On November 21, 2023, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, released the Canadian Federal Government's 2023 Fall Economic Statement. The 141-page document was accompanied by legislative proposals to amend the Underused Housing Tax Act and to introduce new goods and services tax/harmonized sales tax joint venture election rules in the Excise Tax Act. The document and draft legislation provided some additional details regarding both new and previously-announced tax measures which are summarized below.
Underused Housing Tax (UHT)
On January 1, 2022, the Underused Housing Tax Act (UHT Act) came into force, which requires certain owners (other than "excluded owners") of residential property in Canada to file an annual return to report their ownership and, subject to certain statutory exemptions, pay a 1% UHT on the property's value. The 2023 Fall Economic Statement introduces a number of measures aimed at facilitating compliance and ensuring that the UHT continues to apply as intended.
Elimination of filing requirement for certain owners
Currently, every person that is an "owner" (other than an "excluded owner") of residential property in Canada, as of December 31 of the calendar year, is required to file a UHT return for the calendar year in respect of the property. However, an exemption from paying the UHT may be available for the following types of owners:
- A "specified Canadian corporation," which is a Canadian corporation where less than 10% of the voting shares and equity value are owned by non-Canadian individuals or corporations;
- A partner of a "specified Canadian partnership," which is, as currently defined, a partnership each member of which is an excluded owner or a specified Canadian corporation; and
- A trustee of a "specified Canadian trust," which is, as currently defined, a trust under which each beneficiary having a beneficial interest in the property is an excluded owner or a specified Canadian corporation.
To ease the UHT compliance burden for these Canadian entities, effective for the 2023 and subsequent calendar years, the government is proposing to include specified Canadian corporations, partners of specified Canadian partnerships and trustees of specified Canadian trusts in the definition of "excluded owner" for UHT purposes. Accordingly, they will no longer be required to file an annual UHT return.
The government is also proposing, effective for the 2023 and subsequent calendar years, to expand the definitions of "excluded owner," "specified Canadian partnership" and "specified Canadian trust" to provide UHT filing and tax relief for a broader range of Canadian ownership structures.
Reduction to minimum failure to file penalties
Effective for 2022 and subsequent calendar years, the government is proposing to reduce the minimum penalty for owners who fail to file a UHT return by the filing deadline. In particular, the government proposes to reduce the minimum penalty from CA$5,000 to CA$1,000 for individuals, and from CA$10,000 to CA$2,000 for corporations, per failure.
Exemption for certain employee accommodations
Effective for 2023 and subsequent calendar years, the government is proposing to introduce a new UHT exemption for residential properties held as a place of residence or lodging for employees and other contractors rendering services to the owner. This exemption would be available in respect of residential properties located anywhere in Canada other than in a population centre within either a census metropolitan area or census agglomeration having 30,000 or more residents.
Additional technical changes
Currently, the UHT is not payable if the property is located in certain prescribed areas of Canada and is used as a place of residence or lodging by the owner or the owner's spouse or common-law partner for at least 28 days during the calendar year. The government is proposing to ensure than an individual or a spousal unit can claim this exemption for only one residential property for a calendar year, effective for the 2024 and subsequent calendar years.
The government is also proposing to exclude unitized apartment buildings from the definition of "residential property" for UHT purposes, effective for the 2022 and subsequent calendar years. In particular, a residential condominium unit (a Unit) that is part of a building containing four or more Units is not considered a residential property for purposes of the UHT Act if a person that is the owner of all or substantially all of the Units in the building is the owner of the particular Unit, and all or substantially all of those Units owned by the person are held by the person for the purpose of providing individuals with continuous occupancy of a Unit as a place of residence or lodging for a period of at least one month.
Additional time to file 2022 UHT returns
The filing deadline for UHT returns for the 2022 calendar year was April 30, 2023. However, on March 27, 2023, the Canada Revenue Agency announced that it would waive penalties and interest, provided the UHT returns are filed and the UHT is paid by October 31, 2023. On October 31, 2023, the Minister of National Revenue announced this relief would be extended for an additional six months, giving owners until April 30, 2024, to file their 2022 UHT returns. UHT returns for the 2023 calendar year will also need to be filed by the normal deadline of April 30, 2024.
International tax reform and digitalization
In the 2023 Fall Economic Statement, the government reaffirmed its commitment to the two-pillar tax reform design originating from the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. More specifically, as previously announced in Budget 2023, the government intends to move ahead with legislation to implement Pillar II and the global minimum tax in Canada, and until the time that Canada and a sufficient number of its international partners are prepared to implement Pillar I, Canada will implement its own Digital Services Tax. To that end, the government alluded to forthcoming legislation that would allow them to determine the entry-into-force date of the Digital Services Tax (which was previously anticipated to be enacted by January 1, 2024, with retroactive effect to January 1, 2022).
Clean Economy Investment Tax Credits (ITCs)
The 2023 Fall Economic Statement provided the following updates on the progress of various investment tax credit initiatives directed at enhancing Canada's clean economy.
Carbon Capture, Utilization and Storage (CCUS)
Legislation will be introduced before the end of the year, following consideration of consultations that completed in September. The CCUS ITC will be available from January 1, 2022.
Clean Technology
Legislation will be introduced before the end of the year, following consideration of consultations that completed in September. The Clean Technology ITC will be available from March 28, 2023.
The 30% Clean Technology ITC will be expanded to include systems that produce electricity, heat, or both electricity and heat from waste biomass. This expansion would be available to businesses investing in eligible property that is acquired and becomes available for use on or after November 21, 2023.
Clean Electricity
This is a 15% tax credit ITC that was announced as part of Budget 2023. The Clean Electricity ITC is available to both taxable and nontaxable entities such as Crown corporations and publicly-owned utilities, corporations owned by Indigenous communities and pension funds.
The 2023 Fall Economic Statement announced that the design and implementation details of the Clean Electricity ITC, except for those pertaining to publicly-owned utilities, will be published in early 2024. With respect to the Clean Electricity ITC for publicly-owned utilities, the federal government will begin consultations with provinces and territories in 2024. In both cases, the federal government is targeting fall 2024 to introduce legislation for the Clean Electricity ITC.
The Clean Electricity ITC will be expanded to include systems that produce electricity or both electricity and heat from waste biomass (but not just heat). This expansion would be available as of the date of Budget 2024 for projects that did not begin construction before March 28, 2023.
Clean Technology Manufacturing
Consultations on draft legislation will be launched by the federal government this fall with a goal of introducing legislation in early 2024. The Clean Technology Manufacturing ITC will be available from January 1, 2024.
Clean Hydrogen
Consultations on draft legislation will be launched by the federal government this fall with a goal of introducing legislation in early 2024. The Clean Hydrogen ITC will be available from March 28, 2023.
Budget 2023 indicated that the Clean Hydrogen ITC would provide support for clean ammonia production at a 15% ITC rate. The 2023 Fall Economic Statement proposes that property that is required to convert clean hydrogen into ammonia will also qualify for the ITC provided a number of conditions are met.
The 2023 Fall Economic Statement also provided more details on the use of Power Purchase Agreements and renewable natural gas in calculating carbon intensity for the purpose of the Clean Hydrogen ITCs.
The 2023 Fall Economic Statement included additional details on carbon intensity assessments and validation as well as compliance and recovery in connection with clean hydrogen projects.
Labour requirements for Clean Economy ITCs
The 2023 Fall Economic Statement indicated that draft legislation will be released before the year, following consideration of consultations that completed in September, with respect to the labour requirements (e.g., prevailing union wages and apprenticeship training) that will need to be met in order to receive maximum ITCs available for Clean Technology, Clean Hydrogen, Clean Electricity and CCUS. The effective date for these labour requirements will be the date the enabling legislation is first tabled.
Canadian journalism labour tax credit
The Canadian journalism labour tax credit (the Journalism Tax Credit) is a refundable 25% tax credit on the salary or wages paid to eligible newsroom employees of a "qualifying journalism organization." Qualifying labour expenditures per eligible newsroom employee are capped at CA$55,000 for a taxation year.
The 2023 Fall Economic Statement proposes to increase the cap on labour expenditures per eligible newsroom employee from CA$55,000 to CA$85,000. In addition, the government proposes that the Journalism Tax Credit rate be temporarily increased to 35% for a period of four years. As a result, organizations would be able to claim up to CA$29,750 in eligible labour costs per eligible newsroom employee per year.
These changes would apply to qualifying labour expenditures incurred on or after January 1, 2023. The Journalism Tax Credit rate would return to 25% for expenditures incurred on or after January 1, 2027.
Short-term housing
The 2023 Fall Economic Statement announced that, effective January 1, 2024, 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 and for short-term rentals where operators are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements. The government is also proposing to provide CA$50 million over three years to support municipal enforcement of restrictions on short-term rentals.
Dividend deductions by financial institutions
Budget 2023 introduced proposed legislation limiting the ability of financial institutions to claim a deduction for dividends received on shares that are mark-to-market property (assets whose values are regularly revalued based on market prices). The 2023 Fall Economic Statement adds a noteworthy exception to this rule. Specifically, this exception would exclude dividends received on "taxable preferred shares" as defined within the Income Tax Act (Canada) (the Tax Act) from the application of the new legislation introduced in Budget 2023. This change, along with the broader measure that was introduced in Budget 2023, is scheduled to come into effect for dividends received by financial institutions on or after January 1, 2024.
Concessional loans
The Tax Court of Canada's 2021 decision in CAE Inc. v. R. 2021 CCI 57 (affirmed by the Federal Court of Appeal, 2022 CAF 178), found that a fully-recourse, low-interest government loan (with other "non-commercial" terms) was "government assistance" for purposes of the Tax Act. Generally, the receipt of government assistance by a taxpayer may result in all or a portion of the amount of the government assistance be (i) includible in income, (ii) not otherwise deductible, (iii) not otherwise available to be added to the tax cost of a capital asset and/or (iv) not available in calculating potential investment tax credits. The Canada Revenue Agency's historical position, found in Interpretation Bulletin IT-273R2, Government Assistance – General Comments (13 September 2000), had been that fully-recourse, low-interest or even zero interest government loans would "not normally cause the loan to be considered as [government] assistance."
The 2023 Fall Economic Statement proposes to amend the Tax Act, with effect from November 21, 2023, to provide that bona fide low-interest or zero-interest government (i.e., public authority) loans with "reasonable repayment terms" will generally not be considered government assistance. The purpose of this amendment appears to attempt to address concerns regarding the potential clawback or denial of investment tax credit incentives, particularly those related to "clean energy" projects, where government loan incentives are also available and accessed to help fund the project.
International shipping
Income from international shipping activities is generally not subject to corporate income tax in Canada if one of the following conditions are met: 1) the income is earned by a non-resident whose country extends a similar exemption to Canadian companies; or 2) the company is managed from Canada, but they are incorporated in a foreign jurisdiction with a reciprocal exemption (among other conditions).
Shipping companies managed from Canada have often structured their operations to align with the aforementioned conditions by incorporating in a foreign jurisdiction and booking their international shipping income there. However, the government's proposed implementation of Pillar II in Budget 2023, only excluded international shipping enterprises whose "strategic or commercial management" is located in the same jurisdiction where its income is booked from the global minimum tax.
In an effort to establish consistency between the relevant provisions of the Tax Act and the proposed global minimum tax, it was proposed in the 2023 Fall Economic Statement that the Tax Act be amended to make an exemption for international shipping income that is generally available to Canadian resident companies. This proposed amendment is intended to allow shipping companies with management in Canada to continue their operations in line with both the Pillar II international shipping exclusion and the proposed exemption in the Tax Act, and to remove the incentive 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 on or after December 31, 2023.
Taxpayer information sharing for the Canadian Dental Care Plan
In Budget 2023, the government announced a proposal to implement the Canadian Dental Care Plan (the Plan), which would be administered by Health Canada. The Plan will provide dental coverage for uninsured Canadians with annual family income of less than CA$90,000, with no co-pays for those with family incomes under CA$70,000. The 2023 Fall Economic Statement proposes to amend the Tax Actto permit the Canada Revenue Agency to share taxpayer information with Public Services and Procurement Canada for the purpose of administering the Plan. Presumably, this includes information regarding the annual family income of those seeking benefits under the Plan.
Removing the GST/HST from psychotherapists' and counselling therapists' services
Under the Excise Tax Act (ETA), most services rendered to individuals by physicians, dentists and nurses and certain other health care practitioners are exempt from the goods and services tax/harmonized sales tax (GST/HST) as set out in the legislation.
The 2023 Fall Economic Statement proposes that psychotherapists and counselling therapists be added to the list of health care practitioners whose professional services rendered to individuals are exempt from the GST/HST.
This measure would apply on royal assent of the enacting legislation.
Removing the GST from new co-op rental housing
The federal government recently announced its intention of removing GST from new purpose-built rental housing projects, such as apartment buildings, student housing and seniors' residences by introducing, on September 21, 2023, Bill C-56, the Affordable Housing and Groceries Act.
The removal of the GST would apply only to projects that begin construction between September 14, 2023, and the end of 2030, and that complete construction before 2036. The removal would not apply to substantial renovations of existing residential complexes.
The 2023 Fall Economic Statement announced that co-operative housing corporations that provide long-term rental accommodation would also be eligible for the removal of the GST on new rental housing, provided the other conditions have been met. The measure is not intended to apply to co-operative housing corporations where occupants have an ownership or equity interest.
Joint venture election
The 2023 Fall Economic Statement announces that the government is seeking stakeholders' views and comments on the below proposed new GST/HST joint venture election rules. Draft legislative proposals with respect to these measures will be released for public consultation in the draft legislation section of the Department of Finance website. The federal government invites Canadians and stakeholders, including Indigenous governments, organizations and associations, to share their feedback on these proposals by March 15, 2024.
Proposed new joint venture election rules
To allow more participants in commercial joint ventures access to the simplification benefits of the joint venture election, new joint venture election rules are proposed. Key elements of these proposed new rules include:
- Replacing the condition that the joint venture activities must be eligible activities set out in the legislation or regulations with an "all or substantially all commercial activities" condition (within the meaning of the GST/HST legislation);
- Requiring all electing participants to be registered for GST/HST purposes; and
- Replacing existing deeming measures with revised deeming measures that are more precisely focused on tax accounting.
Making or revoking the election
Under the proposed new rules, a qualifying operator and a qualifying participant in a qualifying joint venture could jointly make or revoke a joint venture election. Only one person could make the election as the qualifying operator in respect of a qualifying joint venture at any given time.
For a qualifying operator and a qualifying participant to make an election or revocation under the proposed new rules, the details of the election or revocation, including the effective date, would have to be filed in prescribed manner with the CRA. An election would cease to have effect on the day on which a person that made the election no longer meets the conditions for making it, such as if the person ceased to be registered.
Effects of the election
If an election under the proposed new joint venture election rules is in effect between a qualifying operator (the operator) and a qualifying participant (the participant), the measures described below would generally apply.
Supplies made on behalf of the participant
If the operator makes a supply (other than a supply described in Subdivision C (Special Cases) and D (Capital Property) of Division II) on behalf of the participant in the course of the joint venture activities:
- Section 177 of the ETA (agents) would not apply to the supply;
- Tax collectible in respect of the supply or an amount charged or collected by the operator on behalf of the participant as or on account of tax in respect of the supply would be deemed to be collectible, charged or collected by the operator and not by the participant for purposes of determining net tax of the operator and participant, and for applying section 222 of the ETA (trust for amounts collected);
- The operator would account for any related adjustments under the bad debt rules in section 231 of the ETA and the credit note rules in section 232 of the ETA; and
- For purposes of the filing frequency rules in section 249 of the ETA, the threshold amounts of the operator and participant would be determined as if any consideration in respect of the supply that became due or was paid to the participant, had become due or had been paid to the operator.
Tax payable to the Receiver General
If tax is payable by the participant to the Receiver General under section 219 of the ETA (self-assessment for imported taxable supplies), 220.09 of the ETA (self-assessment for property and services brought into a participating province) or subsection 228(4) of the ETA (self-assessment for real property and emission allowance) by the operator on behalf of the participant for consumption, use or supply, all or substantially all in the course of the joint venture activities, then the operator (rather than the participant) would be required to pay the tax to the Receiver General on or before the day on or before which the operator's return for the reporting period in which the tax became payable is required to be filed, and the tax would be reported by the operator in that return.
Input tax credits
If the operator acquires or imports property or a service, or brings it into a participating province on behalf of the participant for consumption, use or supply, all or substantially all in the course of the joint venture activities, and if tax that is payable or paid by the participant in respect of the supply (other than a supply described in Subdivision C (Special Cases) and D (Capital Property) of Division II of the ETA), importation or bringing in, as the case may be, is included in determining an input tax credit of the participant:
- The participant would not be entitled to claim the input tax credit;
- The operator could deduct an amount equal to the input tax credit in determining the operator's net tax;
- If the operator deducts such an amount in determining the operator's net tax for a reporting period, the amount would be deemed to have been claimed by the participant as an input tax credit in the last reporting period of the participant that ended before that time; and
- If the operator makes a deduction and the participant is thereby deemed to claim the input tax credit, and subsequently a credit note is received or a debit note is issued in respect of an adjustment, refund or credit of an amount of tax, the operator would make any required additions to net tax under paragraph 232(3)(c) of the ETA.
Tax adjustments
There are tax adjustment measures (particularly under Subdivision C (Special Cases) and D (Capital Property) of Division II) that variously deem there to be a supply, deem tax to be paid or collected, require an addition to net tax or allow input tax credits to be claimed in specified circumstances. Under the proposed new rules, the default would be that the participants, rather than the operator, would account for these adjustments.
Conversely, if the operator is required under the proposed new rules to account for tax on behalf of the participant in respect of a particular supply, acquisition, importation or bringing of property or services into a participating province, the operator (rather than the participant) would be required to also account for related tax adjustments under the following measures:
- The credit and debit note rules in section 232 of the ETA;
- The bad debt rules in section 231 of the ETA;
- The drop-shipment rules in subsection 169(2) and sections 179 and 180 of the ETA; and
- The forfeiture and extinguished debt rules in section 182 of the ETA.
The question of whether the operator or the participant should account for these and other tax adjustment measures under the GST/HST will be revisited following consultations and in light of information obtained during those consultations.
Supplies by the operator to the participant
If the operator supplies property or a service (other than a supply by way of sale of real property) to the participant and the property or service is acquired for consumption, use or supply by the participant all or substantially all in the course of both the joint venture activities and the participant's commercial activities, the supply would be deemed to be made for no consideration.
Joint and several or solidary liability
A person that makes or purports to make the election in respect of an agreement would be jointly and severally, or solidarily, liable for all GST/HST obligations that result from activities carried on under the agreement.
Coming into force and transitional rules
As part of the consultations, the government is seeking views and comments on coming into force considerations for the proposed new joint venture election rules, which are currently proposed to come into force on the day on which the Act enacting the new rules receives royal assent. In addition, the government is seeking views and comments on transitional considerations for the existing rules.
Previously announced measures
The 2023 Fall Economic Statement confirmed the government's intention to move forward with a number of previously announced measures. These include legislative proposals released on August 4, 2023, several of which were subject to consultations. Notable items in those proposals include:
- Modernizing the general anti-avoidance rule;
- Alternative minimum tax for high-income individuals;
- Intergenerational business transfers;
- Tax on repurchases of equity;
- Technical amendments to GST/HST rules for financial institutions, notably in respect of selected listed financial institutions;
- Revised Luxury Tax draft regulations to provide greater clarity on the tax treatment of luxury items; and
- Employee ownership trusts.
We would like to thank the following for their contributions to this Insight: Keaton Buchberger, Paige Donnelly, Gergely Hegedus, Camille Janvier-Langis, Manon Jubinville, Brian Kearl, Adam Kotlowitz and Dragann Mallette.
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