The past week was a busy one for Canada's Department of Finance ("Finance"). On November 3, 2022, Finance released its 2022 Fall Economic Statement (the "Fall Economic Statement") and the following day, it introduced Bill C-32 to Parliament, which implements many of the outstanding tax measures from this past April's Federal Budget (the "Budget Implementation Bill"). This update summarizes the key business income tax-related measures announced in the Fall Economic Statement, as well as from a concurrently released update on certain tax proposals previously announced by Finance. It will then highlight key aspects of the Budget Implementation Bill.
The Fall Economic Statement proposes to introduce the following:
SHARE BUYBACK TAX
A corporate-level tax of 2% that would apply on the net value of all share buybacks by public corporations in Canada. The details of this new tax will be announced in Budget 2023, which is typically released in the spring, and the tax is proposed to come into force on January 1, 2024.
CLEAN TECHNOLOGIES ITC
A refundable investment tax credit ("ITC") for investment in clean technologies at a specified percentage of the capital cost of eligible equipment. The specified percentage will be 30% if certain labour conditions, including the payment of market wages and the creation of apprenticeship training opportunities, are met. If the labour conditions are not met, the specified percentage will be limited to 20%. The credit is proposed to apply as of the date of Budget 2023 through 2034, subject to a phase-out starting in 2032. The proposed qualifying clean technologies are:
- electricity generation systems, including solar photovoltaic, small modular nuclear reactors, concentrated solar, wind, and water (small hydro, run-of-river, wave, and tidal);
- stationary electricity storage systems that do not use fossil fuels in their operation, including but not limited to: batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage, and thermal energy storage;
- low-carbon heat equipment, including active solar heating, air-source heat pumps, and ground-source heat pumps; and
- industrial zero-emission vehicles and related charging or refueling equipment, such as hydrogen or electric heavy-duty equipment used in mining or construction.
Finance will consult with stakeholders on any additional eligible technologies (e.g., large scale-nuclear and large-scale hydroelectric technologies) and on the labour conditions relevant to the credit. Further details will be announced in Budget 2023.
CLEAN HYDROGEN ITC
A refundable ITC to support investment in clean hydrogen production, with an ITC rate of 40% for the lowest qualifying carbon intensity tier but the maximum tax credit rate will be reduced by 10% if certain labour conditions are not met. The details of this tax credit will be announced in Budget 2023. This tax credit is proposed to apply as of the date of Budget 2023 through 2030.
In addition, the Fall Economic Statement announced that, in respect of international tax reform and in connection with the Organization for Economic Cooperation and Development's Inclusive Framework on Base Erosion and Profit Sharing ("BEPS"), Finance anticipates that the tax treaty to implement BEPS Pillar One proposals (reallocation of taxation rights among global companies, especially digital companies) will be signed in the first half of 2023, with a view to it entering into force in 2024. Further, Finance confirmed that it continues to negotiate the terms of BEPS Pillar Two (global minimum tax) with its international partners.
Finance also reaffirmed its commitment, as announced in Budget 2022, to examine a new alternative minimum tax regime to update and refine the existing alternative minimum tax regime applicable to Canadian individuals.
Concurrently with the Fall Economic Statement, Finance also announced updates regarding certain prior tax proposals, which are summarized as follows:
Finance released revised excessive interest and financing expense limitation rules (the "EIFEL Rules"). The key change is that the implementation of the EIFEL Rules has been delayed until taxation years beginning on or after October 1, 2023. This effectively delays the application of the EFIEL Rules until 2024 for taxpayers with a December 31 taxation year.
In order to fully assess the feedback received on the proposed mandatory reportable and notifiable reportable transaction rules, Finance has delayed the implementation of these rules to a future unspecified date. However, Finance did not delay the effective date for the reporting rules applicable to uncertain tax positions. This means that the uncertain tax treatment reporting rules will apply to taxation years beginning after 2022, although the related penalty provisions will become effective on the date on which the implementing legislation receives Royal Assent.
Finance released draft legislative proposals for consultation, which incorporate model OECD rules for income reporting by digital platforms.
Budget Implementation Bill
As noted above, on November 4, 2022, Finance introduced the Budget Implementation Bill to Parliament. This legislation will implement many of the tax proposals announced in the 2022 Federal Budget, including:
- Introducing the Canada Recovery Dividend, which imposes a temporary one-time 15% tax on taxable income of banks and life insurers' groups above $1 billion over five years.
- Increasing the corporate income tax rate of banks and life insurers' groups by 1.5% on taxable income above $100 million.
- Providing additional reporting requirements for trusts although importantly deferring the application of these rules until 2023 (which is likely a significant relief for the real estate industry where bare trust title companies are common).
- Establishing a 30% critical mineral exploration tax credit, which is intended to incentivize critical mineral exploration in Canada.
- Eliminating the flow-through share regime for oil, gas, and coal exploration and development for flow-through share agreements made after March 2023.
- Extending the application of the general anti-avoidance rule with respect to certain tax attributes.
- Enhancing measures to curtail certain cross-border interest coupon stripping arrangements.
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