technology Manufacturing ITC (CTM ITC) in each of the three qualifying EV supply chain segments
  • Recapture rules – similar to the existing recapture rules for the CTM ITC; over a 10‑year period from the date of acquisition, the credit could be repayable in proportion to the fair market value of the particular property if it is converted to an ineligible use, exported from Canada, or disposed of (also repayable if the corporation ceases to meet other required conditions)
  • Application and phase-out – the property must be acquired and become available for use after December 31, 2023; the 10% credit rate is reduced to 5% for property that becomes available for use in 2033 or 2034 and to nil after 2034

Other design elements would generally be based on those of the CTM ITC, where applicable.

Canada Carbon Rebate for Small Businesses  

The economic statement proposes to modify certain elements of the Canada Carbon Rebate for Small Businesses, effective for the 2024‑25 and later fuel charge years, by:

• extending the rebate to cooperative corporations and credit unions
• revising the calculation of number of employees to determine the minimum payment (the same base payment to be made to all businesses with up to 20 employees across Canada)
• phasing‑out the payment amount on a straight-line basis when the number of employees across Canada is between 300 and 500, with the payment amount being zero once it reaches 500 employees

Personal tax measures

Capital gains rollover on investments

Current income tax rules allow individuals 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 and the total carrying value of the assets of the ESBC (and related corporations) must not exceed $50 million immediately before and after the share was issued.

The economic statement proposes, effective for qualifying dispositions that occur after December 31, 2024, to:

• increase the period to acquire replacement shares, to include the year of disposition and the entire calendar year after the year of disposition
• expand what qualifies as an ESBC share, to include both common and preferred shares and increase the total carrying value limit for the assets of the ESBC (and related corporations) to $100 million

Canada Disability Benefit

Effective for 2025 and subsequent years, the economic statement proposes to exempt amounts received under the Canada Disability Benefit from being treated as income under the Income Tax Act. This helps ensure that income‑tested benefits and programs (both federal and provincial/territorial) are not reduced as a result of payments under the Canada Disability Benefit.

Canada Carbon Rebate rural supplement  

A rural supplement, an additional 20% of the base amount of the Canada Carbon Rebate, is available to individuals living outside a Census Metropolitan Area (CMA), as designated by Statistics Canada. The economic statement proposes to expand eligibility for the rural supplement to individuals who, within a CMA, reside in a census rural area (less than 1,000 individuals) or a small population centre (less than 30,000 individuals). The changes are proposed to be effective the 2024 taxation year, which means that it would apply to payments starting April 2025.

Other measures

Reporting by non-profit organizations

To improve transparency in the non-profit organization (NPO) sector, the economic statement proposes two changes, effective for the 2026 and subsequent years, to expand the class of NPOs required to file an annual return. An NPO:

• will be required to file an annual information return if it has gross revenues over $50,000 in a fiscal period
• that does not meet the thresholds for filing the annual NPO information return (i.e. small NPOs) will file a new, short‑form return that contains basic information about the organization

Previously announced tax measures

The economic statement confirms that the government intends to proceed with measures announced in its 2024 federal budget and other previously announced measures, as modified to take into account consultations, including:¹

• legislative proposals included in the notice of ways and means motion tabled on September 23, 2024, related to capital gains and the lifetime capital gains exemption
• August 12, 2024 legislative proposals on measures that include:
  • Canadian Entrepreneurs’ Incentive
  • alternative minimum tax and employee ownership trust tax exemption
  • scope of enhanced trust reporting rules
  • avoidance of tax debts
  • mutual fund corporations, synthetic equity arrangements and manipulation of bankrupt status
  • accelerated CCA for productivity-enhancing assets and purpose-built rental housing and interest deductibility limits
  • withholding for non-resident service providers
  • substantive CCPCs
  • CE ITC and expansion of eligibility for Clean Technology ITC (waste biomass) and CTM ITC (polymetallic extraction and processing) and other changes to clean economy ITCs
  • Global Minimum Tax Act
• Crypto‑Asset Reporting Framework and the Common Reporting Standard (2024 federal budget)
• proposed amendments to the Canadian transfer pricing rules (June 6, 2023 consultation paper)
• additional legislative amendments to implement the hybrid mismatch arrangements rules announced in the 2021 federal budget
• suspension of the Canada-Russia tax treaty, effective November 18, 2024

^{1. For more details on these proposed measures, see our Tax Insights:
  - “Finance releases draft legislation to increase the capital gains inclusion rate” (August 28, 2024 update)
  - “2024 Federal budget: Supporting housing, raising taxes” 
  - “Finance proposes to reduce the scope of the enhanced trust reporting rules” (November 1, 2024 update)
  - “Bill C-59: Excessive interest and financing expenses limitation (EIFEL) regime” (August 28, 2024 update)
  - “Clean economy investment tax credits (August 2024 update)”
  - “Finance releases draft legislation to implement the undertaxed profits rule”
  - “Finance launches consultation on reforming and modernizing Canada’s transfer pricing rules”}