This update is intended for those seeking additional insights into the Fall Economic Statement 2022 including its impact on both domestic and multinational enterprises.
The Minister of Finance (Canada), the Honourable Chrystia Freeland, presented the Government of Canada's (the "Federal Government") Fall Economic Statement 2022 (the "Fall Economic Statement") on November 3, 2022.
The Fall Economic Statement announced plans to tax share buybacks by public companies, reaffirmed the Federal Government's intention to introduce a new minimum tax regime for high income Canadians, and reaffirms its intention to implement the Organisation for Economic Co-operation and Development (OECD)'s two-pillar plan on international tax reform. Other significant tax measures announced in the Fall Economic Statement include an extension of the Residential Property Flipping Rule announced in the 2022 Federal Budget to assignment sales, and an investment tax credit for clean technologies.
The Fall Economic Statement provides updates on many announcements made in the Federal Government's 2022 Federal Budget ("Budget 2022"). See Fasken's analysis of the 2022 Budget Tax Measures Bulletin.
Selected proposals, tax measures, and other updates are detailed below:
A Tax on Share Buybacks by Public Companies
The Fall Economic Statement announces the government's intention to introduce a corporate-level 2 per cent tax that would apply on the net value of all types of share buybacks by public corporations in Canada, similar to a recent measure introduced in the United States. A share buyback occurs when a company buys their own shares from existing shareholders. The Federal Government's position is that while buying back shares legitimately returns value to shareholders, it has the disadvantage of diverting corporate resources from being reinvested in workers and businesses in Canada. The details of this new tax will be announced in Budget 2023, and the tax would come into force on January 1, 2024.
Update on Pillar One and Pillar Two
In the Fall Economic Statement, the Federal Government reaffirmed its intention to implement the Pillar One and Pillar Two tax proposals developed by the OECD. Canada and 136 other members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting had developed a two-pillar plan for international tax reform, which was agreed to in October 2021.
Pillar One's purpose is to re-allocate a portion of taxing rights on profits of the largest multinational enterprises (MNEs) to jurisdictions where customers are located. The Fall Economic Statement reports that significant progress has been made in establishing the technical rules of the new system and the OECD has been conducting ongoing public consultations. The Inclusive Framework's intention is to complete multilateral negotiations so that the treaty to implement Pillar One can be signed in the first half of 2023, with a view to it entering into force in 2024.
The Federal Government has previously noted that as a back-up in case the Pillar One regime is not implemented, the Federal Government may impose its previously announced Digital Services Tax as of January 1, 2024. Accordingly, the Fall Economic Statement confirms the Federal Government's intention to proceed (as a previously announced tax measure) with the legislative proposals tabled on December 14, 2021 to introduce the Digital Services Tax Act (subject to consultations and deliberations).
Pillar Two is intended to introduce a global minimum tax regime that will subject certain MNEs to a minimum effective tax rate of 15 per cent on profits in every jurisdiction in which they operate. The Fall Economic Statement reaffirms the Federal Government's commitment to the global minimum tax regime and notes that Canada continues to work on a coordinated implementation framework with international partners but does not provide an updated timeline.
Update on the Alternative Minimum Tax
Budget 2022 announced a commitment by the Federal Government to the examine a new minimum tax regime that would replace or supplement the existing Alternative Minimum Tax for high income Canadians. The Federal Government notes that the existing Alternative Minimum Tax has not been substantially reviewed since its introduction in 1986. The Fall Economic Statement reaffirms the commitment by the Federal Government to examine a new minimum tax regime which would replace or supplement the existing Alternative Minimum Tax for high income Canadians. The Fall Economic Statement notes that a detailed proposal and path for implementation will be released in Budget 2023.
Extension of the Residential Property Flipping Rule to Assignment Sales
Budget 2022 proposed a Residential Property Flipping Rule which applies to transactions occurring on or after January 1, 2023. The Residential Property Flipping Rule deems profits from dispositions of residential property owned for less than 12 months to be business income, unless the transaction is in relation to at least one of the listed life events. The Fall Economic Statement proposes that this new deeming rule also apply to profits that arise from the disposition of the rights to purchase a residential property via an assignment sale.
Profits arising from an assignment sale would be deemed to be business income if the rights to purchase a property were assigned after having been owned for less than 12 months. This 12-month period will reset once the property is owned by the taxpayer who entered into a purchase and sale agreement. The purpose of this reset provision is to ensure that the Residential Property Flipping Rule cannot be bypassed when selling a constructed property simply because a taxpayer held the rights to purchase the property before it was constructed.
The new deeming rule will not apply if in relation to the same listed life events to which the Residential Property Flipping Rule does not apply, or if the property was owned for 12 months or more. In such cases, it would be a question of fact whether profits from the disposition are taxed as business income.
Investment Tax Credit for Clean Technologies
The Fall Economic Statement proposes a refundable Clean Technology Investment Tax Credit equal to 30 per cent of the capital cost of eligible equipment, with a focus on net-zero technologies, battery storage solutions, and clean hydrogen. Companies that do not adhere to certain labour conditions (i.e. paying fair wages, ensuring ample apprenticeship training opportunities, etc.) will only be eligible for a credit of 20 per cent. Budget 2023 will provide specific details regarding the labour conditions and any additional eligible technologies. This credit would be available as of the day of Budget 2023 and no longer in effect at the start of 2035, subject to a phaseout starting in 2032.
The following types of investments would be eligible for the credit:
- 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.
The Department of Finance will consult with stakeholders, including unions, on how best to attach labour conditions to the proposed tax credit. The Department of Finance will also consult on any additional eligible technologies (e.g. large scale-nuclear and large-scale hydroelectric).
Update on Investments in the CRA
The Fall Economic Statement proposes investing an additional $400 million in 2022-23 and 2023-24 for the CRA to support call centre operations in the face of projected call volumes that are expected to remain above pre-pandemic levels. This investment is addition to the $1.2 billion over five years for the CRA to expand audits of larger entities and non-residents engaged in aggressive tax planning, increase the investigation and prosecution of those engaged in criminal tax evasion, and to expand educational outreach that was previously announced in Budget 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.