On November 21, 2023, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, presented Canada’s 2023 Fall Economic Statement. Consistent with last fall’s announcement, the federal government’s fiscal plan remains focused on making life more affordable for Canadians, introducing several measures designed to address the housing crisis and stabilize prices, while continuing to foster environmentally sustainable economic development.
Projecting a deficit of $40 billion for 2023–24—effectively unchanged from last spring’s federal budget—the government’s fiscal plan includes several interesting tax measures and funding initiatives.
New Joint Venture Election Rules
This fall’s economic statement introduces long-awaited proposals to simplify and expand the GST/HST joint venture election rules. Under the proposed changes, the joint venture election will be available to any participant in a commercial joint venture, provided that all electing participants are registered for GST/HST and all or substantially all the joint venture’s activities are commercial activities (i.e., involved in making taxable supplies).
Presently, this election is only available where the activities of the joint venture are prescribed by regulation, including the exploration or exploitation of mineral deposits, construction, the sale or lease of real property or an interest in real property, and certain other activities. The list of eligible activities is quite restrictive, and the proposed changes should allow more joint venture participants to take advantage of the simplified compliance procedures afforded by the election.
Highlights of the proposed changes to the joint venture election rules include:
- Replacing the condition that eligible joint venture activities be prescribed by regulation with an all or substantially all commercial activities test;
- Requiring all electing participants to be registered for GST/HST;
- Specifying that a qualifying joint venture must not be considered a person for GST/HST purposes and must operate under an otherwise eligible joint venture agreement;
- Defining a “specified person” to be a person registered for GST/HST and engaged all or substantially all in commercial activities (excluding public sector bodies and listed financial institutions);
- Requiring a “qualifying participant” to be a specified person that is a valid participant in and contributor to the joint venture, with an interest in the property of, and rights with respect to management or control of, the joint venture;
- Requiring a “qualifying operator” to be a specified person who is resident in Canada (excluding anyone who is bankrupt), with monthly reporting periods, and either a qualifying participant or person designated as the joint venture operator with primary responsibility for operational control;
- Allowing qualifying participants in a qualifying joint venture to jointly enter into or revoke the election, with only one of the participants permitted to be the qualifying operator at any given time; and
- Requiring details regarding the election, such as the effective date, to be filed with the Canada Revenue Agency (CRA) in a prescribed manner.
In addition, under the proposed new joint venture election rules:
- An election will no longer be in effect on the day a participant to it no longer satisfies the conditions;
- The operator must account for tax collectible on any supply made on behalf of a participant in relation to the joint venture’s activities, as well as any tax payable in respect of property or services acquired or brought into a participating province by the operator on behalf of a participant for use in joint venture activities;
- Only the operator will be eligible to claim input tax credits for tax paid or payable in relation to property or services acquired or imported on behalf of a participant for use in joint venture activities;
- The operator will be required to make any necessary adjustments to net tax in relation to tax accounted for on behalf of a participant, such as in the case of debit or credit notes and bad debts;
- Participants will be required to account for adjustments to net tax in various situations involving deemed supplies or tax deemed to be paid or collected, such as taxable benefit remittances and employee allowances and reimbursements;
- Supplies of property or services by the operator to a participant will be deemed to be made for nil consideration when acquired for use all or substantially all in both the participant’s commercial activities and those of the joint venture (excluding sales of real property); and
- Every person entering into the election will be joint and severally, or solidarily, liable for all GST/HST obligations resulting from the joint venture’s activities.
Draft legislation to enact the proposed changes will be released for public consultation, with feedback from interested parties to be submitted by March 15, 2024. It is anticipated that the proposed new rules will take effect once the legislative amendments receive royal assent.
These proposals may sound familiar, as similar plans to make the joint venture election available for a wider range of activities were announced in the 2014 federal budget, with the government confirming its intention to move forward with those changes in subsequent budgets, but never implementing them. We at Ryan are hopeful that these proposed changes do not suffer a similar fate.
Exemption for Psychotherapist and Counselling Therapist Services
Under the current rules, most services delivered to individuals by physicians, dentists, nurses, and certain other health care practitioners are exempt from GST/HST. The economic statement proposes to add psychotherapists and counselling therapists to the list of health care practitioners whose professional services are exempt when provided to individuals. This change will take effect once the enacting legislation receives royal assent.
Removal of GST from New Co-operative Housing
The fall economic statement also includes a proposal to make co-operative housing corporations providing long-term rental accommodation eligible for the removal of GST on the construction of new rental housing, subject to certain conditions. However, this change will not apply to co-operative housing corporations in which the occupants have an ownership or equity interest.
Underused Housing Tax Measures
The government is proposing several changes to its Underused Housing Tax (UHT), which took effect on January 1, 2022, levying an annual 1% tax on the value of vacant or underused residential real estate in Canada.
Elimination of Filing Requirements in Certain Cases
The UHT targets non-resident, non-Canadian owners of vacant or underused housing. Anyone considered to be an excluded owner of Canadian residential property has no liability or reporting obligations under the UHT. However, other owners of residential property in Canada are required to file a UHT return in respect of each property for each calendar year. The current legislation has had unintended consequences, placing reporting requirements on certain unsuspecting owners, even when no tax liability exists, particularly when the owner or part owner of a residential property is not a Canadian individual, or is a partner in a partnership or trustee of a trust.
To reduce the UHT compliance burden for many Canadian corporations, partnerships, and trusts, the economic statement proposes to treat “specified Canadian corporations,” partners of “specified Canadian partnerships,” and trustees of “specified Canadian trusts” as excluded owners for UHT purposes. These owners will no longer have UHT reporting obligations. In addition, the definitions for these three groups will be broadened to provide compliance relief to a wider range of Canadian ownership structures.
These changes will apply in respect of the 2023 and subsequent calendar years.
Reduction in Failure to File Penalties
The government has proposed, effective for 2022 and later years, to reduce the minimum failure to file penalties from $5,000 to $1,000 per failure for individuals, and from $10,000 to $2,000 per failure for corporations.
Employee Accommodations Exemption
For 2023 and subsequent calendar years, the government proposes to provide an exemption for residential properties used as a place of lodging or residence for employees, provided such properties are not located in a population centre within a metropolitan area or census group containing 30,000 or more residents.
The economic statement also proposes a few technical changes to the UHT, including amendments to ensure that:
- Unitized apartment buildings (i.e., condominium buildings) will not be considered residential property for UHT purposes, effective for 2022 and subsequent calendar years; and
- An individual or spousal unit may only claim the vacation property exemption for one residential property in a calendar year, effective for 2024 and subsequent calendar years.
These UHT proposals are in addition to the recently announced extended transitional relief for the filing of returns, as discussed in our tax development: Underused Housing Tax Return Filing Deadline Extended to April 30, 2024
Consultations on the proposals will be undertaken, and interested stakeholders can provide their input until January 3, 2024.
Corporate Tax Measures
Update on Clean Economy Investment Tax Credits
The fall economic statement reaffirmed the current government’s commitment to its suite of clean economy investment tax credits, including the Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credit, Clean Technology Investment Tax Credit, Clean Technology Manufacturing Investment Tax Credit, Clean Hydrogen Investment Tax Credit, and Clean Electricity Investment Tax Credit.
The government has provided further details on the design of certain investment tax credits, as well as a roadmap for their implementation, and proposed several amendments and adjustments to previously announced measures. Although Canada continues to lag behind the United States in implementing these types of measures, the progress reflected in the economic statement is welcome news for Canadian businesses.
Clean Hydrogen Investment Tax Credit
Consultations on the Clean Hydrogen Investment Tax Credit, introduced in last spring’s budget and available from March 28, 2023, will take place this fall before legislative amendments under the Income Tax Act (ITA) are introduced in early 2024.
The economic statement provides further information on the planned structure for this tax credit, which is designed to encourage low-carbon hydrogen production, including:
- Conditions for the eligibility of clean ammonia production equipment;
- Conditions for the use of power purchase agreements and similar instruments for tax credit purposes (including the calculation of carbon intensity);
- Conditions for the eligible use of renewable natural gas in calculating a project’s carbon intensity;
- Clarification on the initial project carbon intensity assessment and validation process; and
- Details on the compliance verification process and calculation of any required recovery of previously claimed tax credits.
Clean Technology Investment Tax Credit
Legislation to enact the Clean Technology Investment Tax Credit will be introduced soon, with the credit being available for eligible property that is acquired and becomes available for use on or after March 28, 2023, and before 2035. Examples of eligible property include equipment used for electricity generation, stationary electricity storage, and low-carbon heating.
Clean Electricity Investment Tax Credit
The Clean Electricity Investment Tax Credit has two streams. One stream for publicly owned utilities and another for all other companies. For publicly owned utilities, consultations with the provinces and territories will take place in 2024, with the introduction of enacting legislation targeted for next fall.
For all other entities (i.e., not publicly owned utilities), design and implementation details for the tax credit are expected to be released in early 2024, with consultations on draft legislation following in the summer and introduction of the enacting legislation planned for next fall.
In both cases, the tax credit would be available from the date of the 2024 federal budget for eligible projects that did not begin construction before March 28, 2023. Examples of eligible projects include property used for electricity generation, stationary storage, and transmission between jurisdictions.
The economic statement proposes to expand eligibility for both the Clean Technology and Clean Electricity Investment Tax Credits to include systems that use specified waste biomass solely to generate electricity and/or heat. Details on the expansion for each tax credit will be subject to public consultation, with the enacting legislation to follow, but the expanded Clean Technology Investment Tax Credit is expected to be available for property that is acquired and becomes available for use on or after November 22, 2023, provided it has not been previously used for another purpose. Similarly, the expanded Clean Electricity Investment Tax Credit is expected to be available from the date of the 2024 federal budget for projects that did not begin construction before March 28, 2023.
Clean Technology Manufacturing Investment Tax Credit
Consultations on draft legislation for the Clean Technology Manufacturing Investment Tax Credit will launch this fall with the introduction of enacting legislation targeted for early 2024. This credit would be available from January 1, 2024.
CCUS Investment Tax Credit
The government has indicated that the legislation to enact the CCUS Investment Tax Credit will be introduced this fall, with the credit available from January 1, 2022.
Legislative amendments are also expected this fall to implement the previously announced labour requirements to receive the maximum investment tax credit rate available under the CCUS, Clean Technology, Clean Hydrogen, and Clean Electricity Investment Tax Credits. The labour requirement thresholds are expected to be in effect once the enacting legislation has been tabled.
Taxation of International Shipping
Under current rules in the ITA, income derived from international shipping is generally not subject to Canadian corporate income tax, in part due to an exemption for shipping companies managed from Canada and incorporated in a foreign jurisdiction with a reciprocal exemption, subject to other conditions.
To maintain this exclusion considering the impact of the government’s recently proposed Global Minimum Tax Act, which is set to take effect for taxation years beginning on or after December 31, 2023, the government is proposing to make the exemption for international shipping under the ITA available to corporations that are residents of Canada. This change will allow shipping companies with management in Canada to qualify for exemption on international shipping income without becoming subject to the global minimum tax.
Treatment of Concessional Loans
In response to a recent court decision affirming that the full amount of principal in a concessional loan (i.e., a loan with no interest or interest rate below market rates) from a public authority constitutes government assistance for income tax purposes, the economic statement includes a proposal to amend the ITA to clarify that such loans with reasonable repayment terms will generally not be considered government assistance.
Exception to Dividend Received Deduction Rule for Financial Institutions
Last spring’s federal budget included a proposal to deny financial institutions the dividend received deduction in respect of shares that are mark-to-market property, and the economic statement proposes to add an exception to this measure for dividends received on taxable preferred shares (as defined in the ITA). The original measure and the new exception will apply to dividends received on or after January 1, 2024.
Enhancement to Journalism Labour Tax Credit
The economic statement proposes to enhance the existing Canadian Journalism Labour Tax Credit by increasing the cap on labour expenditures from $55,000 to $85,000 per eligible newsroom employee and temporarily raising the refundable tax credit rate from 25% to 35%. These changes will be effective for qualifying labour expenditures incurred on or after January 1, 2023, with the enhanced rate set to return to 25% on January 1, 2027. Transitional rules will be put in place for situations in which an entity’s taxation year is not a calendar year.
Previously Announced Measures
The fall economic statement once again reaffirms the government’s intention to move forward with a host of previously announced tax measures. While legislative proposals to implement several of the changes have already been introduced, proposed amendments for various other measures remain outstanding, with announcement dates ranging as far back as 2019.
Government Funding Initiatives
For information on new and extended government funding initiatives included in this year’s fall economic statement, please navigate to our Mentor Works website and read the Canada’s Federal Fall Economic Statement 2023: Funding Takeaways.
Further details on the 2023 Fall Economic Statement may be found on the Government of Canada website.
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 email@example.com or 1.800.667.1600.