Canadian government releases 2023 federal budget

In brief

On March 28, Canada’s 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 labor 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).

Observation: The budget restates Canada’s intention to implement Pillar Two, along with a Domestic Minimum Top-up Tax. The Income Inclusion Rule (IIR) and Domestic Minimum Top-up Tax will come into effect for fiscal years of multinational enterprises (MNEs) that begin on or after December 31, 2023; the Undertaxed Profits Rule (UTPR) will come into effect for fiscal years of MNEs that begin on or after December 31, 2024. 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.