Federal Budget 2023: Modest tax measures emphasizing incentives for a greener economy

63 minute read
29 March 2023

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Federal Budget 2023 (Budget 2023) assumes a moderately positive fiscal outlook, expecting that the "looming" recession will be "shallow." In describing the current state of the Canadian economy, Budget 2023 and the Minister of Finance's speech tout a "remarkable" recovery from the COVID recession, the "strongest economic growth" in the G7 and a recovery of 126 per cent of the jobs lost in the first months of COVID, compared to 114 per cent for our neighbours. The Minister of Finance places emphasis on the "record high" (85.7 per cent) participation rate in the economy for Canadian women, crediting the measures introduced in Budget 2021 dealing with child care and early childhood education.

The Budget forecasts a slight increase in the federal debt-to-GDP ratio in fiscal 2023-24 (to 43.2 per cent) due to a slightly lower forecasted GDP. Post fiscal 2023-24, the Budget forecasts a gradual decline in this ratio.

The deficit for fiscal 2023-24 is projected to be $40.1 billion. It too is predicted to decline by an average of $6.5 billion a year over the next four years, returning to 1 per cent of GDP by 2025-26.

Overall, the principal fiscal message of Budget 2023 is that the Government's "fiscal anchor" is to gradually reduce the federal debt-to-GDP ratio by returning the deficit to 1 per cent of GDP by fiscal 2025-26.

The tax measures, which are described in more detail below, are modest. The themes can be summarized as follows:

  • A few measures target cost of living issues for middle and lower income Canadians. These include a grocery rebate, a deduction for tradespeople tool expenses, and modest amendments to the Registered Education Savings Plan and the Registered Disability Savings Plan.
  • There are several clean energy tax credits to foster the green economy.
  • There is a small number of targeted technical tax measures that include a tightening of the rules governing intergenerational transfers of businesses and a strengthening of the General Anti-Avoidance Regime.
  • Finally, there are one or two measures that express a commitment to "ensuring" that the wealthiest Canadians pay their fair share. These include an expansion of the alternative minimum tax regime and new rules to implement the tax on share repurchases first introduced in the Fall Economic Statement.

In case anyone is keeping score, Budget 2023 contains a list of previously announced tax measures that the Government will continue to proceed with after further consultation and deliberation. It is a long list and includes: the November 3, 2022 rules on Excessive Interest and Financing Expenses; the August 9, 2022 legislative proposals dealing with, among other things, the Substantive CCPC rules, together with a myriad of technical amendments; the April 29, 2022 legislative proposals dealing with hybrid mismatch arrangements; and the December 14, 2021 Digital Services Tax Act. There is a closing promise of other technical amendments to improve the certainty and integrity of the tax system.

There are many other non-tax legislative measures, perhaps more than 50 in total, and a multitude of spending commitments that express the above-mentioned themes and several others, including, principally, health care and reconciliation. These are accompanied by a somewhat speculative 124-page report entitled "Statement and Impacts Report on Gender, Diversity and Quality of Life" that evaluates all of the budget measures (tax and non-tax) against diversity goals. The broad scope of spending measures are illustrated by the six chapters:

  • Chapter 1: "Making Life More Affordable and Supporting the Middle Class" includes subchapters entitled "Cracking Down on Junk Fees" and "Cracking Down on Predatory Lending."
  • Chapter 2: "Investing in Public Health Care and Affordable Dental Care" reports on the Government's commitment to health-care funding and promises specific programs in public health care dealing largely with the treatment of health-care professionals and access-to-care issues.
  • Chapter 3: "Made in Canada Plan: Affordable Energy, Good Jobs and a Growing Clean Economy" describes measures aimed at greening the economy. There is a sense that Canada needs to get on board with friend shoring, as well as meet the challenges posed by President Biden's Inflation Reduction Act.
  • Chapter 4: "Advancing Reconciliation and Building a Canada that Works for Everyone" contains a commitment to investments in Indigenous priorities, as well as a long list of environmental and social policy commitments.
  • Chapter 5: "Canada's Leadership in the World" addresses, among other things, defence spending, protecting diaspora communities from foreign interference, supporting Ukraine and combatting financial crime.
  • Chapter 6: "Effective Government and a Fair Tax System" deals with the tax measures described above, as well as Canada's international commitments arising from Pillar 1 and Pillar 2 of the OECD's BEPS project.

Overall, this is a modest effort that focuses almost entirely on spending, skewed towards health care and green initiatives, but does not raise rates and does not propose any momentous technical tax changes. There is very limited recognition of any need for fiscal restraint. The fiscal anchor – getting the deficit down to 1 per cent of GDP at some point in the future (2025-26) – is it.

Table of contents

  1. Clean economy incentives
  2. Flow-through shares and the Critical Mineral Exploration Tax Credit: Lithium from Brines
  3. Tax on repurchases of publicly traded equity
  4. GAAR proposals
  5. Intergenerational transfer of business
  6. Introduction of the Employee Ownership Trust
  7. Alternative minimum tax
  8. Retirement compensation arrangements and "trapped" refundable tax
  9. International tax reform
  10. Intercorporate dividends on portfolio investments of financial institutions to be taxable
  11. Changes to qualification as credit union
  12. GST/HST Measures
  13. Excise measures

Learn more about Gowling WLG's Tax Group

Clean economy incentives

Budget 2023 proposes the introduction of six targeted tax measures – aimed at clean technology manufacturing, clean hydrogen, zero-emission technologies, and carbon capture and storage components – of which a number have been previously announced, including in the 2022 Fall Economic Statement (FES) and Budget 2022.

These measures are intended to help Canada build its clean economy, meet its 2030 greenhouse gas emissions reduction targets and drive the creation of high paying jobs. The measures are also a response to the United States' Inflation Reduction Act's (IRA) clean growth incentives, which some see as a challenge to Canada's ability to compete in the industries that will drive Canada's clean economy.

Below is a summary of the clean technology tax credits in Budget 2023:

Tax Credit Applicable tax rate Property acquired and becomes available for use Phase out date Subject to Labour Requirements

Investment Tax Credit for Clean Hydrogen (CH Tax Credit)

15 per cent-40 per cent (refundable)

March 28, 2023

Phased out starting in 2034 (reduce to 15 per cent), and fully phased out for property that becomes available for use after 2034


Clean Technology Investment Tax Credit – Geothermal Energy (Clean Tech Tax Credit)

30 per cent (refundable)

March 28, 2023

Phased out starting in 2034 (reduce to 15 per cent), and fully phased out for property that becomes available for use after 2034


Investment Tax Credit for Clean Electricity (Clean Electricity ITC)

15 per cent (refundable)

Available as of the day of Budget 2024, for projects that did not begin construction before the day of Budget 2023

Not available after 2034


Investment Tax Credit for Clean Technology Manufacturing (Clean Tech Manufacturing Tax Credit)

30 per cent (refundable)

January 1, 2024

Phased out starting in 2032 and fully phased out for property that becomes available for use after 2034

2032: 20 per cent

2033: 10 per cent

2034: 5 per cent


Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS Tax Credit)


January 1, 2022

Not available after 2041


With the exception of the CCUS Tax Credit, Budget 2023 does not include proposed legislation for the above clean technology tax credits.

Investment tax credit for clean hydrogen

The CH Tax Credit was first introduced in Budget 2022, and then expanded upon in the FES. A consultation period was held to consider the implementation of carbon intensity tiers to guide the level of support – i.e., the tax credit rate – for such projects. Budget 2023 proposes support for "eligible projects" that produce hydrogen with a carbon intensity (CI) of less than 4kg. The support ranges from a maximum refundable tax credit at the rate of 40 per cent of the cost of purchasing and installing "eligible equipment" for a CI of less than 0.75kg, dropping to 25 per cent for a CI greater than or equal to 0.75kg, but less than 2kg, to 15 per cent for a CI greater than or equal to 2kg, but less than 4kg. This makes Canada's regime more or less in line with the measures in the IRA.

Measuring and verifying CI of a project, as well as ensuring compliance with the assessed CI tier, are therefore central to the CH Tax Credit regime.

"Eligible projects" are projects that produce all, or substantially all, hydrogen from a production process involving, for now, only either electrolysis or natural gas (with emissions abated using carbon capture utilization and storage). "Eligible equipment" includes equipment that produces hydrogen from electrolysis, if all or substantially all of the use of that equipment is to produce hydrogen through electrolysis of water, and equipment that produces hydrogen from natural gas (with emissions abated per above), but excludes equipment already described in Class 57 or Class 58 of the capital cost allowance (CCA) regime, which are instead eligible for the CCUS Tax Credit.

Similar to the IRA, there is a 10 per cent reduction to the relevant credit rate for the assessed CI tier if the applicable labour requirements (see further below) are not met.

Clean technology investment tax credit: Geothermal energy

The 2022 FES introduced the Clean Tech Tax Credit equal to 30 per cent of the capital cost of investments in certain class 43.1, 43.2 and 56 property. The types of assets eligible for the Clean Tech Tax Credit include equipment used to generate electricity from solar, wind and water energy, stationary electricity storage equipment, low-carbon heat equipment and industrial non-road zero-emission vehicles.

Budget 2023 proposes to expand eligibility of the Clean Tech Tax Credit to include geothermal energy systems that are eligible for Class 43.1. This includes piping, pumps, heat exchangers, steam separators, and electrical generating equipment, but not equipment used for geothermal energy projects that will co-produce oil, gas, or other fossil fuels. Budget 2023 also proposes to modify the phase-out schedule of the Clean Tech Tax Credit announced in the 2022 FES, so that the credit rate would remain at 30 per cent for property that becomes available for use in 2032 and 2033 and would be reduced to 15 per cent in 2034.

The rate of the Clean Tech Tax Credit is also reduced by 10 per cent (to 20 per cent) if the labour requirements (see further below) are not met.

Investment tax credit for clean electricity

Budget 2023 proposes to introduce the refundable Clean Electricity ITC of 15 per cent for eligible investments in:

  • Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors);
  • Abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035);
  • Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage, and
  • Equipment for the transmission of electricity between provinces and territories.

Both new projects and the refurbishment of existing facilities will be eligible.

Taxable and non-taxable entities (e.g., Crown corporations, municipally owned utilities, corporations owned by indigenous communities, pension funds), would be eligible for the Clean Electricity ITC.

The Clean Electricity ITC could be claimed in addition to the Atlantic Investment Tax Credit, but generally not with any other investment tax credit.

The labour requirements discussed below must also be met to qualify for the full Clean Energy ITC. If not the credit will be reduced by 10 per cent. To access the tax credit in each province and territory, other requirements will include a commitment by a competent authority that the federal funding will be used to lower electricity bills, and a commitment to achieve a net-zero electricity sector by 2035.

Investment tax credit for clean technology manufacturing

Budget 2023 also introduces the new refundable Clean Tech Manufacturing Tax Credit for clean technology manufacturing and processing, and critical mineral extraction and processing, for up to 30 per cent of the capital cost of certain depreciable property that is used all or substantially for eligible activities. Eligible property includes machinery and equipment, including certain industrial vehicles, as well as related control systems.

Eligible activities include:

  • Manufacturing of certain renewable energy equipment (solar, wind, water, or geothermal);
  • Manufacturing of nuclear energy equipment;
  • Processing or recycling of nuclear fuels and heavy water;
  • manufacturing of nuclear fuel rods;
  • Manufacturing of electrical energy storage equipment used to provide grid-scale storage; or other ancillary services;
  • Manufacturing of equipment for air- and ground-source heat pump systems;
  • Manufacturing of zero-emission vehicles, including conversions of on-road vehicles;
  • Manufacturing of batteries, fuel cells, recharging systems, and hydrogen refuelling stations for zero-emission vehicles;
  • Manufacturing of equipment used to produce hydrogen from electrolysis; and
  • Manufacturing or processing of upstream components, sub-assemblies, and materials provided that the output would be purpose-built or designed exclusively to be integral to other eligible clean technology manufacturing and processing activities, such as anode and cathode materials used for electric vehicle batteries

Eligible activities would also include the extraction and certain processing activities related to six critical minerals essential for clean technology supply chains: lithium, cobalt, nickel, graphite, copper, and rare earth elements. This could include activities both before and after the prime metal stage or its equivalent. This inclusion shows the Government's focus on these critical minerals and echoes the scope of the Critical Mineral Exploration Tax Credit introduced in Budget 2022.

Tax integrity rules would apply to recover a portion of the Clean Tech Manufacturing Tax Credit if the eligible property is subject to a change in use or sold within a certain period of time. Unlike the Section 45X Advanced Manufacturing Production Tax Credit available in the US under the IRA, the Clean Tech Manufacturing Tax Credit is not subject to any production levels but rather on the purchase of the relevant equipment.

Investment tax credit for carbon capture, utilization, and storage

In response to submissions received in public consultations, Budget 2023 proposes additional design details in respect of the CCUS Tax Credit first introduced in Budget 2022, but full details will only be released in the coming months.

Proposed changes include:

  • Making dual use equipment that produces heat and/or power or uses water, and that is used for carbon capture, utilization, and storage (CCUS) as well as another process, eligible for the CCUS Tax Credit, and treating the equipment as capture equipment, provided that the energy balance is expected to be primarily used (i.e., more than 50 per cent) to support the CCUS process or hydrogen production eligible for the CH Tax Credit;
  • Adding British Columbia to the list of eligible jurisdictions for dedicated geological storage, applicable to expenses incurred on or after January 1, 2022;
  • No longer requiring Environment and Climate Change Canada to approve the process for using and storing CO2 in concrete in order for the storage to be considered an eligible use. Instead, a member of an accredited body may issue a validation statement that the process for CO2 storage in concrete meets the minimum 60-per-cent mineralization requirement; and
  • Introducing specific rules regarding the calculation of tax credits with respect to eligible refurbishment costs and the recovery of the ITCs.

Labour requirements related to certain investment tax credits

The CH Tax Credit, Clean Electricity Investment Tax Credit, and Clean Tech Tax Credit (with exceptions) are subject to certain "labour requirements" regarding wages and apprenticeship opportunities. The Government has also announced its intention to apply labour requirements to the CCUS Tax Credit. In each case, failure to satisfy the labour requirements means a 10 per cent reduction in the tax credit rate.

The labour requirements only apply in respect of workers – i.e., employees or personnel engaged by a contractor or subcontractor – working in project elements that are subsidized by the relevant investment tax credit and whose duties are primarily manual or physical in nature. The labour requirements do not apply to workers whose duties are primarily administrative, clerical, supervisory, or executive. Additionally, acquisitions of zero-emission vehicles and acquisitions and installations of low-carbon heat equipment are exempt from the labour requirements for the purposes of the Clean Tech Tax Credit.

The two main prongs of the labour requirements are:

  • Prevailing wage: To meet the wage requirement, a taxpayer needs to ensure that covered workers are compensated at a level that meets or exceeds the relevant wage, plus the substantially similar monetary value of benefits and pension contributions (converted into an hourly wage format). This requirement could be met by a taxpayer outside of Quebec paying the covered workers in accordance with an "eligible collective agreement," which is considered or based on "industry standard" and which most closely aligns with the workers' tasks and location. In Quebec, the reference is an "eligible agreement" negotiated in accordance with the Act Respecting Labour Relations, Vocational Training, and Workforce Management in the Construction Industry for the experience level, type of work, and region most closely aligned with the relevant worker.
  • Apprenticeship: To meet the apprenticeship requirement, a taxpayer needs to ensure that in any given year 10 per cent or more of the total labour hours performed by workers engaged in subsidized project elements and whose duties correspond to those performed by a journeyperson in a Red Seal trade are "registered apprentices." However, a taxpayer also has to be careful to ensure that at no point are there more apprentices working than are allowed under applicable labour laws or collective agreement.

If a taxpayer has failed to comply with the labour requirements, Budget 2023 indicates the taxpayer could opt to pay corrective remuneration to workers (including interest) and penalties to the Receiver General and therefore be deemed to have satisfied the requirements; however, full details about this mechanism are not provided. Budget 2023 noted that the Government will consult with labour unions and other stakeholders to refine these labour requirements in the months to come, so changes are possible.

Interactions with other federal tax credits

If a particular property that is eligible for more than one of the CH Tax Credit, CCUS Tax Credit, Clean Tech Tax Credit, Clean Electricity ITC or Clean Tech Manufacturing Tax Credit (collectively, the Clean Tech ITCs), taxpayers will be able to claim just one of the Clean Tech ITCs in respect of that particular property. However, a taxpayer could claim multiple Clean Tech ITCs for different types of eligible property used in a single project. Notably, the Atlantic Investment Tax Credit is not impacted by the CH Tax Credit. In particular, the CH Tax Credit would not reduce the cost of property that is used to determine the amount of the Atlantic Investment Tax Credit.

Reduced tax rates for zero-emission technology manufacturers

Budget 2023 expands the eligible activities that qualify for the reduced tax rates for zero-emission technology manufacturers to include certain nuclear manufacturing and processing activities, particularly:

  • Manufacturing of nuclear energy equipment;
  • Processing or recycling of nuclear fuels and heavy water; and
  • Manufacturing of nuclear fuel rods.

The Government introduced in Budget 2021 a temporary measure to reduce the corporate income tax rates for eligible zero-emission technology, manufacturing and processing income by 50 per cent for qualifying zero-emission technology manufacturers.

This expansion of eligible activities would apply for taxation years beginning after 2023. Budget 2023 also extends the availability of these reduced rates by three years. As a result, the reduced tax rates for zero-emission technology manufacturers are scheduled to be gradually phased out starting in taxation years that begin in 2032 and fully phased out for taxation years that begin after 2034.

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Flow-through shares and the Critical Mineral Exploration Tax Credit: Lithium from Brines

Flow-through shares

Flow-through shares are a tax-incentivized financing mechanism for investment in certain mining and exploration activities. Generally, a flow-through share is a share of a principal business corporation (PBC) issued under an agreement between an investor and the PBC pursuant to which the PBC agrees to incur within 24 months from the date of the agreement "Canadian exploration expenses" (CEE) or "Canadian development expenses" (CDE), in an amount not less than the consideration received for the share. The PBC also agrees to renounce such CEE or CDE to the investor within the prescribed times. Investors may then deduct the CEE or CDE in calculating their own income.

In the mining context, CEE and CDE generally relate to certain expenses incurred with respect to the exploration for, and the development and production of, "mineral resources." A mineral resource is defined in the Income Tax Act (Canada) (ITA) to include specifically enumerated mineral deposits as well as any mineral deposit that the Minister of Natural Resources has certified to be an industrial mineral contained in a non-bedded deposit. Lithium is not an enumerated mineral deposit and the Canada Revenue Agency (CRA) has in the recent past (see CRA document no. 2020-0858761E5) expressed the view that lithium that exists within brines would not likely be contained in a "non-bedded deposit" and therefore could generally not be certified as a mineral resource by the Minister of Natural Resources. As a result, expenses incurred for the exploration, development or production of lithium brines would likely not qualify as CEE or CDE.

Budget 2023 proposes to amend the ITA to expressly include lithium from brines as a mineral resource so that PBCs undertaking certain exploration and development activities with respect to lithium in brines could issue flow-through shares to investors and renounce qualifying expenses to such investors. Eligible expenses related to lithium from brines made after Budget Day would qualify as CEE and CDE.

Critical Mineral Exploration Tax Credit

The Critical Mineral Exploration Tax Credit (CMETC) was introduced in Budget 2022 to encourage investment in clean technology. Mining corporations that are PBCs may renounce certain grassroots exploration expenses as CEE to an investor of flow-through shares, 100 per cent of which may be deducted by the investor for the taxation year in which such expenses are renounced. Investors who are individuals may also claim the CMETC equal to 30 per cent of such expenses incurred in Canada with respect to "critical minerals," provided that a "qualified professional engineer or professional geoscientist" (as defined in the ITA) certifies that the expenses are to be incurred in accordance with an exploration plan that primarily targets critical minerals. The current definition of critical mineral in the ITA is comprised of a list of specific minerals, including lithium.

Budget 2023 also proposes to expand the eligibility of the CMETC to lithium from brines applicable to flow-through share agreements entered into after Budget Day and before April 2027.

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Tax on repurchases of publicly traded equity

Budget 2023 details the design and implementation of the proposed 2 per cent tax on share repurchases by public corporations in Canada. This measure, which was previously announced in the 2022 FES, is similar to a recent measure introduced in the United States under the IRA, which included a 1 per cent tax on the market value of net public company shares that are repurchased, beginning in 2023 (US Rules).

Entities subject to the tax

Budget 2023 provides that the tax would apply to Canadian-resident corporations whose shares are listed on a designated stock exchange (excluding mutual fund corporations), as well as to real estate investment trusts (REITs), specified investment flow-through (SIFT) trusts and SIFT partnerships, to the extent they have units listed on a designated stock exchange. Moreover, publicly traded entities that would be SIFT trusts or SIFT partnerships if their assets were located in Canada would also be subject to this tax.

Calculation of the tax

Generally, the tax is equal to 2 per cent of net value of the equity repurchased by the entity in a taxation year (i.e., the fair market value of equity of the entity that is repurchased less the fair market value of the equity that is issued from treasury). This "netting rule" applies on an annual basis based on the entity's taxation year, and will apply to repurchases and issuances of equity that occur on or after January 1, 2024.

Exceptions to the tax are provided for transactions that involve the following:

  • The issuance and cancellation of equity with debt-like characteristics (e.g., shares and units with a fixed dividend and redemption entitlement); and
  • The issuance and cancellation of equity in certain corporate reorganizations, which include certain share-for-share exchanges, amalgamations and liquidations.

De minimis rule

A de minimis rule is provided where an entity repurchases less than $1 million of equity in a taxation year (pro-rated for short taxation years), determined on a gross basis.

Acquisition by affiliates

The proposed rules provide that the acquisition of equity of an entity by certain affiliates is deemed to be acquired by the entity itself. This rule also applies to an acquisition by a non-affiliate if one of the main purposes of the transactions, or series of transactions, is to avoid the tax. Exceptions to this deeming rule are provided to facilitate certain equity-based compensation arrangements and acquisitions made by registered securities dealers in the ordinary course of business.

The US Rules have already introduced a broad "funding" rule that could deem a US affiliate of a Canadian public corporation to be subject to the US tax if the US affiliate funds "by any means" the acquisition or repurchase of the Canadian public corporation's shares. As such, repurchases of Canadian public corporation shares that are funded by their US affiliates could potentially be subject to both the 1 per cent US tax and the proposed 2 per cent Canadian tax.

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GAAR proposals

Budget 2023 provided more tangible proposals for the general anti-avoidance rule (GAAR) amendments. Ostensibly taking into account stakeholder input, the proposals include adding a preamble to seek to address interpretative issues, lowering the threshold for finding an avoidance transaction, enacting some form of economic substance aspect to the "misuse or abuse" exception, adding a penalty and extending the normal reassessment period.

Preamble to the GAAR

The proposed preamble would address three points.

  • First, it would affirm that while taxpayers may arrange their affairs to obtain tax benefits intended by Parliament, taxpayers may not misuse or abuse the rules to obtain unintended benefits. While this seems like an obvious proposition, it sets up a false dichotomy – there is much more to tax planning than benefits intended by Parliament on one hand and abusive avoidance on the other. Moreover, this proposition runs contrary to the well-established principle that taxpayers may arrange their affairs as they see fit to minimize their liability: whether Parliament specifically intended an outcome or not is beside the point.
  • Second, the preamble would affirm that the principle of fairness, often cited in tax appeals as a pro-taxpayer principle, should be broadly interpreted as fairness to all taxpayers who supposedly shoulder the burden of tax avoidance by a few. References to fairness in the case law are more or less meaningless, and this aspect of the proposed preamble likely is too.
  • Third, the preamble would affirm that the GAAR is intended to apply whether or not a tax strategy was foreseeable, a concept that may likely connect with comments expressed in Lehigh Cement, 2010 FCA 124.

Each of the proposed preamble principles appears to be an effort to legislate values, which reflects a certain degree of optimism on the part of the Department of Finance.

Avoidance transaction

Budget 2023 proposes to lower the threshold for a Court to find an avoidance transaction.

Section 245(3) of the ITA is presently oriented around a primary purpose test, by which a transaction is not an avoidance transaction if it may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit.

Budget 2023 proposes a "one of the main purposes" test, which is a lower bar for the CRA. This threshold may be met where there are multiple purposes for a transaction, some of which are important and others less so. Essentially, sufficiently important purposes may be described as a "main purpose." Thus, if tax savings are an important purpose, even if not the principal purpose of a transaction or arrangement, then a Court may still find an avoidance transaction under the proposed amendment.

Economic substance

The centrepiece of the proposed GAAR amendments is the inclusion of some form of economic substance analysis. Regrettably, neither the August 2022 GAAR Consultation[1] nor Budget 2023 have provided anything approximating a reasonable definition of economic substance. This is surprising, considering the potential scope and effect of a GAAR amendment that is to include an economic substance analysis.

Budget 2023 asserts that economic substance, whatever that may be, would be considered at the "misuse or abuse" stage of a GAAR analysis. Budget 2023 provides that economic substance may or may not indicate abusive tax avoidance: the object, spirit and purpose of the relevant provisions or legislative scheme would still have to be analyzed to localize the underlying policy that was supposedly frustrated. Thus, economic substance would seem to be a rule of interpretation. If a transaction is determined to have economic substance, the usual misuse or abuse analysis would be undertaken. If indicia point to a lack of economic substance, then economic substance would become a factor to consider in the misuse or abuse analysis. However, where a tax plan is consistent with "object, spirit and purpose", there would be no finding of abusive tax avoidance, even where economic substance may be lacking. It is challenging to parse exactly what is being proposed, but it may be that economic substance functions as a tie-breaker where a determination of misuse or abuse is too close to call (which may alter the tilt of the playing field slightly, since the current rule is that the benefit of the doubt goes to the taxpayer if the existence of abusive tax avoidance is unclear).

Having not defined what economic substance is, Budget 2023 proposes some indications that economic substance is lacking, qualified by the assertion that different and unnamed factors may be relevant depending on the case, which is not especially reassuring. Insofar as the GAAR already injects a modicum of uncertainty into tax planning, these nebulous proposals threaten to turn the GAAR into an absurdity. Budget 2023 gives an example of a transaction that may lack economic substance but that would be acceptable, namely, moving funds from a taxable account into a TFSA. This is acceptable because it would be using a tax advantage that Parliament specifically considered and blessed through legislation. One is left to wonder what possible fate could befall a transaction that was not specifically legislated into existence, and that lacks the ineffable economic substance but does not actually frustrate a discernable policy.

Finally, Budget 2023 states that the proposed changes would not legislatively undermine the well-established doctrine of substance over form, or require an inquiry into what the economic substance of a transaction actually is – rather, economic substance would be a consideration in determining whether abusive tax avoidance occurred.


Budget 2023 proposes that a penalty calculated at 25 per cent of the tax benefit be introduced for a transaction subject to the GAAR. Where the tax benefit is a stepped-up attribute that has not been deployed, the benefit would be nil (and, thus, the penalty would be nil). The penalty also would not apply if a taxpayer disclosed the particular transaction to the CRA pursuant to the proposed mandatory disclosure rules or voluntarily. Putting aside the odd suggestion that a transaction not caught by the mandatory disclosure rules might somehow be "voluntarily" disclosed, it is interesting that the Department of Finance is seeking to build greater connection between the GAAR and the proposed mandatory disclosure rules, as if the latter were not already sufficiently onerous.

While it is not surprising that the Department of Finance wishes to increase the risk profile for abusive tax strategies, reasonable criticisms exist. GAAR subsists at the outer limit of the rule of law and applies to adjust the tax consequences of a transaction that technically complies with the specific provisions of the ITA. It is arguably inappropriate that a transaction that complies with the law but offends the sensibilities of the CRA should result in financial penalties against the taxpayer. A critic might ask whether the Government might be prepared to compensate taxpayers who successfully defend themselves in GAAR appeals, or if a mistaken self-assessment under GAAR by a taxpayer is categorically different from a mistaken reassessment under GAAR by the CRA.

Extended reassessment period

Finally, Budget 2023 proposes that the limitation period for the CRA to reassess would be extended by three years for GAAR assessments, unless the subject transaction had been proactively disclosed to the CRA. The stated purpose is that some transactions are complex and difficult to detect. The time lag between the advent of a tax strategy and reassessment (and legislative amendment, if required) can be years long, and delay can be very costly, hence the desire on the part of the Department of Finance to further incentivize early disclosure of potentially abusive transactions.

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Intergenerational transfer of business

Section 84.1 of the ITA is an anti-avoidance provision that addresses "surplus stripping" (i.e., transactions in which a shareholder "extracts" the corporate surplus as a capital gain, as opposed to a dividend). Surplus stripping is attractive because the capital gains rate can be more than 15 per cent lower than the dividend rate. Hence, section 84.1.

Were it not for section 84.1, a shareholder could transfer their 100 per cent shareholding in a corporation (the "subject corporation") to a transferee corporation for a promissory note, thereby realizing a capital gain, then have the subject corporation pay a tax-free intercorporate dividend to the transferee corporation, which would then repay the note. In this way, the surplus in the subject corporation will have been extracted at the capital gains rate. Section 84.1 prevents this result by deeming, in certain cases, the promissory note to be a dividend.

Prior to June 29, 2021, many people thought that the operation of section 84.1 was impeding the ability of certain taxpayers – owners of small businesses, farm businesses and fishing businesses - from transferring their business to the next generation. Where a parent sought to transfer shares of a Qualified Small Business Corporation ("QSBC" shares) (or shares in the capital of a family farm or fishing corporation – "FFFC" shares) to their children using the structure just described, section 84.1 would recharacterize the gain arising on the transfer as a dividend. Further, in this example, because of the capital gains exemption available in respect of gains on QSBC shares and FFFC shares, the capital gains rate (in respect of the amount of the gain that is eligible for the exemption) is zero. A sale by the parent to an arm's length corporation would have been eligible for the capital gains exemption. A sale of the same shares to their child would have attracted tax at the dividend rate.

Bill C-208, enacted June 29, 2021, sought to address these concerns by providing an exception to section 84.1 where there is an intergenerational transfer of QSBC shares or FFFC shares. The main condition for this exception is that the transferor is the parent or the grandparent of the shareholder(s) who controls the transferee corporation. This legislation was introduced as a private member's bill. The Department of Finance issued a statement very shortly after enactment expressing concern that there were insufficient safeguards in the legislation, suggesting that it could be exploited to facilitate inappropriate surplus stripping.

Budget 2023 proposes long-awaited amendments to the Bill C-208 provisions to ensure that exception to section 84.1 in the Bill 208 provisions applies only where there is a genuine intergenerational transfer of the business. In particular, the transfer must be of a QSBC share or a or a FFFC share and the corporation that purchases those shares must be controlled by "one or more persons each of whom is an adult child of the Transferor" and for these purposes, "child" has the extended definition of including grandchildren, step-children, children-in-law, nieces and nephews, and grand nieces and grand nephews as well as spouse of those nieces and nephews.

Taxpayers now have two transfer options: (i) an immediate intergenerational business transfer based on arm's length sale terms (the three-year test); or (ii) a gradual intergenerational business transfer (the five- to 10-year test). Each option has certain conditions that must be met, but the timing and terms can differ depending on the option chosen.

Immediate business transfer (three-year test)

  • Control: The parent must transfer both legal and factual control to the child. To meet this test a majority of the voting shares must be transferred immediately with the balance to be transferred with in 36 months.
  • Economic interest: The parent must immediately transfer a majority of the common growth shares and transfer the balance of common growth shares within 36 months.
  • Management: The parent must transfer management of the business to the child within a reasonable time based on the particular circumstances with a 36-month safe harbour.
  • Child maintains control: The child retains legal control for a 36-month period after the share transfer.
  • Child works in business: At least one child must remain active in the business for the 36-month period following the share transfer.

Gradual business transfer (five- to ten-year test)

  • Control: The parent must transfer legal control (not factual) to the child. To meet this test a majority of the voting shares must be transferred immediately with the balance to be transferred within 36 months.
  • Economic interest: The parent must immediately transfer a majority of the common growth shares and transfer the balance of common growth shares within 36 months. In addition, within 10 years of the initial sale, parents must reduce the economic value of their debt and/or equity interest in the business to 50 per cent of the value of their interest in a FFFC at the initial sale time, or 30 per cent of the value of their interest in a QSBC at the initial sale time.
  • Management: The parent must transfer management of the business to the child within a reasonable time based on the particular circumstances with a 36-month safe harbour.
  • Child maintains control: The child retains legal control for the greater of 60 months or until the business transfer is completed.
  • Child works in business: At least one child must remain active in the business for longer of the 60-month period following the initial share transfer or until the business transfer is completed.

In both scenarios, an election will be jointly made and the children will be jointly and severally liable for any additional taxes payable by the payment should section 84.1 apply.

There are relieving provisions should a child die or suffer a disability after the disposition of the shares and where there is a subsequent arm's length sale.

In addition to the foregoing where one of the two transfer options outlined above are met:

  • A 10-year capital gains reserve is provided; and
  • The limitation period for assessing taxpayers liability for tax that may arise on the transfer is extended by three years for an immediate business transfer and by 10 years for a gradual business transfer.

The measures are to apply to transactions that occur on or after January 1, 2024.

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Introduction of the Employee Ownership Trust

Budget 2023 proposes a new vehicle, an Employee Ownership Trust (EOT), to facilitate a "qualifying business transfer" of ownership of certain "qualifying business" corporations to a trust for the benefit of employees. The EOT rules are intended to facilitate employee ownership while providing an alternative business succession plan for business owners. The new rules are proposed to become effective January 1, 2024.

Qualifying business

A qualifying business is defined in a manner that mirrors the current definition of a small business corporation, namely a Canadian-controlled private corporation (CCPC) all or substantially all of the fair market value of the assets of which is attributable to assets that are used principally in an active business carried on primarily in Canada by the corporation or by a corporation that it controls (the "90 per cent" test").

Qualifying business transfer

A qualifying business transfer is defined as a disposition by a taxpayer (the prior owner(s) of the shares of the qualifying business) to an EOT (or to a CCPC controlled and wholly-owned by the EOT), where (i) immediately before the disposition the "90 per cent" test was met, (ii) the taxpayer deals at arm's length with the EOT (and any intermediary purchaser corporation), and (iii) the taxpayer does not retain any right or influence that would permit the taxpayer to control the corporation or the EOT (or any intermediary purchaser corporation) directly or indirectly.

Qualifying as an EOT

An EOT must be a Canadian resident trust the purposes of which are limited to (i) holding shares of a qualifying business for the benefit of employee beneficiaries, and (ii) making distributions to such beneficiaries, with distinctions between employee beneficiaries permitted only on the basis of length of service, remuneration and hours worked. The EOT must hold a controlling interest in the qualifying business and all or substantially all the property of the EOT must be shares of one or more qualifying businesses. Persons who held significant ownership interests in the qualifying business prior to the transfer to the trust are excluded as potential beneficiaries. The EOT is not permitted to distribute shares of the qualifying business to the employee beneficiaries.

To facilitate the qualifying business transfer, Budget 2023 proposes to extend the capital gains reserve mechanism contained in the ITA from five years to 10 years for a qualifying business transfer, thus providing business owners who dispose of shares to an EOT with a longer potential deferral as well as the possibility to access graduated rates over a greater number of years. In addition, the rules propose to exempt an EOT from the shareholder loan rules contained in the ITA for 15 years, in order to permit the EOT to borrow from the qualifying business to make the purchase without having to recognize the loan as income.

The EOT would be a taxable trust, such that dividend income received by the trust that is not distributed to the employee beneficiaries in the year would be taxable at the highest marginal rate. Dividends flowed through to the employee beneficiaries would reduce the trust's taxable income and would be eligible for the dividend tax credit. Further, the EOT would be exempt from the rule that typically deems a trust to dispose of its property every 21 years.

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Alternative minimum tax

Following through on promises made last year, Budget 2023 proposes certain changes to the existing alternative minimum tax (AMT) provisions. The stated goal is to ensure fairness in the Canadian tax system and to "ensure that the wealthiest pay their fair share." Budget 2023 emphasizes that 80 per cent of the additional revenues from these changes will be raised from taxpayers earning over $1,000,000, and 99 per cent of additional revenues will be raised from taxpayers earning over $300,000.

What is AMT?

The AMT was introduced in 1986 to correct for a perceived lack of fairness in the Canadian tax system. The AMT is payable where a taxpayer has a certain amount of gross income, but little or no tax payable due to the use of deductions, credits, and other exemptions. AMT may arise, for example, where a taxpayer receives Canadian dividends (in particular eligible dividends), realizes capital gains, makes use of the lifetime capital gains exemption, deducts interest expense or carrying charges, makes donations of publicly traded securities, benefits from tax shelter deductions, and/or donates stock options or benefits from the employee stock option deduction.

Canadian taxpayers are required to calculate their tax liability under two separate methods, both the regular method and the AMT method, which effectively adjusts taxable income by limiting the use of certain tax preferences and incentives. This "adjusted taxable income" is then reduced by the exemption amount (to exclude lower income taxpayers), multiplied by the applicable tax rate, and finally, certain non-refundable tax credits are deducted to determine the AMT amount. If this amount exceeds the federal tax liability calculated under the regular method, the AMT amount will be payable instead. Provincial AMT liability also applies, varying from province to province.

AMT may be viewed as a prepayment of tax or tax installment, insofar as AMT can be carried forward and applied against taxes (with the exception of the tax on split income) payable in future years to the extent the Part I tax in the year exceeds the taxpayer's AMT for the year. However, the AMT becomes an actual tax cost to the extent that AMT cannot be fully utilized within the seven-year carryforward period (or if the taxpayer dies during that period). Where a taxpayer has sufficient amounts of other taxable income (in addition to the tax preferred items, such as salary), the AMT liability may be offset.

Proposed changes to the AMT

Budget 2023 proposes a number of changes to the AMT, which raise the AMT exemption, broaden the AMT tax base and increase the AMT rate. Effective beginning in 2024, the proposals are as follows:

  • The basic AMT exemption will increase from $40,000 to the start of the fourth federal tax bracket (expected to be inflation adjusted to $173,000 for 2024). This change is unlikely to have any significant impact, as the vast majority of taxpayers in the excluded income brackets are not currently subject to the AMT.
  • The AMT (flat) tax rate will jump a bracket, increasing from 15 per cent to 20.5 per cent.
  • The AMT capital gains inclusion rate will increase from 80 per cent to 100 per cent (as compared to a 50 per cent inclusion under the regular system).
  • Budget 2023 proposes to include 30 per cent of capital gains on donations of publicly listed securities in the AMT base. This same inclusion rate would apply to employee stock option benefits when the underlying publicly listed securities are donated to a charity. Under the regular system, the accrued capital gain on donated publicly listed securities is fully exempt from taxation (with a similar rule applying to the donation of securities received through the exercise of employee stock options).
  • The full benefit associated with the exercise of employee stock options will be included in the AMT base.
  • Fifty per cent of a long list of deductions will be disallowed. Of greatest interest to the high-income earners targeted by the proposals, is the inclusion of child care expenses, interest and carrying charges incurred to earn income from property, limited partnership losses of other years, and non-capital loss carryovers.
  • Only 50 per cent of non-refundable tax credits may be credited against the AMT (with limited exceptions), which can be contrasted with the current regime in which most non-refundable tax credits may be credited.
  • However, no change is to be made to the treatment of Canadian dividends, for which the cash value (rather than the grossed up value) is included, and the dividend tax credit fully disallowed.


Although these measures will make it more difficult for high-income earners to reduce their income by relying on tax preferences and incentives, planning and considerations should remain relatively constant, with taxpayers and their advisors adopting many of the same strategies for limiting exposure to the AMT and for ensuring that the AMT may be recovered over the subsequent seven-year period. That said, many may be disappointed, for policy reasons, as well as for financial reasons, by the proposal limiting the full exemption from capital gains tax for donated public securities. Of most interest is that the proposals are presented in isolation from a number of other significant measures that were anticipated for Budget 2023: a general increase to the capital gains inclusion rate to 75 per cent, targeted measures against private corporation surplus strip transactions, and a bump of two per cent to the top tax rate.

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Retirement compensation arrangements and "trapped" refundable tax

Budget 2023 proposes to address an anomaly relating to RCAs that were funded by way of letter of credit rather than cash. In such cases, the refundable tax associated with the RCA would be computed by reference to the fee paid by the RCA sponsor to the issuer of the letter of credit. When retirement benefits become payable under the arrangement, the sponsor would typically pay the benefits from its own cash resources, such that no retirement benefits would be paid by the RCA trust, with the effect that there was no method to recover the refundable tax paid to the CRA on the issuance or renewal of the letter of credit. Such refundable tax was essentially "trapped." Budget 2023 proposes to exempt from the refundable tax regime the fees paid for the purposes of securing or renewing a letter of credit (or surety bond) for an RCA that is supplemental to a registered pension plan. This exemption would apply to fees paid after Budget Day. Further, the proposals would provide a mechanism for sponsors to request a refund of previously remitted refundable tax in respect of fees for letters of credit (or surety bonds) based on retirement benefits paid from the sponsor's revenues. This latter change is to apply to retirement benefits paid after 2023.

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International tax reform

Budget 2023 reaffirms the Government of Canada's intention to implement the two-pillar plan for international tax reform agreed to by the members of the OECD/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) in October 2021.

Pillar One ensures that the largest and most profitable multinational enterprises (MNEs) pay income tax based on the location of their users and customers.

Pillar Two introduces a minimum effective tax rate of 15 per cent on the profits of large MNEs, regardless of where the MNEs' profits were earned.

The Income Inclusion Rule (IIR) will allow the jurisdiction of the ultimate parent entity of an MNE to impose a top-up tax on that entity with respect to income from the MNE's operations in any jurisdiction where it is taxed at an effective tax rate below 15 per cent. However, if the jurisdiction of the ultimate parent of an MNE has not implemented the IIR, the Undertaxed Profits Rule (UTPR) will allow jurisdictions in which the MNE operates to impose the top-up tax on the group entities located in their jurisdiction, with the top-up tax to be allocated among those jurisdictions on a formulaic basis.

Dates for implementation

The dates for the next implementation milestones announced in Budget 2023 make clear that one of the most significant global tax reforms in decades is imminent.

The Government of Canada is working with its international partners and the OECD to establish this new multilateral tax framework. However, if the multilateral convention to implement Pillar One does not come into force by January 1, 2024, the Government of Canada is prepared to impose the Digital Services Tax (DST), payable as of 2024 in respect of revenues earned as of January 1, 2022. Draft legislative proposals for the DST were released in December 2021.

Budget 2023 confirms the Government of Canada's intention to release draft legislative proposals for the IIR and a domestic minimum top-up tax for public consultation in the coming months. The draft legislative proposals for the UTPR will follow. The legislation would apply to Canadian entities of MNEs within the scope of Pillar Two, with effect for fiscal years of MNEs beginning on or after December 31, 2023. The Government of Canada intends to implement the UTPR legislation for fiscal years beginning on or after December 31, 2024.

The Government of Canada announced that it intends to share with provinces and territories a portion of the revenues resulting from this international tax reform.

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Intercorporate dividends on portfolio investments of financial institutions to be taxable

Budget 2023 proposes to eliminate the deduction for dividends received by a financial institution on shares and other "mark-to-market property" of the financial institution. The change is proposed to be effective for dividends received after 2023.

In most cases, Canadian resident corporations may deduct the amount of dividends received from other corporations resident in Canada, such that dividends paid from one Canadian corporation to another do not result in multiple levels of corporate tax. This is consistent with what was, at least historically, a policy of corporate integration in Canada's tax system. However, the ITA has long differentiated certain shares (and similar property) held by financial institutions that are held in the ordinary course of business of the financial institution (i.e., its financing activities). This includes "mark-to-market property" as defined in subsection 142.2 of the ITA, which includes shares of a corporation in which a financial institution does not hold at least 10 per cent votes and value. Financial institutions are required to "mark-to-market" these interests and, thereby, realize gains and losses from year to year rather than only on a disposition. Moreover, such gains are characterized as income that does not benefit from the lower inclusion rate other taxpayers receive for capital gains.

Eliminating the deduction for dividends received on shares and other mark-to-market property of financial institutions appears consistent with the existing mark-to-market regime and prevents tax-free intercorporate dividends from reducing the value, and thereby the tax, that might otherwise be payable. However, it also further decreases the level of corporate integration within Canada's tax system.

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Changes to qualification as credit union

Budget 2023 proposes to amend the definition of "credit union" for purposes of both the ITA and the Goods and Services Tax/Harmonized Sales Tax (GST/HST), by removing the existing revenue test, to be more reflective of how credit unions have evolved.

The existing revenue test that forms part of the definition requires "all or substantially all" (words the CRA has interpreted to mean 90 per cent or more) of the entity's revenue to be derived from what are effectively lending activities. As credit unions have evolved to provide a broader service offering (e.g., investment and financial planning advice), they may not meet this revenue test.

No draft legislation for the amended definition has been released. Budget 2023 states the amendments are intended to be effective retroactive to taxation years ending after 2016, which is already in excess of six years. However, until the draft legislation is released, credit unions and taxpayers that could possibly be credit unions will have some uncertainty, even if the measure is framed as relieving in nature.

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GST/HST Measures

Payment card processing

In a 2021 decision, the Federal Court of Appeal allowed an appeal, finding that certain of VISA's services provided to CIBC were exempt from GST/HST as a "financial service" under the Part IX of the Excise Tax Act (Canada) (ETA). Budget 2023 proposes to amend the definition of a "financial service" in the ETA to exclude payment card clearing services rendered by a payment card network operator, which will result in such payment card clearing services being subject to the GST/HST.

The exclusion will apply unless consideration for the payment card clearing service became due or was paid without having become due before March 28, 2023, and the payment card network operator did not charge, collect or remit any GST/HST in respect of the payment card clearing service, nor in respect of any other supply made under an agreement that included a payment card clearing service.

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Excise measures

Temporary alcohol duty rate cap

Since Budget 2017, duties on beer, spirits and wine have been automatically indexed to the Consumer Price Index under the Excise Act and Excise Act, 2001. Budget 2023 limits the automatic inflation adjustment to two per cent for one year from April 1, 2023. The draft legislation operates by only modifying the one year, such that it would not apply in future years without further amendment.

Cannabis producer reporting periods

In Budget 2022, it was proposed that cannabis producers that had remitted less $1 million in excise duties in the prior four fiscal quarters would be entitled to remit excise duties on a quarterly rather than a monthly basis. Budget 2023 proposes to allow all cannabis producers to remit excise duties on a quarterly basis, starting from the quarter beginning on April 1, 2023.

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This analysis was prepared by the following members of the Gowling WLG Tax Group:

The Gowling WLG Tax Group delivers expert and innovative advice to our clients. Our team of tax professionals have leading practices in income tax, international tax planning, transfer pricing, Indigenous tax, executive compensation, indirect tax and customs, and tax dispute resolution.

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