2022 Fall Economic Statement Dispatch
The Deputy Prime Minister and Minister of Finance, Chrystia Freeland, presented the 2022 Fall Economic Statement (“the Statement”) on November 3, 2022. The Statement announced several new and updated tax measures. Some new legislation was also introduced. Freeland also tabled Bill C-32, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022.
The economic messaging of the Statement touched on themes of high inflation, rising interest rates, a strong labour market, and slowing economic activity. A summary of the latest fiscal projections is provided below. Amounts are in the billions of dollars.
Budgetary Balance – Baseline Scenario
Budgetary Balance – Downside Scenario
All of the new tax-related announcements in the Statement are summarized below.
Tax on Share Buybacks
Following the lead in the US, the 2022 Fall Economic Statement announced that the government plans to introduce a 2% corporate tax that would apply on the net value of all types of “share buybacks by public corporations in Canada” in order to encourage corporations to reinvest their profits in their workers and businesses. No details were provided as to how this tax would be implemented or as to exactly which buybacks would be subject to the tax.
The details of this new tax will be announced in Budget 2023, and the tax will come into force on January 1, 2024.
International Tax Reform
Canada and 136 other members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting have developed a two-pillar plan for international tax reform, which was agreed to in October 2021.
Pillar One (Reallocation of Taxing Rights)
Pillar One will ensure that the largest and most profitable global corporations, including large digital corporations, pay their fair share of tax in the jurisdictions where their users and customers are located. Significant progress has been made in establishing the technical rules of the new system, and the OECD has been conducting ongoing public consultations. The Inclusive Framework’s intention is to complete multilateral negotiations so that the treaty to implement Pillar One can be signed in the first half of 2023, with a view to it entering into force in 2024.
Pillar Two (Global Minimum Tax)
Pillar Two, a global minimum tax regime, will ensure that multinational corporations are subject to a minimum effective tax rate of 15% on profits in every jurisdiction in which they operate. The 2022 Fall Economic Statement reiterates that Canada is committed to the global minimum tax on large corporations and is continuing to work closely with our international partners to develop a coordinated implementation framework, to be put in place in a timely and coordinated manner.
Alternative Minimum Tax
Through significant use of deductions, tax credits, and other ways of having income taxed at lower rates, some of the wealthiest Canadians pay comparatively little personal income tax as a share of their income. The Alternative Minimum Tax (“AMT”), which was introduced in 1986, was intended to address this and ensure that high-income Canadians could not disproportionately lower their tax bill through advantages in the tax system.
In this year’s federal budget, the government committed to examining a new minimum tax regime to ensure that all wealthy Canadians pay their fair share of tax. The 2022 Fall Economic Statement reaffirms this intent, and a detailed proposal and path for implementation will be released in Budget 2023.
Excess Interest and Financing Expense Limitation
The excess interest and financing expense limitation (“EIFEL”) rules were first introduced as draft legislative proposals on February 4, 2022. The 2022 Fall Economic Statement includes a release of a revised version of these proposals. Initially, the EIFEL rules were scheduled to apply as of January 1, 2023. However, the implementation date has been deferred to October 1, 2023. Interested parties can send comments regarding the revised legislation to [email protected] by January 6, 2023.
Notable changes to the latest proposed rules (compared to the Feb. 4 version) include:
- Adding the concept of “exempt interest and financing expenses”;
- Making various modifications to the definition of “adjusted taxable income”;
- Adding the concept of "financial institution group entity";
- Making various modifications to the definition of "interest and financing expenses"; and
- Making many modifications related to foreign affiliates.
Mandatory Disclosure Rules
The government is delaying the coming into force date of the reporting requirements for reportable transactions and notifiable transactions until the date on which a bill implementing these changes receives Royal Assent. This delay will allow the government to fully assess feedback received via the recent consultation. However, the coming into force date for uncertain tax treatments will remain the same as described in August (i.e., taxation years beginning after 2022, with penalties only applying after Royal Assent).
Investment Tax Credit for Clean Technologies
The Statement proposes to introduce a refundable clean technology investment tax credit (“ITC”) equal to 30% of the capital cost of eligible equipment. The following types of equipment would be eligible for the credit:
- equipment to generate electricity from solar, wind and water energy that is described under subparagraphs (d)(ii), (iii.1), (v), (vi), and (xiv) of capital cost allowance Class 43.1;
- stationary electricity storage equipment that is described under subparagraphs (d)(xviii) and (d)(xix) of Class 43.1, but that does not use any fossil fuels in operation, which includes, but is not limited to, batteries, flywheels, supercapacitors, magnetic energy storage, compressed air energy storage, pumped hydroelectric energy storage, gravity energy storage, and thermal energy storage;
- active solar heating equipment, air-source heat pumps, and ground-source heat pumps that are described under subparagraph (d)(i) of Class 43.1;
- equipment to generate heat or electricity from concentrated solar energy;
- equipment to generate heat or electricity from small modular nuclear reactors; and
- non-road zero-emission vehicles described in Class 56 (e.g. hydrogen or electric heavy duty equipment used in mining or construction) and charging or refuelling equipment described under subparagraph (d)(xxi) of Class 43.1 or subparagraph (b)(ii) of Class 43.2 that is used primarily for such vehicles.
The government will continue to review eligibility for relevant technologies, including the possibility of adding new ones.
The clean technology ITC would be available in respect of the capital cost of property that is acquired and that becomes available for use on or after the day that the 2023 Budget is released, where it has not been used for any purpose before its acquisition. The ITC would be gradually phased out starting with property that becomes available for use in 2032 and would no longer be in effect for property that becomes available for use after 2034. The credit would gradually phase out with a credit rate of 20 per cent in 2032, 10 per cent in 2033 and 5 per cent in 2034.
The 30% credit rate for eligible investments would mandate that certain labour conditions be fulfilled. A 20% rate would be available to claimants that do not meet the labour conditions. The Department of Finance will consult with a broad group of stakeholders, but especially with unions, on how best to attach labour conditions to the proposed tax credit. Additional details on the labour conditions will be announced in Budget 2023.
Investment Tax Credit for Clean Hydrogen
In the 2022 federal budget, the government announced that it would create an ITC to support investments in clean hydrogen production. The government commits that it will proceed to establish the parameters under which such a credit will be granted. Consultations will be held with stakeholders including unions on how best to set parameters to protect the workers in that industry. The credit is proposed to be as high as 40% for the lowest carbon intensity tier. The maximum rate will be reduced by 10% if the company does not meet certain labour conditions.
The ITC will be refundable and effective for eligible investments made as of the budget day in 2023 and will be phased out after 2030.
Income Reporting by Digital Platforms
The Organisation for Economic Co-operation and Development (“OECD”) has presented Model Rules for Reporting by digital platform operators with respect to Sellers in the sharing and Gig economy. In compliance with these rules Canada has already enacted Subdivision e of Part IX of the Excise Tax Act allowing for simplified compliance with respect to application of the Goods and Services Tax Act.
Now, to comply with the new Model rules that require platform operators to report certain information to the Canada Revenue Agency and to follow due diligence procedure, the Minister has presented draft legislation which will result in new Part XX of the Income Tax Act.
New Part XX of the Act is to come into force on January 1, 2024.
Previously Announced Measures
The Statement confirmed the government’s intention to proceed with a long list of previously announced tax and related measures, as modified to take into account consultations and deliberations since their release.