On November 21, 2023, the Canadian Department of Finance (“Finance”) released its 2023 Fall Economic Statement (“FES 2023”). The focus of FES 2023 was on affordability measures, particularly with respect to housing. New spending commitments in FES 2023 were relatively modest and it notably did not include any increases to personal or corporate income tax rates. Nevertheless, FES 2023 did include some tax-related announcements that we expect will be of interest to our clients. These measures are summarized below.
Employee Ownership Trusts
In the 2023 Federal Budget (“Budget 2023”), Finance introduced new measures designed to permit business owners to transfer shares of Canadian-controlled private corporations to trusts established for the benefit of employees (“Employee Ownership Trusts”) with such rules coming into force as of January 1, 2024. In FES 2023, Finance is proposing to exempt business owners from paying tax on the first $10 million in capital gains realized upon selling a business to an Employee Ownership Trust (with some exceptions). This exemption would also become effective as of January 1, 2024, but will be limited in its duration – applying to only the 2024, 2025 and 2026 taxation years. For more detailed information about Employee Ownership Trusts, see our commentary from earlier this year.
Pensions and the “30 Per Cent Rule”
In order “to enable pension funds to more fully participate in Canada’s economic growth,” Finance announced in FES 2023 that it will explore the possibility of removing the “30 per cent rule” from pension fund investments in Canada. In general terms, current federal rules prevent Canadian pension funds from holding more than 30% of the voting shares of most corporations. By removing the 30% rule from investments in Canadian corporations, the government apparently hopes to encourage Canadian pension funds – who have well over two trillion dollars of assets under management – to deploy some of their significant capital to promote the growth of Canadian businesses.
Dividend Received Deduction – Financial Institutions
The Income Tax Act (Canada) (“Tax Act”) generally allows a Canadian corporation to claim a deduction for dividends that it receives from other Canadian corporations. In Budget 2023, Finance announced an exception to this general rule which would have the effect of denying the dividend received deduction to financial institutions who received dividends on shares held as mark-to-market property. In FES 2023, Finance has proposed a refinement to this exception which to permit financial institutions to deduct dividends received on “taxable preferred shares” (defined in the Tax Act). Presumably, Finance has concluded that existing rules imposing a special tax on taxable preferred shares adequately address the policy concerns associated with banks that provide debt-like preferred share financing to Canadian corporations. Both the original proposal and the new exception to it are intended to apply to dividends received by financial institutions after 2023. For more information about the initial proposal, see our Budget 2023 commentary.
Concessional Loans
As a result of recent case law, a taxpayer that receives a non-interest bearing loan (or a loan with a below market interest rate) from a public authority could generally be considered to have received taxable governmental assistance. In response to this jurisprudence, Finance has proposed to amend the Tax Act so that bona fide concessional loans from governmental agencies that include reasonable repayment terms will not, in general, be characterized as taxable government assistance. This amendment would come into force as of November 21, 2023. This is a welcome and unexpected change; in our experience, it is unusual for the federal government to propose legislative changes to overturn case law that was favourable to the government.
Digital Services Tax and Global Minimum Tax
In FES 2023, Finance reaffirmed its commitment to proceed with implementing a Digital Services Tax (“DST”) and a Global Minimum Tax (Pillar Two) in Canada. FES 2023 notes that several countries – including a number of Canada’s major trading partners, such as the United Kingdom, France, Italy, and Spain – have continued to apply their own DSTs in anticipation of multilateral measures being implemented. Interestingly, FES 2023 indicated that “forthcoming legislation would allow the government to determine the entry-into-force date” of the DST. It therefore remains to be seen when this new regime will actually become effective, and what the full economic consequences of the DST will be. We note that the United States has criticized Canada’s DST proposals as discriminatory and has threatened to retaliate if the DST is implemented.
Clean Energy Investment Tax Credits
In FES 2023, Finance outlines a delivery timeline for implementing the Clean Economy Investment Tax Credits, proposes additional details for the Clean Hydrogen Investment Tax Credit and expands the Clean Technology and Clean Electricity Investment Tax Credits to include eligibility for systems generating electricity, heat or electricity and heat from specified waste materials. For additional information about the Clean Economy Investment Tax Credits, see our Budget 2023 commentary.
Underused Housing Tax
In its 2021 Federal Budget, Finance introduced a 1% tax imposed on vacant or underused real estate owned by non-residents (including certain non-Canadian owned entities). The resulting Underused Housing Tax (“UHT”) took effect on January 1, 2022. In FES 2023, Finance has proposed to narrow the scope of these rules with the stated intention of facilitating compliance and ensuring that the tax applies as intended.
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