On Nov. 3, 2022, the Government of Canada tabled its 2022 Fall Economic Statement (FES). A more general review of the FES is available here. This bulletin summarizes the principal business-related tax measures announced in the FES.
Clean technology investment tax credit
The FES introduces a refundable clean technology tax credit equal to 30 per cent of the capital cost of investments in certain class 43.1, 43.2 and 56 property. Taxpayers can currently claim a deduction against income for capital cost allowance of 30 per cent of the undepreciated capital cost of assets in class 43.1 and 56 and 50 per cent on class 43.2 assets. This new measure introduces a refundable tax credit for 30 per cent of the capital cost of the asset, thereby benefiting businesses in the startup phase of operations.
The types of assets eligible for the tax credit are:
- Equipment to generate electricity from solar, wind and water energy, including solar photovoltaic, small modular nuclear reactors, concentrated solar, wind, and water (small hydro, run-of-river, wave, and tidal);
- Stationary electricity storage equipment that do not use fossil fuels in their operation, including but not limited to: batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage, and thermal energy storage;
- Low-carbon heat equipment, including active solar heating, air-source heat pumps, and ground-source heat pumps; and
- Industrial non-road zero-emission vehicles described in Class 56 and related charging or refueling equipment described in Class 43.1 and 43.2, such as hydrogen or electric heavy-duty equipment used in mining or construction.
The credit would be available for property that is acquired and becomes available for use on or after the day of Budget 2023 and will be gradually phased out starting with property that becomes available for use in 2032 and would no longer be in effect for property that becomes available for use after 2034. The credit would gradually phase out with a credit rate of 20 per cent in 2032, 10 per cent in 2033 and five per cent in 2034. Ten percent of the 30 per cent credit would be subject to a labour market conditions test that remains to be announced in Budget 2023 after consultations with unions, including paying prevailing wages based on local labour market conditions, and ensuring that apprenticeship training opportunities are being created.
Consultations are ongoing for additional eligible technologies (e.g. large-scale nuclear and large-scale hydroelectric). This credit is similar to the United States section 48C advanced energy project investment tax credit that was expanded under the Inflation Reduction Act (IRA). We note however that Canada has not yet announced an equivalent to the section 45X advanced manufacturing tax credit, which provides a per unit credit for manufacturers of eligible components sold beginning in 2023 including wind, solar, and battery projects. Instead, the FES announces that significant additional actions would be announced in Budget 2023.
Clean hydrogen investment tax credit
The FES also provides more details on the establishment of a refundable 30 per cent to 40 per cent investment tax credit for clean hydrogen production first announced in Budget 2022 (see our discussion here). A consultation period will be held to consider the implementation of carbon intensity tiers to guide the level of support for such projects. As introduced in the IRA, support is being considered for projects where the emissions from the production of clean hydrogen are 4.0kg of CO2e or less per kg of hydrogen, while the highest level of support would be provided when emissions are 0.45kg of CO2e or less per kg of hydrogen. Similar to the clean technology tax credit, 10 per cent of the credit will also be subject to labour protection requirements, which is also in line with certain requirements of the IRA.
Tax on corporate share buybacks
The FES announced the government's intention to introduce a two per cent tax that would apply to public corporations in Canada on the net value of all types of share buybacks by such corporations. The government indicates that this measure, designed to be similar to a comparable measure recently announced in the United States, is intended to encourage the reinvestment of profits in Canada rather than distributions to shareholders and to ensure that large corporations pay their fair share. No draft legislation was released with the FES with respect to this measure. Rather, the details are to be announced in Budget 2023, with the measure to come into force on Jan. 1, 2024. The government estimates that this measure would increase federal tax revenues by $2.1 billion over five years.
As no draft legislation was released, we will have to wait to see how broadly this tax will be crafted. For the moment, a few observations can be made.
- The government suggests that this proposal will ensure that large corporations pay their fair share. Yet, it appears that the proposed buyback tax would be levied on after-tax profits or invested capital used to make the buyback. The connection to paying a fair share of taxes appears remote at best.
- When a corporation buys back its shares, the excess of the buyback price over the invested capital is generally taxable in the hands of the shareholder. Imposing an additional tax on the corporation suggests an element of double tax. It is not clear whether the reference in the FES to imposing the tax on the net value of share buybacks is intended to alleviate this potential double tax.
- The proposal is silent on whether there will be an offset for new issuances of capital by the corporation. If the goal is to encourage investment in Canada, such an offset should be available.
- With respect to executive compensation, the proposal may precipitate a move towards awards that are to be cash-settled.
- In the M&A context, a share buyback tax may be sufficiently broad to apply to dissenter rights.
- Finally, it is not entirely clear that this proposed tax would be effective in achieving its goal of encouraging reinvestment in Canada, as corporations have other means of distributing excess cash without effecting a share buyback, as well as the 13-month period prior to implementation.
Reporting rules for digital platform operators
The FES included draft legislation that sets out new reporting rules for certain digital platform operators. The proposed rules stem from the Organisation for Economic Cooperation and Development's model reporting rules for digital platforms that were published on June 22, 2021. The model reporting rules were designed to support an exchange of information by tax authorities in the respective jurisdictions of digital platform operators and users for transactions in the sharing and gig economy.
Under the proposed rules, digital platform operators are required to collect and report information about users (referred to as "sellers") that sell goods or the following services on digital platforms: rental of immovable property, rental of means of transportation, personal services, or prescribed services.
The proposed rules would apply to digital platform operators that are:
- Resident in Canada;
- Resident, incorporated, or managed in a partner jurisdiction, identified by the Minister of Revenue or the Canada Revenue Agency (CRA), if they facilitate the sale of goods or services by sellers resident in Canada and elect for the rules to apply; or
- Not a resident in Canada or in a partner jurisdiction, and facilitate the sale of goods or services by sellers resident in Canada or with respect to the rental of immovable property located in Canada.
The proposed rules would not apply to digital platform operators that demonstrate, to the satisfaction of the Minister of Revenue, that their business model does not allow users to derive a profit or to sell goods or services.
Digital platform operators caught by the rules must collect and verify each seller's name, primary address, date of birth, tax identification number (TIN), the jurisdiction in which the TIN was issued, business registration number (for entities), and the address of each property listed on the platform, if applicable. Sellers that fail to provide their TIN upon the request of a digital platform operator are subject to a $500 penalty for each failure.
Digital platform operators are not required to collect information in respect of the following excluded sellers:
- Entities for which the digital platform operator facilitated more than 2,000 rentals of immovable property at the same address and for the same seller;
- Governmental entities;
- Entities the stock of which is regularly traded on a recognized and supervised stock exchange with an annual value of stocks traded exceeding one billion USD in each of the three preceding calendar years; and
- Sellers for which the digital platform operator facilitated less than 30 sales of goods and for which total consideration paid or credited did not exceed 2,000 euros.
Each calendar year is a "reportable period" for the purposes of the proposed rules. The required information must be collected and verified for each reportable period by Dec. 31 of each year and reported in prescribed manner and form no later than Jan. 31 of the following calendar year. The report must also include consideration paid or credited to sellers, amounts withheld or charged by the digital platform operator, and financial account identifiers, if available. The deadline to complete the information collection and verification process is extended by a year for the first reportable period of a digital platform operator.
To alleviate the administrative burden, the proposed rules allow digital platform operators to fulfill their obligations through third-party service providers. They can also, in certain circumstances, rely on previously collected and verified information for subsequent reporting periods.
The proposed rules are slated to come into force on Jan. 1, 2024, with a comment period open until Jan. 6, 2023.
Excessive interest and financing expense limitation
Federal Budget 2021 had proposed new interest and financing expenses limitation (EIFEL) rules and draft legislation was released for public consultation on Feb. 4, 2022. The FES announced that the implementation of the proposed EIFEL rules will be deferred to taxation years beginning on or after Oct. 1, 2023 rather than taxation years beginning on or after Jan. 1, 2023. The FES included further revisions to the draft legislation based on issues identified during a recent public consultation, along with explanatory notes. Finance will accept feedback on this revised draft legislation until Jan. 6, 2023.
The purpose of the EIFEL rules is to protect the Canadian tax base from erosion due to excessive debt and interest expense for situations not already covered by other measures such as the thin capitalization rules. Excessive debt or interest expense can occur in many situations, such as where Canadian businesses bear a disproportionate burden of a multinational group's third-party borrowings.
In general terms, the EIFEL rules limit the amount of net interest and financing expenses (being the taxpayer's interest and financing expenses net of its interest and financing revenues) that may be deducted in computing a taxpayer's income to no more than a fixed ratio of earnings before interest, taxes, depreciation and amortization (EBITDA). Interest and financing expenses is defined as including, among other things, interest and financing expenses that are "capitalized" and deducted as capital cost allowance or as amounts in respect of resource expenditure pools; an imputed amount of interest in respect of certain finance leases; certain amounts that are economically equivalent to interest or that can reasonably be considered part of the cost of funding; and various expenses incurred in obtaining financing.
A more detailed review of the EIFEL rules will be the subject of a forthcoming bulletin.
Previously announced measures
The FES includes a list of previously-announced measures, reiterating the government's intention to proceed with such measures and related consultations.