On November 3, 2022, the Federal Government released its Fall Economic Statement 2022 (the “Statement”). In the Statement, the government reaffirmed its commitment to various tax measures it previously announced, including rules relating to substantive Canadian-controlled private corporations and implementation of the new digital services tax.
The Statement was accompanied by two pieces of draft legislation and related explanatory notes: one pertaining to “excessive interest and financing expenses limitation” (“EIFEL”) rules, and another pertaining to reporting rules for digital platform operators.
This post briefly summarizes the key income tax measures included in the Statement and the draft legislation concurrently released by the government.
- Key income tax measures in the Statement and accompanying releases
Delayed implementation of the mandatory disclosure rules
In a news release accompanying the Statement, the federal government announced that the rules relating to “notifiable transactions” and the proposed changes to the “reportable transaction” regime will not take effect on January 1, 2023, as initially announced. Instead, implementation will be delayed until the date a bill formally introducing these rules receives Royal Assent. The disclosure rules relating to “uncertain tax treatments” will still apply as of January 1, 2023.
Proposed extension of the residential property flipping rule
In Budget 2022, the federal government proposed to implement a residential property flipping rule. This rule would deem profits from the sale of residential property held for less than 12 months to be taxed as business income. The rule would not apply if the sale occurred due to certain enumerated circumstances, such as death or the breakdown of the taxpayer’s marriage. For a detailed review of the residential property flipping rule as proposed in Budget 2022, see our previous blog post here.
In the Statement, the federal government proposed to extend this rule to profits arising from disposition of rights to purchase a residential property by assignment of a contract for purchase and sale. This rule would apply in respect of dispositions that occur on or after January 1, 2023.
Proposed investment tax credits for clean technologies and hydrogen
In Budget 2022, the federal government announced its intention to establish investment tax credits for investments in clean technologies and hydrogen.
In the Statement, the government proposed a refundable tax credit of 30% of the capital cost of eligible “clean” equipment such as electricity generation systems and industrial zero-emission vehicles. Companies that adhere to certain labour conditions would be eligible for the full 30% credit while other companies would be eligible for a 20% credit. The government announced that consultations with stakeholders will be ongoing and specific details will be announced in Budget 2023. The credit would be available starting as of the day Budget 2023 is released, and gradually phased out starting with property that becomes available for use in 2032. The credit would apparently cease to be available in respect of property available for use in or after 2035.
The government also announced the Department of Finance would launch a consultation on implementation of an investment tax credit for clean hydrogen. The government intends to offer at least a 40% credit to companies in the lowest carbon intensity tier, with a 10% reduction for companies that do not meet certain unspecified labour conditions. The credit would become available for eligible investments made as of the day Budget 2023 is released, and phased out completely after 2030.
Proposed 2% tax on share buybacks by public corporations
In the Statement, the government announced its intention to introduce a new tax on share buybacks by public corporations. The tax is intended to equal 2% of the “net value” of all share buybacks by public corporations in Canada. The government advised that details of this tax will be announced in Budget 2023 and would come into force on January 1, 2024.
Proposed introduction of minimum tax regime
In the Statement, the government also reaffirmed its intention to introduce a new minimum tax regime for Canadians. However, the government did not announce any concrete plans for this measure. Rather, the government advised that a detailed proposal and path for implementation would be released in Budget 2023.
Affirmed commitment to Pillar One and Pillar Two
The federal government reaffirmed its commitment to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and the intention to implement a global minimum tax regime, applicable to large multinational corporations. The government also confirmed that negotiations regarding the implementation of Pillar One (dealing with the reallocation of taxing rights) are on track to be completed in the first half of 2023, with a view to the implementing treaty coming into force in 2024. However, no additional details or related measures were announced in the Statement.
- Draft Legislation
Draft legislation relating to EIFEL
On November 3, 2022, Finance released revised draft legislation proposing to implement the EIFEL rules. Further background that release are included in our . Of note, the draft legislation includes a substantially broadened definition of “excluded entity”, which may result in a far greater number of taxpayers being excluded from the EIFEL rules. Under the latest release, these rules would apply to taxation years beginning on or after October 1, 2023.
The government also released lengthy to accompany this draft legislation, the full text of which can be found here. A public consultation in respect of the draft legislative proposals is open until January 6, 2023. Interested parties are invited to send comments to [email protected].
Draft legislation regarding digital platform operators
Separately, the federal government released draft legislation and accompanying explanatory notes regarding new reporting and due diligence rules for digital platform operators. These rules are intended to implement standards set by the OECD in the Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy. The legislation, as drafted, is proposed to come into force on January 1, 2024.
A public consultation in respect of the draft legislative proposals is open until January 6, 2023. Interested parties are invited to send comments to [email protected].