2023 Fall Economic Statement
On November 21, the Deputy Prime Minister and Minister of Finance released the federal government’s 2023 Fall Economic Statement (FES), which contained some new tax announcements along with an update on previously announced tax measures. Please see our summary of key changes and updates below.
Underused Housing Tax (UHT)
The government introduced a national, annual 1 per cent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused, which took effect on January 1, 2022.
In May 2023, CPA Canada submitted a letter to the Deputy Minister of Finance highlighting concerns with this tax and its impact to Canadian owners, and recommended legislative changes.
In line with CPA Canada’s recommendation, the government is proposing to make “specified Canadian corporations”, partners of “specified Canadian partnerships” and trustees of “specified Canadian trusts”, “excluded owners” for UHT purposes. These excluded owners would no longer have UHT reporting obligations.
Other proposed changes include:
- expanding the definitions “excluded owner”, “specified Canadian partnership” and “specified Canadian trust”
- reducing the minimum non-filing penalties from $5,000 for individuals ($10,000 for non-individuals) to $1,000 and $2,000 respectively
- introducing a new UHT exemption for residential properties held as a place of residence or lodging for employees (excluding property located in a metropolitan area with 30,000 or more residents)
- providing that unitized (condominiumized) apartment buildings are not “residential property” for UHT purposes
- ensuring that an individual or a spousal unit can claim the UHT “vacation property” exemption for only one residential property for a calendar year
Most of these changes would apply in respect of 2023 and subsequent calendar years, except as follows:
- proposed changes to the penalties and the definition of rental property for unitized apartment buildings applies to 2022 and subsequent calendar years
- single claim of vacation property exemption is effective in respect of 2024 and subsequent calendar years
Non-Compliant Short-Term Rentals
The federal government is acting to disincentivize short-term rentals.
The 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
- for short-term rental operators who are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements
These measures would apply to deny all expenses incurred on or after January 1, 2024.
Business Income Tax Measures
Supporting Employee Ownership Trusts
Budget 2023 introduced tax rules to facilitate the creation of Employee Ownership Trusts to provide an alternative business succession option for retiring business owners.
Consistent with the message from the Canadian Employee Ownership Coalition (CEOC), CPA Canada expressed concern to senior officials at the Department of Finance Canada that employee ownership trusts would be underutilized without additional incentives for business owners.
To encourage more business owners to sell to an Employee Ownership Trust, the government proposes to exempt the first $10 million in capital gains realized on the sale of a business to an Employee Ownership Trust from taxation, subject to certain conditions.
This incentive would be in effect for the 2024, 2025, and 2026 tax years.
Clean Hydrogen Investment Tax Credit
Budget 2023 introduced the main design elements of the Clean Hydrogen Investment Tax Credit (ITC) with the 2023 FES announcing some specific details regarding:
- eligible clean ammonia production equipment
- power purchase agreements and other similar instruments
- renewable natural gas
- initial project carbon intensity assessment and validation
- compliance and recovery
- strategic environmental assessment statement
Clean Technology and Clean Electricity Investment Tax Credits – Equipment Using Waste Biomass
The government proposes to expand eligibility for the Clean Technology and Clean Electricity Investment Tax Credits to support the generation of electricity, heat, or both electricity and heat, from waste biomass.
The expansion of the eligibility for the Clean Technology Investment Tax Credit would apply in respect of
property that is acquired and becomes available for use on or after November 21, 2023, provided it has not been used for any purpose before its acquisition.
The expansion of the eligibility for the Clean Electricity Investment Tax Credit would be available as of the day of Budget 2024 and to projects that did not begin construction before March 28, 2023, consistent with the general proposed application of this credit.
Canadian Journalism Labour Tax Credit
The government proposes to increase the cap on labour expenditures per eligible newsroom employee from $55,000 to $85,000. It is further proposed that the Canadian journalism labour tax credit rate be temporarily increased from 25 per cent to 35 per cent for a period of four years.
These changes would apply to qualifying labour expenditures incurred on or after January 1, 2023, with the rate returning back to 25 per cent on January 1, 2027.
Dividend Received Deduction by Financial Institutions – Exception
Budget 2023 proposed to deny the dividend received deduction in respect of dividends received by financial institutions on shares that are mark-to-market property.
The government proposes an exception to this measure for dividends received on or after January 1, 2024 on “taxable preferred shares”.
Government assistance tends to reduce the amount of a related expense or the cost or capital cost of the related property, or may be included into income. Historically, non-forgivable loans from public authorities were generally not considered government assistance. This position extended to concessional loans (meaning loans that do not bear interest or that bear interest at below-market rates) from public authorities. However, in a recent tax court decision, concessional loans were determined to be government assistance.
The Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada provided a formal submission to the Department of Finance Canada expressing a tax policy concern resulting from the courts decision advocating for a legislative correction.
The government proposes to amend the Income Tax Act to provide that bona fide concessional loans with reasonable repayment terms from public authorities will generally not be considered government assistance.
This amendment would come into force on November 21, 2023.
Sales and Excise Tax Measures
Removing the GST/HST From Psychotherapists’ and Counselling Therapists’ Services
The government 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.
Joint Venture Election
The government is seeking stakeholders’ views and comments on proposed new Goods and Services Tax/Harmonized Sales Tax (GST/HST) joint venture election rules. These consultations will allow for stakeholders’ views to be taken into consideration prior to finalizing the design of the new rules and the tabling of enacting legislation.
Draft legislative proposals with respect to these measures will be released for public consultation in the draft legislation section of the Department of Finance Canada website. Stakeholders can share their feedback on these proposals via email by March 15, 2024.
International Tax Measures
To ensure consistency with international tax norms, the Income Tax Act and the proposed new Global Minimum Tax Act, it is proposed to make the exemption for international shipping income in the Income Tax Act generally available to Canadian resident companies. This would allow shipping companies with management in Canada to continue their operations in line with both the Pillar Two international shipping exclusion and the exemption in the Income Tax Act. This measure would also effectively remove the incentive that the current tax rules create 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.