Tax Insights: 2022 Federal Fall Economic Statement – Tax highlights

Issue 2022-28

In brief

On November 3, 2022, the Deputy Prime Minister and federal Minister of Finance, Chrystia Freeland, presented the 2022 Federal Fall Economic Statement (economic statement). The economic statement does not change corporate or personal income tax rates, but does:

• introduce investment tax credits for clean technologies and for clean hydrogen production, to be effective upon release of the 2023 federal budget
• propose a new tax on share buybacks by public corporations in Canada, effective January 1, 2024
• provide an update on the status of previously announced international tax reform measures
• extend the residential property flipping rule to assignment sales, for transactions occurring after 2022

The Department of Finance also:

• released revised draft legislation for the proposed excessive interest and financing expenses limitation (EIFEL) regime
• announced a new effective date for certain of the proposed enhancements to Canada’s mandatory disclosure rules

This Tax Insights discusses these and other tax initiatives proposed in the economic statement.

In detail

Business tax measures 

Environmental incentives

Investment tax credit for clean technologies

The economic statement introduces a refundable clean technology investment tax credit. The tax credit will equal 30% of the capital cost of eligible new equipment that is acquired and becomes available for use on or after the day that the 2023 federal budget is released. Claimants meeting certain labour conditions (to be determined after the Department of Finance consults with stakeholders) will be eligible for the full tax credit rate; otherwise, a 20% credit rate would apply. The tax credit will be gradually phased out, starting in 2032, as shown in the table below.   

Investment tax credit for clean hydrogen

The economic statement confirms the government’s intention (as stated in its 2022 federal budget) to proceed with an investment tax credit for clean hydrogen production. The investment tax credit will be refundable, available for eligible investments made as of the day that the 2023 federal budget is released and phased out after 2030. Certain labour conditions will be attached to this credit, which must be met for claimants to be eligible for the maximum tax credit rate (which is proposed to be at least 40% for the lowest carbon intensity tier); otherwise, the rate will be reduced by 10 percentage points. The Department of Finance will launch a consultation on the implementation of this proposed tax credit.   

A tax on share buybacks

The economic statement proposes to introduce a corporate‑level 2% tax that would apply on the net value of all types of share buybacks by public corporations in Canada; this would be similar to a recent measure introduced in the United States. The details of this new tax will be announced in the 2023 federal budget, and the tax would come into force on January 1, 2024.

Excessive interest and financing expenses limitation (EIFEL) regime

The Department of Finance released significant revisions to the draft EIFEL legislation, based on comments received following the initial consultation period last spring. The proposed EIFEL rules will limit the amount of net interest and financing expenses that certain taxpayers may deduct in computing their taxable income, based on a fixed percentage of earnings before interest, taxes, depreciation and amortization. The rules are now proposed to be effective for taxation years beginning after September 30, 2023 (previously for taxation years beginning after 2022). Interested parties are invited to submit comments to the Department of Finance on the revised draft legislation by January 6, 2023. For background on the proposed EIFEL rules, see our Tax Insights “Excessive interest and financing expenses limitation (EIFEL) regime.”

International tax measures

Reporting rules for digital platform operators

Canada intends to implement the Organisation for Economic Co‑operation and Development (OECD) Model Rules for income reporting by digital platforms. The Department of Finance has released for public comment draft legislation to incorporate the OECD Model Rules into the Canadian Income Tax Act. Interested parties are invited to submit comments by January 6, 2023.

International tax reform

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has developed a two-pillar plan to reform the international tax system, as part of the “BEPS 2.0” initiative. In October 2021, Canada and other members of the Inclusive Framework committed to adopt this plan (for a discussion on that commitment, see our Tax Insights “The new international tax framework and Canada’s digital services tax.”) The economic statement provides an update on Canada’s proposed implementation of the two pillars.

Pillar One (reallocation of taxing rights)

Pillar One will introduce new rules for allocating taxing rights between countries that will generally apply to multinational enterprises (MNEs) with annual revenue above €20 billion (expected to be reduced to €10 billion after 7 years) and profit margins above 10%. The right to tax a portion of these MNEs’ profits will be reallocated to market countries (i.e. the countries where the MNEs’ users and customers are located).

The economic statement states that significant progress has been made in establishing the technical rules of the new system and the OECD continues to conduct public consultations. The Inclusive Framework’s intention is to complete multilateral negotiations so that the treaty to implement Pillar One can be signed in the first half of 2023, with a view to it entering into force in 2024.

Pillar Two (global minimum tax)

Pillar Two will introduce a 15% global minimum tax that will generally apply to MNEs with global revenues of at least €750 million.

The economic statement affirms Canada’s commitment to the global minimum tax and that Canada continues to work closely with its international partners to develop a coordinated implementation framework, to be implemented in a timely manner.

Personal tax measures

Residential property flipping rule

The proposed residential property flipping rule (RPFR), announced in the 2022 federal budget, would deem gains arising from certain dispositions of residential properties owned for less than 12 months to be business income. The economic statement extends the RPFR to gains arising from the disposition of the rights to purchase a residential property by way of an assignment sale. The RPFR, including the extension for assignment sales, will apply in respect of transactions occurring after 2022.

Canada Workers Benefit

The economic statement proposes to automatically approve advance payments for the Canada Workers Benefit (CWB), starting in the 2023 taxation year, for current CWB beneficiaries, provided that their personal income tax return for the previous year has been filed and assessed before November 1 of the current year (previously, recipients were required to request advance payments via their income tax return). Advance payments will be issued automatically, beginning in July 2023.  

Minimum tax for high earners

The economic statement reaffirms the government’s intention to introduce a new minimum tax regime (to augment, or perhaps replace, the existing Alternative Minimum Tax) that will target high‑income Canadians. Details on a proposed approach and its implementation will be included in the 2023 federal budget.

Other tax measures

Mandatory disclosure rules

The Department of Finance announced that proposed enhancements to Canada’s mandatory disclosure rules, which change the existing “reportable transaction” rules and will require taxpayers to report “notifiable transactions,” will come into force on the date any enacting legislation receives royal assent (previously for transactions entered into after 2022). The new requirement for “specified corporations” to report “uncertain tax treatments” would still come into effect for taxation years beginning after 2022, with penalties only applying upon royal assent of the enacting legislation. For background on the proposed mandatory disclosure rules, see our Tax Insights “Finance releases draft legislative proposals: Mandatory disclosure rules.”

Previously announced tax measures

The economic statement confirms that the government will proceed with measures announced in its 2022 federal budget and other previously announced measures, as modified to take into account consultations, including:

• legislative proposals released August 9, 2022
• hybrid mismatch arrangements (April 29, 2022 legislative proposals)
• allocation to redeemers methodology for mutual fund trusts, audit authorities, EIFEL and crypto asset mining (February 4, 2022 legislative proposals)
• digital services tax (December 14, 2021 legislative proposals)

The government also intends to proceed with the following previously announced consultations:

• transfer pricing (2021 federal budget)
• general anti-avoidance rule (August 9, 2022 consultation paper)

For more details on these proposed measures, see our Tax Insights:

• “2022 Federal budget: Encouraging affordable housing and sustainability”
• “Finance releases draft legislative proposals: Taxation of insurance contracts under IFRS 17”
• “Canada introduces first package of hybrid mismatch rules”
• “Navigating the proposed trust reporting rules: Trustees need to be prepared”
• “Finance releases draft legislative proposals: Asset wealth management industry measures”
• “Finance releases draft legislative proposals: GST/HST measures for cryptoasset mining”