2023 Canadian Federal Budget
Support for a clean economy
Canada | Publication | 3月 2023
The highly anticipated 2023 Canadian federal budget (Budget 2023) was tabled by Deputy Prime Minister and Minister of Finance, the Honourable Chrystia Freeland on March 28, 2023 (Budget Day). Budget 2023 comes at a time of economic uncertainty and one major focus of Budget 2023 was the announcement of a number of investment tax credits meant to encourage investment in clean energy.
In particular, Budget 2023 included proposed new tax credits for clean electricity, clean technology manufacturing and processing, and critical mineral extraction and processing. In addition, Budget 2023 provided additional details on previously announced green credits, including the labour conditions required to claim the full 30% rate under the clean technology investment tax credit and the clean hydrogen investment tax credit.
While Budget 2023 did not include changes to federal personal or corporate tax rates, it does propose to broaden the alternative minimum tax (AMT) by disallowing certain deductions and increasing the AMT capital gains inclusion rate from 80% to 100%, among other adjustments. Budget 2023 also proposed changes to the Income Tax Act (Canada) (the Tax Act) to allow employee ownership trusts to acquire and hold shares of a business.
The tax highlights proposed in Budget 2023 include:
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BUSINESS INCOME TAX PROPOSALS
- Budget 2023 (i) proposed to introduce new refundable investment tax credits for certain clean hydrogen equipment and certain clean technology manufacturing and processing equipment (ii) proposed to expand previously announced tax credits for clean technology equipment to include certain geothermal energy systems (iii) provided details of the proposed labour requirements that would apply to the clean hydrogen, clean technology and clean electricity investment tax credits; (iv) announced a public consultation on a refundable investment tax credit for certain clean electricity systems and equipment and (v) proposed to expand the eligible activities and extend the phase-out period for the reduced tax rates that apply to zero‑emission technology manufacturing and processing income. These measures are summarized below, and for a more detailed discussion of these proposed tax measures, see Clean energy.
- Investment Tax Credit for Clean Hydrogen. Budget 2023 proposes to introduce a refundable clean hydrogen investment tax credit for the cost of purchasing and installing eligible equipment for projects that produce hydrogen from electrolysis or from natural gas, so long as emissions are abated using carbon capture, utilization, and storage (CCUS). The tax credit rate is proposed to be 40%, 25%, or 15%, based on assessed carbon intensity of the hydrogen that is produced and will be available for eligible equipment that is acquired and becomes available for use on or after Budget Day and before 2034. The tax credit rate for each tier is proposed to be reduced by 10% if the business does not meet certain labour requirements (described below). The clean hydrogen investment tax credit is proposed to be phased out by 50% for property that becomes available for use in 2034 and will be fully phased out for property that becomes available for use after 2034.
- Clean Technology Investment Tax Credit – Geothermal Energy. The proposed refundable clean technology investment tax credit, which provides for 30% of the capital cost of certain eligible clean technology equipment, was announced in the 2022 Fall Economic Statement. If enacted, the clean technology investment tax credit would be generally available for the capital cost of property that is acquired and that becomes available for use on or after Budget Day. Budget 2023 proposed to expand the proposed 30% refundable clean technology investment tax credit to include geothermal energy systems that are already eligible for Class 43.1 capital cost allowance. Eligible equipment would include equipment used primarily for the purpose of generating electrical energy or heat energy from geothermal energy (including piping, pumps, heat exchangers, steam separators, and electrical generating equipment) that is acquired and becomes available for use on or after Budget Day. Equipment that co-produces oil, gas or other fossil fuels would not be eligible for the clean technology investment tax credit. Budget 2023 also proposed changes to the previously announced phase-out schedule of the clean technology investment tax credit. Instead of the phase-out beginning in 2032, the credit rate will be 30% for property that becomes available for use in 2032 and 2033 and is reduced to 15% in 2034. The credit will not be available after 2034. Labour requirements (described below) would need to be satisfied to qualify for the 30% rate, otherwise a 20% rate would apply.
- Investment Tax Credit for Clean Technology Manufacturing and Critical Mineral Extraction and Processing. Budget 2023 proposed to introduce a new refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing, for up to 30% of the capital cost of eligible depreciable property, the use of which is all or substantially all for eligible activities related to clean technology manufacturing and processing, and the extraction and processing activities related to minerals essential for clean technology supply chains (lithium, cobalt, nickel, graphite, copper, and rare earth elements). The investment tax credit for clean technology manufacturing is proposed to apply to property that is acquired and becomes available for use on or after January 1, 2024. Gradual phase out of the investment tax credit is proposed to begin for property that becomes available for use in 2032 and will no longer be available for property that becomes available for use after 2034.
- Zero-Emission Technology Manufacturers. Budget 2023 proposes to expand the availability of reduced tax rates for zero-emission technology manufacturers to include income from the manufacturing of nuclear energy equipment, processing or recycling of nuclear fuels and heavy water, and manufacturing of nuclear fuel rods. The expansion of eligible activities applies for taxation years beginning in 2023. Budget 2023 also proposes to extend the availability of the reduced tax rates such that the three-year phase-out would start in 2032.
- Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS). In response to submissions received through consultation in the summer of 2022, Budget 2023 proposes to expand and change certain conditions for the previously announced refundable investment tax credit for CCUS. Specifically, taxpayers would be entitled to have their concrete storage technology validated by a qualified third party (instead of obtaining approval from Environment and Climate Change Canada) for purposes of demonstrating the necessary carbon dioxide mineralization requirement. Additional changes include adding British Columbia to the list of eligible jurisdictions for dedicated geological storage (applicable to expenses incurred on or after January 1, 2022), expanding credit eligibility to certain dual-use equipment that produces heat and/or power or uses water that is used for CCUS, and providing investment tax credits for eligible refurbishment costs incurred once a CCUS project is operational. Budget 2023 also included an intention to apply labour requirements to the CCUS tax credit, with details to be announced later.
- Investment Tax Credit for Clean Electricity. Budget 2023 introduces a new refundable 15% investment tax credit for clean electricity for eligible investments in non-emitting electricity generation systems, abated natural gas electricity-fired electricity generation, stationary electricity storage systems, and equipment for the transmission of electricity between provinces and territories. New projects and the refurbishment of existing facilities would be eligible for the investment tax credit for clean electricity. Eligible entities must meet certain labour requirements (discussed below) to receive the full 15% tax credit, otherwise the credit rate will be 5%. The proposed investment tax credit for clean electricity would be available as of the day of the 2024 federal budget for projects that did not begin construction before Budget Day and will not be available after 2034.
- Labour Requirements Related to Certain Investment Tax Credits. The 2022 Fall Economic Statement announced the government’s intention to attach prevailing wage and apprenticeship requirements (together referred to as "labour requirements") to the proposed clean technology investment tax labour credit and the clean hydrogen investment tax credit. Budget 2023 indicates that the government also proposes to have these requirements apply to the proposed clean electricity investment tax labour credit and the CCUS investment tax credit. The details of the required labour requirements for the CCUS investment tax credit will be announced later.
- Interaction of Investment Tax Credits. Budget 2023 proposes that taxpayers can claim only one of the clean hydrogen investment tax credit, the CCUS tax credit, the clean technology investment tax credit, the investment tax credit for clean electricity or the investment tax credit for clean technology manufacturing, where a particular property is eligible for more than one of these tax credits. However, multiple tax credits may be available for the same project, if the project includes different types of eligible property.
- Flow-Through Shares and Critical Mineral Exploration Tax Credit. Budget 2023 proposes to expand the flow-through share regime to eligible development and exploration expenses incurred with respect to lithium from brines after Budget Day. Similarly, Budget 2023 would introduce expanded eligibility for the critical mineral exploration tax credit (which is a 30% non-refundable tax credit announced in the 2022 federal budget) to specified critical mineral expenses incurred with respect to lithium from brines, which is proposed to apply to expenditures renounced under eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.
- Tax on Repurchases of Equity. The 2022 Fall Economic Statement announced the government's intention to introduce a 2% tax on the net value of all types of share repurchases by public corporations in Canada. Budget 2023 included details of the proposed tax on repurchases of equity, which will apply for repurchases (including normal course issuer bids and substantial issuer bids) and issuances of equity that occur on or after January 1, 2024. The tax is proposed to apply to Canadian resident public corporations, real estate investment trusts, specified investment flow-through (SIFT) trusts and SIFT partnerships where the shares/units are listed on a designated stock exchange, subject to a de minimis threshold of $1 million in gross equity repurchases during the taxation year of the relevant entity (and prorated for short taxation years). Budget 2023 proposed that the tax would not apply to mutual fund corporations. For a more detailed discussion of this proposed tax measure, see Share buyback tax
- General Anti-Avoidance Rule. Budget 2023 proposes to amend the general anti-avoidance rule (GAAR) in the Tax Act to modernize and strengthen the GAAR.
- The measures proposed in Budget 2023 would (i) add a preamble to assist with the interpretation and application of the GAAR; (ii) reduce the threshold for the determination of an "avoidance transaction" that may be subject to the GAAR from a "primary purpose" test to a "one of the main purpose" test; and (iii) add economic substance indicators that are to be considered at the misuse or abuse stage of the GAAR analysis. This is achieved through the implementation of an interpretive rule indicating that an avoidance transaction that is "significantly lacking in economic substance" would tend to be a transaction to which the GAAR applies.
- The proposed economic substance indicators look at (i) the opportunity for economic gain; (ii) whether the expected value of the tax benefit exceeds the expected non-tax economic return; and (iii) whether it is reasonable to conclude that the entire, or almost entire, purpose was to obtain the tax benefit.
- Where the GAAR applies to an avoidance transaction, Budget 2023 proposes to apply a penalty of 25% of the tax benefit that would otherwise result but for the GAAR (except in the case of tax attributes not used in the relevant transaction or series of transactions) and to extend the normal reassessment period by three years, in both cases unless disclosure of the transaction is made to the Canada Revenue Agency (either voluntarily or under the mandatory disclosure rules). These proposals are open for comment until May 31, 2023, following which it is intended that revised legislative proposals will be published and the application date of the amendments will be announced. For a more detailed discussion of the proposed amendments to the GAAR, see General anti-avoidance rule
- Dividend Received Deduction by Financial Institutions. Budget 2023 proposes to deny the dividend received deduction (a rule intended to limit the imposition of multiple levels of corporate tax) for dividends received by financial institutions after 2023 on shares that are mark-to-market property. The mark-to-market rules apply to certain property (mark-to-market property) held by financial institutions in the ordinary course of their business. Under these rules, gains on the disposition of mark-to-market property are included in ordinary income, not capital gains, and unrealized gains are included in computing income annually on a mark-to-market basis (in addition to when the property is disposed of). The elimination of the dividend received deduction results in all income earned by financial institutions on mark-to-market property being taxed as ordinary business income. Budget 2023 also included proposals that deem "tracking property" to be mark-to-market property for the purposes of the dividend deduction denial. Tracking property generally includes units of mutual fund trusts, unit trusts and other equity derivatives that would not otherwise meet the definition of mark-to-market property.
INTERNATIONAL TAX MEASURES
- Budget 2023 restates the intentions outlined in the 2022 federal budget for Canada to implement the two-pillar approach to international tax reform developed by the Organization for Economic Co-operation and Development (OECD)/ Group of 20 Inclusive Framework on Base Erosion and Profit Shifting. Over the last year, the OECD has significantly advanced the frameworks for Pillar One (a reallocation of taxable income) and Pillar Two (a 15% global minimum tax), but progress is still required prior to any implementation.
- Pillar One would primarily be implemented though a multilateral convention (MLC), and would provide a new taxing right over a portion of the residual profits of large multinational enterprise groups (MNE) to certain jurisdictions. These residual profits — equal to 25% of profits that are in excess of 10% of a MNE’s revenues — are referred to as “Amount A,” which is allocated proportionately between market jurisdictions based on the location of revenue generation. The reallocation of Amount A will only apply to MNEs with revenues over EUR 20 billion (subject to certain exceptions). The implementation of Pillar One would also require the repeal of any existing domestic digital services taxes. While still being settled, both Canada and the OECD have indicated the intent is to sign the MLC in mid-2023, with a view to it entering into force in 2024.
- Budget 2023 restated Canada’s intention to implement its own domestic digital services tax (DST) if Pillar One was not implemented by January 1, 2024. Canada will revise the draft DST legislation (initially released in 2021) and if implemented, the DST would apply to revenues earned as of January 1, 2022.
- Budget 2023 also commits to introducing the domestic legislation required by Pillar Two, including the income inclusion rule (IIR) and the undertaxed profits rule (UTPR), as well as the optional qualified domestic minimum top-up tax (QDMTT). The QDMTT effectively acts as an alternative minimum tax where top-up tax might otherwise accrue to a jurisdiction other than Canada under the IIR or UTPR. Canada intends to implement the IIR and QDMTT for fiscal years that begin on or after December 31, 2023, and the UTPR for fiscal years that begin on or after December 31, 2024. These rules will apply to MNEs with revenues over EUR 750 million.
PERSONAL INCOME TAX MEASURES
- Grocery Rebate. Budget 2023 proposes to increase the maximum goods and services tax credit (GSTC) amount for January 2023. The increase, referred to as the "grocery rebate," is equal to a maximum of $153 per adult, $81 per child, and $81 for single individuals without children. Budget 2023 proposes that the grocery rebate be paid through the GSTC system, as soon as possible following the passing of enabling legislation.
- Deduction for Tradespeople’s Tool Expenses. The Tax Act generally allows a tradesperson to deduct up to $500 of the amount by which the cost of acquiring new tools as a condition of employment exceeds the Canada employment tax credit ($1,368 in 2023). Budget 2023 proposes to increase the deduction from $500 to $1,000 for 2023 and subsequent taxation years.
- Employee Ownership Trusts. Budget 2023 proposed to introduce rules to facilitate the use of employee ownership trusts, which are Canadian resident trusts (excluding deemed resident trusts) that satisfy certain requirements and that hold shares of a qualifying business for the benefit of a corporation’s employees. For a discussion of the proposed rules for employee ownership trusts, see Employee ownership trusts. The employee ownership trust rules are proposed to apply as of January 1, 2024.
- Registered Education Savings Plans. Budget 2023 proposes to increase educational assistance payment withdrawal limits from $5,000 to $8,000 for beneficiaries enrolled full time in respect of the first 13 consecutive weeks of enrollment in a 12-month period. That threshold would be increased from $2,500 to $4,000 for beneficiaries enrolled part time. Budget 2023 also proposes to enable divorced or separated parents to open joint registered education savings plans for one or more of their children or to move an existing joint registered education savings plans to another promoter. These measures are proposed to come into force on Budget Day. Individuals who withdrew educational assistance payments prior to Budget Day may be able to withdraw an additional educational assistance payment amount, subject to the new limits and the terms of the plan.
- Retirement Compensation Arrangements. Budget 2023 proposes to amend the Tax Act so that fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for a retirement compensation arrangement (RCA) that is supplemental to a registered pension plan would no longer be subject to the 50% refundable tax. This change would apply to fees or premiums paid on or after Budget Day. Employers would also be allowed to request a refund of previously remitted refundable taxes for fees or premiums paid for letters of credit (or surety bonds) by RCAs, based on the retirement benefits that are paid out of the employer's corporate revenues to employees that had RCA benefits secured by letters of credit (or surety bonds). Employers would generally be eligible for a refund of 50% of the retirement benefits paid, up to the amount of refundable tax previously paid. This measure is proposed to apply to retirement benefits paid after 2023.
- Registered Disability Savings Plans. Budget 2023 proposes to extend to December 31, 2026, the period during which a “qualifying family member” would be entitled to open a registered disability savings plan (RDSP) and be the plan holder for an adult whose capacity to enter into an RDSP contract is in doubt, and who does not have a legal representative. Budget 2023 also proposes to broaden the definition of “qualifying family member” to include a brother or sister of the beneficiary who is 18 years of age or older. This proposed expansion to the "qualifying family member" would apply as of royal assent of the enabling legislation and would be in effect until December 31, 2026.
- Alternative Minimum Tax for High-Income Individuals. Budget 2023 included several proposed changes to the AMT in the Tax Act, including to broaden the base on which the tax is calculated, raise the AMT exemption to approximately $173,000 (from $40,000) and increase the AMT rate to 20.5% (from 15%). For a discussion of the proposed amendments to the AMT rules, see Alternative minimum tax
- Strengthening the Intergenerational Business Transfer Framework. Budget 2023 proposes to introduce new conditions that must be satisfied for business transfers to qualify as a genuine intergenerational business transfer, notably a three-year test for immediate transfers based on arm’s length sale terms or a five-to-ten-year test for more gradual business transfers based on traditional estate freeze characteristics. Under the three-year test, a parent would be required, among other conditions, to immediately and permanently transfer (i) both legal and factual control; and (ii) a majority of the common growth shares, with a transfer of the residual voting and common growth shares within 36 months, to a purchaser corporation controlled by an adult child. These conditions would be more flexible under the five-to-ten-year test as only legal control would need to be transferred and parents would have up to 10 years from the initial sale to reduce their economic value in the business (in debt and equity) to certain thresholds. Budget 2023 also proposes to provide a 10-year capital gains reserve for transfers that satisfy the above-proposed conditions. These measures are proposed apply to transactions that occur on or after January 1, 2024.
