Tax Insights: Bill C-59 introduces EIFEL, environmental incentives, digital services tax, GAAR changes and more

In brief

On November 30, 2023, the federal government tabled Bill C-59,¹ which includes legislation to implement a variety of tax measures, many of which have been long awaited by taxpayers and tax practitioners. Key tax measures:

• implement the excessive interest and financing expenses limitation (EIFEL) regime
• provide for the refundable investment tax credits (ITCs) for clean technology equipment and for carbon capture, utilization and storage (CCUS)
• implement the Digital Services Tax Act
• strengthen the general anti-avoidance rule (GAAR)

This Tax Insights highlights the income tax-related and other measures included in Bill C-59. Upcoming Tax Insights, which will be available at www.pwc.com/ca/taxinsights, will discuss a number of these measures in more depth.

In detail

Bill C-59 contains legislation for the following measures:

Business tax measures

• implementing a tax of 2% on the net value of equity repurchased by certain public corporations and other publicly listed entities²
• limiting the amount of net interest and financing expenses that certain taxpayers may deduct in computing their taxable income, by introducing the EIFEL regime³
• introducing specific anti-avoidance rules relating to corporations referred to as substantive Canadian-controlled private corporations (CCPCs) – but Bill C-59 does not contain the previously proposed international tax elements of this measure
• providing for refundable ITCs for:
  • clean technology equipment
  • CCUS equipment,
    

as well as requiring that certain labour requirements be met to qualify for the full ITC rates³  

• extending the phase-out by three years, and expanding the eligible activities to include certain nuclear manufacturing and processing (M&P) activities, relating to the reduced tax rates for zero-emission technology M&P income²
• allowing lithium from brines to be included as a mineral resource for purposes of flow-through shares and the application of the critical mineral exploration tax credit²
• denying the dividend received deduction for dividends received by Canadian financial institutions on certain shares that are held as mark-to-market property²
• amending the definition “credit union” to eliminate the current revenue test²
• implementing the Digital Services Tax Act, which introduces a 3% tax in respect of Canadian-source digital services revenue earned by large domestic and foreign taxpayers³ (the coming into force of this Act will require the additional step of an order of the Governor in Council)

International tax measures

• eliminating the tax benefits arising under certain hybrid mismatch arrangements (i.e. the rules that were part of the first package released on April 29, 2022)⁴

Absent from Bill C-59 is the legislation to enact the Global Minimum Tax Act.³ However, Canada remains committed to adopting the Organisation for Economic Co‑operation and Development/G20 two-pillar plan to reform the international tax system, which includes implementing a 15% global minimum tax that will generally apply for multinational enterprises with global revenues of at least €750 million (Pillar 2). The federal government has also indicated its continued preference for implementing a multilateral system of income reallocation (Pillar 1), but until that time is moving ahead with a digital services tax.   

Personal tax measures

• ensuring that only genuine intergenerational business transfers are excluded from the anti-surplus stripping rule in section 84.1 of the Income Tax Act, by adding additional conditions that must be met for these transfers²
• facilitating the creation and use of employee ownership trusts²
• implementing consequential changes of a technical nature to facilitate the operation of the existing rules for First Home Savings Accounts
• permitting a qualifying family member to acquire rights as successor of a holder of a Registered Disability Savings Plan following the death of that plan’s last remaining holder who was also a qualifying family member
• exempting certain fees from the refundable tax that applies to contributions under retirement compensation arrangements²

Notably absent from Bill C-59 is the legislation that would significantly change the alternative minimum tax (AMT) regime, effective for taxation years beginning after 2023.³

Other tax measures

• amending the GAAR to strengthen it, as well as introducing a new penalty and extending the normal reassessment period for the GAAR by three years in certain circumstances²
• implementing previously announced GST/HST changes relating to financial institutions, including the GST/HST treatment of payment card clearing services,⁵ as well as other minor amendments to the Excise Tax Act

The takeaway

The legislation in Bill C-59 covers a wide range of tax measures and includes several that make significant tax policy changes in Canada. These include the new EIFEL regime and changes to Canada’s GAAR. Given the late introduction of Bill C-59 and with only a few weeks remaining before Parliament adjourns for the winter break, it is unlikely that the bill will be enacted in 2023. Nevertheless, it is advisable that taxpayers learn about these changes, determine whether any could apply to them and start preparing for their implementation. We look forward to discussing these tax measures with you to facilitate your understanding.

<sup>1. Bill C-59, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023 (first reading: November 30, 2023)
2. For more information, see our Tax Insights “2023 Federal budget: Supporting a clean economy.” 
3. For details of draft legislative proposals released on August 4, 2023, see our Tax Insights:
 - “Updated legislation: Excessive interest and financing expenses limitation (EIFEL) regime (August 2023 release)”
 - “Finance releases draft legislation for the clean technology and CCUS investment tax credits”  
 - "Digital Services Tax: One step closer to becoming a reality”
 - “Canada releases draft Global Minimum Tax Act”
 - “Proposed changes to the alternative minimum tax: How will it affect individuals and trusts?”
4. For details of draft legislative proposals released on April 29, 2022, see our Tax Insights “Canada introduces first package of hybrid mismatch rules.”
5. For more information, see our Tax Insights “2023 Federal budget: GST/HST and financial institutions.”</sup>