Stikeman Elliott’s Tax Group has prepared the following commentary on the 2023 federal budget.
Highlights
- Broadening the application of the GAAR through various changes, including a new preamble, a revised avoidance transaction standard, and an “economic substance” test.
- A 2% tax on the net value of repurchases of equity by certain publicly traded entities.
Intergenerational Business Transfers
- Amendments to ensure that only genuine intergenerational share transfers are excluded from the application of section 84.1.
- Introducing rules to facilitate the purchase of a business by employees through employee ownership trusts.
- Increasing the required income level, expanding the AMT base, and increasing the tax rate.
Dividend Received Deduction by Financial Institutions
- Denial of the dividend received deduction on shares that are mark-to-market property.
- Revised tax incentives related to clean energy, including new and revised ITCs and reduced tax rates.
- Updates to the definitions of “credit union” and “financial services”.
- Expanding CEE and CDE to include expenses related to lithium from brines and expanding the eligibility for the CMETC to lithium from brines; continuing review of the SRED program; furthering international tax reform measures (Pillar One and Pillar Two); and moving forward with certain previously announced measures.
General Anti-Avoidance Rule (GAAR)
The GAAR has been in existence with some modifications for thirty five years. The government has had reasonable success with it. Nonetheless the Department of Finance recently conducted consultations on the GAAR and Budget 2023 proposes certain amendments.
First, a preamble will be added to set out the principles underlying the rule. Interestingly, the preamble provides that the rule can apply regardless of whether a tax strategy is foreseen. This change is intended to preclude the argument that the GAAR should not apply if the government knew or reasonably ought to have known that taxpayers were commonly employing a particular avoidance strategy.
Second, the purpose test threshold for an avoidance transaction is lowered so that an avoidance transaction requires only that one of the main purposes be to obtain a tax benefit, consistent with other anti-avoidance rules in the Income Tax Act (Canada)(the Tax Act) as well as the principal purpose test contained in the OECD’s Multi-Lateral Instrument (MLI).
Third, a specific rule dealing with economic substance is added that provides that a significant lack of economic substance will “tend” to indicate that a transaction is a misuse of a particular provision of the Tax Act or an abuse having regard to the Tax Act read as a whole. Factors that tend to establish that a transaction is significantly lacking in economic substance include: (i) the opportunity for profit or gain and risk of loss of the taxpayer is unchanged, (ii) at the time the transaction was entered into, it was reasonable to conclude that the expected value of the tax benefit exceeded the expected non-tax economic return and (iii) it is reasonable to conclude that the entire or almost entire purpose for undertaking the transaction was to obtain the tax benefit.
Finally, the proposals will add the long-awaited GAAR penalty equal to 25% of the tax benefit. The penalty can be avoided if the transaction is disclosed either voluntarily or pursuant to the proposed mandatory disclosure rules.
The Supreme Court has said that the requirements for the application of the GAAR are: (i) a tax benefit resulting from a transaction, (ii) an avoidance transaction (namely one not undertaken primarily for purposes other than to obtain the tax benefit) and (iii) abusive tax avoidance. As noted, the proposals lower the threshold for avoidance transaction to a “one of the purposes” test and allow the lack of economic substance to indicate misuse or abuse. If the goal as stated in the preamble is to have the rule strike a balance between a taxpayer’s need for certainty and the government’s responsibility to protect the tax base and the fairness of tax system, it is difficult to see how vague language like “tend to establish” and “reasonable to conclude” furthers that goal. The reality is that the GAAR requires a court to determine if particular tax planning is abusive. It is not evident that adding imprecise language and nebulous concepts to the GAAR will better assist a court in making this determination. Only another thirty-five years will tell.
Tax on Repurchases of Equity
As announced in the 2022 Fall Economic Statement, Budget 2023 introduces a 2% tax on the net value of all types of equity repurchases by the following entities whose equity is listed on a designated stock exchange: Canadian-resident corporations (other than mutual fund corporations), real estate investment trusts, specified investment flow-through (SIFT) trusts, SIFT partnerships (each as defined in the Tax Act), and entities that would be SIFT trusts and SIFT partnerships if their assets were located in Canada.
The tax would apply in respect of repurchases and issuances of equity that occur on or after January 1, 2024.
This measure, which is intended to ensure large corporations pay their fair share of tax, is estimated to increase federal revenues by $2.5 billion over five years.
Calculation of the Tax
The tax is equal to 2% of the net value of an entity’s repurchase of equity, which is equal to the fair market value of the equity repurchased by the entity in the taxation year less the fair market value of the equity issued from treasury in the taxation year. The issuance and cancellation of debt-like preferred shares and units, and the issuance and cancellation of shares or units in certain corporate reorganizations and acquisitions, should not be considered an issuance or repurchase of equity.
Since the tax is intended to apply to large corporations, the tax would not apply to an entity in a taxation year if it repurchased less than $1 million (determined on a gross basis) of equity during that taxation year (prorated for short taxation years).
Similar Transactions
The acquisition by certain affiliates of an entity would be deemed to have been a repurchase of equity by the entity itself, subject to exceptions to facilitate certain equity-based compensation arrangements and acquisitions made by registered securities dealers in the ordinary course of business. If it is reasonable to consider that one of the main purposes of a transaction or series of transactions is to cause a person or partnership to acquire equity of an entity to which these rules apply to avoid the 2% tax, the person or partnership shall be deemed to be a specified affiliate of such entity from the commencement of the transaction or series until immediately after the transaction or series ends.
Intergenerational Business Transfers
Bill C-208 was a private member’s bill introduced in the previous Parliament designed to eliminate what were viewed as inappropriate tax results on the sale of a private corporation from an individual to his or her children. Generally, on the sale of shares of a private corporation to an arm’s length party, the individual seller realizes a capital gain equal to the difference between the sale price and the cost of the shares. One-half of the gain is included in income and if certain conditions are met, a portion of the gain may be totally exempt from tax under the lifetime capital gains exemption. Under the rules in the Tax Act before Bill C-208 was enacted, these tax consequences did not apply on a sale of the shares of a private corporation by an individual to a corporation controlled by his or her child or other non-arm’s length parties. In those circumstances, the transferor was deemed to have received a dividend equal to the amount by which the sale proceeds exceeded the “paid-up capital” of the shares transferred. While a dividend received from a Canadian corporation is taxed more favourably than ordinary income (such as salaries), the taxation of a dividend is less favourable than the taxation of a capital gain. As a result, prior to Bill C-208, there was a tax incentive to sell the shares of a private corporation to a neighbour rather than to children.
Bill C-208 made amendments to the anti-surplus stripping rule in section 84.1 of the Tax Act to address this apparent inequity, and while the Department of Finance agreed with the policy direction of the amendments, it was concerned that the amendments went too far. Budget 2023 proposes to further amend section 84.1 to address these concerns.
The amendments introduce additional conditions to be met to avoid the application of section 84.1. The shares sold must be shares that qualify for the lifetime capital gains exemption (as under the current rules) and the purchaser corporation must be controlled by one or more persons each of whom is an adult child of the transferor (which, for these purposes, would include grandchildren, step-children, nieces and nephews and grandnieces and grandnephews). The additional conditions will depend on whether the transfer is an immediate intergenerational business transfer or a gradual intergenerational business transfer.
In an immediate transfer, both legal and factual control is transferred immediately to the children and all shares (other than certain non-voting preferred shares) must be transferred to the children within 36 months (up to 50% of the shares may be retained up until that time). In addition, management of the business must be transferred to the children within 36 months or a reasonable time thereafter, the children must legally control the corporation during that 36-month period and at least one child must be actively engaged in the business on a regular, continuous and substantial basis throughout that period.
In a gradual transfer, legal (but not factual) control is transferred immediately to the children and all shares (other than certain non-voting preferred shares) must be transferred to the children within the 36 month period described above. Parents can retain freeze-like preferred shares or debt of the corporation for up to 10 years after the initial sale and such shares or debt having a value of 50% or less (in the case of a farm or fishing corporation) or 30% or less (in the case of a small business corporation) of the initial value after that time. Management of the business must be transferred to the children within 60 months or a reasonable time thereafter, the children must legally control the corporation during that 60-month period (or up to 10 years after the sale) and at least one child must be actively engaged in the business on a regular, continuous and substantial basis throughout that period.
There are still a number of questions with the proposed rules. Both the immediate and gradual transfers require the transferor, either alone or together with a spouse or common law partner, to control the subject corporation immediately before the sale. This seems to preclude joint owners of a corporation from taking advantage of the section 84.1 exception. For example, two siblings that each own 50% of the shares of a corporation would not be able to take advantage of the exception to transfer the shares to a corporation owned 50/50 by their respective children.
Notably, Budget 2023 does not address the Bill C-208 changes that were made to section 55 of the Tax Act. The proposed changes to section 84.1 are effective January 1, 2024.
Employee Ownership Trusts
Budget 2023 introduces new rules to facilitate the use of an employee ownership trust (an EOT) as a mechanism for business owners to transfer their businesses to their employees. The federal government initially expressed its interest in exploring EOTs in the 2021 Federal Budget.
Under the proposed rules, an EOT would be a personal trust and, like other trusts, the EOT would be taxable at the highest marginal rate applicable to individuals, but would be entitled to deduct distributions to its beneficiaries (such distributions would be taxable to the beneficiaries). The trust would be entitled to designate dividends that are distributed to beneficiaries so that they retain their character and are eligible for the dividend tax credit in the hands of the beneficiaries.
As described in more detail below, in order to implement EOTs in Canada, changes are being proposed to the rules in the Tax Act related to (i) the capital gains reserve, (ii) shareholder loans, and (iii) the 21-year deemed disposition rule for trusts.
Qualifying Conditions
In order to qualify as an EOT, several conditions must be met. In general terms:
- The trust must be a Canadian resident trust (excluding deemed resident trusts);
- The trust must be established exclusively for the benefit of employees of one or more “qualifying businesses” controlled by the trust and who do not hold a significant economic interest in the qualifying business;
- The interest of each beneficiary is determined based on hours worked, length of employment, and salary paid to the beneficiary by the qualifying business;
- The trust is prohibited from acting in the interest of one beneficiary to the prejudice of another beneficiary;
- The trust is prohibited from distributing shares of a qualifying business to any beneficiary of the trust;
- Trustees of the trust must be elected by the beneficiaries for a period not exceeding five years;
- Individuals and their related persons who held a significant economic interest in the business prior to the trust acquiring control are not entitled to make up more than 40% of (i) the trustees of the EOT, (ii) directors of the board of a corporation serving as trustee of the EOT, or (iii) directors of any qualifying business held by the EOT;
- The trust must hold a controlling interest in the shares of one or more qualifying businesses; and
- All or substantially all of the trust’s assets must be shares of qualifying businesses that the trust controls and by which all of the beneficiaries of the trust are employed;
A “qualifying business” is generally a Canadian-controlled private corporation (i) all or substantially all of the fair market value of the assets of which are used in an active business carried on in Canada, (ii) of which not more than 40% of the directors consist of individuals who owned 50% or more of the corporation, and (iii) that deals at arm’s length and is not affiliated with anyone who owned 50% or more of the corporation immediately before the time the trust acquired control of the corporation.
In order to transfer a business to an EOT, the taxpayer disposing of the shares to the trust must deal at arm’s length with the trust and the corporation following the transfer.
Changes to Existing Rules to Permit EOTs
To facilitate the use of EOTs, the following changes have been proposed:
- Ten-year capital gains reserve: Budget 2023 proposes to extend the capital gains reserve for taxpayers who transfer qualifying businesses to an EOT from five years to ten years. This means that a capital gain on the transfer of shares to an EOT can be deferred until the year in which proceeds are received, up to a maximum of 10 years. A minimum of 10% of the gain would be required to be brought into income each year.
- Exception to the shareholder loan rules: Under the existing rules in the Tax Act, a taxpayer who receives a shareholder loan is generally required to include the loaned amount in income in the year the loan is received unless it is repaid within one year. Budget 2023 proposes to amend this rule so that the EOT can borrow funds from a qualifying business in order to finance the purchase of shares, and the amount of the loan would not be included in the EOT’s income provided that bona fide arrangements are in place at the time the loan is made for the repayment of the loan within 15 years of the transfer.
- Exception to the 21-year deemed disposition rule: Because an EOT is intended to allow for shares to be held indefinitely for the benefit of employees, Budget 2023 proposes to exempt EOTs from the rules in the Tax Act that would otherwise deem the trust to dispose of its assets every 21 years.
These amendments are proposed to come into force as of January 1, 2024. Certain details about EOTs still remain unclear, most notably what happens to the accrued value of the business when an employee ceases to be employed by the qualifying business or dies.
Alternative Minimum Tax (AMT)
To better target the AMT to high-income individuals, Budget 2023 proposes various changes to its calculation and application. The proposed amendments will raise the AMT rate from 15% to 20.5% and limit the use of tax credits, deductions, exemptions and other tax preferences. At the same time, the AMT exemption will increase from $40,000 to $173,000 (indexed annually to inflation), thereby increasing the income level necessary to be subject to the AMT.
In terms of limiting tax preferences, Budget 2023 proposes the following key, additional changes:
- The AMT capital gains inclusion rate will be increased to 100% and capital loss carry forwards and allowable business investment losses would apply at a 50% rate. 100% of the benefit associated with stock options would also form part of the AMT base;
- 30% of capital gains on donations of publicly listed securities will now be included in the AMT base, as will the full benefit associated with stock options to the extent that a deduction is available because the underlying securities are publicly listed securities that have been donated;
- 50% of several deductions (such as employment expenses and non-capital loss carryovers) will be disallowed, thereby broadening the AMT base; and
- Certain non-refundable credits which can be credited against the AMT will be limited to 50%.
Additional details will be released later this year. The proposed changes will come into force for taxation years that begin after 2023. The revised AMT rules will generate an estimated $3 billion of revenue over five years.
Dividend Received Deduction by Financial Institutions
The Tax Act generally permits corporations, including financial institutions, to claim a deduction in respect of dividends received on shares of other corporations resident in Canada, while the mark-to-market rules in the Tax Act treat gains on the disposition of certain property held by financial institutions in the ordinary course of business (mark-to-market property) as ordinary income. To align the treatment of dividends and gains on shares that are mark-to-market property, Budget 2023 proposes to deny financial institutions a deduction in respect of dividends received on such shares after 2023.
Generally, shares are mark-to-market property when a financial institution has less than 10% of the votes or value of the corporation that issued the shares. These proposed rules provide that a share (other than a share of a financial institution) that is a tracking property of a corporation at any time in a taxation year is deemed to be mark-to-market property of the corporation for the year.
Clean Energy Incentives
Overview of Investment Tax Credits
Budget 2023 delivers a series of major incentives to ensure Canada’s clean economy can deliver prosperity, middle class jobs, and more vibrant communities across Canada. These new incentives in form of investment tax credits are in certain cases accompanied by labour requirements, as initially announced in the 2022 Fall Economic Statement, to help ensure that Canadian workers see the benefits of a clean economy.
Over the next five years the cost of such incentives is estimated to be more than $10 billion dollars.
Taxpayers are only eligible to claim one of the Clean Hydrogen Investment Tax Credit (the CH Tax Credit), the Investment Tax Credit for Clean Technologies, the Investment Tax Credit for Clean Electricity, the Investment Tax Credit for Clean Technology Manufacturing or the Investment Tax Credit for Carbon Capture, Utilization, and Storage (the CCUS Tax Credit). Accordingly, if a property is eligible for more than one of these tax credits, taxpayers will need to carefully model out and decide which of these tax credits to claim in any given taxation year to achieve maximum tax efficiency.
The accompanying Notice of Ways and Means does not yet provide any draft provisions or specific amendments to the Tax Act. Accordingly there is still significant uncertainty as whether these credits would be available and, if so, how they would be computed in respect of projects being operated through limited or general partnership structures.
The table below provides an overview of the new investment tax credits that were announced in Budget 2023. Further details with respect to each of the tax credits and the applicable criteria to qualify are summarized below under the relevant headings.
Labour Requirements
The 2022 Fall Economic Statement announced the government’s intention to attach prevailing wage and apprenticeship requirements to certain investment tax credits (together referred to as labour requirements). Such labour requirements were established by the Department of Finance in consultation with a broad group of stakeholders, including labour unions.
Budget 2023 elaborates on the labour requirements that are attached to certain investment tax credits. The labour requirements would apply in respect of workers engaged in project elements that are subsidized by the respective investment tax credit, whether they are engaged directly by the business or indirectly by a contractor or subcontractor.
The labour requirements would apply to workers whose duties are primarily manual or physical in nature (e.g., labourers and tradespeople). The labour requirements would not apply to workers whose duties are primarily administrative, clerical, supervisory, or executive.
Prevailing Wage Requirement
To meet the prevailing wage requirement, a business would need to ensure that all covered workers are compensated at a level that meets or exceeds the relevant wage, plus the substantially similar monetary value of benefits and pension contributions (converted into an hourly wage format), as specified in an “eligible collective agreement”.
A business could meet the prevailing wage requirement either by paying workers in accordance with an eligible collective agreement, or by paying workers at or above the equivalent prevailing wage. The definition of eligible collective agreement will vary depending on whether the workers are governed by a collective bargaining agreement outside of Québec or within Québec. In the latter case, eligible agreements would be those negotiated in accordance with provincial law (i.e., the Act Respecting Labour Relations, Vocational Training, and Workforce Management in the Construction Industry).
With respect to particular workers, the relevant eligible collective agreement is determined by reference to the tasks and locations described therein that most closely aligns with the worker’s tasks and location.
Apprenticeship Requirement
Not less than 10% of the total labour hours performed by covered workers engaged in subsidized project elements must be performed by registered apprentices. To the extent applicable labour laws or a collective agreement that applies to the work being performed sets restrictions as to the number of apprentices, such restrictions will be incorporated by reference in the apprenticeship requirement.
Investment Tax Credit for Clean Hydrogen
Budget 2023 proposes to introduce the CH Tax Credit. The CH Tax Credit is a refundable credit between 15% and 40% of eligible property costs, with the projects that produce the cleanest hydrogen receiving the highest credit rates.
More specifically, the credit applies to eligible property that becomes available for use before 2034 and the credit rate is determined based on assessed carbon intensity (CI) of the hydrogen that is produced (i.e., kilogram (kg) of carbon dioxide equivalent (CO2e) per kg of hydrogen):
- 40% for a CI of less than 0.75 kg;
- 25% for a CI greater than or equal to 0.75 kg, but less than 2 kg; and
- 15% for a CI greater than or equal to 2 kg, but less than 4 kg.
The CH Tax Credit rate for the applicable CI-tier is reduced by 10% where a business does not meet the labour requirements. We further note that property that is required to convert clean hydrogen (i.e., meets a CI of less than 4 kg of CO2e per kg of hydrogen) to clean ammonia would also be eligible for the CH Tax Credit, at the lowest credit rate of 15 per cent.
Eligible equipment required to produce hydrogen must be made available for use in Canada and generally includes the following:
- Equipment required to produce hydrogen from electrolysis would be eligible if all or substantially all of the use of that equipment is to produce hydrogen through electrolysis of water;
- Equipment required to produce hydrogen from natural gas with emissions abated using CCUS would be eligible for the CH Tax Credit, excluding equipment already described in capital cost allowance Class 57 or Class 58, which is eligible for the CCUS Tax Credit;
- Oxygen production equipment used for hydrogen production would also be eligible, so long as the resulting CO2 is captured by a CCUS process;
- Equipment that produces heat and/or power from natural gas or hydrogen; and
- Dual use power or heat production equipment would be eligible only if the energy balance is expected to be primarily used (i.e., more than 50%) to support the CCUS process or hydrogen production that is eligible for the proposed CH Tax Credit.
Other expenses that may be related to a hydrogen production project, including feasibility studies, front-end engineering design studies, and operating expenses, would not be eligible for the CH Tax Credit. Budget 2023 also provides details regarding the compliance and verification of the level of CI.
This CH Tax Credit would apply to eligible property that is acquired and that becomes available for use on or after March 28, 2023.
Clean Technology Investment Tax Credit – Geothermal Energy
Budget 2023 proposes to expand eligibility for the refundable Clean Technology Investment Tax Credit of 30% to include geothermal energy systems that are eligible for capital cost allowance Class 43.1. Geothermal energy uses thermal energy stored in the earth’s crust to generate electricity, direct-heat or combined heat and power. As a low-emitting renewable resource, geothermal energy could help reduce greenhouse gas emissions by displacing the use of fossil fuels. A 20% rate would still be available to businesses that do not meet the labour requirements described above.
Eligible property would include equipment used primarily for the purpose of generating electrical energy or heat energy, or both electrical and heat energy, solely from geothermal energy, that is described in subparagraph (d)(vii) of capital cost allowance Class 43.1. This includes, but is not limited to, piping, pumps, heat exchangers, steam separators, and electrical generating equipment. Equipment used for geothermal energy projects that will co-produce oil, gas or other fossil fuels would not be eligible for the credit.
The expansion of the Clean Technology Investment Tax Credit would apply in respect of property that is acquired and becomes available for use on or after Budget Day, where it has not been used for any purpose before its acquisition.
Budget 2023 extends the phase-out as of 2032 announced in the 2022 Fall Economic Statement to 2034. The 30% Clean Technology Investment Tax Credit rate is reduced to 15% for property that becomes available for use in 2034 and would no longer be available after 2034.
Investment Tax Credit for Clean Technology
Budget 2023 proposes to introduce a refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing, equal to 30% of the capital cost of eligible property associated with eligible activities. A 20% rate would still be available to businesses that do not meet the labour requirements described above.
This credit seeks to incentive major investments in Canada in manufacturing of machinery and equipment used in the clean technology industry, and to thereby create quality manufacturing jobs for Canadians.
Eligible Property
Eligible property would generally include machinery and equipment, including certain industrial vehicles, used in manufacturing, processing, or critical mineral extraction, as well as related control systems.
Tax integrity rules would apply to recover a portion of the tax credit if eligible property is subject to a change in use or sold within a certain period of time.
Eligible Activities
Eligible activities related to clean technology manufacturing and processing, and include manufacturing of certain renewable energy equipment (solar, wind, water, or geothermal), manufacturing of nuclear energy equipment and other enumerated activities.
In addition to the listed activities, eligible activities would also include the extraction and certain processing activities related to six critical minerals essential for clean technology supply chains: lithium, cobalt, nickel, graphite, copper, and rare earth elements.
The Investment Tax Credit for Clean Technology Manufacturing would apply to property that is acquired and becomes available for use on or after January 1, 2024. The credit would be progressively phased-out for property made available for use in 2032 to 2034, and would cease to be available for property made available for use after 2034.
Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS)
Building on the proposed CCUS Tax Credit that would be available to businesses that incur eligible expenses starting on January 1, 2022, Budget 2023 proposes to expand the CCUS Tax Credit to dual use equipment that produces heat and/ or power or uses water, that is used for carbon capture, utilization, and storage (CCUS).
From 2022 through 2030, the investment tax credit rates would be set at:
- 60% for investment in equipment to capture CO2 in direct air capture projects;
- 50% for investment in equipment to capture CO2 in all other CCUS projects; and
- 37.5% for investment in equipment for transportation, storage and use.
The above credit rates will be reduced by 50 per cent for the period from 2031 through 2040.
Dual use equipment that produces heat and/or power or uses water would be treated as capture equipment, provided all other eligibility conditions are met. It should be noted that such dual use power or heat production equipment would be eligible only if the energy balance is expected to be primarily used (i.e., more than 50 per cent) to support the CCUS process or hydrogen production that is eligible for the proposed Clean Hydrogen Investment Tax Credit. Moreover, CO2 emissions from power and/or heat production equipment would need to be captured and stored or used for the equipment to be eligible.
Budget 2023 proposes that British Columbia be added to the list of eligible jurisdictions for dedicated geological storage, applicable to expenses incurred on or after January 1, 2022.
Budget 2023 proposes that CCUS Tax Credits related to eligible refurbishment costs (Refurbishment ITCs) incurred once the project is operating would be calculated based on the average of the expected eligible use ratio for the five-year period (the period) in which they are incurred, and each subsequent period (i.e., the periods over which they contribute to the useful life of the project). An example of the Refurbishment ITC calculation is provided for illustration purposes in the notes accompanying Budget 2023.
The accompanying Notice of Ways and Means includes the draft legislative proposal for Part XII.7 of the Tax Act, which imposes a requirement on certain corporations to produce an annual Climate Risk Disclosure report and a requirement for CCUS projects with eligible expenses of $250 million or greater over the life of the project (based on project plans) to contribute to public knowledge sharing in Canada.
The CCUS Tax Credit, as expanded by Budget 2023, would apply to eligible expenses incurred after 2021 and before 2041.
Investment Tax Credit for Clean Electricity
To support and accelerate clean electricity investment in Canada, Budget 2023 proposes to introduce the Investment Tax Credit for Clean Electricity. Such credit is a 15% refundable credit and would be available for investments in, among others, non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors).
Both new projects and the refurbishment of existing facilities will be eligible.
Taxable and non-taxable entities such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and pension funds, would be eligible for the Clean Electricity Investment Tax Credit.
The Clean Electricity Investment Tax Credit could be claimed in addition to the Atlantic Investment Tax Credit, but generally not with any other investment tax credit.
The Clean Electricity Investment Tax Credit would be available as of the day of Budget 2023 for projects that did not begin construction before March 28, 2023. The Clean Electricity Investment Tax Credit would not be available after 2034.
Treatment of Credit Unions and Payment Card Clearing Services
Budget 2023 proposes to amend the definition of “credit union” retroactively to taxation years ending after 2016, for both income tax and Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes, by eliminating the existing 10% revenue test, which unintentionally excludes entities such as full-service financial institutions that offer a comprehensive suite of financial products and services.
Budget 2023 also proposes to amend the GST/HST definition of “financial service” to clarify that card clearing services rendered by a payment card network operator are excluded from the definition in response to a recent court decision that the GST/HST does not apply to supplies of these services. This measure applies to services in respect of which consideration is due, or is paid, after Budget Day.
Other Measures
Flow-Through Shares and Critical Mineral Exploration Tax Credit (CMETC)
Budget 2023 proposes to amend the Tax Act to include lithium from brines as a mineral resource, which will allow relevant principal-business corporations that undertake exploration and development activities related to lithium from brines to issue flow-through shares and renounce expenses to their investors. Eligible expenses made after Budget Day related to lithium from brines will now qualify as Canadian exploration expenses (CEE) and Canadian development expenses (CDE). Budget 2023 also proposes to expand the eligibility of the CMETC to lithium from brines. The expansion of the eligibility for the CMETC would apply to flow-through share agreements entered into after Budget Day and before April of 2027.
Scientific Research & Experimental Development (SRED) Tax Incentive Program
In Budget 2022, the government announced its intention to review the SRED program to ensure it is providing adequate support and improving the development, retention and commercialization of intellectual property. The Department of Finance will continue engaging stakeholders regarding the next steps in this process in the coming months.
Pillar One and Pillar Two
Budget 2023 reinforces the government’s support of the two-pillar international tax reform plan agreed to in October of 2021 amongst the 183 members of the OECD/G20 Inclusive Framework on BEPS.
Pillar One will ensure that the largest and most profitable global corporations pay their fair share of tax in the jurisdiction where their users and customers are located by advancing the legislation for a digital services tax (DST), which will revise what was released in December of 2021 and be subject to public comment. The DST could be imposed as of January 1, 2024 in respect of revenues earned as of January 1, 2022, but only if the multilateral convention implementing the Pillar One framework has not yet come into force.
Pillar Two will ensure large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% on their profits in every jurisdiction in which they do business. The primary charging rule under Pillar Two (known as the Income Inclusion Rule or IIR) along with the domestic minimum top-up tax will be effective for fiscal years of MNEs beginning on or after December 31, 2023, and the secondary charging rule (a “backstop” rule known as the Undertaxed Profits Rule or UTPR) will be effective for fiscal years of MNEs beginning on or after December 31, 2024. For these purposes, an MNE is considered to have the same fiscal year as its ultimate parent entity. Draft legislative proposals for the IIR and domestic minimum top-up tax will be released for public consultation in the coming months, with draft legislative proposals for the UTPR to follow at a later time.
Previously Announced Measures
Budget 2023 also confirms the government’s intention to move forward with the following key, previously announced measures (as modified to take into account consultations and deliberations):
- Legislative proposals released on November 3, 2022 with respect to excessive interest and financing expenses limitations (also known as EIFEL).
- Tax measures announced in the Fall Economic Statement on November 3, 2022 related to the investment tax credit for clean technologies.
- Legislative proposals released on August 9, 2022 with respect to:
- Borrowing by defined benefit pension plans;
- Reporting requirements for RRSPs and RRIFs;
- The investment tax credit for carbon capture, utilization and storage;
- Substantive Canadian-controlled private corporations; and
- The mandatory disclosure rules.
- Legislative proposals released on April 29, 2022 with respect to hybrid mismatch arrangements.
