On November 21, 2023, Chrystia Freeland, the Deputy Prime Minister and the Federal Minister of Finance, unveiled the 2023 Fall Economic Statement (the "Economic Statement"). While the primary emphasis of the economic statement appears to be the Federal Government's housing action plan and addressing issues of inflation and affordability, it also proposed technical updates on various tax-related matters. This article summarizes the proposed tax measures in the Economic Statement including updated implementation dates to previously announced measures.
Historically, non-forgivable loans from public authorities and concessional loans (loans from public authorities that do not bear interest or that bear interest at below-market rates) were not normally considered government assistance by the Canada Revenue Agency ("CRA") (See Interpretation Bulletin IT-273R2). However, in the 2021 decision CAE Inc. v. The Queen, 2021 CCI 57, aff'd 2022 CAF 178, the Tax Court of Canada ("TCC") determined that the full principal amount of a concessional loan constituted government assistance. This decision was affirmed by the Federal Court of Appeal in 2022. As a result of the TCC overturning the long standing CRA position, the Economic Statement proposes to amend the Income Tax Act (the "ITA") to provide that, effective as of November 21, 2023, bona fide concessional loans from public authorities with reasonable repayment terms will generally not be considered government assistance. Therefore, as previously understood, concessional loans will not be taxed as income to borrowers, or erode tax attributes, otherwise available.
Dividend Received Deduction by Financial Institutions
In Budget 2023, the Federal Government proposed to deny the dividend received deduction (the "DRD") in respect of dividends received by financial institutions on shares that are mark-to-market property (or would be mark-to-market property if held by the corporation at any time in the year).
The Economic Statement proposes an exception to this rule for dividends received on or after January 1, 2024, on "taxable preferred shares" (as defined in the ITA). As a result, financial institutions may continue to claim a deduction for dividends received on taxable preferred shares.
Employee Ownership Trusts
Budget 2023 introduced a new tax regime to facilitate the creation of Employee Ownership Trusts. In the Economic Statement, the Federal Government announced that it proposes to exempt the first $10 million in capital gains realized on the sale of a business to an Employee Ownership Trust from taxation, subject to certain conditions.
This incentive would be in effect for the 2024, 2025, and 2026 tax years. Further details will be provided in the coming months.
Short-term Rental Expenses
The Federal Government announced its intention to deny income tax deductions for expenses incurred to earn short-term rental income, including interest expenses, in provinces and municipalities that have prohibited short-term rentals. Similarly, the Federal Government intends to introduce measures to deny income tax deductions when short-term rental operators are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements.
These measures would apply to deny all expenses incurred on or after January 1, 2024.
Underused Housing Tax
In the 2021 Federal Budget, the government introduced a new Underused Housing Tax ("UHT") which took effect on January 1, 2022. The UHT is an annual 1% tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused.
To reduce the UHT compliance burden in relation to specific Canadian entities, the Economic statement proposes that "specified Canadian corporations", partners of "specified Canadian partnerships" and trustees of "specified Canadian trusts", are deemed "excluded owners" for UHT purposes. As excluded owners, these owners would no longer have UHT reporting obligations.
Further, effective for 2022 and subsequent calendar years, the government is proposing to reduce the minimum penalty for owners who fail to file a UHT return by the filing deadline from CA$5,000 to CA$1,000 for individuals, and from CA$10,000 to CA$2,000 for corporations, per failure.
The Economic Statement also proposes a few technical changes to the UHT. One of these changes includes granting an exemption from the UHT for residential properties used as a residence or employee lodging throughout Canada, excluding population centers within census metropolitan areas or census agglomerations with 30,000 or more residents, applicable from 2023 onward. The exemption was also extended to unitized ('condominiumized') apartment buildings by excluding them from the "residential property" definition for purposes of the UHT.
Further, the Federal Government is proposing a new restriction that a spousal unit can claim the "vacation property" exemption from the UHT for only one residential property per calendar year, effective from 2024 onward.
The deadline for filing UHT returns for the 2022 calendar year had previously been extended to April 30, 2024. UHT returns for the 2023 calendar year will need to be filed by the normal deadline of April 30, 2024, to avoid penalties and interest.
Carbon Capture, Utilization and Storage ("CCUS")
Legislation for CCUS will be introduced by the end of 2023, after consideration of the consultations that took place in September. The CCUS ITC will be available from January 1, 2022.
Clean Technology Manufacturing
Consultations on draft legislation for Clean Technology Manufacturing will be proposed by the Federal Government this fall with a goal of introducing legislation in early 2024. The Clean Technology Manufacturing ITC will be available from January 1, 2024.
By the end of 2023, legislation will be introduced for Clean Technology, after consideration of consultations that took place in September. The Clean Technology ITC will be available from March 28, 2023.
Furthermore, the 30% Clean Technology ITC will be broadened to include systems generating electricity, heat, or a combination of both from waste biomass. This extension applies to businesses investing in eligible property acquired and made available for use on or after November 21, 2023.
As part of Budget 2023, a 15% tax credit ITC that was introduced for Clean Electricity, which is available to both taxable and non-taxable entities such as Crown corporations and publicly-owned utilities. The Economic Statement announced that the design and implementation details of the Clean Electricity ITCs will be published in early 2024. Clean Electricity ITCs pertaining to publicly-owned utilities are excluded from this, and the Federal Government will begin consultations for these with provinces and territories in 2024. In both cases, the Federal Government's goal is to introduce legislation for the Clean Electricity ITC by the fall of 2024.
Consultations on draft legislation for Clean Hydrogen will be launched by the Federal Government this fall with the aim of introducing legislation in early 2024. The Clean Hydrogen ITC will be available from March 28, 2023.
The Economic Statement further suggests that property essential for converting clean hydrogen into ammonia can qualify for the ITC, subject to specific conditions being satisfied. Moreover, it offers additional insights into incorporating Power Purchase Agreements and renewable natural gas in determining carbon intensity for Clean Hydrogen ITCs.
Labour Requirements for Clean Economy ITC's
The Economic Statement stated that draft legislation, informed by consultations concluded in September, will be released by the end of 2023. This legislation will outline the labor prerequisites, such as prevailing union wages and apprenticeship opportunities, necessary to qualify for the maximum ITCs in Clean Technology, Clean Hydrogen, Clean Electricity, and CCUS. The effective date for these labor requirements will align with the initial tabling of the enabling legislation.
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