If you run your own business, you need to know about small business tax changes for the 2024 fiscal year.
The forgiveness repayment date of January 18, 2024, for eligible CEBA Loan Holders in good standing has now passed.
If you have a CEBA loan outstanding, it has been converted to a two-year loan with the entire balance due on December 31, 2026.
There are a few tax hikes to be aware of that can impact your bottom line in 2024:
• A new Canada Pension Plan (CPP) ceiling will be introduced
• Employment Insurance (EI) premiums will rise
• New rules will apply to intergenerational business transfers
However, there are also favourable changes that you can take advantage of, including higher deductions for vehicles used for business purposes and tax breaks for employee ownership trusts.
The changes you should know for 2024
When you own a small business, every penny counts. Be sure to assess how your operation will be affected by the following tax changes:
- New rules for intergenerational business transfers
- Changes to EI premiums
- Changes to the CPP
- New limits on auto deduction & expense benefit rates
- Air quality improvement tax credit
- Change to the tax-free savings account contribution limit
- New limits on interest deductions
- Enhanced benefits for employee ownership trusts
Let's look at each of these in detail.
1. New rules for intergenerational business transfers
The first small business tax change you should know about is an amendment to Bill C-208 proposed by the federal government in 2023.
First enacted in June 2021, Bill C-208 allowed individuals to hand over their business assets to a corporation owned by their children on a tax-advantaged basis.
Basically, the gain on the transfer would be treated as a capital gain instead of a deemed dividend, which would be eligible for the lifetime capital gains exemption. As a result, a business owner could potentially transfer their corporate assets to their children without incurring a tax bill.
However, there were some glaring loopholes in this legislation. Most notably, the children would not have to carry on managing the corporation, which raised concerns in Parliament that the bill would encourage tax avoidance.
As a result, you will need to meet some additional conditions to reap the tax benefits of this transaction in 2024. These vary depending on whether the business transfer occurs immediately or gradually over several years.
For one, you must retain no legal or factual control over your business following the transfer. In addition, your children will have to be personally involved in operating the company for at least three years after acquiring it.
Editor’s note: If your business doesn’t have a website, consider using your 2022 tax savings to build one. It’s one of the best long-term investments you can make.
2. Changes to EI premiums
Your payroll department will need to remit more money to the federal government in EI premiums this year.
In 2024, the EI rate rises from 1.63% to 1.66%
This is a lower rate increase than the previous year, when the EI rate rose from 1.58% to 1.63%, following a three-year rate freeze.
Still, if you own a business, you must account for this rate hike in your 2024 budget, as it will reduce your profit.
3. Changes to the CPP
Unlike in recent years, Canada Pension Plan (CPP) contributions will stay the same in 2024 — but only up to a point, given a new development in Canada's national pension plan.
As of 2024, employee and employer CPP contribution rates will hold steady at 5.95%. However, the maximum pensionable earnings under the CPP will increase to $68,500, a jump from $66,600 in 2023.
Beginning in 2024, the Government of Canada will also implement a new tier on earnings subject to CPP contributions known as the year's additional maximum pensionable earnings (YAMPE).
The new tier, CPP2, will be $73,200 for the 2024 tax year with a 4% contribution rate for both the employee and employer. In other words, the CPP2 source deduction applies to employee earnings between $68,500 and $73,200.
As a business owner, you are expected to make CPP contributions on your employees' behalf, so ensure you update your payroll system accordingly to account for these changes.
4. New limits on auto deduction & expense benefit rates
Have you recently purchased a vehicle (or two) for your small business? If so, the Government of Canada has instituted the following deduction limits and benefits, all effective January 1, 2024:
- The ceiling for capital cost allowance (CCA) for new and used passenger vehicles that belong to Class 10.1 has increased from $36,000 to $37,000.
- Tax-deductible leasing costs have risen from $950 to $1050 per month for new leases entered into on or after January 1, 2024.
- The maximum interest deduction for auto loans has increased to $350 per month, up from $300.
- The tax-exempt allowance paid to employees who use their personal vehicle for business-related activities has increased from 70 cents per kilometer for the first 5,000 kilometers driven and 64 cents for every kilometer after that. Note: the limits for the territories are 74 cents and 68 cents, respectively.
5. Change to the tax-free savings account contribution limit
Do you maintain a tax-free savings account (TFSA) for your small business?
You'll be thrilled to hear that the annual contribution limit in 2024 has increased from $6,500 to $7,000.
With little tax relief available for businesses in 2024, it's worth topping up your account if you have spare cash lying around. Just remember that you will be penalized if you overcontribute, so keep track of your deposits and contribution room.
6. New limits on interest deductions
As a business owner, you can generally deduct all interest charges you incur to finance your expenses. However, the Department of Finance Canada has proposed new rules that will cap the amount of interest you can claim when filing your taxes.
The new rules, referred to as the Excessive Interest and Financing Expenses Limitation (EIFEL), limit tax-deductible interest and financing expenses to 30% of adjusted taxable income beginnning January 1, 2024 (with some exceptions).
Adjusted taxable income is generally earnings before interest, taxes, depreciation and amortization (EBITDA). However, there are additional adjustments to account for under EIFEL when calculating adjusted taxable income.
Given the current environment of high interest rates, it's vital to review these changes and assess how they may impact your business's bottom line, especially if yours relies heavily on financing. You may need to rearrange your financing deals.
The rules are complex, so it's wise to plan early and consult a tax specialist to help you navigate them.
Note: EIFEL applies to businesses with tax years beginning on or after October 1, 2023. For taxation years that start on or before January 1, 2024, the deduction is limited to 40% of adjusted taxable income. Tax years that begin on January 1, 2024, are subject to a 30% deduction.
7. Enhanced benefits for employee ownership trusts
In Canada, an employee ownership trust (EOT) is a type of trust that holds shares of a corporation for the benefit of its employees. Once the owner decides to exit their business, employees can use the EOT's assets to purchase the corporation without acquiring the shares directly.
In other words, an EOT allows for succession planning, enabling your employees to continue operating the business.
The federal government has introduced new rules designed to boost the appeal of EOTs among business owners as a significant number plan to retire within the next ten years.
For example, the first $10 million in capital gains realized upon the sale of a business to an EOT will be exempt from tax during the 2024, 2025, and 2026 taxation years (provided certain conditions are met). You'll also have up to 10 years instead of five to claim the capital gains reserve if you transfer your business through an EOT and receive the proceeds over several years.
You can read about the new legislation for EOTs in 2024 in this report from Ernest and Young.
Make the most of the small business tax changes
Despite the extra burden of increased source deductions and stricter rules for intergenerational business transfers, there is still plenty of small business tax relief to enjoy in 2024.
Talk to your accountant about how you can take advantage of:
- New rules surrounding automobile deductions
- Making wise investment decisions through your TFSA
- Adapting to changes in the deductibility of interest and financing expenses
The new EOT rules offer attractive succession planning opportunities that could significantly lower your tax bill. If you plan to transfer your business to your employees, consider exploring how to use an EOT to take advantage of the new tax breaks.
Stay on top of your tax deadlines and make sure you take full advantage of new small business tax changes. Not all are beneficial, but some will provide financial relief, so always plan to maximize your deductions.
Smart tax planning will ensure more of your money stays with your business rather than going to the Canada Revenue Agency.
UPDATE: This small business tax changes post was originally published on 17 April 2019 and was updated on 8 May 2020, 6 April 2023 and 15 February 2024.
