Authored by RSM Canada
Executive summary
On Nov. 21, 2023, the Minister of Finance, Chrystia Freeland, released Canada’s 2023 Fall Economic Statement (2023 Economic Statement). The Economic Statement introduces several new tax measures which focus on Canada’s plan for affordable housing and building a strong economy in the form of clean energy credits and addressing international tax gaps.
The Economic Statement also affirms the government’s intention to proceed with previously announced tax measures, including by providing clarifications to certain priority economic areas.
Economic statement 2023
Business tax measures
Clean hydrogen investment tax credit
The 2023 Economic Statement provides further details on the clean hydrogen investment tax credit (Clean Hydrogen ITC), originally proposed in the 2023 Federal Budget (Budget 2023), outlines key design elements of the credit, including eligible projects, credit rates and carbon intensity measurement. The federal government plans to continue reviewing low-carbon hydrogen production pathways leading up to Budget 2024.
Budget 2023 highlighted that the Clean Hydrogen ITC would provide support for clean ammonia production, offering a 15% credit rate with specific conditions. The 2023 Economic Statement extends eligibility of the credit to property converting clean hydrogen into ammonia, subject to sufficient production capacity, transportation feasibility and hydrogen sourcing criteria. The 2023 Economic Statement also addresses the conditions necessary for the inclusion of power purchase agreements and similar instruments for calculating project’s carbon intensity (CI). Eligibility is contingent on sourcing electricity from hydro-, solar- or wind-powered generation that:
- first commenced production on or after March 28, 2023, and no more than one year before the initial CI assessment; and,
- is located in the same province or territory and connected to the electricity grid of that province or territory.
The Clean Hydrogen ITC’s positive environmental impact aligns with the federal sustainable development strategy, aiming to reduce greenhouse gas emissions by 40% to 45% below 2005 levels by 2030 and achieve net-zero emissions by 2050.
Clean Technology and Clean Electricity Investment Tax Credits
The 2022 Fall Economic Statement introduced a 30% refundable clean technology investment tax credit for eligible taxpayers investing in clean technology property between March 28, 2023 and 2035, subject to a phase out in 2034. Budget 2023 added a 15% refundable clean electricity investment tax credit for eligible property starting from Budget 2024 until 2034.
Notably, the 2023 Economic Statement extends the eligibility of these tax credits to encompass systems that support the generation of electricity, heat or a combination thereof, from waste biomass.
The expanded eligibility for the clean technology investment tax credit applies to property acquired on or after the day of the 2023 Economic Statement, as long as it has not been used before acquisition. For the clean electricity investment tax credit, eligibility starts from the Budget 2024 release date and extends to projects that have not commenced construction before March 28, 2023.
Exception on dividend received deduction by financial institutions
In Budget 2023, the government proposed to disallow financial institutions from claiming a deduction for dividends received on shares of other corporations resident in Canada where those shares are mark-to-market property. This measure is intended to better calculate the income of financial institutions from securities consistent with the purpose of the mark-to-market property rules.
The 2023 Economic Statement offers relief from the above amendments by allowing financial institutions to continue to claim the deduction on dividends received on “taxable preferred shares”. Financial institutions will need to review their holdings to fully understand the tax impact of losing this deduction on securities that do not qualify for the exemption.
These changes are proposed to apply to dividends received on or after Jan. 1, 2024.
Supporting the adoption of employee ownership trusts
First introduced in Budget 2022, employee ownership trusts (EOTs) serve as a mechanism to allow employees to purchase a business without requiring them to pay directly to acquire the shares of the business. EOTs also serve as a valuable option for owners planning business succession.
To further incentivize the use of EOTs, the 2023 Economic Statement expands on the proposals contained in Budget 2023. The government proposes to exempt the first $10 million in capital gains realized from the sale of a business to an EOT from taxation. This incentive will apply to the 2024 to 2026 tax years. Details on the exemption will be provided at a future date.
Concessional loans
When a taxpayer receives government assistance in the course of earning income from business or property, the amount of assistance may reduce the amount of related expenses, property costs or may result in a potential inclusion in the taxpayer’s overall income.
Historically, non-forgivable and concessional loans from public authorities were not considered government assistance, until a pivotal 2021 decision by the Tax Court of Canada. This ruling, upheld in 2022 by the Federal Court of Appeal, changed the treatment of concessional loans, considering their full principal amount as government assistance.
Addressing this shift, the 2023 Economic Statement proposes a crucial amendment to the Income Tax Act. The proposed change aims to exclude bona fide concessional loans with reasonable repayment terms from public authorities as government assistance. If enacted, this amendment will take effect on the day of the 2023 Economic Statement, signaling a swift government response to evolving tax law.
International tax measures
Underused Housing Tax
The Underused Housing Tax Act (UHTA) requires affected owners of residential property in Canada to file an annual return starting for the 2022 calendar year. Where the residential property is considered vacant or underused, the owner is required to pay an annual federal 1% tax. The implementation of the UHTA has caused significant confusion and most recently necessitated a second administrative extension to the filing and payment deadline regarding the 2022 calendar year. In particular, if affected owners file their returns and pay the underused housing tax for the 2022 calendar year by April 30, 2024 (previously extended to Oct. 31, 2023), the CRA will waive all penalties and interest otherwise applicable.
In light of feedback received on the UHTA, the 2023 Economic Statement proposes several amendments to the legislation. The UHTA was originally positioned in Budget 2021 as a tax on property owned by non-Canadian individuals and entities. Despite this intention, certain Canadian owners of residential property were also required to file returns and potentially pay tax. The amendments proposed in the 2023 Economic Statement will bring the UHTA closer in line with its original objective by expanding the definition of “excluded owner”. Excluded owners are not required to file a UHTA return or pay tax on their property. “Specified Canadian corporations”, partners of “specified Canadian partnerships” and trustees of “specified Canadian trusts” will now be considered excluded owners. The definitions of “specified Canadian partnership” and “specified Canadian trust” will also be expanded. These changes will apply for 2023 and subsequent calendar years.
The other proposed changes to the UHTA are:
- Decreasing the minimum failure to file penalty from $5,000 for individuals and $10,000 for corporations to $1,000 and $2,000, respectively, for 2022 onwards;
- Introducing an exception for residential properties held as a place of residence or lodging for employees in rural areas for 2023 onwards; and,
- Exempting unitized (“condominiumized”) apartment buildings from the definition of “residential property” for 2022 onward, and limiting the “vacation property” exemption to only one residential property for a calendar year for 2024 onward, in addition to other technical changes alluded to but not described.
Canada’s intention to proceed with implementing global minimum tax
The 2023 Economic Statement reiterates Canada’s commitment to international efforts to reform corporate taxation, particularly through the implementation of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two, aimed at establishing a global minimum tax rate.
Canada intends to enact the Global Minimum Tax Act (GMTA) to implement Pillar Two of the inclusive framework, with an effective date after Dec. 31, 2023. Pillar Two (and the GMTA by extension) would establish a global minimum tax rate of 15% on the profits of large multinational corporations, regardless of where they maintain tax residency. Tax revenue is projected to exceed $3.1 billion by fiscal year 2029 from the Pillar Two international tax reform.
The 2023 Economic Statement also includes an exemption from the application of the GMTA for income from shipping companies to align with global treatment.
Indirect tax measures
Removing GST from new co-op rental housing
The federal government proposed on Sept. 14, 2023 to remove the goods and services tax (GST) from new purpose-built rental housing construction projects to incentivize the rapid construction of new homes. The federal government has also called on provinces to remove provincial sales taxes on rental property construction. Consistent with the federal government, Ontario plans to offer full HST rebates for long-term rental units, as previously announced in the 2023 Ontario Fall Economic Statement.
In the 2023 Economic Statement, co-operative housing corporations that provide long-term rental accommodation will also be eligible to benefit from the GST exemption, subject to additional conditions. The exemption will not apply to substantial renovations of existing residential properties to prevent the displacement of existing renters.
The GST exemption will apply to construction projects that are initiated between Sept. 14, 2023, and Dec. 31, 2030, and fully completed before 2036.
Other tax measures
Non-compliant short-term rentals
The Economic Statement outlines the federal government’s proactive measures to address the growing issue of non-compliant short-term rentals in major Canadian cities like Montréal, Toronto and Vancouver.
The federal government plans to deny income tax deductions for expenses related to earning short-term rental income, including interest expenses, in provinces and municipalities that have prohibited such rentals. This denial of deductions is also extended to cases where short-term rental operators are non-compliant with provincial or municipal licensing, permitting or registration requirements. These measures are set to take effect from Jan. 1, 2024.
Intention to proceed with previously announced measures
Subject to amendments resulting from public consultations and legislative processes, the government intends to proceed with previously announced tax measures. These measures include, but are not limited to:
- The introduction of:
- Hybrid mismatch arrangements rules;
- Excessive interest and financing expenses limitations (EIFEL) regime and;
- Substantive Canadian-controlled private corporations.
- Amendments to:
- Alternative minimum tax for high-income individuals;
- Intergenerational business transfers;
- General anti-avoidance rule and;
- Information requirements for claiming input tax credits for GST/HST purposes, back from the 2021 Federal Budget.
As some of these measures are slated to come into effect in 2024, middle market companies should consider proactive changes to ensure readiness for these new measures.
This article was written by Clara Pham, Daniel Mahne, Farryn Cohn, Sigita Bersenas, Cassandra Knapman, Olukayode Akinbosede, Elizabeth Ojesekhoba and originally appeared on 2023-11-21. Reprinted with permission from RSM Canada LLP.
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The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
Boost Your Employee Productivity and Profitability in Business Services
Investing in development, technology, automation, and outsourcing can improve employee productivity and profitability in business services.
In this article, written by RSM Canada, they explore the different ways businesses can increase their profit margins, as well as boost employee productivity.
Association and HST
In the tax world, association can have a significant impact on your income taxes, but it can also impact your GST/HST as well. When it comes to having to register for GST/HST, the small supplier threshold of $30,000 (or $50,000 for public service bodies) applies to a company and its associates. Association is defined in section 127 of the Excise Tax Act (ETA) and subsections 256 (1) to (6) of the Income Tax Act (ITA). The rules of association for ITA purposes can be found at: http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-256.html
When it comes to association and GST/HST, a common error is not factoring in all of the taxable sales of all associated parties when looking at the small supplier test. Unlike the ITA definition of association, which applies to corporations only, the ETA extends this definition to apply to other persons (such as individuals). It is common for an individual who controls a corporation to charge management fees or commercial rent to their corporation. Assuming the corporation they control is not a small supplier, due to the association rules, these fees would be taxable for GST/HST. Having the individual registered and charging for these services is often overlooked on the incorrect assumption they are not taxable if under $30,000 of taxable supplies. Please note the appropriateness and income tax consequences of such management fees are beyond the scope of this article.
It should also be noted that, as a trust and a partnership is a person for GST/HST purposes, they should also be factored into association with any corporations with common ownership.
If you have a corporate group with transactions amongst all of the entities and shareholders, it would be prudent to have a GST/HST review done to ensure that all taxes are being charged appropriately.
2023-2024 Corporate Income Tax Rates
RSM has created a handy table of the tax rates imposed by the federal and provincial/territorial authorities on income earned by Canadian-controlled private corporations (CCPCs) and general corporations. We’ve linked to it below for easy access. Also included in the table is the combined federal and provincial tax rate for your convenience.
Inflation, Interest Rates Will Have a Surprising Effect on Your Taxes Next Year
The Bank of Canada’s decision this week to hold its benchmark interest rate steady at 5% as it attempts to battle inflation was welcome news for many. But the effects of both higher interest rates and inflation on the tax system will be felt in the new year in at least a couple of ways based on recent economic data available over the past week or so.
First, let’s start with the interest rate environment. It appears that even though the central bank’s rate isn’t rising, the Canada Revenue Agency’s prescribed interest rate will indeed increase (yet again) as of Jan. 1, 2024. The prescribed rate is set quarterly and is tied directly to the yield on Government of Canada three-month Treasury bills, but with a lag.
The calculation is based on a formula in the Income Tax Regulations that takes the simple average of three-month Treasury bills for the first month of the preceding quarter, rounded up to the next highest whole percentage point (if not already a whole number).
To calculate the rate for the upcoming quarter (Jan. 1 through March 31, 2024), we look at the first month of the current quarter (October 2023) and take the average of the three-month T-bill yields, which were 5.16% (Oct. 10) and also 5.16% (Oct. 24). Since the prescribed rate is then rounded up to the nearest whole percentage point, we get 6% for the new prescribed rate for the first quarter of 2024. Contrast this with the historically low rate of 1% we had from July 1, 2020, through June 30, 2022. The last time the prescribed rate was 6% was more than 20 years ago in the second quarter of 2001.
The hike in the prescribed rate has a number of implications. To understand these, we should point out that there are, in reality, three prescribed rates: the base rate, the rate paid for tax refunds, and the rate charged for unpaid taxes. The base rate, which will be increasing to 6% (from 5%) on Jan. 1, applies to taxable benefits for employees and shareholders, low-interest loans, and other related party transactions.
The rate for tax refunds is two percentage points higher than the base rate, meaning that if the CRA owes you money, the rate of interest will be 8% as of Jan. 1. Note, however, that rushing to file your 2023 tax return as early as possible next tax filing season won’t necessarily get you that rate on your refund, because the CRA only pays refund interest on amounts it owes you after May 30, assuming you filed by the deadline.
Finally, if you owe the CRA money, or if you’re late or deficient in one of your quarterly tax instalments, then the rate the CRA charges is a full four percentage points higher than the base rate. This puts the interest rate on tax debts, penalties, insufficient instalments, unpaid income tax, Canada Pension Plan contributions, and employment insurance premiums at a whopping 10% come Jan. 1.
Keep in mind that this interest is compounded daily and is not tax deductible. For example, if you’re a resident of Newfoundland and Labrador and in the highest 2023 tax bracket of 55%, that means you’d have to find an investment that earns a guaranteed, pre-tax rate of return of 22% to be better off than paying down your tax debt.
The other recent economic news that will impact taxpayers in 2024 is the latest inflation number. The tax brackets and most other amounts in the tax system are indexed to inflation. While the inflation indexation factor for 2024 that will be applied to the tax brackets and various other amounts won’t officially be released by the CRA until November, we can do a rough calculation based on the consumer price index (CPI) data released by Statistics Canada last week.
The federal indexation factor for 2024 is calculated as the average of the monthly CPI numbers for the 12-month period ended Sept. 30, 2023, divided by the average of the monthly CPI factors for the 12-month period ended Sept. 30, 2022. The September CPI data released last week showed a 3.8% increase over the past 12 months. We can then use this data to finalize the 2024 indexation factor, which should come in at 4.7%. By comparison, the 2023 indexation factor was 6.3%.
The silver lining in the latest inflationary number is that the tax-free savings account (TFSA) limit for 2024 should go up to $7,000, an increase from the current 2023 limit of $6,500. Note that this marks the first time the TFSA limit has risen in two consecutive years, as it was $6,000 in 2022.
The TFSA was first introduced in the 2008 federal budget and became available to Canadians for the 2009 calendar year. Its initial limit of $5,000 rose to $5,500 and stayed there for a number of years, with a short-lived flirtation at $10,000 in 2015. Under the tax rules, starting in 2016 and for each subsequent year, the annual TFSA dollar limit was fixed at $5,000, indexed to inflation for each year after 2009, and rounded to the nearest $500, which makes the annual limits easy to remember.
The TFSA limit only gets increased, therefore, when the cumulative effect of the annual inflation adjustments is enough to push the limit to the next highest $500 increment. The indexed TFSA dollar amount for 2024 is now at $6,859, meaning that the official limit gets boosted to $7,000, the closest $500 increment.
For someone who has never contributed to a TFSA and has been a resident of Canada and at least 18 years of age since 2009, the total contribution room available in 2024 will rise to $95,000 from $88,000 in 2023.
CEBA REPAYMENT DEADLINE EXTENDED: Some Issues
On September 14, 2023, the Department of Finance provided details on extending the deadline for Canada Emergency Business Account (CEBA) repayments, including the following key elements:
- the deadline to qualify for partial loan forgiveness (by paying the non-forgivable portion) has been extended from December 31, 2023, to January 18, 2024;
- if a refinancing application is made with the financial institution that provided the CEBA loan by January 18, 2024, the deadline to qualify for partial loan forgiveness will be extended to March 28, 2024;
- as of January 19, 2024, outstanding loans will convert to three-year term loans subject to a 5% annual interest rate regardless of whether refinancing is sought; and
- the previous final repayment deadline of December 31, 2025, has been extended to December 31, 2026.
Financial institutions will contact CEBA loan holders directly regarding their loans. The above changes also apply to CEBA-equivalent lending through the Regional Relief and Recovery Fund.
ACTION ITEM: Ensure you fully understand the deadlines to avoid missing the partial loan forgiveness.
PAYING RENT TO NON-RESIDENTS: Withholdings
Required
In a March 30, 2023, Tax Court of Canada case, the taxpayer was assessed for failing to withhold taxes on rent paid on Canadian real estate to a non-resident. Penalties and interest were also assessed.
The information known to the taxpayer was limited to an Italian telephone number on the lease document (with a Canadian number), the landlord’s email address ending with “.it” rather than “.ca” or “.com” and some Italian writing at the bottom of an email. The taxpayer argued that he did not know that the landlord was a non-resident, and that a due diligence defence should apply.
Taxpayer loses
The Court first noted that a non-resident is subject to a 25% flat tax on gross rent received on Canadian property. The Canadian resident paying the rent is required to withhold and remit this tax and is liable for it if this is not done. Penalties and interest on this amount also apply.
The Court then noted that the withholding requirement exists regardless of whether or not the taxpayer knows that the landlord is non-resident. Further, there is no due diligence defence in respect of the tax withholding. As such, the taxpayer was liable for the tax not withheld.
The Court stated that a due diligence defence could apply to penalties and interest. However, the taxpayer provided no evidence of any efforts to confirm the landlord’s residency. The absence of any reason to question the landlord’s residency was insufficient – due diligence requires taking positive steps to ensure compliance.
ACTION: Ensure to take proactive steps to understand a landlord’s residency status. Renters can be liable for unremitted withholdings even if they do not know the landlord’s residency status.
Considerations for Implementing AI in a Professional Services Firm
Ignoring the growth in Artificial intelligence (AI) is not sustainable. AI is changing how companies in all industries conduct business, creating efficiencies and in some cases, lowering costs.
With 35% of companies in all industries using AI to date and another 42% implementing a formalized strategy within their business, it appears that AI is here to stay.
So how can professional services firms embrace AI and leverage it for more successful outcomes? In this article written by RSM Canada, they highlight the key areas that professional services firms need to consider before jumping right in.
Things like, what processes can be replaced by AI, how it may change the billable hours model, potential privacy issues, and the importance of continuing to have human oversight throughout the process.
GIFTS DIRECTED TO OTHER DONEES: Loss of
Charitable Status
In some situations, a registered charity may be asked to receive donations on behalf of another organization or cause. While this may seem like a good way to generate funds and reward donors with charitable contribution receipts, it can have serious implications for the charity.
A February 1, 2023, Technical Interpretation considered a charity that would collect funds, issue receipts, and then disburse the funds to a qualified donee (a municipality). The municipality would then direct the funds to a non-qualified donee. The charity’s intention was to assist a non-qualified donee (in this case, a non-profit organization) in a fundraising campaign by collecting funds and issuing receipts.
A charity may have its status revoked if the charity:
- carries on a business that is not a related business of that charity;
- fails to expend amounts in any taxation year on charitable activities carried on by the charity and by way of qualifying disbursements, the total of which is at least equal to the charity’s disbursement quota for that year; or
- makes a disbursement, other than
- one made in the course of charitable activities carried on by it, or
- a qualifying disbursement.
If the charity’s disbursement to the municipality was not a qualifying disbursement, the charity could have its status revoked.
A qualifying disbursement includes a gift to a qualified donee. A qualified donee includes a municipality in Canada that is registered by the Minister.
It is a question of fact as to whether the transfer to the qualified donee constituted a gift received, and therefore a qualifying disbursement. CRA’s general view is that donations can be received and receipted by a qualified donee (such as the municipality), provided that the qualified donee retains discretion regarding how the donated funds will be spent. If a qualified donee is merely acting as a conduit by collecting funds from donors, including a charity, on behalf of an organization that is legally or otherwise entitled to the funds so donated, the qualified donee is not in receipt of a gift. In this case, the gift from the charity would not be a qualifying disbursement.
A charity may also have its status revoked if it accepts a gift, the granting of which was conditional on the charity making a gift to another person, club, society, association, or organization other than a qualified donee.
ACTION: Caution and professional guidance should be sought should a charity consider accepting donations on behalf of another organization.
Tax Planning: 2023 Year-end Considerations for Businesses and Individuals
RSM Canada’s 2023 year-end tax guide summarizes the key federal, provincial, and territorial tax updates that may create risk or opportunity for middle-market taxpayers in 2024 and beyond.
Tax trends and topics discussed as the Canadian economy moves into 2024 include:
- Revisions to the general anti-avoidance rule
- Mandatory disclosure rules
- Financial institutions dividend
- Tax on repurchase of equity
As year-end approaches, companies and individuals alike must carefully consider tax-planning opportunities in light of economic uncertainty and evolving tax legislation and regulations. Learn more in our year-end planner.
Canadian tax integration on private company Income
Tax integration is achieved when a particular stream of income is subject to the same or similar total tax rate once it reaches the individual taxpayer level. These tables provide an illustration of how the Canadian income tax integration system works.