On March 28, 2023, Deputy Prime Minister and Minister of Finance Chrystia Freeland tabled Canada’s 2023 federal budget. Balancing the rising cost of living for Canadians against the need to reign in inflation amidst global economic uncertainty, this year’s budget includes several interesting initiatives designed to make life more affordable, such as lowering the criminal rate of interest, addressing hidden fees, and increasing student grants and interest-free loan limits. In addition, significant spending is planned for various programs to improve health and dental care, and numerous measures have been proposed to support clean technology development and Canada’s movement towards a more environmentally sustainable economy.
The “Made-in-Canada Plan” projects a deficit of $40.1 billion, with further reductions forecasted over the next four years, but no apparent plan to return to balanced budgets in the near future.
From a tax perspective, several significant measures were announced, including: a new investment tax credit for clean technology manufacturing; a tax on equity buy-backs; a change to how dividends received by financial institutions will be treated for income tax purposes; modifications to various investment tax credits; and a highly anticipated change to the Goods and Services Tax/Harmonized Sales Tax (GST/HST) treatment of payment card clearing services. These and other interesting tax changes are summarized below.
Corporate Income Tax Measures
Clean Technology Manufacturing Investment Tax Credit
The government proposes to introduce a new refundable investment tax credit for 30% of the capital cost of eligible property for clean technology manufacturing and processing as well as critical mineral extraction and processing.
Property eligible for the Investment Tax Credit for Clean Technology Manufacturing would generally include machinery and equipment, including certain industrial vehicles, utilized in manufacturing, processing, or critical mineral extraction.
Eligible activities related to clean technology would include the manufacturing or processing of:
- Renewable solar, wind, water, or geothermal energy equipment;
- Nuclear energy equipment, heavy water, and fuel rods;
- Heat pump systems;
- Grid-scale electrical energy storage equipment;
- Zero-emission vehicles, including batteries, fuel cells, recharging systems, and hydrogen refueling stations for zero-emission vehicles; and
- Equipment used to produce hydrogen through electrolysis.
However, for a particular eligible property, only one of the following credits can be claimed:
- Investment Tax Credit for Clean Technology Manufacturing;
- Investment Tax Credit for Clean Technology;
- Investment Tax Credit for Clean Electricity; or
- Investment Tax Credit for Clean Hydrogen.
The new tax credit will be available for property that is acquired and made available for use on or after January 1, 2024, with a gradual phase-out planned for property that becomes available for use between 2032 and 2034.
Investment Tax Credits for Clean Technology and Clean Hydrogen (CH)
Both the Investment Tax Credits for Clean Technology and CH were introduced in last fall’s economic statement and last year’s budget. This year’s budget provides further details on how both proposed tax credits are intended to operate.
Investment Tax Credit for CH
Projects that produce hydrogen in the production process can benefit from the new refundable Investment Tax Credit for CH at rates ranging from 15% to 40% of qualifying costs. Qualifying costs will include the purchase and installation of eligible equipment for projects that produce hydrogen from electrolysis or natural gas, where emissions are abated using carbon capture, utilization, and storage.
Qualifying hydrogen production projects will require:
- A front-end engineering design study; and
- In operation, proof that the carbon intensity of the hydrogen produced falls into the same tier for which the project was assessed, verified by an independent third party.
As with other clean technology tax credits, for a particular eligible property, only one of the following credits can be claimed:
- Investment Tax Credit for CH;
- Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS);
- Investment Tax Credit for Clean Technologies;
- Investment Tax Credit for Clean Electricity; and
- Investment Tax Credit for Clean Technology Manufacturing.
The Investment Tax Credit for CH would be available for eligible property acquired and becoming available for use on or after March 28, 2023, with a phase-out planned for property that becomes available for use after 2034.
Investment Tax Credit for Clean Technology
The budget proposes to have the Investment Tax Credit for Clean Technology, a refundable tax credit for 30% of the cost of qualifying equipment, to come into force for eligible property acquired and becoming available for use on or after March 28, 2023.
In addition, the government is proposing to expand eligibility for this tax credit to include geothermal energy systems that are eligible for Capital Cost Allowance Class 43.1.
Eligible property under this expansion would include equipment used primarily for the purpose of generating electrical energy or heat energy, such as piping, pumps, heat exchangers, steam separators, and electrical generating equipment.
A modified phase-out schedule has also been proposed, with the tax credit reduced to 15% in 2034 and nil thereafter.
Labour Requirements for Certain Investment Tax Credits
As announced in last fall’s economic statement, specific labour requirements will impact the eligible rate for certain investment tax credits, including those for both Clean Technology and CH, as well as the newly proposed tax credit for clean electricity.
Where the labour requirements are met, a higher tax credit rate will be available. Otherwise, a lower rate applies. The specified labour requirements generally cover prevailing wage and apprenticeship standards.
To meet the prevailing wage standard, a business would generally need to ensure that all covered workers are compensated at a level that meets or exceeds the relevant wage as specified in an “eligible collective agreement” (i.e., either a collective bargaining agreement or a project labor agreement meeting industry standards).
To meet the apprenticeship standard, a business would need to ensure that, for a given taxation year, not less than 10% of the total labour hours are performed by registered apprentices.
Under the Investment Tax Credit for Clean Technology, exemptions from the labour requirements would apply in respect of the acquisition of zero-emission vehicles and acquisition or installation of low-carbon heat equipment.
The proposed labour requirements would apply to work performed on or after October 1, 2023.
Similar requirements will extend to the Investment Tax Credit for CCUS, with further details to be provided in the future.
Adjustments to CCUS Investment Tax Credit
The budget proposes several enhancements to the Investment Tax Credit for CCUS, a refundable investment tax credit, including: making dual-use equipment that produces heat and/or power or uses water and is used for carbon capture, utilization, and storage as well as another process eligible equipment; adding British Columbia to the list of eligible jurisdictions for dedicated geological storage; and allowing concrete storage technology to be validated by a qualified third party (instead of Environment and Climate Change Canada).
The budget also proposes to have the tax credit include eligible refurbishment costs incurred once a project is in operation. Total eligible refurbishment costs over the first 20 years of the project would be limited to a maximum of 10% of the total pre-operational costs that were eligible for the tax credit. These changes would be effective for eligible expenses incurred after 2021 and prior to 2041.
Expanded Relief for Zero-Emission Technology Manufacturers
The government has decided to expand the tax relief available to zero-emission technology manufacturers to include income from certain nuclear manufacturing and processing activities, including:
- Manufacturing of nuclear energy equipment;
- Processing or recycling of nuclear fuels and heavy water; and
- Manufacturing of nuclear fuel rods.
Eligible income from these activities would qualify for reduced corporate income tax rates, effective for taxation years beginning after 2023, as follows:
- 7.5%, where income would otherwise be taxed at 15%; and
- 4.5%, where income would otherwise be taxed at the 9% small business tax rate.
The budget also proposes to extend the availability of the reduced tax rates by three years, with full phase-out planned for taxation years beginning after 2034.
Expansion of Flow-Through Shares and Critical Mineral Exploration Tax Credit
Flow-through share agreements permit eligible corporations to renounce certain costs in favor of a “flow through” to investors of eligible exploration expenses and development expenses for a full deduction or at a 30% rate on a declining-balance basis, respectively.
In addition to the flow-through, investors can claim a 30% non-refundable Critical Mineral Exploration Tax Credit (CMETC) in respect of eligible critical mineral exploration expenses.
The budget proposes to expand eligibility for both flow-through treatment and the CMETC to include lithium from brines as a mineral resource, effective for eligible expenses made after March 28, 2023, and for flow-through share agreements entered after that day and prior to April 1, 2027.
Tax on Repurchases of Equity
As announced in last fall’s economic statement, the government will introduce a tax on the net value of share repurchases by public corporations in Canada. Further details on this measure, which will take effect for repurchases and the issue of equity occurring on or after January 1, 2024, are outlined in this year’s budget.
The new tax will apply to Canadian-resident corporations whose shares are listed on a designated stock exchange (excluding mutual fund corporations), as well as real estate investment trusts, specified investment flow-through (SIFT) trusts, and SIFT partnerships with units listed on a designated stock exchange.
Tax will be calculated at a rate of 2% of the net value of an entity’s equity repurchase, which will be defined as the fair market value of equity repurchased less the fair market value of any equity issued from treasury. This netting rule will generally take into account all transactions undertaken by an entity involving equity repurchases or issuances in the entity’s taxation year.
The following transactions will not be considered an issuance or repurchase of equity for purposes of the tax:
- The issue and cancellation of debt-like preferred shares and units (e.g., shares with a fixed dividend and redemption entitlement); and
- The issue or cancellation of shares or units in certain corporate reorganizations and acquisitions.
A de minimis rule will prevent the tax from applying in a taxation year if an entity has repurchased less than $1 million of equity during that period. Deeming rules will also be put in place for certain activities undertaken by an entity’s affiliates.
Dividends Received by Financial Institutions
Under current rules, corporations are allowed to claim a deduction for dividends received on shares of other corporations residing in Canada, effectively excluding the dividends from income and preventing the cascading of corporate income tax.
The budget proposes to deny the dividend received deduction for dividends received by financial institutions on shares that qualify as market-to-market property (i.e., portfolio shares where the financial institution owns less than 10% of the votes or value of the issuing corporation’s shares), effective for dividends received after 2023.
Tax Treatment of Credit Unions
Credit unions must follow specific rules contained in the Income Tax Act (ITA) and Excise Tax Act (ETA). In addition, the definition of a “credit union” found in the ITA is used for GST/HST purposes. This year’s budget proposes to eliminate the revenue test from the definition of a credit union and amend that definition to reflect how credit unions operate in today’s marketplace.
Presently, a credit union will not satisfy the legislative definition of such an entity if more than 10% of its revenue is earned from sources other than those specified (i.e., traditional credit union activities, such as interest derived from lending). This technicality could prevent a credit union from taking advantage of specific provisions intended to apply to it, such as the rule allowing credit unions to receive normally taxable supplies from credit union centrals and other credit unions exempt from GST/HST.
The proposed changes are intended to recognize the reality that most credit unions now offer a wide range of products and services in line with many other financial institutions. The amendments are expected to take effect for credit union taxation years ending after 2016.
Strengthening the General Anti-Avoidance Rule (GAAR)
Following consultations on modernizing the GAAR, a process announced in last year’s budget, the government is proposing amendments to strengthen the rule by:
- Adding a preamble to the legislative wording to clarify the rule’s intent and address perceived issues in its interpretation;
- Lowering the standard to be used in determining whether an avoidance transaction exists from a “primary purpose” to a “one of the main purposes” test;
- Introducing a new requirement to consider the economic substance, or lack thereof, of a transaction or series of transactions as part of the GAAR analysis in certain situations;
- Adding a penalty equal to 25% of the tax benefit obtained from transactions found to be subject to the GAAR, as well as provisions to allow such a penalty to be avoided through voluntary disclosure; and
- Extending the normal reassessment period by three years for transactions subject to the GAAR (except where previously disclosed to the CRA).
The current version of the GAAR, while successfully applied in certain cases, does not always prevent abusive tax avoidance (i.e., where a taxpayer abuses or misuses the legislation to obtain benefits unintended by Parliament) and the government believes that the proposed changes are an important step in creating an anti-avoidance rule that functions more effectively. Further consultations on the changes are planned, with submissions to the Department of Finance Canada due by May 31, 2023.
Employers and Retirement Compensation Arrangements
The budget proposes amendments to exempt fees or premiums paid to secure or renew a letter of credit or surety bond for a retirement compensation arrangement that is supplemental to a registered pension plan from the refundable tax under Part XI.3 of the ITA, effective for amounts paid on or after March 28, 2023. Further amendments would allow employers to request a refund of previously remitted tax based on retirement benefits paid out under such an arrangement, effective for benefits paid after 2023.
International Income Tax Measures
International Tax Reform Update
Canada is one of 138 members of the Organisation for Economic Co-operation and Development (OECD)/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting that joined a two-pillar plan for international tax reform in late 2021. In this year’s budget, the government has provided an update on its progress towards the implementation of both pillars.
As described extensively in last year’s budget, Pillar One of the OECD framework seeks to allow for a reallocation of taxing rights to countries where users and customers are located. This will ensure that the largest and most profitable global corporations, including large digital corporations, pay their fair share of tax across global jurisdictions. Current tax treaties are not yet modernized for global business in the digital world and Pillar One is an update to the framework to address this deficiency.
For in-scope multinational enterprises (global revenues above €20 billion and a profit margin above 10%), 25% of residual profit, defined as profit in excess of 10% of revenue, will be allocated to market countries using a revenue-based allocation key.
The government has indicated that it continues to work with the OECD and its members to establish the multilateral framework and conventions necessary to implement Pillar One. However, as previously indicated, if Pillar One is not ratified by January 1, 2024, the government intends to move forward with its Digital Services Tax (DST). As it stands, the DST could be imposed as of that date, but only if the multilateral convention implementing the framework to prevent the double taxation of profit reallocated to market countries has not come into force. The DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022.
Draft legislative proposals for the DST have already been released and the government plans to release revisions for public consultation prior to the introduction of legislation.
Pillar Two is intended to ensure that large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% on their profits in every jurisdiction in which they operate. This framework would apply to MNEs with annual revenue of at least €750 million.
The jurisdiction of the ultimate parent entity of an MNE will have the right pursuant to an income inclusion rule (IIR) to impose a top-up tax on the ultimate parent entity with respect to income from the MNE's operations in any jurisdiction where it is taxed at an effective tax rate below 15%.
The framework includes an undertaxed profits rule (UTPR) for situations in which a parent jurisdiction of an MNE has not implemented the IIR, but other jurisdictions in which the MNE operates have implemented the UTPR. As a result, MNEs whose parent entities are in non-implementing jurisdictions are still subject to a top-up tax in respect of their low-taxed income.
Pillar Two also contains a treaty-based rule called the “subject-to-tax rule.” Where applicable, this rule allows a country to impose a higher rate of withholding tax than the negotiated tax treaty rate on certain payments (including interest, royalties, and a defined set of other payments) made between related entities, if the payment is subject to tax in the payee country at a nominal tax rate below 9%.
In last year’s budget, the government proposed to implement Pillar Two in Canada, which would be comprised of income inclusion and undertaxed profits rules, along with a domestic minimum top-up tax. This year’s budget confirms the government’s intention to introduce legislation to implement an IIR and a domestic minimum top-up tax applicable to Canadian entities of MNEs falling within the scope of Pillar Two, effective for fiscal years that begin on or after December 31, 2023.
Similarly, the government reiterated its intention to move forward in implementing the UTPR, effective for fiscal years of subject MNEs beginning on or after December 31, 2024. Draft legislative proposals for the IIR and domestic minimum top-up tax are expected to be released for public consultation in the coming months, with proposals for the UTPR to follow.
Personal Income Tax Measures
This year’s budget includes several proposed personal income tax changes, ranging from tax relief for lower-income taxpayers to measures designed to ensure wealthier taxpayers pay their fair share.
Revisions to Alternative Minimum Tax (AMT)
The government had announced a review of the AMT, which has not been significantly updated since its inception, in last year’s budget. Ostensibly stemming from that review, the current budget proposes to broaden the base used to calculate the tax, raise the exemption threshold, and increase the AMT rate.
With further details to be provided later this year, the following specific changes to the AMT have been proposed for taxation years beginning after 2023:
- Increasing the AMT rate from 15% to 20.5%;
- Raising the exemption threshold from $40,000 to the starting level of the fourth federal income tax bracket (expected to be around $173,000), with annual indexation for inflation;
- Increasing the capital gains inclusion rate for the AMT base from 80% to 100%;
- Including the full amount of employee stock option benefits in the AMT base, subject to an exception for donated publicly listed securities;
- Including 30% of capital gains on donations of publicly listed securities in the AMT base; and
- Disallowing 50% of several deductions and non-refundable tax credits currently permitted in determining the AMT base.
New Rules for Employee Ownership Trusts and Intergenerational Business Transfers
The budget includes detailed proposals to facilitate the use of Employee Ownership Trusts (EOTs) to acquire and hold the shares of a business by extending the capital gains reserve to 10 years for qualifying transactions, creating an exception to the existing shareholder loan rules, and providing an exemption from the 21-year deemed disposition rule for trusts. These measures, which are subject to numerous conditions, would come into effect on January 1, 2024.
The government has also proposed modifications to the rules for intergenerational business transfers recently introduced under Bill C-208. The proposed amendments are intended to ensure the rules only apply to “genuine” intergenerational business transfers. In addition to new conditions, the proposals contemplate both immediate business transfers based on arm’s-length sale terms and gradual business transfers that take into consideration the characteristics of estate freeze transactions.
The proposed measures also include a 10-year capital gains reserve for qualifying intergenerational share transfers, as well as extended limitation periods on reassessments to facilitate the CRA’s monitoring of compliance. The new rules would apply to transactions occurring on or after January 1, 2024.
One of the headline-grabbing announcements in this year’s budget, the government has proposed a “Grocery Rebate” that will be implemented through an increase to the maximum GST Credit amount for January 2023. The additional amount (which the government has named the Grocery Rebate) would be equal to double the GST Credit amount received for January, with maximum amounts of $153 per adult and $81 for each child and the single supplement.
This rebate will be paid through the GST Credit system once the required legislation has been passed. To ensure the rebate is fully phased in and out based on current GST Credit income thresholds, the maximum January credit amount will be tripled.
Other Affordability Measures
The government has also proposed the following personal income tax changes to provide tax relief in certain situations:
- Doubling the maximum deduction from employment income for tradesperson’s tools from $500 to $1,000, subject to existing conditions, effective for the 2023 and subsequent taxation years;
- Increasing the Registered Education Savings Plan (RESP) withdrawal limit for Educational Assistance Payments from $5,000 to $8,000;
- Allowing divorced and separated parents to open joint RESPs for their children, effective March 28, 2023;
- Extending a temporary measure that allows a qualifying family member to open a Registered Disability Savings Plan and be the plan holder for an adult who may not have the capacity to do so and does not have a legal representative to December 31, 2026, and extending the definition of a “qualifying family” to include a brother or sister of the family member who is at least 18 years old; and
- In relation to the delivery of the Canadian Dental Care Plan, amending various tax statutes to allow the Canada Revenue Agency (CRA) to share taxpayer information with officials of Health Canada and Employment and Social Development Canada (to come into force upon Royal Assent).
Commodity Tax Measures
GST/HST on Payment Card Processing Services
This year’s budget proposes to revise the definition of a “financial service” to clarify that services supplied by payment card network operators are excluded from this definition and, therefore, subject to GST/HST. Payment card network operators typically provide clearing systems in respect of payment cards (e.g., credit, debit, and charge cards) and offer payment card clearing services. While, historically, payment card processing services had been understood to be a taxable supply rather than an exempt financial service, the somewhat surprising decision by the Federal Court of Appeal in Canadian Imperial Bank of Commerce v. The Queen (2021 FCA 10) found that GST/HST did not apply to the supply of such services.
This clarification will apply to services supplied under an agreement where any consideration for the supply becomes due, or is paid without becoming due, after March 28, 2023. This change will also apply retroactively in certain situations. Specifically, payment card processing services will be subject to GST/HST when provided under an agreement if all the consideration for the supply became due, or was paid, on or before March 28, 2023, unless the supplier did not, on or before that date, charge, collect, or remit any amount as or on account of tax in respect of the supply and in respect of any other supply made under an agreement that includes the provision of a payment card clearing service.
Excise Duty on Alcohol
In response to recent public debate on the impending increase to the excise duty on alcohol, which is generally adjusted annually to reflect Consumer Price Index (CPI) inflation, the government has announced a temporary, one-year cap at 2% on the inflation adjustment for wine, spirits, and beer. In the absence of this cap, excise duty rates would have increased by approximately 6%.
As a result, effective April 1, 2023, the following excise duty rates will apply to alcohol products:
- $35.516 (up from $34.820) per hectolitre of beer;
- $0.702 (up from $0.688) per litre of wine; and
- $13.303 (up from $13.042) per litre of absolute ethyl alcohol (for spirits).
Domestic beer producers continue to be subject to reduced rates on the first 75,000 hectolitres of Canadian-brewed beer annually. Similarly, spirits and wine with an alcohol content by volume of 7% or less are subject to reduced rates. Note that excise duty does not apply to alcohol products containing 0.5% or less alcohol by volume.
Cannabis Duty Remittances
Licensed cannabis producers typically remit the excise duty on cannabis products monthly. Last year’s budget allowed certain smaller licensed producers to remit the duty every quarter. The year’s budget proposes to allow all licensed producers to remit the excise duty on cannabis quarterly rather than monthly, commencing with the quarter beginning on April 1, 2023.
Air Travellers Security Charge (ATSC) Increase
To help fund enhancements to the government’s air travel security system, including baggage and passenger screening at Canadian airports and other security measures, the government is proposing a 32.85% increase to the ATSC, effective for taxable air transportation services to be provided on or after May 1, 2024, and for which any payment is made on or after that date.
Once the proposed increase has been implemented, the new ATSC rates will be:
- $9.94 for a domestic one-way flight;
- $19.87 for a domestic round trip;
- $16.89 for a transborder flight; and
- $34.42 for other international trips.
Note that ATSC rates are GST/HST inclusive and, for international and transborder travel, generally only apply to flights departing from Canada.
Customs Duty Measure
Renewal of Preferred Tariff Programs
The government has announced that it intends to extend its General Preferential Tariff and Least Developed Country Tariff programs until December 31, 2034. In addition, the programs will be updated to expand the benefits for certain imports, simplify administrative procedures for Canadian importers, and create a new preferred tariff program.
Previously Announced Measures
Consistent with prior years, the government has expressed its intention to move forward with several previously announced tax and related measures, with introduction dates ranging from 2016 to 2022.
For information on new and extended government funding initiatives included in this year’s federal budget, please navigate to:
Further details on the 2023 federal budget may be found on the Government of Canada website at: https://www.budget.canada.ca/2023/home-accueil-en.html
To read key updates from Canada’s 2023 provincial budgets, please navigate to Key Changes | 2023 Canadian Federal and Provincial Budgets.
If you have any questions about how these proposed changes might impact your organization, please do not hesitate to contact the Ryan TaxDirect® line at 1.800.667.1600 or firstname.lastname@example.org.