Business tax measures
Clean Electricity Investment Tax Credit
The 2023 budget proposed a refundable ITC for clean electricity, equal to 15% of the capital cost of eligible property. The 2024 budget provides the design and implementation details of the ITC, including the eligibility criteria. It also includes special rules for property that generates electricity from natural gas with carbon capture and property used to transmit electrical energy between provinces or territories, as well as details of the compliance and recovery process.
The ITC will be available only to eligible Canadian corporations, which are defined as:
- taxable Canadian corporations and pension investment corporations
- provincial and territorial Crown corporations (subject to additional requirements)
- corporations owned by municipalities or Indigenous communities
Property eligible for the ITC includes equipment used to generate electricity from:
- solar, wind or water energy (certain class 43.1 property, but hydroelectric installations would not be subject to a capacity limit)
- concentrated solar energy (as defined for the purposes of the proposed clean technology ITC)
- nuclear fission, including heat generating equipment (as defined for the purposes of the proposed clean technology ITC, without the generating capacity limits and other certain requirements of that credit)
- geothermal energy, including heat generating equipment, if it is used exclusively for that purpose (excluding equipment that is part of a system that extracts fossil fuel for sale)
- specified waste materials, as part of a system
Eligible property also includes equipment that is:
- stationary electricity storage equipment and equipment used for pumped hydroelectric energy storage (excluding any that uses a fossil fuel in operation)
- part of an eligible natural gas energy system (special rules apply)
- used for transmission of electricity between provinces and territories (special rules apply)
Previously proposed labour requirements must be met to qualify for the 15% ITC, otherwise a 5% ITC is available. The ITC will be subject to potential repayment obligations, repayable in proportion to the FMV of the particular property when it has been converted to an ineligible use, exported from Canada, or disposed of.
The ITC will be available for new eligible property (i.e. has not been used for any purposes before its acquisition) that is acquired and becomes available for use after April 15, 2024 and before 2035 in respect of projects that did not begin construction before March 28, 2023.
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EV Supply Chain Investment Tax Credit
The budget introduces the EV supply chain ITC, equal to 10% of the cost of buildings used in Canada in the following electric vehicle supply chain segments:
- electric vehicle assembly
- electric vehicle battery production
- cathode active material production
To qualify for the ITC, the taxpayer (or member of a group of related taxpayers) must claim the clean technology manufacturing ITC (CTMITC) in all three of the segments (or must claim the CTMITC in two of the three segments and hold at least a qualifying minority interest in an unrelated corporation that claims the CTMITC in the third segment – the building costs of the unrelated corporation would also qualify for the new ITC).
The ITC is effective for property that is acquired and becomes available for use after December 31, 2023. The ITC will be reduced to 5% for 2033 and 2034 and 0% after 2034. Design and implementation details of the ITC will be provided in the 2024 Fall Economic Statement.
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Clean Technology Manufacturing Investment Tax Credit
The 2023 budget proposed a clean technology manufacturing ITC, and draft legislative proposals were released in December 2023. The 2024 budget proposes to update the clean technology manufacturing ITC for production of qualifying minerals (such as copper, nickel, cobalt, lithium, graphite and rate earth elements) that occur at polymetallic projects (i.e. projects engaged in the production of multiple minerals) by:
- clarifying that the value of qualifying materials will be used as the appropriate output metric when assessing the extent to which property is used (or expected to be used) for qualifying mineral activities producing qualifying materials
- modifying eligible expenditures to include investments in eligible property used in qualifying mineral activities that are expected to produce primarily qualifying materials at mine or well sites, including tailing ponds and mills located at these sites (50% or more of the financial value of the output comes from qualifying materials)
A safe harbour rule will apply to the recapture rule for all qualifying mineral activities, to mitigate against the effects of mineral price volatility on the potential recapture of the ITC, the details of which will be provided at a later date.
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Accelerated Capital Cost Allowance (CCA)
Purpose-built rental housing
The budget provides an accelerated CCA of 10% for new eligible purpose-built rental projects that begin construction after April 15, 2024 and before January 1, 2031, and are available for use before January 1, 2036.
Eligible property will be new purpose-built rental housing that is a residential complex:
- with at least four private apartment units, or 10 private rooms or suites, and
- in which at least 90% of residential units are held for long-term rental
The Accelerated Investment Incentive (AII), which suspends the half-year rule, will continue to apply to eligible property put in use before 2028. The accelerated CCA will not apply to renovations of existing residential complexes, but new additions to an existing structure will be eligible. Projects that convert existing non-residential real estate into a residential complex will be eligible.
Productivity-enhancing assets
The budget provides immediate expensing (i.e. a 100% first-year CCA deduction) for property that is acquired after April 15, 2024 and becomes available for use before January 1, 2027, for the following CCA classes of assets:
- class 44 (patents or rights to use patented information for a limited or unlimited period)
- class 46 (data network infrastructure equipment and related systems software)
- class 50 (general-purpose electronic data-processing equipment and systems software)
The accelerated CCA will be available only for the year in which the property becomes available for use. For a short taxation year, the accelerated CCA must be prorated and will not be available in the following taxation year. Property that becomes available for use after 2026 and before 2028 will continue to benefit from the AII.
Property that has been used (or acquired for use) for any purpose before it is acquired by the taxpayer will be eligible for the accelerated CCA only if both of the following conditions are met:
- neither the taxpayer nor a non-arm’s length person previously owned the property, and
- the property has not been transferred to the taxpayer on a tax-deferred “rollover” basis
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Interest Deductions and Purpose-Built Rental Housing
The excessive interest and financing expenses limitation (EIFEL) rules restrict a Canadian taxpayer’s deductions for interest and financing expenses, based upon a percentage of its “tax-EBITDA” (i.e. its taxable income, adjusted for items such as interest expenses, depreciation and amortization). For a discussion of the EIFEL rules, see our Tax Insights “Bill C-59 ─ Excessive interest and financing expenses limitation (EIFEL) regime.” The EIFEL rules currently include a single sector-specific exemption, for certain interest and financing expenses relating to public-private partnership (P3) infrastructure projects. The budget proposes to extend this election, on an elective basis, for certain interest and financing expenses relating to arm’s length financing that is used to build or acquire certain purpose-built rental housing located in Canada. This exemption will be effective for taxation years beginning after September 30, 2023, consistent with the EIFEL rules more generally. However, this exemption will be available only for expenses incurred before January 1, 2036.
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Taxing Vacant Lands to Incentivize Construction
The government is concerned that some landowners are holding residentially zoned vacant land as a speculative investment. The budget announces that the government will consider introducing a new tax on residentially zoned vacant land to spur development. The government will launch consultations later this year.
In March 2024, the government began consultations on how federal policies can better support the needs of all Canadians seeking to become homeowners. The government will provide an update in the 2024 Fall Economic Statement.
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Confronting the Financialization of Housing
The budget announces the government’s intention to restrict the acquisition of existing single-family homes by very large corporate investors. The government will consult in the coming months and provide further details in the 2024 Fall Economic Statement.
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Halal Mortgages
The budget announces that the government is exploring new measures to expand access to alternative financing products for home purchasers, such as halal mortgages. These measures could include changes in the tax treatment of these products or a new regulatory regime for financial service providers, while ensuring adequate consumer protections are in place.
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Non-Compliance with Information Requests
The budget proposes several amendments to the CRA’s information gathering provisions in the ITA, with the intent of enhancing the efficiency and effectiveness of tax audits and facilitating the collection of tax revenues on a timelier basis. These changes include:
- allowing the CRA to issue a new type of notice, referred to as a “notice of non-compliance” and to levy a monetary penalty
- permitting the CRA to specify that any required information (oral or written) or documents be provided under oath or affirmation
- imposing a penalty when the CRA obtains a compliance order against a taxpayer, and
- extending the stop the clock rules (which suspend the counting of days in the assessment limitation period), so that these rules apply when a taxpayer seeks judicial review of any requirement or notice issued to the taxpayer by the CRA in relation to the audit and enforcement process, and during any period that a notice of non-compliance is outstanding
Analogous amendments are also proposed to other federal tax statutes administered by the CRA. The budget also proposes certain technical amendments to ensure the rules meet their policy objectives.
These amendments would come into force upon royal assent of the enacting legislation.
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Synthetic Equity Arrangements
The ITA allows a corporation to deduct the amount of any dividends received on a share of a corporation resident in Canada, subject to certain limitations.
One of these limitations is an anti-avoidance rule that denies the dividend received deduction in connection with synthetic equity arrangements. Synthetic equity arrangements include arrangements in which a person receives a dividend on a share, but all or substantially all of the risk of loss and opportunity for gain or profit (the “economic exposure”) in respect of the share are provided to another person.
Where a taxpayer enters into a synthetic equity arrangement in respect of a share, the taxpayer is generally obligated to compensate the other person for the amount of any dividends paid on the share. This compensation payment may result in a tax deduction for the taxpayer in addition to the dividend received deduction. Unless the anti-avoidance rule applies to deny the dividend received deduction, a tax loss would generally arise as a result of the two deductions.
The anti-avoidance rule incorporates certain exceptions, including where the taxpayer establishes that no tax-indifferent investor has all or substantially all of the economic exposure in respect of the share. An associated exception is also available for synthetic equity arrangements traded on a derivatives exchange.
The budget proposes to remove the tax-indifferent investor exception (including the exchange traded exception) to the anti-avoidance rule. This measure would prevent taxpayers from claiming the dividend received deduction for dividends received on a share in respect of which there is a synthetic equity arrangement.
This measure would apply to dividends received after December 31, 2024.
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Mutual Fund Corporations
A mutual fund is a type of investment vehicle that allows investors to pool their money and invest in a portfolio of investments without purchasing the investments directly. A mutual fund corporation is a mutual fund organized as a corporation that meets certain conditions set out in the ITA.
The ITA includes special rules for mutual fund corporations that facilitate conduit treatment for investors (shareholders). For example, these rules generally allow capital gains realized by a mutual fund corporation to be treated as capital gains realized by its investors. In addition, a mutual fund corporation is not subject to mark-to-market taxation and can elect capital gains treatment on the disposition of Canadian securities.
To qualify as a mutual fund corporation under the ITA, a corporation must satisfy several conditions, including that it must be a “public corporation”. A corporation can meet this condition if a class of its shares is listed on a designated stock exchange in Canada. A corporation that is controlled by a corporate group may satisfy this condition, and qualify as a mutual fund corporation, even though it is not widely held. The government is concerned that this could allow a corporate group to use a mutual fund corporation to benefit from the special rules available to these corporations in an unintended manner.
Although the government believes this planning can be challenged based on existing rules in the ITA, the budget proposes specific amendments to the ITA to preclude a corporation from qualifying as a mutual fund corporation where it is controlled by or for the benefit of a corporate group (including a corporate group that consists of any combination of corporations, individuals, trusts, and partnerships that do not deal with each other at arm’s length). Exceptions would be provided to ensure that the measure does not adversely affect mutual fund corporations that are widely held pooled investment vehicles.
This measure would apply to taxation years that begin after 2024.
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Canada Carbon Rebate for Small Business
The budget introduces the Canada Carbon Rebate for Small Business, to return a portion of the federal backstop pollution pricing fuel charge proceeds collected from a province. This will be an automatic refundable tax credit for CCPCs with less than 500 employees in Canada in the calendar year in which the fuel charge begins. The tax credit in respect of the 2019-20 to 2023-24 fuel charge years will be available to a CCPC that files a tax return for its 2023 taxation year by July 15, 2024 (with similar timelines for future fuel charge years).
The tax credit amount:
- is determined for each applicable province in which the eligible corporation had employees in the calendar year in which the fuel charge year begins; and
- is equal to the number of persons employed by the eligible corporation in the province in that calendar year multiplied by a payment rate specified by the Minister of Finance for the province for the corresponding fuel charge year
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Avoidance of Tax Debts
The ITA includes an anti-avoidance rule that is intended to prevent taxpayers from avoiding payment of their tax liabilities by transferring their assets to non-arm’s length persons. The effect of this tax debt avoidance rule is to make the transferee jointly and severally, or solidarily, liable with the transferor for the transferor’s tax debts, to the extent that the value of the property transferred exceeds the amount of consideration given by the transferee for the property.
The ITA contains a number of rules that address various planning techniques employed by taxpayers attempting to circumvent the tax debt avoidance rule, as well as a penalty for those who engage in, participate in, assent to, or acquiesce in planning activity that they know, or would reasonably be expected to know, is tax debt avoidance planning.
The budget includes a new specific measure to address tax debt avoidance planning (although the government believes this planning can also be challenged based on existing rules in the ITA). The measure would apply in the following circumstances:
- there has been a transfer of property from a tax debtor to another person
- as part of the same transaction or series of transactions, there has been a separate transfer of property from a person other than the tax debtor to a transferee that does not deal at arm’s length with the tax debtor, and
- one of the purposes of the transaction or series is to avoid joint and several, or solidary, liability
Where these conditions are met, the property transferred by the tax debtor would be deemed to have been transferred to the transferee for the purposes of the tax debt avoidance rule. This would ensure that the tax debt avoidance rule applies in situations where property has been transferred from a tax debtor to a person and, as part of the same transaction or series, property has been received by a non-arm’s length person. The penalty applicable to those who participate in tax debt avoidance planning would also be extended to this proposed new rule.
In many cases, tax debt avoidance planning is facilitated by a planner who receives a significant fee, which is effectively funded by a portion of the avoided tax debt. The courts have held that a taxpayer who engages in tax debt avoidance planning is normally not jointly and severally, or solidarily, liable for the portion of the tax debt that has effectively been retained by the planner as a fee. The budget proposes that taxpayers who participate in tax debt avoidance planning be jointly and severally, or solidarily, liable for the full amount of the avoided tax debt, including any portion that has effectively been retained by the planner.
Similar amendments would be made to comparable provisions in other federal statutes.
These measures would apply to transactions or series of transactions that occur after April 15, 2024.
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Reportable and Notifiable Transactions Penalty
The ITA includes a general rule providing that a person who fails to file or make a return or comply with certain specified rules is guilty of an offence, and liable to penalties of up to $25,000 and imprisonment for up to a year. The mandatory disclosure rules in the ITA also include specific penalties that apply in these circumstances, making the application of this general penalty provision unnecessary.
The budget therefore proposes to remove from the scope of the general penalty provision the failure to file an information return in respect of a reportable or notifiable transaction under the mandatory disclosure rules.
This amendment would be deemed to have come into force on June 22, 2023, which is the day the enhanced mandatory disclosure rules received royal assent.
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Manipulation of Bankrupt Status
Under the ITA, losses and other tax attributes that arise from expenditures for which a taxpayer did not ultimately bear the cost are generally not recognized. The ITA contains a set of debt forgiveness rules that apply where a commercial debt is settled for less than its principal amount. These rules generally reduce tax attributes by the amount of debt that is forgiven and, where tax attributes have been fully reduced, the rules cause an income inclusion equal to half of the remaining forgiven amount. The ITA also contains a rule that entitles an insolvent corporation to a corresponding deduction to offset all or part of an income inclusion from the debt forgiveness rules.
Bankrupt taxpayers are generally excluded from these debt forgiveness rules. Instead, a separate loss restriction rule applies to extinguish the losses of bankrupt corporations that have received an absolute order of discharge.
The government is concerned that some taxpayers have sought to manipulate the bankrupt status of an insolvent corporation, with a view to benefiting from the exception in the debt forgiveness rules while also avoiding the loss restriction rule applicable to bankrupt corporations. This planning seeks to preserve the losses and other tax attributes of the insolvent corporation (which would otherwise be eliminated upon the forgiveness of its debts), so that these attributes can be acquired and used by a profitable corporation. This planning is the subject of a designated transaction under the notifiable transactions element of the mandatory disclosure rules.
Although the government believes that manipulation of bankrupt status can be challenged based on existing rules in the ITA, the budget proposes a specific legislative measure to address this issue: repealing the exception to the debt forgiveness rules for bankrupt corporations and the loss restriction rule applicable to bankrupt corporations. This change would subject bankrupt corporations to the general rules that apply to other corporations whose commercial debts are forgiven. The bankruptcy exception to the debt forgiveness rules would remain in place for individuals. While bankrupt corporations would be subject to the reduction of their loss carryforward balances and other tax attributes upon debt forgiveness, as insolvent corporations they could qualify for relief from the debt forgiveness income inclusion rule provided under the existing deduction for insolvent corporations.
These proposals would apply to bankruptcy proceedings that are commenced on or after April 16, 2024.
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Scientific Research and Experimental Development (SR&ED)
The government launched a consultation on the existing SR&ED tax incentives on January 31, 2024, which closed on April 15, 2024. The budget announces a second phase of consultations, to focus on specific policy parameters, explore how Canadian public companies could become eligible for the enhanced SR&ED ITC and inform how additional funding announced by the budget can support future enhancements to the SR&ED program. Further details of the consultation will be released on the Department of Finance Canada website at a later date.
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