Tax Insights: 2023 Federal Fall Economic Statement – Tax highlights

Issue 2023-34

In brief

On November 21, 2023, the Deputy Prime Minister and federal Minister of Finance, Chrystia Freeland, presented the 2023 federal Fall Economic Statement (economic statement). Generally, the economic statement focuses on the government’s housing action plan and addresses inflation and affordability. The economic statement does not change corporate or personal income tax rates, but it does:

• give additional details of, and expand eligibility for, certain clean energy investment tax credits
• enhance the Canadian journalism labour tax credit
• provide an exception to the proposed measure denying the dividends received deduction for financial institutions in certain circumstances
• announce the federal government’s intention to deny income tax deductions for expenses incurred to earn short-term rental income in provinces and municipalities that have prohibited short-term rentals
• make the exemption for international shipping income in the Income Tax Act available to Canadian resident companies
• amend the Underused Housing Tax Act to provide filing and tax relief to certain residential property owners and reduce failure to file penalties

The Department of Finance also released for consultation draft legislative proposals relating to new GST/HST joint venture election rules. Finally, the economic statement confirms that the government intends to move ahead with legislation to enact a digital services tax in Canada. Forthcoming legislation would allow the government to determine the entry‑into‑force date of this new tax, as Canada continues conversations with its international partners.

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

In detail

Business tax measures

Environmental incentives  

The economic statement:

• provides additional details on the Clean Hydrogen Investment Tax Credit, including the eligibility criteria for property to convert clean hydrogen to ammonia, use of power purchase agreements and renewable natural gas in the calculation of carbon intensity, carbon intensity assessment and validation, and details of the compliance and recovery process
• proposes to expand eligibility for the Clean Technology Investment Tax Credit and the Clean Electricity Investment Tax Credit to support the generation of electricity, heat, or both from waste biomass, for property acquired and available for use:
  • after November 20, 2023 for the Clean Technology Investment Tax Credit
  • as of the date of the 2024 federal budget and for projects that did not begin construction before March 28, 2023 (i.e. the proposed effective dates) for the Clean Electricity Investment Tax Credit

For more information, see our upcoming Tax Insights, which will be available at www.pwc.com/ca/taxinsights.

Canadian journalism labour tax credit

The economic statement proposes to enhance this refundable tax credit on the salary or wages paid to eligible newsroom employees of a "qualifying journalism organization." For qualifying labour expenditures incurred after 2022, the enhancements increase:

• the cap on labour expenditures per eligible newsroom employee in a taxation year from $55,000 to $85,000
• the tax credit rate from 25% to 35% for four years (the rate will return to 25% for expenditures incurred after 2026)

The cap and rates will be prorated for non‑calendar taxation years.

Dividends received deduction for financial institutions

The economic statement proposes an exception to a measure introduced in the 2023 federal budget that would deny financial institutions the dividends received deduction in certain circumstances. The exception is for dividends received on “taxable preferred shares” (as defined in the Income Tax Act) and would apply to dividends received after 2023 (i.e. the effective date of the 2023 federal budget measure).

Government assistance – concessional loans

In a 2021 decision, the Tax Court of Canada held (affirmed by the Federal Court of Appeal) that the full principal amount of a concessional loan (i.e. an interest‑free loan or loan with below‑market interest rate) received from a public authority was government assistance for income tax purposes. In response to the decision, the economic statement proposes to amend the Income Tax Act to provide that bona fide concessional loans from public authorities with reasonable repayment terms will generally not be considered government assistance, effective November 21, 2023.

Non-compliant short-term rentals

The economic statement announces that the federal government intends 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. The federal government also intends to deny income tax deductions when short-term rental operators are not compliant with the applicable provincial or municipal licensing, permitting or registration requirements. This would apply to deny expenses incurred after 2023.

International tax measures

International shipping

The economic statement proposes to make the exemption for international shipping income in the Income Tax Act generally available to Canadian resident companies. The objective is to ensure consistency with international tax norms and greater consistency between the international shipping provisions of the Income Tax Act and the proposed new Global Minimum Tax Act. The proposed change is also meant to allow shipping companies with management in Canada to continue their operations and benefit from both the Pillar Two international shipping exclusion and the exemption in the Income Tax Act. Effectively, this change would remove the incentive in the current tax rules for shipping companies with management in Canada to incorporate and carry on certain international shipping activities in foreign jurisdictions.

This measure would apply to taxation years that begin after December 30, 2023.

Sales tax measures

Goods and services tax/Harmonized sales tax (GST/HST) joint venture election

Under the GST/HST, a joint venture is not a person and therefore cannot register and account for tax. Instead, each participant accounts separately for their proportionate share of tax that is collectible, payable or recoverable in the course of their joint venture activities. To simplify tax accounting, a joint venture participant that is a registrant (the operator) can make an election (a joint venture election) with another participant (the co‑venturer) if the activities under their joint venture agreement are eligible activities or prescribed activities. Certain rules apply when a joint venture election is in effect.

To allow more participants in commercial joint ventures to access the simplification benefits of the joint venture election, the federal government has proposed new joint venture election rules. Draft legislative proposals on new joint venture election rules have been released for consultation. Interested parties are invited to submit their comments by March 15, 2024.

Psychotherapist and counselling therapist services

The economic statement proposes to add psychotherapists and counselling therapists to the list of healthcare practitioners whose professional services rendered to individuals are exempt from GST/HST, effective upon royal assent of the enacting legislation.

Other tax measures

Underused housing tax (UHT)

The economic statement proposes several changes to the UHT that would:

• eliminate the filing requirement for certain owners, effective for the 2023 and subsequent calendar years, by:
  • making “specified Canadian corporations,” partners of “specified Canadian partnerships” and trustees of “specified Canadian trusts” “excluded owners” for UHT purposes (i.e. they will no longer have a UHT reporting obligation)
  • expanding the definitions of “excluded owner,” “specified Canadian partnership” and “specified Canadian trust” to provide UHT filing and tax relief in respect of a broader range of Canadian ownership structures
• reduce the minimum penalty for failing to file by the filing deadline, effective for the 2022 and subsequent calendar years, from:
  • $5,000 to $1,000 per failure for individuals
  • $10,000 to $2,000 per failure for corporations
• exempt certain employee accommodations, effective for the 2023 and subsequent calendar years, by introducing a UHT exemption for residential properties held as a place of residence or lodging for employees (exceptions apply depending on the location of the property)
• make technical changes to ensure the UHT applies in accordance with the policy intent, such as:
  • providing that unitized (“condominiumized”) apartment buildings are not “residential property” for UHT purposes, effective for the 2022 and subsequent calendar years
  • ensuring that an individual or a couple can claim the UHT “vacation property” exemption for only one residential property for a calendar year, effective for 2024 and subsequent calendar years

The economic statement provides a reminder that the deadline for filing the inaugural UHT returns (for the 2022 calendar year) has been extended by one year to April 30, 2024. For more information, see our Tax Insights “The underused housing tax – A new compliance requirement for many owners of Canadian residential property.” 

Draft legislative proposals on the above changes have been released for consultation. Interested parties are invited to submit their comments by January 3, 2024.

Employee ownership trusts (EOTs)

The economic statement proposes to temporarily exempt from tax, for the 2024 to 2026 taxation years, the first $10 million in capital gains realized on the sale of a business to an EOT, subject to certain conditions. Further details will be provided in the coming months. 

Previously announced tax measures

The economic statement confirms that the government intends to proceed with measures announced in its 2023 federal budget and other previously announced measures, as modified to take into account consultations, including:¹

• August 4, 2023 legislative proposals on:
  • clean energy investment tax credits and enhancing the reduced tax rates for zero-emission technology manufacturers
  • Employee Ownership Trusts, intergenerational business transfers and the alternative minimum tax for high‑income individuals
  • a tax on share repurchases
  • modernizing the general anti-avoidance rule (GAAR)
  • a global minimum tax (Pillar Two) and digital services tax
  • GST/HST rules for financial institutions
  • the excessive interest and financing expenses limitation (EIFEL) regime
• proposed amendments to the Canadian transfer pricing rules (June 6, 2023 consultation paper)
• hybrid mismatch arrangements (April 29, 2022 legislative proposals)
• August 9, 2022 legislative proposals on substantive Canadian-controlled private corporations

^{1. For more details on these proposed measures, see our Tax Insights:  
 - “2023 Federal budget: Supporting a clean economy” 
 - “Finance releases draft legislative proposals”
 - “Finance releases draft legislation for the clean technology and CCUS investment tax credits”
 - “Proposed changes to the alternative minimum tax: How will it affect individuals and trusts?”
 - “Canada releases draft Global Minimum Tax Act”
 - “Digital Services Tax: One step closer to becoming a reality”
 - “Updated legislation: Excessive interest and financing expenses limitation (EIFEL) regime (August 2023 release)”
 - “Finance launches consultation on reforming and modernizing Canada’s transfer pricing rules”
 - “Canada introduces first package of hybrid mismatch rules”}