2023 Canadian Federal Fall Economic Statement (“FES”) and Bill C-59 “Fall Economic Statement Implementation Act, 2023”
Prepared by Danny Guérin and Shant Ghazelian, Andersen in Montreal (Canada)
On November 21st, 2023, the Deputy Prime Minister, and Finance Minister Chrystia Freeland, issued the 2023 FES which contained various tax measures aimed at both Canadian individuals and corporations. Among the measures proposed, the following topics of interest were also covered:
- Proposed changes to the Underused Housing Tax (“UHT”)
- International tax measures (including international shipping)
- Sales and Excise tax measures.
Further, on November 30th, 2023, Bill C-59, “Fall Economic Statement Implementation Act, 2023, was introduced in Parliament through its first reading in the House of Commons. We have described below the various measures of interest contained in the 2023 FES and specified whether they had been included or not in Bill C-59.
Personal Measures
Canadian Dental Care Plan
The government had proposed to implement a Canadian Dental Care Plan in its 2023 Budget which was to be administered by Health Canada. This plan provided dental coverage for Canadians that are not insured, where their annual family income was within pre-determined parameters.
On June 22nd, 2023, amendments were proposed to the Canadian Income Tax Act[1] (“ITA”) and the Excise Tax Act[2] (“ETA”), where the CRA will have the authority to share all necessary information of the taxpayer with Health Canada and Employment and Social Development Canada.
The FES plans to broaden the recipients of such information, to include Public Services and Procurement Canada, for the deliverance of the Canadian Dental Care Plan[3].
Employee Ownership Trusts (“EOT”)
To promote participation in business decisions and profits on behalf of employees, the federal Budget of 2023 proposed more incentivising rules for setting up EOT. EOT are purposed to acquire and hold shares of a Canadian-controlled private corporation (“CCPC”).
Concerning the 2024, 2025 and 2026 tax years, the current FES announced that it would exempt from taxation the first CA$10M portion of capital gains when selling a business to an EOT. This exemption is subject to certain conditions that have not yet been made public[4].
Other Measures
Underused Housing Tax (“UHT”)
The Underused Housing Tax Act (UHT Act), which is effective from January 1st, 2022, is a measure which requires certain owners of Canadian residential property to file an annual UHT return in respect of such property. Certain taxpayers are required to pay a tax equal to 1% of the value of the property in question, subject to certain statutory exemptions.
The 2023 FES provides further information to remove certain ambiguities concerning the targeting of the UHT, and to increase the leniency of the filing requirements.
Excluded owners
The UHT filing and payment requirements for 2023 and subsequent years are being eliminated for the following owners, now considered excluded owners:
- Specified Canadian corporations,
- Meaning a Canadian corporation where less than 10% of voting shares or equity value (in FMV) are owned by non-Canadian individuals or corporation;
- Partners of specified Canadian partnerships,
- Where each member is an excluded owner or a specified Canadian corporation;
- Trustees of specified Canadian trusts,
- Where each beneficiary is an excluded owner or a specified Canadian corporation.
Exemption – Residence or lodging for employees and Unitized apartment buildings
Where the exception of excluded owners is not available, a new exemption is being introduced which taxpayers can potentially benefit from if the situation permits it. For the fiscal year 2023 and subsequent years, residential properties held as a place of residence or lodging for employees will be exempt from the UHT. The exemption is applicable to any residential properties located in Canada, except residential property located in a population centre within a census metropolitan area or a census agglomeration having 30,000 or more residents.
Other technical changes
The definition of “residential property” for UHT purposes has been narrowed to exclude “condominium-type” unitized apartment buildings, for 2022 and subsequent calendar years.
Effective for the 2024 calendar year, the government has the intention to ensure that an individual or a couple can claim the UHT “vacation property” exemption only once a year for a maximum of one residential property.
UHT filing particularities
UHT returns must be filed by April 30th of the following calendar year. However, an extension of one year has been offered to taxpayers for the filing of their 2022 UHT returns. The 2022 first year filing deadline now corresponds to that of a 2023 UHT return (i.e., April 30th, 2024).
Effective for 2022 and subsequent years, the minimum penalty for failing to file on time has been reduced from:
- $5,000 to $1,000 for individuals,
- $10,000 to $2,000 for corporations.
Limitations to non-compliant short-term housing
To prevent keeping long-term homes off the market for Canadians, the 2023 FES proposes to deny income tax deductions for expenses incurred after 2023 to earn short term rental income in provinces and municipalities that disallows such types of rental activities undertaken by operator type taxpayers. This covers any expenses, including but not limited to interest deductions and will apply to any such expenses incurred on or after January 1st, 2024.
The same consequence applies if the rental operators are not aligned with licensing, permitting or registration requirements of provinces or municipalities.
A sum of CA$50M is being provided by the government, over the course of three years, to support municipal enforcement of these restrictions.
Corporate Measures
Journalism Tax Credits
Qualifying journalism organizations are eligible to a refundable tax credit on salary or wages paid to eligible newsroom employees. The Statement proposes to increase the cap on labour expenditures incurred on or after January 1st, 2023, per employee from CA$55,000 to $CA85,000 per taxation year. A temporary bump in the credit rate from 25% to 35% has also been announced for the taxation years ending before 2027. As for non-calendar years, both the cap and rates must be prorated.
Concessional Loans
In 2021, the Federal Court of Appeal[5] affirmed the decision of the Tax Court of Canada[6] where the full principal amount of a concessional loan, such as loans from public authorities that bear below-market to nil interest rates, are to be considered government assistance for the purposes of the ITA. In this context, government assistance typically has negative impacts on the taxpayer.
It is the CRA’s general position[7] that fully-recourse, low or even zero interest bearing government loans would “not normally cause the loan to be considered as assistance.”
Consequently, the ITA is to be amended to provide that bona fide government loans (from low to no interest) issued on or after November 21, 2023, are not to be considered government assistance, so long as there are reasonable repayment terms.
Dividends received deductions – Financial Institutions
In the federal Budget of 2023, a legislation was proposed to limit the deductions claimed by financial institutions on received dividends after January 1st, 2024. This measure was meant to apply to shares that are considered mark-to-market property, whose assets are revaluated on market prices on a regular basis. The 2023 Statement has proposed that an exception be added to this rule to exclude dividends received on taxable preferred shares (“TPS”)[8].
Clean Economy Investment Tax Credits (ITCs)
In hopes of encouraging clean economy in Canada, the 2023 FES has further developed on the following different investment tax credit initiatives.
Clean Hydrogen
Budget 2023 introduced the Clean Hydrogen ITC, which mentioned that clean ammonia production would also be supported under such incentive without any further details. The FES of 2023 provides additional details to that regard and states that property required to convert clean hydrogen into ammonia would qualify for the ITC, subject to meeting certain technical criteria and conditions.
Furthermore, the use of renewable natural gas in calculating a project’s carbon intensity (“CI”) is to be implemented. As some projects can use this to their advantage in reducing their carbon footprint, certain conditions are to be met.
Concerning power purchase agreements and other similar instruments, the 2023 Statement indicates that the use of such instruments would also be allowed, under certain conditions, to permit project owners to purchase clean electricity from the grid for purposes of computing the projects CI.
An initial project is to have its CI assessed and validated by a third party. On top of this, an initial verification based on a five-year compliance period is required for any project. Annual reports detailing the effective CI (through a weighted average through the whole period) of the hydrogen produced would determine whether compliance is achieved or not. These documents are required to be subject to third party verification reports.
It is important to note that a recovery program had been announced in the 2023 budget to recover the difference between the amount of ITC claimed as per the formerly assessed CI tier, and the amount of ITC available in the newly entered CI tier during production. The 2023 Statement proposed to provide that project with increases of 0.25kg or less of carbon per kg of hydrogen above the original validated CI would not be subject to any recovery.
Clean Technology and Clean Electricity ITC
The 30% Clean Technology and 15% Clean Electricity ITC will be broadened to include systems producing electricity, heat, or both, from waste biomass. The Clean technology ITC’s expansion is only available to businesses who invest in acquiring eligible property that is available for use starting November 21, 2023.
The expansion of the eligibility of the Clean Electricity ITC, will be available as of the date of the 2024 federal budget for projects that did not begin construction before March 28, 2023.
International Tax Measures
International Tax Reform
Canada had proposed to implement the OECD/G20 Pillar Two global minimum tax as well as the interim Digital Services Tax Act (“DST”), which was delayed on October 1st, 2021, to allow further negotiations concerning Pillar One. Until a sufficient number of international partners are ready to implement Pillar One, Canada has proposed to implement its own DST. The previously proposed coming into force of the new legislation by Finance was set to be January 1st, 2024, with retroactive application until January 1st, 2022. The 2023 FES is mute on the timing of its enactment[9]. As part of the revision of the DST Act (DSTA”) included in Bill C-59, the Department of Finance decided to move thresholds (Global revenue, in-scope revenue and registration), deductions and applicable rates from the DSTA itself to new Digital Services Tax Regulations. Such a change enables the Federal government to modify the threshold levels, change the tax rates, etc. without any legislative amendments that would need to be passed in Parliament (and as a result would need to seek Parliament’s approval).
Many other countries disagree with Canada’s intention to implement the DST, especially with a retroactive application. The United States has criticized it as discriminatory and has announced intentions to retaliate with potential tariffs.
International Shipping
For taxation years beginning after December 30th, 2023, focusing on ensuring consistency between international tax norms, the international shipping provisions of the ITA and the proposed new Global Minimum Tax Act, the 2023 FES proposes to extend the exemption for international shipping income, as per the ITA, to Canadian resident companies.
Sales and Excise Tax Measures
Co-op Rental Housing
On September 21st, 2023, the federal government introduced Bill C-56 “Affordable Housing and Groceries Act”, which premise was to exempt new purpose-built rental housing projects from GST. Housing projects would include apartment buildings, student housing and seniors’ residences. This measure targets projects which construction started from September 14, 2023 to the end of 2030. Substantial renovations of existing residential complexes are out of scope for the purpose of this measure.
The 2023 FES announced that co-op housing corporations providing long-term rental accommodation would be eligible for this GST “removal” on new rental housing, if occupants of such rental properties would not have any type of ownership or interest.[10]
Psychotherapists and Professional Services
The 2023 Economic Statement proposes that psychotherapists and counselling therapists be added to the list of healthcare practitioners which services, provided to individuals, would be considered as exempt from GST/HST. This will be effective upon royal assent of the enacting legislation[11].
Joint Venture (“JV”) Election
A JV is a combination of two or more parties whose goals align concerning the undertaking of a single project or enterprise, where all opportunities and risks concerning the development of said project are shared. For GST/HST purposes, given that a JV is not considered a person, each party implicated is required to register separately and account for their fair share of sales tax and the respective credits. To simplify the administration process, provided that the activities of the JV are eligible activities, as prescribed by the ETA as well as the JV (GST/HST) regulations, an election is available so that a JV participant that is a registrant (the operator) is responsible to account for all sales tax on purchases and sales made by all participants of the JV, as if it was considered a person for GST/HST purposes.
Modifications to the current rules
To ensure that the above election would be available to more participants in commercial JV, the Minister of Finance, through the 2023 FES, proposed the following modifications to the current JV election mechanism:
- Requiring that “all or substantially all” of the JV activities be commercial activities instead of eligible activities prescribed by the ETA and related Regulations, as it is the case under the current rules,
- Requiring all participants that are making the election to be registered for GST/HST purposes,
- Revised deeming measures to provide better focus on tax accounting.
These new JV election rules, although currently at the public consultation stage, would come into force on the day the Act enacting the proposed rules receives royal assent.
Previously Announced Measures
While not further developed in the 2023 FES, the following select sample of measures of interest, that were previously announced in the federal Budget’s legislative proposals released on August 4th, 2023, have been confirmed to be set in motion as per the government’s intention:
- Global Minimum Tax (Pillar Two) and
- Alternative minimum tax for high-income individuals;
- Clean Technology Manufacturing Tax credit, etc.
Furthermore, the following select sample of measures of interest, not discussed in the above text, have been included as part of Bill C-59, Fall Economic Statement Implementation Act, 2023 which received first reading in the House of Commons on November 30th, 2023:
- Modernizing the general anti-avoidance rule (GAAR);
- Excessive Interest and Financing Expenses Limitations (“EIFEL”) rules;
- DST;
- Hybrid mismatch arrangement rules;
- Reduced tax rates for zero-emission technology manufacturers;
- Carbon Capture, Utilization and Storage ITC (“CCUS”);
- Clean Technology ITC;
- Labor requirements for certain ITC;
- Tax on share repurchases;
- Proposals on substantive CCPCs (only a portion was included, not the elimination of the tax deferral advantage for investment income earned by CCPC’s);
- Intergenerational business transfers;
[1] Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)).
[2] Excise Tax Act, R.S.C. 1985, c. E-15.
[3] This proposal was included under Bill C‑59, Fall Economic Statement Implementation Act, 2023, which received first reading in the House of Commons on November 30th, 2023.
[4] The EOT rules were included under Bill C‑59, Fall Economic Statement Implementation Act, 2023, which received first reading in the House of Commons on November 30th, 2023. However, the proposed exemption of tax on the first $10 million in capital gains realized on the sale of a business to an EOT, introduced in the 2023 FES for 2024, 2025 and 2026 taxation years was not.
[5] CAE Inc. v. R. 2022 FCA 178.
[6] CAE Inc. v. R. 2021 TCC 57.
[7] Interpretation Bulletin IT-273R2, Government Assistance – General Comments, September 13, 2000.
[8] Ibid 2.
[9]The revised version of the DST Act was included in Bill C‑59, Fall Economic Statement Implementation Act, 2023 which received first reading in the House of Commons on November 30th, 2023.
[10] Ibid 2.
[11] Ibid 2.
