Tax measures announced in 2023 Fall Economic Statement

In a time of high interest rates, increasing debt servicing costs and lower than expected growth, Deputy Prime Minister and Minister of Finance Chrystia Freeland delivered the Government's Fall Economic Statement ("FES 2023") in the House of Commons on November 21, 2023.

There was little draft legislation included in the FES. There are promises of tax and other legislation to come and mention of the Government's resolve to implement a backlog of income tax proposals held over from Budget 2023 and the August 4, 2023 tax proposals. There are new spending proposals to commence in 2025, with over $20 billion of additional spending over the next six years compared to Budget 2023. The projected deficit for 2023-2024 is $40 billion (or more, by about $10 billion, in a recession scenario). The public debt service cost for 2023-24 will be $46.5 billion. This cost will grow to $60.7 billion in 2028-29.

The spending proposals focus on housing, affordability for the middle class, and economic measures focused on the green economy and business investment. There are many specific measures in each of these categories:

• The housing measures aim to incentivize construction of new housing and new rental housing and to ease the burdens of financing home purchasing and mortgage renewals, including the introduction of a "Canadian Mortgage Charter."
• The affordability measures include making groceries more affordable, "cracking down" on junk fees, and introducing low cost bank accounts.
• The green economy and business investment measures promise legislation to introduce tax credits for carbon capture and storage, clean technology, clean hydrogen and clean electricity.
• The business investment measures promise a $10-million capital gains exemption on the sale of a business to an Employee Ownership Trust and the development of an Indigenous Loan Guarantee Program to facilitate Indigenous equity ownership in natural resource projects.

What follows is a high-level summary of the principal business-related tax measures.

Please refer to Gowling WLG's complementary report Financial Services Sector announcements in 2023 Fall Economic Statement for details on financial services sector-related announcements contained in FES 2023.

Business-related income tax measures

The Digital Services Tax (DST)

FES 2023 affirms 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 MNE's profits were earned.

In October 2021, the Federal Government agreed to pause the implementation of Canada's Digital Services Tax ("DST") (a summary of which is provided here), which had been announced in 2020, until the end of 2023, in order to give time for negotiations on Pillar One to conclude. Meanwhile, at least seven other countries (Austria, France, India, Italy, Spain, Türkiye, and the United Kingdom) have continued to apply their own Digital Services Taxes.

FES 2023 reaffirms the Government of Canada's intention to move ahead with its plan for legislation to enact its DST. Draft legislation for the DST was introduced in August 7, 2023, but its entry-into-force date remains to be determined as Canada negotiates the impact that the DST would have on its biggest trading partner, the United States. Once enacted, the DST would apply at a rate of 3 per cent in respect of revenues earned as of January 1, 2022 by large businesses from certain digital services that rely on data and content contributions from Canadian users.

Short-term rentals

FES 2023 announced the Government's intention to deny income tax deductions for expenses incurred to earn short-term rental income, including interest expenses, in provinces and municipalities that have prohibited short-term rentals, as well as when short-term rental operators are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements. These measures would apply to expenses incurred on or after January 1, 2024. No draft legislation was released with respect to these measures.

Dividend received deduction by financial institutions – Exception

The Income Tax Act generally permits corporations to deduct dividends received on shares of other corporations resident in Canada, subject to certain exceptions. Budget 2023 proposed to align the treatment of dividends and capital gains on portfolio shares under the "mark-to-market property" ("MTMP") rules, consistent with the broader policy applicable to financial institutions ("FIs") by denying FIs the dividend received deduction on shares that are MTMP. FES 2023 proposes an exception to that measure for dividends received on "taxable preferred shares" as such term is defined in the ITA. This exception, along with the rest of the measure, would apply to dividends received on or after January 1, 2024.

Employee ownership trusts

Budget 2023 contained detailed measures regarding employee ownership trusts. An EOT is intended 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.  Perhaps due to the limited interest to date in such vehicles and to better align this measure with similar rules in other jurisdictions, FES 2023 proposes to introduce measures to encourage business owners to sell to an EOT by exempting the first $10 million in capital gains realized on the sale of shares to an EOT for 2024 through 2026, subject to certain conditions to be detailed at a later date.

Clean economy investment tax credits

FES 2023 provides further details regarding the Clean Hydrogen Investment Tax Credit ("Clean Hydrogen ITC") announced in Budget 2023 and expands the eligibility for the Clean Technology and Clean Electricity Investment Tax Credits to support the generation of electricity, heat, or both electricity and heat, from waste biomass. Read more about these credits in our Budget 2023 bulletin.

Clean Hydrogen ITC

FES 2023 proposes that property that is required to convert clean hydrogen into ammonia be eligible for the Clean Hydrogen ITC of 15 per cent, provided that the following conditions are met:

• The taxpayer that is producing the ammonia use their own hydrogen feedstock for ammonia production, and the hydrogen feedstock comes from a clean hydrogen project of the taxpayer that is eligible for the Clean Hydrogen ITC;
• The clean hydrogen projects have sufficient production capacity to satisfy the needs of the taxpayer's ammonia production facility; and
• The taxpayer demonstrates the feasibility of transporting the hydrogen from the hydrogen production facilities to the ammonia production facility if they are not co-located.

Equipment used for the sole purpose of converting clean hydrogen into ammonia — including equipment necessary for the feed compression, conversion (such as reactors or other equipment used to carry out the Haber–Bosch process), refrigeration, and on-site storage of ammonia — would be eligible.

Power Purchase Agreements and other similar instruments

Budget 2023 indicated that Power Purchase Agreements (PPAs) and other similar instruments that allow project owners to purchase clean electricity from the electricity grid would be eligible for the purpose of calculating a project's carbon intensity ("CI"), in place of using the grid's CI, subject to certain conditions that would be provided at a later date

FES 2023 sets out the conditions in respect of the use of PPAs and other similar instruments for the purposes of the Clean Hydrogen ITC, which include:

• That the purchased electricity must be sourced from hydro, solar or wind-powered generation that  first commenced production on or after March 28, 2023, and no more than one year before the initial project CI assessment for the related clean hydrogen project is submitted; and,
• Is located in the same province or territory as the clean hydrogen project and is connected to the electricity grid of that province or territory.

Renewable natural gas

FES 2023 proposes that the use of renewable natural gas ("RNG") would be eligible for the purpose of calculating a project's CI, subject to the following conditions:

• The RNG would be produced by a supplier subject to the Clean Fuel Regulations; and
• The RNG would be secured from a production facility that commenced RNG production no more than one year before the initial project CI assessment for the associated clean hydrogen project is submitted.

Initial project CI assessment and validation

Budget 2023 indicated that projects would undergo an initial project CI assessment based on the design of the project to determine the expected CI of the hydrogen that will be produced, by validating:

• The modelling of the project using the Fuel LCA Model, and
• That the project design can reasonably be expected to achieve the modelled outcomes.

FES 2023 proposes that the initial project CI assessment would need to be validated by a validation report prepared by a Canadian engineering firm with an engineering certificate of authorization, appropriate insurance coverage, and expertise in modelling using the Fuel LCA Model. The initial project CI assessment and third-party validation report, including any required documentation, would then be submitted to Natural Resources Canada for validation. Only then would the Clean Hydrogen ITC be administered by the Canada Revenue Agency.

Compliance and recovery

Once a project is operating, the CI of the hydrogen produced would need to fall into the same tier at which the project was assessed, or the taxpayer could be made subject to a recovery of tax credit amounts.

FES 2023 proposes that projects be subject to a one-time verification by a separate Canadian engineering firm, based on a five-year compliance period. Over the course of the period, projects would compute and report annually on the effective CI of the hydrogen that is produced. At the end of the period, compliance would be determined by the weighted-average CI over the entire period. The contribution of annual CI figures to the final weighted-average CI would be weighted by the hydrogen produced in each year. Natural Resources Canada would also oversee this verification.

The five-year compliance period would begin 120 days after the beginning of commercial operations, with an option for a one or two-year delay to allow project operators time to make required adjustments.

If following the compliance report a project failed to achieve a CI of produced hydrogen in the same CI tier that the project was assessed at, the Clean Hydrogen ITC could be subject to a recovery equal to the difference between the Clean Hydrogen ITC amount that was claimed based on the assessed CI tier, and the Clean Hydrogen ITC amount that would apply based on the CI tier that is observed during production. FES 2023 proposes that projects with a verified CI no more than 0.25 kilogram (kg) of carbon dioxide equivalent (CO2e) per kg of hydrogen above their original validated CI would not be subject to recovery of Clean Hydrogen ITC amounts even if the verified CI exceeds the upper bound of the originally assessed CI tier.

Clean Technology and Clean Electricity Investment tax credits: Equipment using waste biomass

FES 2023 proposes to expand eligibility for the Clean Technology and Clean Electricity Investment tax credits to include systems that use specified waste materials solely to generate electricity or both electricity and heat (i.e., cogeneration) as well as systems that use specified waste materials, other than spent pulping liquor, solely to generate heat energy.

Eligible systems would be those that use feedstock, all or substantially all of the energy content (expressed as the higher heating value of the feedstock) of which is from specified waste materials (in the case of heat generation, other than from spent pulping liquor), as determined on an annual basis. Systems that use a fuel that is not produced as an integrated part of the system, even if produced from specified waste material, would not be eligible.

The Income Tax Regulations define "specified waste materials" as meaning wood waste, plant residue, municipal waste, sludge from an eligible sewage treatment facility, spent pulping liquor, food and animal waste, manure, pulp and paper by-product and separated organics.

When part of an eligible integrated system, eligible electricity and cogeneration property would include:

• Electrical generating equipment (e.g., steam turbine generators);
• Heat generating equipment used primarily for the purpose of producing heat energy to operate the electrical generating equipment (e.g., steam boilers used to produce steam to operate steam turbine generators);
• Equipment that generates both electrical and heat energy (e.g., gas turbine generators, reciprocating engine generator sets);
• Heat recovery equipment (e.g., heat recovery steam generators);
• Equipment used to upgrade or enhance the combustibility of specified waste material (e.g., a gasifier); and,
• Ancillary equipment (e.g., control, feedwater, and condensate systems).

When part of an eligible integrated system, eligible heating property would include:

• Heat generating equipment (e.g., burners and boilers), other than that used to operate electrical generating equipment;
• Equipment used to upgrade or enhance the combustibility of specified waste material (e.g., a gasifier); and
• Ancillary equipment (e.g., control, feedwater, and condensate systems).

Summary of other clean energy investment tax measures

The tables below provide a timeline for implementation of all of the federal clean energy investment tax measures, including for forthcoming draft legislation, and summarizes their coming-into-force dates. Click here to view an implementation and delivery timeline infographic for these measures.

Delivery timeline for clean economy investment tax credits

Carbon Capture, Utilization, and Storage (CCUS)

• Legislation will be introduced in Parliament this fall.
• Consultations on draft legislation were held from August 4, 2023, to September 8, 2023.
• The tax credit would be available from January 1, 2022.

Clean Technology

• Legislation will be introduced in Parliament this fall.
• Consultations on draft legislation were held from August 4, 2023, to September 8, 2023.
• The tax credit would be available from March 28, 2023.

Clean Hydrogen

• Consultations on draft legislation will launch this fall.
• The government is targeting to introduce legislation in Parliament in early 2024.
• The tax credit would be available from March 28, 2023.

Clean Technology Manufacturing

• Consultations on draft legislation will launch this fall.
• The government is targeting to introduce legislation in Parliament in early 2024.
• The tax credit would be available from January 1, 2024.

Clean Electricity (Except for Publicly-Owned Utilities)

• Design and implementation details will be published in early 2024.
• Consultations on draft legislation will launch in summer 2024.
• The government is targeting to introduce legislation in Parliament in fall 2024.
• The tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Clean Electricity (For Publicly-Owned Utilities)

• Consultations with provinces and territories will take place in 2024.
• The government is targeting to introduce legislation in Parliament in fall 2024.
• The tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Expanding eligibility for the Clean Technology and Clean Electricity Investment tax credits to support using waste biomass to generate heat and electricity

• Consultations on draft legislation will launch in summer 2024.
• The government is targeting to introduce legislation in Parliament in fall 2024.
• The expansion of the Clean Technology investment tax credit would be available from the day of FES 2023.
• The expansion of the Clean Electricity investment tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Labour requirements

Budget 2023 announced that labour requirements to pay prevailing union wages and provide apprenticeship training opportunities will need to be met in order to receive the maximum credit rate of the Clean Technology, Clean Hydrogen, Clean Electricity, and CCUS investment tax credits.

• Legislation to implement the labour requirements will be introduced in Parliament this fall.
• Consultations on draft legislation were held from August 4, 2023, to September 8, 2023.
• The effective date for the labour requirements will be the date that a Notice of Ways and Means Motion for the enabling legislation is first tabled this fall.

Goods and Services Tax/Harmonized Sales Tax (GST/HST) measures

Expansion and refinement of GST/HST joint venture election regime

The Federal Government is seeking input on a proposed expansion and refinement of the existing GST/HST joint venture rules before March 15, 2024, following which it proposes to finalize the design of a new GST/HST joint venture regime along with draft enacting legislation.

A joint venture is not a person and is not deemed to be a person for GST/HST purposes. As a result, a joint venture cannot report for GST/HST on a consolidated basis in the same manner as a corporation, partnership or trust. The existing joint venture rules allow for an election pursuant to which one participant in the joint venture is designated the "operator," who can report for GST/HST on behalf of the joint venture. Its existing rules also avoid the need for reporting of GST/HST on supplies made between the joint venture participants. However, there is currently only a short list of activities eligible for the joint venture election, which is most frequently used in the context of real estate development and operations.

FES 2023 proposes to replace the list of eligible joint venture activities with an industry agnostic "all or substantially all commercial activities" requirement. In addition, it is proposed that all electing participants must be registered for GST/HST purposes. It is further proposed that the operator be resident in Canada and have a monthly reporting period. It is intended that the election form be filed with the Canada Revenue Agency, a new requirement for the joint venture election. The requirement for the operator to have an ownership interest or primary responsibility for the operation control over the carrying on of the day-to-day operations of the joint venture will be carried over under new provisions.

Finally, it is proposed that the new regime replace existing deeming measures in respect of activities between participants with more detailed deeming measures. These include an allocation of responsibility for taxable benefit rules, capital property change-in-use rules, bad debt rules, drop shipment rules and the application of the forfeiture and extinguished debt rules under section 182 of the Excise Tax Act. The Federal Government appears particularly interested in how that responsibility should be allocated as between the operator and participants in respect of these deeming rules.

Removing the GST from new co-op rental housing

It is proposed that co-operative housing corporations that provide long-term rental accommodation also would be eligible for the removal of the GST (and the federal component of the HST) on new rental housing, consistent with recent announcements in respect of certain purpose-built  rental housing. FES 2023 states that the measure is not intended to apply to co-operative housing corporations where occupants have an ownership or equity interest.

Exempting psychotherapists' and counselling therapists' services from GST/HST

FES 2023 proposes to add psychotherapists and counselling therapists to the list of health care practitioners whose professional services, when rendered to individuals, are exempt from the GST/HST. This measure would apply on royal assent of the enacting legislation.

Underused Housing Tax (UHT) measures

The underusing housing tax (UHT) applies a 1 per cent annual tax on value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or otherwise underused. In 2022, the first year of compliance, UHT returns had to be filed by all corporations, partnerships and trusts in respect of owned residential real property. The Federal Government has twice extended the filing deadline for 2022 due to difficulties in accommodating the filing of returns by such a large number of taxpayers.

FES 2023 proposes to eliminate the requirement to file the UHT return for 2023 and following for a Canadian corporation with less than 10 per cent of its votes or equity value owned by foreign individuals or corporations, as well as for a partnership or trust whose partners or beneficiaries are exclusively Canadian.

It is further proposed to reduce the minimum penalties to $1,000 for individuals and $2,000 for corporations, per failure, for the 2022 calendar year and following. FES 2023 further proposes to introduce a new exemption for residential properties held as a place of residence or lodging for employees, provided the property is located outside of a population centre within either a census metropolitan area or a census agglomeration having 30,000 or more residents. Finally, it is proposed that unitized or "condominiumized" apartment buildings will be excluded from taxable "residential property" effective in respect of 2022 and following.

Previously announced measures

The final section of the 2023 FES lists the Government's intention to proceed with numerous other previously announced tax and related measures, including:

• The Carbon Capture, Utilization, and Storage Investment Tax Credit;
• The Clean Technology Investment Tax Credit;
• Strengthening the Intergenerational Business Transfer Framework;
• The Alternative Minimum Tax for High-Income Individuals;
• A Tax on Repurchases of Equity;
• Modernizing the General Anti-Avoidance Rule;
• Technical amendments to Goods and Services Tax / Harmonized Sales Tax (GST/HST) rules for financial institutions;
• Legislative amendments to implement changes discussed in the transfer pricing consultation paper released on June 6, 2023; and
• Regulatory proposals released in Budget 2021 related to information requirements to support input tax credit claims under the Goods and Services Tax/Harmonized Sales Tax.