On November 21, 2023, the Minister of Finance (Minister) released Canada’s 2023 Fall Economic Statement (FES). The primary focus of the FES is on affordability measures for Canadians and increasing Canada’s housing stock, particularly with respect to affordable housing. While the FES is relatively light on tax measures, it does include a few items of note for taxpayers, particularly businesses utilizing government loans for financing and businesses in the clean energy sector.
Highlights
Several of the tax measures announced in the FES are positive developments for taxpayers. Taxpayers who receive financing by way of non-forgivable government loans will be pleased to see changes to the treatment of these loans under the Income Tax Act (ITA) in response to the Federal Court of Appeal’s decision in CAE Inc. v. Canada (CAE Litigation). Canadian residential property owners will also be pleased to see changes to the underutilized housing tax filing requirements, which will reduce the significant administrative burden on taxpayers who are exempt from paying the tax.
The FES also includes additional information and guidance with respect to the Clean Hydrogen Investment Tax Credit and the Clean Technology and Clean Electricity Investment Tax Credits. Long-awaited changes to the joint venture election under the Excise Tax Act (ETA) were also included in the FES.
Table of Contents
Business Income Tax Measures
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Concessional Loans
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Dividends Received Deduction for Financial Institutions
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Clean Hydrogen Investment Tax Credit
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Clean Technology Investment Tax Credit & Clean Electricity Investment Tax Credit
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Employee Ownership Trusts
Sales Tax Measures
Other Tax Measures
The FES proposes to amend the ITA to provide that bona fide non-forgivable loans from public authorities bearing interest at a nil or below-market rate (Concessional Loans) with reasonable repayment terms will generally not be considered "government assistance" for income tax purposes.
There may be several tax implications in circumstances where a taxpayer receives an amount considered to be government assistance, including: a reduction in the amount of a related expense or the cost or capital cost of related property, an inclusion in the taxpayer's income, or the reduction of an amount of an expenditure on which an investment tax credit is based.
The FES recognizes the understanding that, historically, Concessional Loans were not considered government assistance for purposes of the ITA. However, in the decisions of the Tax Court and the Federal Court of Appeal in the CAE litigation, it was held that the full principal amount of precisely such a government loan constituted government assistance. This departure from the prior understanding cast the shadow of unforeseen, uncertain, and potentially very significant adverse income tax consequences for many taxpayers, as well as for those governmental bodies that provide Concessional Loans in pursuit of various public policy and commercial aims. In May of this year, concerns grew when the Supreme Court of Canada denied CAE Inc.'s application for leave to appeal the CAE litigation to that court.
Also of interest is that the revenue impact table (Table 1) of the FES shows no changes in expected business income tax revenue because of the proposed amendments for Concessional Loans. The precise reasons for this are unclear from the interpretive notes provided. However, a possible explanation is rooted in Finance's recognition that such loans were historically not considered to be government assistance, that is: no revenue impact should be projected from the amendment where such loans were not intended to be taxed in the first place.
The proposed amendment is therefore welcome news and will hopefully resolve uncertainties stemming from or reflected in the judicial decisions issued in the CAE litigation. The legislative amendment for Concessional Loans from "government assistance" is proposed to come into force as of November 21, 2023. It is hoped that the explanatory notes accompanying the draft legislation to implement this proposal, as well as future statements from CRA, will serve to mitigate concerns that Concessional Loan arrangements entered into prior to November 21, 2023 are problematic in light of the CAE litigation.
Taxpayers with questions about the scope of the relief that may be available for their existing Concessional Loan arrangements, or planning to enter into such arrangements in the future, are welcome to contact our Tax Group for a more detailed discussion of these matters.
Budget 2023 proposed to deny the inter-corporate dividend deduction on shares of Canadian companies held by financial institutions as mark-to-market property. Shares are generally considered to be a financial institution’s mark-to-market property unless the financial institution owns shares representing 10% or more of the voting rights and fair market value of the issuer or is related to the issuer. For our commentary on this aspect of Budget 2023, please see Blakes Bulletin: 2023 Federal Budget: Selected Tax Measures.
The FES proposes to exclude “taxable preferred shares” from the Budget 2023 proposal such that financial institutions that hold those shares as mark-to-market property can potentially deduct dividends on those taxable preferred shares. The FES did not provide specific statutory language; it is expected that such language will be included in the Budget 2023 implementation bill that is anticipated to be tabled in Parliament shortly. The FES confirmed that the measure denying the inter-corporate dividend deduction, as amended by the FES proposal, will apply to dividends received on or after January 1, 2024.
The FES did not specify a rationale for this proposed change to Budget 2023. Budget 2023 had asserted that the dividends received deduction for corporations is inconsistent with the policy of the mark-to-market rules, which was stated in Budget 2023 to treat mark-to-market property as generating business income. Budget 2023 does not specify why a deduction for dividends received, which provides a measure of integration and prevents double or multiple taxation of corporate profits, is inconsistent with the earning of business income, nor was it clear why the mark-to-market rules were thought to generate business income specifically, as opposed to income more generally. It may be the case that Finance, possibly in response to submissions from stakeholders, concluded that taxable preferred shares are more typically held by financial institutions as relatively passive investments rather than as part of a more actively traded portfolio. Perhaps further clarification of the relevant policy considerations will be set out in the explanatory notes to the legislation that will ultimately be tabled. We note that the “taxable preferred share” definition was drafted in the context of the Part IV.1/Part VI.1 tax regime that generally imposes a special tax on holders and/or issuers of taxable preferred shares (subject to certain exceptions and other relief), which was enacted to address policy concerns that are different than those stated to underlie the Budget 2023 proposal. The decision by Finance to use the taxable preferred share definition may have reflected a desire to avoid the introduction of further complex definitions into the ITA on the basis that the taxable preferred share definition is relatively well established and likely applies to most of the shares in issue, and also that the use of the new exclusion for the purpose of avoiding the denial of the dividends received deduction might be difficult. Finally, we note that the FES indicates that the amendment to the proposal is estimated to cost the federal government C$21-million between 2024/2025 and 2028/2029, in contrast with the C$3.15-billion that Budget 2023 projected would be saved from 2024/2025 to 2027/2028 due to the denial of the dividends received deduction.
The Clean Hydrogen Investment Tax Credit (ITC) was first introduced in the 2022 Fall Economic Statement with further details provided in Budget 2023. The effective date of the Clean Hydrogen ITC was March 28, 2023. For a discussion on the Budget 2023 updates regarding the Clean Hydrogen ITC, please see Blakes Bulletin: 2023 Federal Budget: Green-Energy Tax Incentives.
The 2023 Fall Economic Statement provides information about design elements for the Clean Hydrogen ITC and states that the federal government will continue to review eligibility for other low-carbon hydrogen production pathways in the lead-up to Budget 2024.
Eligible Clean Ammonia Production Equipment
Clean ammonia production equipment is eligible for the Clean Hydrogen ITC at a rate of 15%, subject to the following conditions:
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The taxpayer producing the ammonia must use their own hydrogen feedstock for ammonia production, and the hydrogen feedstock must come from clean hydrogen projects of the taxpayer eligible for the Clean Hydrogen ITC;
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The clean hydrogen projects must have sufficient production capacity to satisfy the needs of the taxpayer’s ammonia production facility; and
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The taxpayer must demonstrate the feasibility of transporting the hydrogen from the hydrogen production facility to the ammonia production facility if they are not co-located.
The FES also provides that equipment used for the sole purpose of converting clean hydrogen into ammonia, refrigeration and on-site storage of ammonia is eligible, and provides guidance regarding the allocation of cost of “dual-use” equipment used for both hydrogen and ammonia production. The carbon intensity (CI) associated with dual-use equipment would be allocated to hydrogen based on the ratio of use attributable to hydrogen production relative to total use (for example, electricity supplied to the integrated facility must be allocated between the hydrogen and ammonia production).
Power Purchase Agreement and Other Similar Instruments
Power purchase agreements (PPAs) and other similar agreements that allow project owners to purchase clean electricity from the electricity grid are eligible for the purpose of calculating a project’s CI, rather than using the grid’s CI. However, the purchased electricity will need to be sourced from hydro, solar or wind-powered generation that first commenced production on or after March 28, 2023, and no more than one year before the initial project CI assessment for the related clean hydrogen project is submitted, and is located in the same province or territory as the clean hydrogen project and connected to the electricity grid of that province or territory. Also, the energy being purchased under these instruments will need to be for the operation of the clean hydrogen project.
The FES also provides guidance regarding the modelling of a project’s CI.
Renewable Natural Gas
The use of renewable natural gas (RNG) to reduce the CI of hydrogen production is eligible for calculating a project’s CI, subject to the following conditions:
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The RNG needs to be produced by a supplier subject to the Clean Fuel Regulations;
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RNG would need to be secured from a production facility that commenced RNG production no more than one year before the initial project CI assessment for the associated clean hydrogen project is submitted; and
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Producers need to demonstrate that the RNG being purchased is for the operation of the clean hydrogen project.
Again, the FES provides guidance regarding the modelling of a project’s CI.
Validation, Compliance and Verification
The FES provides that the initial project CI assessment must be validated with a report prepared by a Canadian engineering firm with an engineering certificate of authorization, appropriate insurance coverage and expertise in modelling using the Fuel Life Cycle Assessment Model.
Taxpayers will need to submit the initial project CI assessment and third-party validation report, including any required documentation, to Natural Resources Canada. Upon validation by Natural Resources Canada, the Canada Revenue Agency (CRA) will administer the Clean Hydrogen ITC.
Clean hydrogen projects will be subject to a one-time verification based on a five-year compliance period. Over the course of the period, clean hydrogen projects must compute and report annually on the effective CI of the hydrogen produced. At the end of the period, compliance would be determined by the weighted-average CI over the entire period. The contribution of annual CI figured to the final weighted-average CI would be weighted by the hydrogen produced each year. The compliance period is expected to begin 120 days after the beginning of commercial operations. However, projects would have the option of delaying the beginning period by one year. A second one-year delay may also be available and could be exercised following the first one-year delay. This delay is designed to allow project operators to make adjustments that may be required to deliver on the expected CI of the hydrogen produced.
Projects must verify the CI of the hydrogen with reports prepared by a Canadian engineering firm with an engineering certificate of authorization, appropriate insurance coverage and expertise in life cycle analysis of greenhouse gas emissions. The engineering firm that verifies the reports on effective CI during the compliance period would need to be a different firm than the engineering firm that validated the initial project CI assessment.
Taxpayers will also need to submit the third-party verification reports, including any required documentation, to Natural Resources Canada.
Recovery
Projects with a verified CI of no more than 0.25 kilogram (kg) of carbon dioxide equivalent (CO2e) per kg of hydrogen above their original validated CI are not subject to recovery of Clean Hydrogen ITCs even if the verified CI exceeds the upper bound of the originally assessed CI tier. Amounts of Clean Hydrogen ITC claimed in respect of ammonia production equipment are subject to full recovery if the hydrogen production project supplying the hydrogen used for ammonia production has a verified CI of 4 kg or more of CO2e per kg of hydrogen. Projects with a verified CI that is in a lower CI tier than the tier at which the project was initially assessed are not eligible for additional Clean Hydrogen ITC amounts in respect of that lower CI tier. Interest on any amount of Clean Hydrogen ITC recovered would be calculated from the time the Clean Hydrogen ITC was claimed.
The Clean Technology ITC was first introduced in the 2022 Fall Economic Statement with further details provided in Budget 2023. The effective date of the Clean Technology ITC is March 28, 2023. Legislative proposals in respect of the Clean Technology ITC were released on August 4, 2023. For a discussion of the Cean Technology ITC legislative proposals, please see Blakes Bulletin: Canada Proposes Updates to Green-Energy Tax Incentives.
The Clean Electricity ITC was first introduced in Budget 2023. The effective date of the Clean Electricity ITC is the day Budget 2024 will be released and will be effective in respect of projects that begin construction after March 27, 2023. For a discussion on the Budget 2023 updates regarding the Clean Electricity ITC, please see Blakes Bulletin: 2023 Federal Budget: Green-Energy Tax Incentives.
The 2023 Fall Economic Statement proposes to expand eligibility for the Clean Technology ITC and Clean Electricity ITC to support the generation of electricity, heat, or both electricity and heat, from waste biomass. Here, waste biomass generally refers to wood waste, plant residue, municipal waste, sludge from an eligible sewage treatment facility, spent pulping liquor, food and animal waste, manure, pulp and paper by-product, and separated organics as contemplated by the definition of “specified waste materials” for purposes of accelerated capital cost allowance classes 43.1 and 43.2.
The expansion of the eligibility for the Clean Technology ITC applies in respect of property that is acquired and becomes available for use on or after November 21, 2023, provided it has not been used for any purpose before its acquisition. The expansion of the eligibility for the Clean Electricity ITC would be available as of Budget 2024’s release day and to projects that did not begin construction after March 27, 2023, consistent with the general proposed application of this credit.
Electricity Generation and Cogeneration From Waste Biomass
The FES proposes to expand eligibility for the Clean Technology ITC and Clean Electricity ITC to include systems that use “specified waste materials” solely to generate electricity or both electricity and heat (i.e., cogeneration). Eligible systems are those that use feedstock, all or substantially all of the energy content (expressed as the higher heating value of the feedstock) from specified waste materials, as determined on an annual basis. Systems that use a fuel that is not produced as an integrated part of the system, even if produced from specified waste material, are not eligible.
When part of an eligible integrated system, eligible property includes electrical generating equipment (e.g., steam turbine generators), heat generating equipment used primarily for the purpose of producing heat energy to operate electrical generating equipment (e.g., steam boilers used to produce steam to operate steam turbine generators), equipment that generates both electrical and heat energy (e.g., gas turbine generators, reciprocating engine generator sets), heat recovery equipment (e.g., heat recovery steam generators), equipment used to upgrade or enhance the combustibility of specified waste material (e.g., a gasifier), and ancillary equipment (e.g., control, feedwater and condensate systems).
Eligible property does not include buildings or other structures, heat rejection equipment (e.g., cooling towers), electrical transmission and distribution equipment, fuel or feedstock storage and handling equipment (e.g., conveyors and wheeled loaders), district energy equipment, or equipment used for carbon capture, utilization and storage (CCUS). Consistent with the treatment of similar systems under classes 43.1 and 43.2, eligible systems include only those systems that do not exceed a heat rate threshold of 11,000 British thermal units per kilowatt-hour. The heat rate would be calculated in a manner similar to that which will be used after 2024 for purposes of eligible specified waste-fuelled electricity generation systems that would qualify for inclusion under classes 43.1 and 43.2.
Heat Generation From Waste Biomass
The FES proposes to expand eligibility for the Clean Technology ITC and Clean Electricity ITC to include systems that use “specified waste materials,” other than spent pulping liquor, solely to generate heat energy. Similar to the restrictions on electricity generation and cogeneration, eligible systems are those that use feedstock, all or substantially all of the energy content (expressed as the higher heating value of the feedstock) from specified waste materials (other than spent pulping liquor), as determined on an annual basis. Systems that use a fuel not produced as an integrated part of the system, even if produced from specified waste material, is not eligible.
When part of an eligible integrated system, eligible property includes heat generating equipment (e.g., burners and boilers), other than that used to operate electrical generating equipment, equipment used to upgrade or enhance the combustibility of specified waste material (e.g., a gasifier), and ancillary equipment (e.g., control, feedwater, and condensate systems). Eligible property does not include buildings or other structures, heat rejection equipment (e.g., cooling towers), fuel or feedstock storage and handling equipment (e.g., conveyors and wheeled loaders), district energy equipment, or equipment used for CCUS.
Compliance
For classes 43.1 and 43.2, an eligible property must satisfy all the conditions for inclusion in the relevant class on an annual basis, with limited exceptions for a property that is part of an eligible system that was previously operated in a qualifying manner. Such property is considered to be operated in the required manner during a period of deficiency, failure or shutdown of the system that is beyond the taxpayer’s control if the taxpayer makes all reasonable efforts to rectify the problem within a reasonable time. Similar rules would apply to the Clean Technology ITC and Clean Electricity ITC with respect to systems that generate electricity, heat or both electricity and heat from specified waste material.
Certain properties described in classes 43.1 and 43.2 may be included in the classes only if they are in compliance with environmental laws, bylaws and regulations at the time the property first becomes available for use. The FES proposes to focus only on significant non-compliance. It also proposes to extend that rule to apply to all properties described in class 43.1 or 43.2 and properties that would be eligible for the Clean Technology ITC and Clean Electricity ITC.
Budget 2023 introduced the concept of an “employee ownership trust” (EOT) to facilitate employee ownership of private companies. While the addition of EOTs to the ITA was a welcome change, the only real tax benefit for owners who disposed of shares in a qualifying Canadian-controlled private corporation (CCPC) to an EOT (or a CCPC controlled by an EOT) was an extension of the normal five-year capital gains reserve in subsection 40(1) to 10 years (with a minimum of 10% of the gain being required to be included in income each year). Given the quite limited benefit of the EOT rules for owners who were looking to divest their businesses, there was a concern that there would not be much use made of EOTs in practice.
It appears that Finance heard the concerns about the lack of a compelling tax reason for an owner to sell their business to an EOT. The FES proposes a significant expansion of the tax benefits when qualifying CCPC shares are disposed of to an EOT. Specifically, it is proposed that the first C$10-million in capital gains realized on the sale of a business to an EOT be exempt from taxation, subject to certain conditions. The conditions for this exemption are not spelled out and the exemption is time limited. According to the FES, it will apply only for the 2024, 2025 and 2026 taxation years. However, the FES also states that Finance will monitor the adoption of EOTs and their associated impact on the economy and Canadians, which would seem to leave open the door for extending the capital gains exemption or making it permanent.
Finance has released for consultation the long-anticipated draft legislative proposals relating to the GST/HST joint venture election rules. These proposals are intended to expand the availability of the election by replacing the criteria that the activity must be an eligible activity with an “all or substantially all commercial activities” condition. Currently, joint venture elections (which effectively allow co-venturers to file a single GST/HST return as if they were a partnership) are mainly used in the real estate and mining industry. Whether and to what extent the expanded joint venture election will be taken up in other industries remains to be seen.
That said, the proposed rules do not simply expand the availability of the election, but also purport to make changes to and/or restrict the existing rules. For example, the new election rules modify the existing deeming rules, which in some cases, can broadly deem no taxable supplies to exist and replace them with more focused “tax accounting” deeming rules. While the elected “operator” of the joint venture will be filing all the GST/HST and claiming input tax credits on behalf of the co-venturers, the corollary of this change is that all participants in a joint venture election will need to be registered for GST/HST purposes, which is currently not the case. Upon a preliminary review, it is not clear why Finance chose to add this administrative burden on certain co-venturers who will now be filing GST/HST returns with nothing to report. Additionally, the new rules will codify the CRA administrative position on who can be an “operator” of the joint venture, with additional restrictions. While the CRA allows any person with an interest in the joint venture property, or any person with operational or managerial control of the joint venture, the proposed definition of “qualifying operator” requires the person to have a non-nominal interest in the joint venture property, or to have primary responsibility for the operational control of the joint venture. These changes could have significant impacts on existing joint ventures. The current proposed legislation does not specify any transitional rules, but the FES says the consultation will consider transitional rules for existing joint venture elections. It is anticipated that the consultation period will run until March 15, 2024.
The Underused Housing Tax (UHT) measures are effectively intended to tax non-resident owners of vacant housing in Canada and were first imposed in the 2022 calendar year. The legislation included sweeping filing obligations on Canadian entities and imposed significant penalties for failing to file even when there was no imposition of tax. For the 2023 and subsequent calendar years, Finance is proposing to expand the definition of “excluded owners,” greatly reducing reporting obligations of Canadian entities who are exempt from the UHT. However, for the initial 2022 calendar year, the current definition of affected owners will remain and UHT returns must still be filed by April 30, 2024. The CRA has twice extended the deadline for filing the initial UHT returns. This means that for one year only many property owners will have a filing obligation and could be subject to penalties. Effective since the beginning of 2022, the proposals will also substantially reduce the minimum penalty and provide relief for condominiumized apartment buildings by excluding them from the definition of “residential property” for UHT purposes. These proposals are subject to a consultation period that runs until January 4, 2024.
The FES confirmed Finance’s intention to move forward with the Digital Services Tax (DST) on revenues from 2022 onward, and announced that the enactment of the draft legislation, which had been proposed in August, is forthcoming. The DST applies to a broad range of revenues earned by non-residents of Canada and residents alike, from “digital” sources that may be attributed to Canada. The attribution rules to calculate taxable revenues for DST purposes are not entirely intuitive, particularly for non-transactional revenues incurred by non-residents (e.g., subscription fees, advertising revenue, etc.), and may require businesses to capture information about their online target audiences that they do not currently track for Canadian tax purposes. For more information on the DST, see our bulletins on the draft legislation here: Blakes Bulletin: 2023 August 4 Draft Legislation: Selected Tax Measures and Blakes Bulletin: 2021 Federal Budget – Selected Tax Measures.
The FES confirmed the federal government’s intention to proceed with several previously announced tax measures, as modified to take into account consultations and deliberations since their release. These measures notably include the following:
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Legislative proposals released on August 4, 2023: These legislative proposals include proposals relating to alternative minimum tax for high-income individuals, a tax on repurchases of equity, modernizing the general anti-avoidance rule, global minimum tax (Pillar Two) and excessive interest and financing expenses. For further information on these legislative proposals please see Blakes Bulletin: 2023 August 4 Draft Legislation: Selected Tax Measures.
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Legislative amendments to implement changes discussed in the transfer pricing consultation paper released on June 6, 2023. Budget 2021 announced the federal government’s intention to open consultation on Canada’s transfer pricing rules. The Consultation on Reforming and Modernizing Canada’s Transfer Pricing Rules closed on July 28, 2023.
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Tax measures announced in Budget 2023. Budget 2023 included proposals relating to the dividends received deduction by financial institutions, the clean hydrogen investment tax credit, the clean technology manufacturing investment tax credit and the clean electricity investment tax credit. For further information on the tax measures proposed in Budget 2023 please see Blakes Bulletin: 2023 Federal Budget: Selected Tax Measures.
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Legislative proposals released on August 9, 2022. These legislative proposals included proposals related to a new rule that will subject substantive Canadian-controlled private corporations to the refundable tax on aggregate investment income that currently applies to Canadian-controlled private corporations, as well as a number of technical amendments.
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Legislative proposals released on April 29, 2022. These legislative proposals were with respect to Hybrid Mismatch Arrangements. For further information on proposals related to hybrid mismatch arrangements as proposed in Budget 2021 please see Blakes Bulletin: 2021 Federal Budget – Selected Tax Measures.
