Fall Economic Statement 2023 - Sales Taxes: VAT, GST

The Deputy Prime Minister and Minister of Finance tabled the 2023 Fall Economic Statement (FES) on November 21, 2023. The tax measures included in the FES are not as extensive as in some prior years; no further details were provided in relation to many previously-announced measures of significance, including the general anti-avoidance rule (GAAR), the excessive interest and financing expense limitation (EIFEL), or the proposed Global Minimum Tax Act (GMTA), apart from announcing the Government's intention to proceed with these measures, as modified to take into account consultations and deliberations since their release. Nevertheless, there are some tax items that will be of interest to Canadian businesses and foreign investors.

Unless otherwise stated, statutory references are to the Income Tax Act (Canada) (ITA).

"Concessional" (i.e., no interest or below market-rate) Loans from Governments

In a recent decision, CAE Inc. v. R., 2022 FCA 178, the Federal Court of Appeal held that the principal amount of a non-forgivable concessional loan received by the taxpayer from a public entity constituted government assistance. The potential treatment of a bona fide loan as government assistance created uncertainty for taxpayers and raised policy concerns. The FES proposes to amend the ITA to clarify that bona fide loans (including concessional loans) with reasonable repayment terms received from public authorities will generally not be considered government assistance.

Clean Hydrogen Investment Tax Credit

Budget 2023 proposed the Clean Hydrogen Investment Tax Credit (CHITC) and main design elements. Further details on the main design elements were included in the FES, including:

The requirements that must be met for a CHITC to be available in respect of property used to convert clean hydrogen into ammonia. Most notably: (i) the ammonia producer must use its own hydrogen feedstock for ammonia production and the hydrogen feedstock must be sourced from clean hydrogen projects that are eligible for the CHITC; (ii) the clean hydrogen project must have sufficient production capacity to satisfy the needs of the taxpayer's ammonia production facility; and (iii) it must be feasible to transport hydrogen from hydrogen production facilities to ammonia production facilities if the facilities are not co-located.
Rules for when power purchase agreements can be used to calculate the carbon intensity of hydrogen production, rather than relying on the carbon intensity of the grid.
Rules for when renewable natural gas may be used to reduce the carbon intensity of hydrogen production.
Further details on the validation of the initial carbon intensity assessment for a project by Natural Resources Canada.
Further details on how Natural Resources Canada will verify the carbon intensity of a hydrogen generation project, and how the CHITC will be recovered if the verified carbon intensity of the project exceeds the original validated carbon intensity assessment.

The Department of Finance has indicated that implementing legislation for the CHITC will be released in 2024 (ideally, early 2024), with a consultation period beginning in late 2023. The eligibility of other low-carbon hydrogen production pathways continues to be reviewed.

Clean Technology Investment Tax Credit and Clean Electricity Investment Tax Credit – Waste Biomass Equipment

The FES proposes that the Clean Technology and Clean Electricity investment tax credits (CTITC and CEITC, respectively) will be expanded to include property that is used to generate heat and/or electricity from waste biomass. Waste biomass would include "specified waste materials" for the purposes of Class 43.1 and 43.2 property (e.g., wood waste, municipal waste, food and animal waste, etc.), and eligible property would include electrical generating equipment, heat generating equipment, heat recovery equipment, and equipment used to upgrade specified waste materials, among other things. There will also be verification to ensure compliance with eligibility criteria and environmental rules for a number of years following the year in which the credit is claimed.

In respect of the CEITC more generally, the FES appears to signal that a distinction may be made between publicly-owned utilities and other taxpayers. The Department of Finance has indicated that:

In respect of the CEITC for publicly-owned utilities, consultations with the provinces and territories will take place in 2024, with the Government targeting to introduce legislation in fall 2024; and
In respect of the CEITC for other taxpayers, design and implementation details will be published in early 2024 and a consultation on draft legislation will launch in summer 2024, with the intention to introduce legislation in fall 2024.

The Department of Finance also indicated that legislation implementing the CTITC will be introduced in Parliament in late 2023.

Dividend Received Deduction for Financial Institutions

Budget 2023 proposed to enact subsection 112(2.01), which would deny a subsection 112(1) deduction for financial institutions in respect of dividends received on a share that is mark-to-market property. The FES proposes an exclusion from subsection 112(2.01), which would ensure that provision would not apply to dividends received on a taxable preferred share. Subsection 112(2.01), as amended, would have effect from January 1, 2024.

Non-Compliant Short-Term Rentals

The FES includes a proposed measure that would deny deductions for expenses to earn short-term rental income (e.g., from Airbnb rentals), including interest expenses, if either: (i) the rental income is earned in a municipality or a province that has prohibited short-term rentals; or (ii) the rental income is earned in a province or municipality that permits short-term rentals, but the taxpayer is not in compliance with the applicable licensing or permitting requirements. It appears that the rationale for this restriction is to reduce the after-tax return on investment in some residential units used for short-term rentals, thereby making longer-term rentals more attractive on an after-tax basis where municipal or provincial governments decide to prohibit or restrict short-term rentals.

No draft legislation accompanied this proposal. It is proposed to apply to expenses incurred on or after January 1, 2024.

International Shipping Income

The Pillar Two Model Rules and the proposed GMTA exempt international shipping income from the proposed 15% global minimum tax, provided that the strategic or commercial management of the international shipping operations is located in the same jurisdiction in which the international shipping income is booked. This requirement is problematic for international shipping operators with strategic management located in Canada (which are deemed to be non-residents of Canada notwithstanding the locus of management), as those operators will be booking international shipping income in a foreign jurisdiction because the exemption for international shipping income in the ITA requires that the international shipping operator be incorporated in a non-Canadian jurisdiction.

The FES proposes to extend the exemption for international shipping income to Canadian-resident corporations. An extended exemption should permit non-resident corporations with international shipping operations managed from Canada to continue into Canada without attracting Canadian income tax on their international shipping income, thereby aligning their exemptions under the ITA and the proposed GMTA. This measure is proposed to apply for taxation years beginning on or after December 31, 2023.

Canadian Journalism Labour Tax Credit

Qualifying journalism organizations are currently entitled to a refundable tax credit of up to 25% of qualifying labour expenditures, to a maximum of $55,000 per eligible newsroom employee. The FES proposes to increase the maximum per-employee amount to $85,000, and to temporarily increase the credit rate from 25% to 35% in respect of labour expenditures incurred between January 1, 2023 and December 31, 2026.

Pension Funds and Domestic Investment

The FES identifies that $3 trillion of assets have accumulated in Canadian pension funds and, in a measure that echoes discussions occurring in other jurisdictions, proposes to try to leverage some portion of those assets to increase domestic investment. Specifically, the FES proposes that the Government will: (i) reach out to Canadian pension funds and work collaboratively to create an environment that "encourages and identifies more opportunities" for investment domestically; (ii) explore the removal of the so-called "30% Rule" vis-à-vis domestic investment by these pension funds; and (iii) impose new disclosure obligations on large federally regulated pension funds that will require them to identify to the Office of the Superintendent of Financial Institutions the distribution of their investments by jurisdiction and asset-type.

Underused Housing Tax (UHT)

The FES includes draft legislation amending the Underused Housing Tax Act to make it easier for affected owners to comply. The draft legislation eliminates the filing requirements for certain owners by adding "specified Canadian corporations", partners of "specified Canadian partnerships" and trustees of "specified Canadian trusts" to the definition of "excluded owners". The draft legislation also expands 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. The elimination of filing requirements for certain owners will apply for 2023 and subsequent years.

The Government is also proposing:

A new UHT exemption for 2023 and onward for properties held as accommodations for employees, if the property is located outside of a census metropolitan area or a census agglomeration with 30,000 or more residents;
Technical amendments to provide, among other things, that: (i) condominiumized apartment buildings are not "residential property" for UHT purposes; and (ii) for 2024 and subsequent calendar years, an individual or couple can only claim the UHT "vacation property" exemption for a single property in a calendar year; and
To lower the minimum penalty for individuals and corporations who fail to file a UHT return by the filing deadline from $5,000 to $1,000 for individuals and from $10,000 to $2,000 for corporations, effective in respect of 2022 and subsequent calendar years.

Notwithstanding that the deadline to file 2022 UHT returns was extended multiple times, the FES suggests that the deadline to file 2023 UHT returns will not be extended beyond April 30, 2024. There will be a consultation on amendments to the UHT until January 3, 2024.

GST/HST Joint Venture Elections

The FES includes draft legislation for new GST/HST joint venture election rules, to be added after section 273 of the Excise Tax Act; these rules appear to be intended to replace the existing joint venture election rules on a going-forward basis. The key elements of the proposed legislation include: (i) allowing the joint venture to engage in any activity as long as all or substantially all of the joint venture's activities are commercial activities; (ii) all electing joint venture participants must be registered for GST/HST purposes; and (iii) updated deeming measures to better align with tax accounting. A consultation on these proposed amendments will accept submissions from stakeholders until March 15, 2024.

GST/HST and New Rental Housing

The FES states that the previously announced measure to remove the GST/HST from new residential housing will be extended to apply to co-operative housing corporations, provided that occupants do not have any ownership or equity interest. The FES also clarifies that, like the previously announced rental housing measures, the removal of GST/HST for new co-op rental housing will not apply to substantial renovations of existing residential complexes. The rationale for this exclusion is to prevent "renovictions" and incentivize the supply of new units.

Previously Announced Measures

The FES confirms that the Government intends to move forward with previously announced tax measures, including:

Various tax expenditures, including the Carbon Capture, Utilization, and Storage Investment Tax Credit, the CTITC, the CHITC, the CEITC, reduced tax rates for zero-emission technology manufacturers, and amendments to the flow-through share rules and the Critical Mineral Exploration Tax Credit relating to lithium from brines. Any tax expenditure that was proposed to include a labour requirement will continue to be subject to the labour requirement.
Employee ownership trusts. Importantly, the FES proposes to exempt the first $10,000,000 of capital gains realized on a sale of a business to an employee ownership trust, subject to certain conditions that will be disclosed at a later date.
Intergenerational business transfers.
Proposed amendments to the alternative minimum tax.
The proposed tax on repurchases of equity.
The proposed amendments to the GAAR.
Pillar One and Pillar Two measures, including the proposed GMTA and the proposed digital services tax. Although there is considerable uncertainty surrounding Pillar One and the digital services tax, the Government intends to move forward with the proposed Digital Services Tax Act on the basis that coming into force date can be coordinated with international partners.
The proposed EIFEL rules.
Amendments to the transfer pricing rules to implement the changes outlined in the June 6, 2023 consultation paper.
The substantive CCPC proposals.
The hybrid mismatch arrangement proposals released on April 29, 2022 (i.e., the first package of the anticipated hybrid mismatch rules).

Updated draft legislation for these previously announced measures was not included with the FES.

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