2023 Federal Budget analysis

In brief 

On March 28, 2023, the Deputy Prime Minister and Minister of Finance, Chrystia Freeland, presented the government’s budget. The budget:

• introduces a refundable investment tax credit for certain clean hydrogen equipment
• expands the refundable investment tax credit for clean technology equipment to include certain geothermal energy systems
• announces a public consultation on a refundable investment tax credit for certain clean electricity systems and equipment
• announces proposed labour requirements that would apply to the clean hydrogen, clean technology and clean electricity investment tax credits
• introduces a refundable investment tax credit for certain clean technology manufacturing and processing equipment
• expands the eligible activities and extends the phase out period for the reduced tax rates that apply to zero‑emission technology manufacturing and processing income
• provides design and implementation details for the 2% tax on the net value of share repurchases by public corporations that was announced in the 2022 Fall Economic Statement
• announces a consultation on specific proposals to strengthen the general anti-avoidance rule (GAAR)
• amends the alternative minimum tax (AMT) to better target the AMT to high-income individuals
• amends the rules introduced by Bill C-208 that facilitate certain intergenerational business transfers, to ensure that they apply only when a genuine intergenerational business transfer occurs
• introduces rules to define and facilitate the use of Employee Ownership Trusts to acquire and hold shares of a business

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

In detail

Business tax measures

Investment Tax Credit for Clean Hydrogen

Following on the government’s announcement in the 2022 Fall Economic Statement, the budget proposes to introduce a refundable investment tax credit for clean hydrogen (Hydrogen ITC), essentially for the purchase and installation of equipment that is acquired (and becomes available for use) after March 27, 2023 and before 2034, and that produces hydrogen from:

• electrolysis, or
• natural gas, so long as emissions are abated using carbon capture, utilization, and storage (CCUS)

The rate of the Hydrogen ITC would be 15%, 25% or 40%, depending on the assessed carbon intensity (CI) of the hydrogen that is produced.

The Hydrogen ITC would be phased out starting in 2034 and would be fully phased out for property that becomes available for use after 2034.

Equipment required to produce hydrogen from electrolysis would be eligible if all or substantially all of the use of that equipment is to produce hydrogen through electrolysis of water, including electrolysers, rectifiers and other ancillary electrical equipment, water treatment and conditioning equipment, and equipment used for hydrogen compression and on-site storage.

Equipment required to produce hydrogen from natural gas with emissions abated using CCUS would be eligible for the Hydrogen ITC, excluding certain equipment which is eligible for the CCUS ITC.

Equipment that is eligible for the Hydrogen ITC would need to be made available for use in Canada.

Property that is required to convert clean hydrogen to clean ammonia would also be eligible for the Hydrogen ITC, at the lowest credit rate of 15%. A description of eligible clean ammonia equipment, as well as specific conditions that would apply, will be provided at a later date.

Certain labour requirements must be satisfied to qualify for the full Hydrogen ITC; these requirements are discussed in the section “Labour Requirements Related to Certain Investment Tax Credits,” below.

Eligible investments would be subject to a verification and compliance process, the details of which will be provided at a later date.

Businesses would be able to claim only one of the Hydrogen ITC, the CCUS ITC, the Clean Tech ITC, the Clean Electricity ITC or the Clean Tech Manufacturing ITC (all of which are discussed below), if a particular property is eligible for more than one of these tax credits. However, multiple tax credits could be available for the same project, if the project includes different types of eligible property. Businesses would be able to fully benefit from both the Hydrogen ITC and the Atlantic Investment Tax Credit.

The budget also announced that the government will continue to review eligibility for other low-carbon hydrogen production pathways.

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Clean Technology Investment Tax Credit – Geothermal energy

The 2022 Fall Economic Statement proposed the Clean Tech ITC, a 30% refundable tax credit that would be available to businesses investing in eligible property that is acquired and that becomes available for use on or after Budget Day (i.e. after March 27, 2023). Certain labour requirements (which are discussed below) must be satisfied to qualify for the full ITC.

The budget proposes to expand eligibility of the Clean Tech ITC to include geothermal energy systems that are eligible for Class 43.1 of Schedule II of the Income Tax Regulations, and which have not been used for any purpose before their acquisition.

Eligible property would include equipment used primarily for the purpose of generating electricity and/or heat solely from geothermal energy, that is described in subparagraph (d)(vii) of Class 43.1. This includes, but is not limited to, piping, pumps, heat exchangers, steam separators, and electrical generating equipment.

Equipment used for geothermal energy projects that will co-produce oil, gas or other fossil fuels would not be eligible for the credit.

The budget also proposes to modify the phase-out schedule of the Clean Tech ITC announced in the 2022 Fall Economic Statement. Rather than starting the phase-out in 2032, the credit rate would remain at 30% for property that becomes available for use in 2032 and 2033 and would be reduced to 15% in 2034. The credit would be unavailable after 2034.

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Investment Tax Credit for Clean Technology Manufacturing

The budget proposes to introduce a refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing (Clean Tech Manufacturing ITC), equal to 30% of the capital cost of eligible property associated with eligible activities.

Investments by corporations in certain depreciable property that is used all or substantially all for eligible activities would qualify for the credit. Eligible property would generally include machinery and equipment, including certain industrial vehicles, used in manufacturing, processing, or critical mineral extraction, as well as related control systems.

Tax integrity rules would apply to recover a portion of the tax credit if eligible property is subject to a change in use or is sold within a certain period of time.

Eligible activities related to clean technology manufacturing and processing would be:

• 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
• 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

In addition, eligible activities would also include extraction and certain processing activities related to certain 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.

Businesses would be able to claim only one of the Clean Tech Manufacturing ITC, the Clean Tech ITC, the Clean Electricity ITC, or the Clean Hydrogen ITC, if a particular property is eligible for more than one of these tax credits. However, they can claim both the Atlantic Investment Tax Credit and the Clean Tech Manufacturing ITC.

The Clean Tech Manufacturing ITC would not be available for property used in the production of battery cells or modules if such production benefits from direct support through a Special Contribution Agreement with the Government of Canada.

The Clean Tech Manufacturing ITC would apply to property that is acquired and becomes available for use after 2023; it would 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.

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Investment Tax Credit for Clean Electricity

The budget proposes to introduce a refundable clean electricity investment tax credit (Clean Electricity ITC) of 15% 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
• 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, such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and 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 Clean Electricity ITC would be available as of the day of the 2024 budget, for projects that did not begin construction before the day of the 2023 budget. The Clean Electricity ITC would not be available after 2034.

Labour requirements (discussed below) must be met to qualify for the full Clean Energy ITC. 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.

The budget states that the Department of Finance will engage with provinces, territories, and other relevant parties to develop the design and implementation details of the Clean Electricity ITC and that the government will also conduct targeted consultations on the possibility to introduce reciprocal treatment in light of some of the eligibility conditions associated with certain tax credits under the U.S. Inflation Reduction Act. With respect to intra-provincial transmission, the government will consult on the best means, whether through the tax system or in other ways, of supporting and accelerating investments in projects that could be considered critical to meeting the 2035 net zero objective.

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Investment Tax Credit for Carbon Capture, Utilization, and Storage

The 2022 budget proposed a refundable investment tax credit for carbon capture, utilization, and storage (CCUS ITC) that would be available to businesses that incur eligible expenses starting on January 1, 2022. The budget proposes additional design details in respect of the CCUS ITC, and states that further details will be included in legislative proposals to be released in the coming months.

The main areas dealt with in these budget proposals are in respect of:

• dual use heat and/or power and water use equipment
• dedicated geological storage in British Columbia
• validation of concrete storage processes
• a recovery calculation in respect of refurbishment property

Businesses would be able to claim only one of the CCUS ITC, the Clean Tech ITC, the Clean Electricity ITC, or the Hydrogen ITC, if a particular property is eligible for more than one of these tax credits.

Draft legislative proposals related to these measures are included in the Notice of Ways and Means Motion accompanying the budget.

These measures would apply to eligible expenses incurred after 2021 and before 2041.

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Labour requirements related to certain investment tax credits

The 2022 Fall Economic Statement announced the government’s intention to attach prevailing wage and apprenticeship requirements (together referred to as “labour requirements”) to the proposed Clean Tech ITC and the Hydrogen ITC. The government also proposes to have these requirements apply to the proposed Clean Electricity ITC.

• In order to qualify for the 30% rate under the Clean Tech ITC, the labour requirements would need to be met. A 20% rate would be available to businesses that do not meet the labour requirements.
• Under the Hydrogen ITC, credit rates will vary across different CI tiers, as discussed above. If a business does not meet the labour requirements, the credit rate for each CI tier will be reduced by ten percentage points.
• In order to qualify for the 15% Clean Electricity ITC (discussed below), the labour requirements would need to be met. A 5% would be available if the labour requirements are not met.
• During the phase-out periods of the Clean Tech ITC and the Clean Hydrogen ITC, if a business does not meet the labour requirements, the tax credit rate available would be reduced by ten percentage points.
• The government also intends to apply labour requirements to the CCUS ITC, the details of which will be announced at a later date.

The labour requirements would apply in respect of workers engaged in project elements that are subsidized by the respective investment tax credit, whether they are engaged directly by the business or indirectly by a contractor or subcontractor. The labour requirements would apply to workers whose duties are primarily manual or physical in nature (e.g. labourers and tradespeople). The labour requirements would not apply to workers whose duties are primarily administrative, clerical, supervisory, or executive.

To meet the prevailing wage requirement, a business would need to ensure that all 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), as specified in an “eligible collective agreement”. Standard benefits would include health and welfare and vacation benefits. A business could meet the prevailing wage requirement either by paying workers in accordance with an eligible collective agreement, or by paying workers at or above the equivalent prevailing wage. The requirement could be satisfied through different combinations of wages, pension contributions and benefits.

To meet the apprenticeship requirement, a business would need to ensure that for a given taxation year, not less than 10% of the total labour hours performed by covered workers engaged in subsidized project elements be performed by registered apprentices. Covered workers are those whose duties correspond to those performed by a journeyperson in a Red Seal trade.

This would be subject to the restriction that at no point could there be more apprentices working than are allowed under applicable labour laws or a collective agreement that applies to the work being performed.

Under the Clean Tech ITC, exemptions from the labour requirements would apply in respect of acquisitions of zero-emission vehicles and acquisitions and installations of low-carbon heat equipment.

Businesses could pay corrective remuneration to workers (including interest) and pay penalties to the Receiver General to resolve non-compliance and be deemed to have satisfied the requirements. The budget states that further details of this mechanism will be announced at a later date.

The budget also states that the government will consult with labour unions and other stakeholders to refine these labour requirements in the months to come.

These requirements would apply to work that is performed on or after October 1, 2023.

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Zero-emission technology manufacturers

The 2021 budget introduced a temporary measure to reduce by one half corporate income tax rates for qualifying zero-emission technology manufacturers. The budget proposes to expand it to income from the following nuclear manufacturing and processing activities:

• manufacturing of nuclear energy equipment
• processing or recycling of nuclear fuels and heavy water
• manufacturing of nuclear fuel rods

This expansion of eligible activities would apply for taxation years beginning after 2023.

Furthermore, the budget proposes to extend the availability of the reduced rates for all eligible activities by three years.

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Flow-through shares and Critical Mineral Exploration Tax Credit – Lithium from brines

The budget proposes to include lithium from brines as a mineral resource, such that eligible corporations can issue flow-through shares and renounce expenses in respect of these resources to their investors. The proposal also includes the expansion of the critical mineral exploration tax credit (CMETC) – a 30% non-refundable tax credit announced in the 2022 budget – to this resource.

Eligible expenses related to lithium from brines made after March 28, 2023 would qualify as Canadian exploration expenses and Canadian development expenses. The expansion of the eligibility for the CMETC to lithium from brines would apply to flow-through share agreements entered into after March 28, 2023 and before April 2027.

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Scientific research and experimental development (SR&ED)

No details of the previously announced SR&ED program review were announced in the budget. However, it was stated that the Department of Finance will continue to engage with stakeholders on the next steps in this process, including the consideration of adopting a patent box regime, in the coming months.

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Tax on equity repurchases

The budget includes details on the proposed 2% tax on share repurchases by public corporations, which was first announced in the 2022 Fall Economic Statement.

This tax will apply to Canadian-resident corporations that have publicly listed equity, other than mutual fund corporations. It will also apply to equity repurchases by certain other publicly listed entities, as follows:

• real estate investment trusts (REITs)
• specified investment flow through (SIFT) trusts and partnerships
• entities that would be SIFT trusts or partnerships, if their assets were located in Canada

The tax is equal to 2% of the net value of equity repurchased by the entity in a taxation year (i.e. the value of equity that is redeemed, acquired or cancelled by the entity, less the value of equity that is issued by the entity from treasury). Exclusions are provided for:

• certain equity with debt-like characteristics (i.e. shares and units that have a fixed dividend and redemption entitlement)
• equity that is issued or cancelled in certain corporate reorganizations

A de minimis exemption is also provided where the taxpayer repurchases less than $1 million of equity in a taxation year. This is determined on a gross basis (i.e. ignoring share issuances).

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

Another anti-avoidance rule essentially prevents the tax base of the new tax (i.e. the net value of equity repurchased) from being manipulated by a transaction (or series of transactions) that has the primary purpose of reducing that tax base.

The new tax will apply to repurchases of equity that occur on or after January 1, 2024.

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General anti-avoidance rule

The general anti-avoidance rule (GAAR) is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction. On August 9, 2022, the government released a consultation paper on modernizing and strengthening the GAAR; this paper identified perceived issues with the existing GAAR and proposed ways to address those issues. The budget includes proposed legislation to amend the GAAR, as follows:

• A preamble will be added, to ensure that the GAAR is interpreted as intended. Among other things, the preamble would state that the GAAR strikes a balance between certainty for taxpayers and protecting the fairness of the tax system. It also would note that the GAAR can apply to a tax benefit, regardless of whether the tax strategy used to obtain that benefit was foreseen.
• The avoidance transaction test in the GAAR is currently based on a “primary purpose” test; this will be broadened to a “one of the main purposes” test. Generally speaking, a transaction will be an avoidance transaction if it results in a tax benefit, and one of the main purposes of the transaction was to obtain the tax benefit. The consultation paper discussed other potential changes to the avoidance transaction test (e.g. addressing foreign tax savings); those changes have not been adopted.
• An economic substance rule will be added to the “misuse or abuse” test in the GAAR. This rule would state that, if a transaction is significantly lacking economic substance, that tends to indicate that the transaction is abusive. Factors that tend to indicate a lack of economic substance would include: no change in economic position; the expected value of the tax benefit exceeding the expected non-tax economic return; and the transaction being entirely (or almost entirely) tax motivated. The new rule would not supplant the existing ‘misuse or abuse’ test – e.g. a transaction that lacks economic substance will not be considered abusive, if the tax benefit was clearly intended by Parliament.
• A penalty will be imposed where the GAAR applies, equal to 25% of the tax benefit. However, no penalty would apply where the tax benefit is a tax attribute that has not been used to reduce tax. Furthermore, a penalty would not apply if the transaction is disclosed to the Canada Revenue Agency (CRA) under the mandatory disclosure rules, including a new option for voluntary reporting under those rules.
• The normal reassessment period for GAAR assessments will be extended by 3 years, unless the transaction had been disclosed to the CRA.

A consultation will be held on the proposed legislation, until May 31, 2023. Following that consultation, the government will release revised proposed legislation, with an effective date.

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Dividend received deduction by financial institutions

A corporation may generally claim a deduction for dividends received on shares of other Canadian-resident corporations. This “dividends received deduction” is intended to limit the imposition of multiple levels of corporate tax. A new rule will prevent financial institutions from claiming this deduction for dividends received on shares that are mark-to-market properties (which are generally portfolio shareholdings). The budget states that the dividends received deduction conflicts with the policy behind the tax regime for mark-to-market properties (which generally includes all gains and losses on such properties in computing ordinary income). The new rule will apply to dividends received after 2023.

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Tax treatment of credit unions

Credit unions are subject to specific income tax and Goods and Services Tax/Harmonized Sales Tax (GST/HST) rules. The current definition of a “credit union” excludes an entity that earns more than 10% of its revenue from sources other than certain specified sources (e.g. interest income from lending activities). The budget proposes to amend the credit union definition by eliminating this revenue test; and by reflecting the way that credit unions currently operate (i.e. as full service financial institutions). These amendments will apply to taxation years ending after 2016.

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Personal tax measures

Alternative minimum tax (AMT) for high‑income individuals

The AMT calculation is a parallel tax calculation that allows fewer deductions, exemptions and tax credits than under the ordinary tax rules. A taxpayer pays the higher of the AMT or regular income tax. To better target high‑income individuals, the budget proposes to increase the federal AMT rate from 15% to 20.5% and to increase the exemption amount for all individuals (including graduated rate estates) from $40,000 to the start of the fourth federal tax bracket, which is approximately $173,000 for the 2024 taxation year. The exemption will be indexed annually to inflation.

The budget proposes to broaden the AMT base by:

• increasing the capital gains inclusion rate from 80% to 100%; capital loss carryforward and allowable business investment loss deductions would apply at a 50% rate
• including 100% of the benefit associated with employee stock options, and
• including 30% of capital gains on donations of publicly listed securities; the 30% inclusion would also apply to the full benefit associated with employee stock options to the extent that a deduction is available for ordinary tax purposes because the underlying securities are donated

The AMT base will also be broadened by disallowing 50% of the following deductions:

• employment expenses, other than those incurred to earn commission income
• deductions for Canada Pension Plan, Quebec Pension Plan, and Provincial Parental Insurance Plan contributions
• moving expenses
• child care expenses
• disability supports deduction
• deduction for workers’ compensation payments
• deduction for social assistance payments
• deduction for Guaranteed Income Supplement and Allowance payments
• Canadian armed forces personnel and police deduction
• interest and carrying charges incurred to earn income from property
• deductions for limited partnership losses of other years
• non-capital loss carryovers, and
• Northern residents deductions

Only 50% of most non-refundable tax credits will be allowed to reduce the AMT. The existing AMT foreign tax credit, treatment of taxable dividends, and denial of certain non-refundable credits will be maintained. The existing carryforward period for AMT credits to reduce ordinary tax will also be maintained at seven years.

The proposed changes will apply to taxation years that begin after 2023.

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Intergenerational business transfers

Private Member’s Bill C-208 introduced an exception to the anti-surplus stripping rules in section 84.1 of the Income Tax Act (ITA) that became effective June 29, 2021. Although the purpose was to facilitate intergenerational business transfers in circumstances where section 84.1 inappropriately applied, the rules introduced by Bill C-208 contain insufficient safeguards and are available where no transfer of a business to the next generation has taken place.

The budget introduces additional conditions to ensure that only genuine intergenerational share transfers are excluded from the application of section 84.1 of the ITA. Taxpayers may choose to rely on one of two transfer options provided they meet certain conditions:

• an immediate intergenerational business transfer (three-year test) based on arm’s length sale hallmarks, or
• a gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing the value of their common shares of a corporation into fixed value preference shares to allow future growth to accrue to their children while the value of the parent’s interest is gradually reduced by the corporation repurchasing the parent’s preference shares)

Existing rules that apply to subsequent share transfers by the purchaser corporation and the lifetime capital gains exemption will be replaced by relieving rules that apply on a subsequent arm’s length disposition or on the death or disability of a child.   

The transferor and the child (or children) must jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child (or children) will be jointly and severally liable for any additional taxes payable by the transferor because of section 84.1 applying if the transfer does not meet the conditions to qualify as an immediate or gradual intergenerational business transfer.

To allow the CRA to monitor compliance with the requirements under the new tests, the limitation period for assessing a transferer’s liability for tax that arose on the transfer will be extended by three years for an immediate business transfer and ten years for a gradual business transfer.

The budget also provides a ten-year capital gains reserve for share transfers that qualify under the immediate or gradual business transfer tests.

These measures will apply to transactions that occur on or after January 1, 2024.

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Employee Ownership Trusts

The budget introduces rules to define and facilitate the use of Employee Ownership Trusts (EOT), which are Canadian resident trusts (excluding deemed resident trusts) that hold shares for the benefit of a corporation’s employees. A trust will be considered an EOT if it has only two purposes. First, it holds shares of a qualifying business for the benefit of employee beneficiaries of the trust. Second, it makes distributions to employee beneficiaries, where reasonable, under a distribution formula that can only consider any combination of an employee’s length of service, remuneration and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.

An EOT will be required to hold a controlling interest in the shares of one or more qualifying businesses.  A qualifying business is one where all or substantially all of the fair market value of its assets are attributable to assets used in an active business carried on in Canada. A qualifying business must not carry on its business as a partner in a partnership. All or substantially all of the EOTs assets must be shares of qualifying businesses.

The EOT will be taxable and generally treated the same as other personal trusts. Income distributed from the trust to the beneficiaries will be taxed at the beneficiary level whereas trust income not distributed will be taxed in the EOT at the top personal marginal tax rate.

The trustees of the EOT must be either Canadian-resident corporations licensed or otherwise authorized in Canada to offer to the public their services as a trustee, or individuals (other than trusts). Trust beneficiaries will elect the trustees at least once every five years. Individuals and their related persons who held a significant economic interest in the business prior to a sale to the EOT will not be able to account for more than 40 percent of the trustees of the EOT, directors of the board of a corporate trustee or directors of any qualifying business of the EOT.

Beneficiaries of the EOT must consist exclusively of qualifying employees, which includes all individuals employed by a qualifying business and any other qualifying businesses it controls other than employees who are significant economic interest holders, or who have not completed a reasonable probationary period of up to 12 months. Individuals and their related persons who hold, or held prior to the sale to an EOT, a significant economic interest in a qualifying business of the EOT will also be excluded from being qualifying employees. The EOT will not be permitted to distribute shares of qualifying businesses to individual beneficiaries.  

The budget also introduces rules to facilitate the acquisition of shares by an EOT. A qualifying business transfer would occur when a taxpayer disposes of shares of a qualifying business, for proceeds not exceeding fair market value, to a trust that, immediately after the sale qualifies as an EOT (or to a corporation wholly owned by an EOT) and the EOT has a controlling interest in the qualifying business immediately after the transfer.

The existing five-year capital gains reserve will be extended to up to ten years for qualifying business transfers. The repayment period to avoid an income inclusion under the shareholder loan rules will be extended from one year to 15 years for amounts loaned to an EOT from a qualifying business to purchase shares in a qualifying business transfer. The EOT will also be exempt from the 21-year deemed disposition rule while it qualifies as an EOT.

The EOT rules will apply as of January 1, 2024.

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The Grocery Rebate

The budget proposes to increase the maximum Goods and Services Tax credit (GSTC) amount for January 2023, to be known as the Grocery Rebate. Eligible individuals will receive a Grocery Rebate equivalent to twice the regular GSTC amount received for January. The Grocery Rebate would be paid through the GSTC system, as soon as possible following the passing of enabling legislation.

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Deduction for tradespeople’s tool expenses

The budget proposes to double the maximum employment deduction for tradespeople’s tools, from $500 to $1,000, effective for 2023 and subsequent taxation years.

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Registered Education Savings Plans (RESP)

The budget proposes to amend the ITA so that, effective March 28, 2023, the terms of an RESP may permit educational assistance payment (EAP) withdrawals of up to:

• $8,000 (increased from $5,000) in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs
• $4,000 (increased from $2,500) per 13-week period for beneficiaries enrolled in part-time programs

EAPs are comprised of government grants and investment income and are taxable income for the RESP beneficiary. RESP promoters may need to amend the terms of existing plans to apply the new EAP withdrawal limits. Individuals who withdrew EAPs prior to March 28, 2023 may be able to withdraw an additional EAP amount, subject to the new limits and the terms of the plan.

The budget also proposes, effective March 28, 2023, to enable divorced or separated parents to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter.

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Retirement Compensation Arrangements (RCA)

The budget proposes to amend the ITA so that fees or premiums paid for the purposes of securing a letter of credit (or surety bond) by an RCA trust that is supplemental to a registered pension plan will not be subject to the refundable tax under Part XI.3 of the ITA. This change will apply to fees or premiums paid on or after March 28, 2023.

The budget also proposes to permit employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit (or surety bonds) by RCA trusts based on retirement benefits that are paid by the corporation to employees that had RCA benefits secured by letters of credit (or surety bonds).  The employer will be eligible for a refund for 50% of retirement benefits paid, up to the refundable tax previously paid in respect of the fees or premiums. This change would apply to retirement benefits paid after 2023.

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Registered Disability Savings Plans (RDSP)

The budget proposes to extend a temporary measure that allows a qualifying family member (parent, spouse or common-law partner) to open an RDSP and be the plan holder for an adult whose capacity to enter into an RDSP contract is in doubt (and who does not have a legal representative) by three years, to December 31, 2026. A qualifying family member who becomes a plan holder before the end of 2026 could remain the plan holder after 2026.

The budget also proposes to broaden the definition of “qualifying family member” to include a brother or sister of the beneficiary who is 18 years of age or older. This proposed expansion will apply as of royal assent of the enabling legislation and be in effect until December 31, 2026. A sibling who becomes a qualifying family member and plan holder before the end of 2026 could remain the plan holder after 2026.

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International tax measures

International Tax Reform

The Organisation for Economic Co-operation and Development (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. On October 8, 2021, Canada and 135 other countries in 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 budget provides an update on the two pillars of this international tax reform initiative.

Pillar One

Pillar One will introduce new rules for allocating taxing rights between countries, to address challenges raised by the digital economy. These rules will generally apply to multinational enterprises (MNEs) with annual revenue above €20 billion 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 budget notes that Canada is currently working with its international partners to develop model Pillar One rules and a multilateral convention to implement these rules (the OECD has released packages of draft rules for public comment, which were consolidated in progress reports released in July and October 2022). The budget also notes that the government intends to release a revised draft of the Digital Services Tax (DST) legislation; the DST could be imposed as of January 1, 2024 if the multilateral convention has not come into force. The DST would take effect in respect of revenues earned as of January 1, 2022. The budget states that the government’s hope and underlying assumption is that the timely implementation of the Pillar One rules will make this DST unnecessary.

Pillar Two

Pillar Two will introduce a 15% global minimum tax. This tax will generally apply to MNEs with global revenues of at least €750 million. These MNEs will be required to compute their effective tax rate (ETR) in each country where they operate. If the ETR for a particular country is below 15%, a top-up tax will be imposed, to raise that ETR to 15% (this top-up tax may be reduced by a substance-based income exclusion, which is computed based on the payroll costs and net book value of tangible assets located in the jurisdiction).

The top-up tax will be collected under two charging rules. The main rule is the Income Inclusion Rule (IIR), which generally requires the ultimate parent of the MNE to pay the top-up tax computed for its foreign subsidiaries (and can also apply in certain other circumstances). The Undertaxed Profits Rule (UTPR) is a backstop rule, which collects any top-up tax that is not collected by the IIR. The UTPR allocates this residual top-up tax amongst all countries in which the MNE operates (and which have adopted the UTPR), based on the employees and tangible assets located in those countries. A country may also choose to adopt a domestic minimum top-up tax, which is based on the Pillar Two rules but collects top-up tax on the income of entities located in that country (rather than foreign entities). Model rules to implement Pillar Two were released by the OECD in December 2021 (for a discussion on these model rules, see our Tax Policy Alert “OECD releases Pillar Two 15% minimum effective tax rate Model Rules” at www.pwc.com/gx/en/services/tax/publications/tax-policy-bulletin.html). The OECD also released commentary on the model rules in March 2022, an implementation framework addressing key elements of the rules in December 2022, and further administrative guidance in February 2023 (including guidance on the interaction of Pillar Two with the U.S. Global Intangible Low-Taxed Income (GILTI) regime).

The budget restates Canada’s intention to implement Pillar Two, along with a domestic minimum top-up tax (which will apply to Canadian entities of MNEs that are within the scope of Pillar Two). The IIR and domestic minimum top-up tax will come into effect for fiscal years of MNEs that begin on or after December 31, 2023; the UTPR will come into effect for fiscal years of MNEs that begin on or after December 31, 2024. For these purposes, an MNE is considered to have the same fiscal year as its ultimate parent entity.

The government intends to release draft legislation for the IIR and domestic minimum top-up tax for public consultation in the coming months; draft legislation for the UTPR will follow at a later time. The draft legislation will closely follow the model rules, and the commentary and administrative guidance on those rules, particularly regarding the application of safe harbours. The budget also states that the government will continue to monitor international developments as it proceeds with the implementation of Pillar Two.

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Sales tax measures

GST/HST treatment of payment card clearing services

As a result of a recent court decision that found that GST/HST does not apply to supplies of payment card clearing services rendered by a payment card network operator, the budget proposes to amend the GST/HST definition of “financial service” to clarify that these services are excluded from the definition, to ensure that such services generally continue to be subject to the GST/HST.

This measure will apply to a service rendered under an agreement for a supply if any consideration for the supply becomes due, or is paid without becoming due, after March 28, 2023. This measure will also generally apply to a service rendered under an agreement for a supply if all of the consideration for the supply became due, or was paid, before March 29, 2023, except in certain situations.

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Other tax measures

Alcohol excise duty

The budget proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2% for one year only, as of April 1, 2023.

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Cannabis taxation

The budget proposes to allow all licensed cannabis producers (instead of only certain smaller licensed cannabis producers) to remit excise duties on a quarterly rather than monthly basis, starting from the quarter beginning on April 1, 2023.

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Tariff support for developing countries

The budget proposes to renew the General Preferential Tariff (GPT) and Least Developed Country Tariff programs until the end of 2034. These programs were to expire on December 31, 2024. The government also intends to update these programs, which would include creating a GPT+ program, expanding benefits for certain import categories and simplifying administrative requirements for Canadian importers.

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Previously announced measures

The budget confirms that the government will proceed with the following previously announced measures, as modified to take into account consultations and deliberations since their announcement or release:

• legislative proposals released on November 3, 2022, relating to the excessive interest and financing expenses limitations and reporting rules for digital platform operators; for more information, see our Tax Insights “Updated legislation: Excessive interest and financing expenses limitation (EIFEL) regime”
• tax measures announced in the November 3, 2022 Fall Economic Statement, for which legislative proposals have not yet been released, including the Investment Tax Credit for Clean Technologies and the extension of the residential property flipping rule to assignment sales; for more information, see our Tax Insights “2022 Federal Fall Economic Statement: Tax highlights"
• legislative proposals released on August 9, 2022, which include measures relating to:
  • borrowing by Defined Benefit Pension Plans and fixing contribution errors in Defined Contribution Pension Plans
  • reporting requirements for Registered Retirement Savings Plans and Registered Retirement Income Funds
  • the Investment Tax Credit for Carbon Capture, Utilization and Storage
  • hedging and short selling by Canadian financial institutions
  • substantive CCPCs
  • mandatory disclosure rules; for more information, see our Tax Insights “Finance releases draft legislative proposals: Mandatory disclosure rules” (November 9, 2023 update)
• legislative proposals released on April 29, 2022, relating to hybrid mismatch arrangements; see our Tax Insights “Canada introduces first package of hybrid mismatch rules”
• legislative proposals released on February 4, 2022 relating to the GST/HST treatment of cryptoasset mining; for more information, see our Tax Insights “Finance releases draft legislative proposals: GST/HST measures for cryptoasset mining”
• legislative proposals released on December 14, 2021, to introduce the Digital Services Tax Act; for more information, see our Tax Insights “Digital Services Tax (DST): Will the DST’s potential implementation affect your business”
• the 2021 federal budget measure to have a consultation on Canada’s transfer pricing rules
• measures confirmed in the 2016 federal budget relating to the GST/HST joint venture election

The budget also reaffirms the government’s commitment to move forward as required with technical amendments to improve the certainty and integrity of the tax system.

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