As 2025 draws near, Canadian business owners and high-net-worth individuals find themselves at the crossroads of evolving tax priorities and geopolitical shifts.
Recent developments—such as the prospect of a significant U.S. tariff on Canadian imports—are adding fresh layers of complexity. These changes bring significant implications for business strategies, cash flow and cross-border operations.
And so, as we prepare for what’s ahead in the new year, here’s what business owners and wealthy individuals should have on their tax radar.
Potential U.S. tariffs on Canadian goods
The prospect of 25-per-cent U.S. tariffs on imported goods from Canada should prompt Canadian business owners to take action before Jan. 20, 2025. Assess how you may be affected and identify ways to reduce your risks.
If, for example, your business has inventory to be shipped to the U.S., consider moving it before tariffs may be imposed. Similarly, if you have existing contracts with U.S. business partners, take the time to renegotiate them and insert provisions to deal with tariff uncertainty and clarify responsibilities between the parties should tariffs or duties suddenly be enacted. Also, review your import and export pricing to ensure all statutory deductions under customs valuation rules are applied to declarations at the border. This is to ensure the lowest possible base for calculating the tariff.
Furthermore, ensure that you verify the eligibility of goods and materials that are made or bought under the Canada-U.S.-Mexico free trade agreement to minimize the duties paid.
Capital gains tax changes
As of the publication date of this article, the proposed changes to the capital gains tax inclusion rate had not yet been passed into legislation; however, the CRA has issued information on tax filings for corporations and trusts that are impacted by these changes.
The CRA will provide interest and penalty relief where the filing due date is prior to March 4, 2025. The new forms for individuals, corporations and trusts are expected before Jan. 31, 2025, so watch out for them.
Here’s what to keep in mind:
- The proposed inclusion rate for corporations and trusts will increase to two-thirds (from the previous one-half) on all capital gains after June 24, 2024. That could have a significant impact on businesses that are planning asset sales or transfers.
- For individuals, the rate will continue to be 50 per cent for the first $250,000 of annual capital gains, and 66.67 per cent if the gains pass the $250,000 threshold. The result? The potential for more taxable income from the sale of investments, real estate and other assets. And that will require careful timing to realize the gains and minimize the tax burden.
Changes to the alternative minimum tax (AMT)
The AMT is a parallel tax system that was designed to ensure individuals with high income or significant deductions still pay a minimum level of tax. Increases in the tax rate can have a significant impact on individuals and businesses alike.
The AMT rate has increased from 15 per cent to 20.5 per cent with the basic exemption rising to $173,000. In effect, this has broadened the income base for AMT calculations. If you’re an individual taxpayer who has substantial capital gains or charitable contributions, it’s likely to increase your tax burden.
If you’re a private business owner, the changes may have a significant impact on you as well. That’s particularly true for tax planning, succession strategies and overall cash flow management, which may make it necessary to:
- Revisit your income realization strategies: Adjust the timing for capital gains, dividend distributions or bonuses to minimize AMT exposure.
- Leverage professional tax advice: Work with advisors to model scenarios and maximize recoveries under the AMT framework.
The new Canadian Entrepreneurs’ Incentive (CEI) program
Federal Budget 2024 has proposed a tax break for entrepreneurs who sell their businesses. Through the Canadian Entrepreneurs’ Incentive program, the capital gain inclusion rate would be reduced to 33 per cent on a lifetime maximum of $2 million in eligible capital gains, which is phased in by increments of $400,000 a year starting in 2025.
As the budget describes, this reduced rate will allow entrepreneurs to “benefit from the fruits of their hard work while facing lower tax burdens.” Some businesses are excluded from this program.
Family succession and intergenerational business transfers
Changes in the rules for intergenerational business transfers (IBTs) were introduced this year and apply to qualifying transfers that occur on or after Jan. 1, 2024. The transfer must represent a genuine succession plan, with clear timelines for when parents must relinquish control of the business to certain family members.
Among the changes:
- Parents are no longer required to maintain control of the company immediately before selling it to the company owned by the adult child.
- The new rules broaden the definition of eligible family members and now include adult nieces, nephews and their descendants.
Employee Ownership Trusts
Employee Ownership Trusts can be an effective solution for long-term business continuity and wealth-building opportunities for employees, while also offering owners a more tax-efficient exit strategy.
Instead of selling the business to conventional buyers, the business is sold to employees through a trust, which holds the corporate shares for the benefit of employees. This makes the legal and administrative details easier to work with, compared to employees owning the shares directly.
Sellers qualify for a $10 million capital gain exemption, which can be allocated among multiple sellers. The capital gains reserve has been extended to a maximum of 10 years (from the previous five years) for any portion of the gain that isn’t sheltered by an exemption.
For the trust, there is no 21-year deemed disposition. And the repayment period has been extended to 15 years (from one year) for loans from a qualifying business to purchase the shares.
Taking a GST/HST holiday
The federal government announced a two-month GST/HST tax holiday on specific goods from Dec. 14, 2024, through Feb. 15, 2025.
While this tax relief is good news for consumers, it is having a significant impact on business owners during a critical sales period. The Dec. 14, 2024, implementation date and the temporary nature of this measure represent a challenge for businesses, large and small alike.
The broad categories of items covered include children’s clothing, certain toys, alcoholic beverages, books, snacks, prepared foods and Christmas trees. However, it is not always easy to determine whether an item meets all the requirements. For example, is that toy marketed to children or adults? And you may not find this information based solely on the product SKU.
As a business owner, you can choose to do a manual override or reconfigure your point-of-sale system to apply a temporary “zero rate” GST/HST and map items included by the government to that category so that the zero rate applies on a temporary basis. You will then need to reinstate the configuration back to the original setting after the Feb. 15, 2025, expiry date.
Businesses are expected to cover the added costs involved in reconfiguring and reinstating the point-of-sale systems. For some small businesses with razor thin margins, this may be challenging.
It will be important to educate staff to avoid misunderstandings with customers. The risk is that if you are mistaken, you may be reassessed by the CRA for failure to collect the tax, with interest applied.
Otherwise, businesses can choose to collect the GST/HST out of an abundance of caution in situations where they are uncertain about whether an item is covered by the tax relief. There are no CRA penalties for collecting tax in error.
Conclusion
Many planned tax changes, such as the capital gains tax, are on the brink of implementation and should be on your planning radar. I encourage business owners to work with a tax professional to help craft a tailored strategy that optimizes your business growth, your family’s generational wealth and future strategic transitions.
Dino Infanti is partner, National Leader, Private Enterprise Tax, at KPMG Canada.
The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.
Please visit here to see information about our standards of journalistic excellence.