Bill C-59 – An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023

Overview

Many firms borrow to fund their operations. Generally, the interest charges on those borrowings are considered a cost of doing business and, therefore, are deductible from income for tax purposes. However, some large companies, typically multinationals, use excessive deductions of interest to reduce the taxes they pay in Canada. The Excessive Interest and Financing Expenses Limitation (EIFEL) rules limit these excessive interest deductions and prevent the erosion of the Canadian tax base.

The EIFEL rules follow through on the Government's commitment – first announced in Budget 2021 – to bring Canada in line with its international peers and implement the recommendations made in the Action 4 Report of the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan. Other G7 countries – notably the United States, the United Kingdom and many EU member states – have implemented or are implementing similar rules.

The EIFEL rules generally limit the deductibility of interest and other financing expenses to 30% of a taxpayer's "tax EBITDA" – taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization, where each of these items is as determined for tax purposes. An elective "group ratio" rule is available to benefit taxpayers in highly leveraged corporate groups (e.g., those in the real estate, infrastructure, regulated utilities, and clean energy industries) – allowing them to deduct interest expenses in excess of the 30% limit. The group ratio allows taxpayers to deduct interest expenses up to the third-party net interest expense-to-EBITDA ratio of its worldwide group. To provide additional relief, the available deduction is grossed up by a 10% up-lift.

The EIFEL rules only apply to corporations and trusts – not to individuals. The rules do not apply to small or medium-size Canadian-controlled private corporations (i.e., those with less than $50 million of taxable capital employed in Canada); entities with less than $1 million in net interest expenses; and certain "Canada-only" corporate groups that do not pose significant base erosion and profit shifting risk due to having de minimis levels of foreign business, investment in foreign affiliates, foreign shareholders, and interest paid to non-arm's length entities that are not taxable in Canada.

Taxpayers that fall within the scope of the EIFEL rules have access to many forms of relief. Taxpayers may carry-forward excess interest deduction capacity for three years and transfer it within their corporate group and may indefinitely carry-forward interest and financing expenses that are not deductible in a particular year. The EIFEL rules also provide adjustments that limit the impact of the rules on recipients of government assistance and investment tax credits and provide an exception for interest and financing expenses incurred in respect of Canadian P3 (public-private partnership) projects, where the interest and financing expenses are economically borne by the Government, provincial governments, or public sector authorities.

The EIFEL rules would apply to taxation years that begin on or after October 1, 2023.

Key Messages

• The Excessive Interest and Financing Expenses Limitation (EIFEL) rules are an integrity measure intended to prevent the erosion of the Canadian tax base through excessive interest deductions. While most interest expenses are deductible from income for tax purposes, some large companies, typically multinationals, use excessive deductions of interest to reduce the taxes they pay in Canada.
• The EIFEL rules are intended to apply to multinational corporate groups, and therefore do not apply to individuals, small to medium-size Canadian-controlled private corporations, entities with less than $1 million in interest expenses per year or entities without significant economic activity outside of Canada.
• The EIFEL rules implement Canada's commitment to follow the recommendations made in the Action 4 Report of the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan. Other G7 countries – notably the United States, the United Kingdom, and many EU member states – have implemented or are implementing similar rules.
• The EIFEL rules bring Canada in line with its international peers by preventing excessive interest deductions from being used to erode the Canadian tax base.

Questions & Answers

Overview

Q. Why is the government introducing restrictions on the amount of interest that businesses can deduct for tax purposes?

A. At present, most of Canada's major trading partners have adopted (or are in the process of adopting) interest deductibility restrictions in line with the recommendations laid out in the OECD/G20's Action 4 Report on addressing base erosion and profit shifting. This change is necessary to bring Canada in line with its international peers, and to support a concerted effort to address base erosion and profit shifting.

Interest expense is generally deductible as a cost of doing business. However, the deduction of interest becomes a concern when multinationals use debt financing to reduce their taxes, either by locating excessive or disproportionate amounts of deductible interest expenses in high-tax jurisdictions or by shifting profits to low-tax jurisdictions by way of intra-group interest payments. This is one of the main forms of tax planning that multinationals use to minimize the taxes they pay in countries where they operate.

Many other countries, including the United States and all of our other G7 peers, have responded to the same concern by strengthening rules on the amount of interest that businesses are allowed to deduct. The Excessive Interest and Financing Expenses Limitation (EIFEL) rules will serve to better protect the tax base and allow Canada to keep pace with the international consensus.

Q. Why is the government introducing more interest restrictions without repealing any existing ones (e.g., thin capitalization and foreign affiliate dumping)?

A. Existing rules that restrict the deductibility of interest expense, including the thin capitalization rules, address specific types of base eroding arrangements that would not in all cases be captured by the EIFEL rules.

Q. How will limiting interest deductibility impact Canada's international competitiveness?

A. At present, most of our major trading partners have adopted (or are in the process of adopting) interest deductibility restrictions in line with the recommendations laid out in the OECD/G20's report on addressing base erosion and profit shifting. This change is necessary to bring Canada in line with its major trading partners, and to support a concerted effort to address base erosion and profit shifting. Concerted action against base erosion and profit shifting is key to maintaining a level playing field among countries.

The global environment has changed in recent decades. Corporate income tax rates have fallen, there is reduced tax competition based on targeted provisions that compensated for higher tax rates and there is less tolerance for base erosion and profit shifting.

Fiscal Impact

Q. What is the projected revenue impact of the EIFEL rules?

A. As indicated in Budget 2021, it is projected that the EIFEL rules will increase federal tax revenues by about $1.8 billion on a full-year basis.

The projected revenue impact accounts for the fact that in the absence of the EIFEL rules, multinationals would increase their shifting of debt to Canada. This is so because at present, most of our major trading partners have adopted (or are in the process of adopting) interest deductibility restrictions in line with the recommendations laid out in the OECD/G20's report on addressing base erosion and profit shifting. The EIFEL rules will prevent such changes in tax planning that would have been detrimental to the Canadian tax base.

Scope of Rules

Q. Who do the EIFEL rules apply to?

A. The EIFEL rules apply to taxpayers that are corporations or trusts, unless the taxpayer meets one of three "excluded entity" exceptions:

• Small to medium sized Canadian-Controlled Private Corporations – i.e. corporations with less the $50 million in taxable capital employed in Canada. This exception is expected to exempt most small to medium sized businesses from the rules.
• Entities with less than $1 million in net interest expenses; and
• Certain "Canada-only" groups that do not pose significant base erosion and profit shifting risk due to having de minimis levels of foreign business, investment in foreign affiliates, foreign shareholders, and interest paid to non-arm's length entities that are not taxable in Canada.

Q. Do the EIFEL rules apply to small businesses?

A. The EIFEL rules will not generally apply to small businesses. Businesses carried on through sole proprietorships are not subject to the rules. Businesses carried on in corporations are not subject to the rules if they are "excluded entities". In most cases, Canadian corporations that operate small businesses will be "excluded entities" and not subject to the rules.

Q. Do the EIFEL rules exempt any industry sectors from this new regime (e.g., real estate, infrastructure)?

A. The EIFEL rules do not provide exemptions for particular industrial sectors. The rules provide a number of exemptions (see Q: Who do the EIFEL rules apply to?) that are available to all taxpayers – and do not favour certain sectors. Taxpayers that come within the scope of the new rules have various forms of relief, including group ratio relief that would take into account a corporate group's overall level of third party debt. (See Q: What relief is available under the EIFEL rules?)

Q. Why do the EIFEL rules provide an exemption for Public Private Partnerships (P3), but not for other capital-intensive industries?

A. In a typical P3 project, a public sector authority partners with a private sector entity to complete a project that the public sector authority will own or have an interest in. While a private sector partner may pay interest on debt used to fund the P3 project, that interest expense is generally recovered from the public sector authority under the P3 agreement. As a result, the public sector authority bears the economic cost of the interest expense.

Such interest expense is exempt from the interest limitation (provided that certain requirements are met) because it is ultimately the public sector authority – not the private sector taxpayer – that is bearing the interest expense.

The P3 exception is not limited to a particular industry. For example, an energy project, a construction project or an information technology project could each qualify if they meet the requirements for the exception.

Q. How do Canada's interest limitation rules compare to the US's rules?

A. Canada has many relieving provisions that are not present in the US rules. The US does not have a group ratio rule for highly leveraged industries and does not have exceptions equivalent to Canada's $1 million de minimis interest exception or Canada's domestic "Canada-only" exception. Both Canada and the US have exceptions for certain small to medium-sized businesses.

While both Canada and the US limit interest deductions to 30% of earnings, the US limit is based on the more restrictive EBIT (earnings before interest and taxes) standard, while Canada' limit is based on EBITDA (earnings before interest, taxes, depreciation and amortization). An EBITDA-based interest limitation allows Canadian taxpayers to deduct more expenses than an EBIT-based one.

Unlike Canada's rules, the US rules provide specific exceptions for certain capital-intensive industries. Canada's group-ratio rule provides similar relief, but this relief is available to all taxpayers, and is not limited to specific industries.

Application of Rules

Q. How much interest expense do the EIFEL rules deny?

A. Taxpayers are permitted to deduct net interest expenses up to 30% of their earnings for tax purposes (tax EBITDA). For taxation years starting between October 1 and December 31, 2023, the limit is 40%. The restriction applies to net interest expense – so any interest income earned by a taxpayer will increase that taxpayer's deduction capacity. Interest deductions that are restricted can be carried-forward to use in future years.

Taxpayers in groups with structurally high third-party debt can deduct interest expenses in excess of 30% under the group ratio rule.

Q. What relief is available under the Rules?

A. The EIFEL rules provide a number of exceptions that exempt certain taxpayers from the rules entirely (see Q: Who do the EIFEL rules apply to?).

• Taxpayers that are subject to the rules have access to several forms of relief, including:
• elective relief under the "group-ratio" rule – which includes a 10% up-lift to the group ratio calculation – that will benefit structurally highly leveraged groups (e.g., real estate, infrastructure, regulated utilities, and clean energy);
• a three-year carry-forward of excess interest deduction capacity and the ability to transfer that capacity within corporate groups;
• unlimited carry-forwards of interest and financing expenses that are not deductible in a particular year under the EIFEL rules;
• adjustments that limit the impact of the EIFEL rules on recipients of government assistance and investment tax credits (including the new clean energy tax credits); and
• an exception for interest and financing expenses incurred on Canadian P3 projects, where the interest and financing expenses are economically borne by the Government, provincial governments, or public sector authorities.

Q. What is the Group Ratio Rule?

A. The group ratio allows taxpayers to deduct interest expenses up to the third-party net interest expense-to-EBITDA ratio of its worldwide group. To provide additional relief, the available deduction is grossed up by a 10% up-lift. For example, Canadian members of a multinational group with a 50% third-party interest expenses-to-EBITDA ratio may be entitled to deduct interest expenses equal to 55% of the earnings of the Canadian group members.

The group ratio rule ensures that interest deductions are not denied simply because a particular group has worldwide third-party debt in excess of the 30% limit, while protecting the tax base from excessive interest deductions by the Canadian members of the group.

Q. How do the changes in the current proposals address the concerns of the infrastructure sector?

A. A specific exemption is provided for certain Canadian P3 infrastructure projects.  In addition, to the extent that the exemption is not available for certain infrastructure projects, the expansion of entities that can qualify as an "excluded entity", the expansion of the "group ratio" rule, and the extension of the carry-forward period for non-deductible interest also address certain concerns of the sector.

Q. Do the changes to the current proposals address the concern of the real estate sector?

A. Although there is no specific exemption for real estate projects, the expansion of the "group ratio" addresses certain concerns of the real estate sector.  Specifically, taxpayers may elect not to include in income for purposes of the group ratio changes in the value of assets or liabilities whose value is measured by the fair value method of accounting. In addition, the expansion of entities that can qualify as "excluded entities" and the extension of the carry-forward period for non-deductible interest also address certain concerns of the sector.

Overview

The hybrid mismatch rules are intended to neutralize the tax benefits of hybrid mismatch arrangements, which are cross-border tax avoidance structures that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce "deduction/non-inclusion mismatches" (i.e., a deduction on a payment in one country with no taxable income for the recipient in another country) or "double deduction mismatches" (i.e., deductions in multiple countries for a single expense).

These rules follow through on the Government's commitment – announced in Budget 2021 – to implement recommendations in the report (the "Action 2 report") under Action 2 of the Group of 20 and Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting Project (BEPS), which recommends detailed rules for countries to adopt in their domestic laws to ensure that multinational enterprises cannot exploit hybrid mismatch arrangements. Several countries (e.g., the United States, the United Kingdom, Australia, and the European Union member states) have implemented rules consistent with the Action 2 report.

In general terms, the hybrid mismatch rules neutralize a hybrid mismatch by aligning the Canadian income tax treatment with the income tax treatment in the foreign country.

To that end, the rules restrict deductions for Canadian income tax purposes on hybrid mismatch payments by Canadian residents to the extent that the payments are not included in the foreign taxable income of a non-resident recipient or give rise to a duplicate foreign tax deduction. They also result in an inclusion in Canadian taxable income – or, in certain cases, a denial of the dividends received deduction for dividends from foreign affiliates – if a Canadian resident receives a hybrid mismatch payment that gives rise to a foreign tax deduction.

With limited exceptions, the hybrid mismatch rules apply in respect of payments between related parties and payments under "structured arrangements" between unrelated parties that are designed to produce a mismatch or that reflect the tax benefit of the mismatch in the pricing of a transaction or series of transactions. In addition, ordering rules ensure that the Canadian rules are coordinated with foreign hybrid mismatch rules.

These amendments would apply in respect of payments arising on or after July 1, 2022. Certain narrow aspects of the rules would apply later (rules relating to non-interest bearing loans, foreign accrual property income and reporting obligations).

Key Messages

• The hybrid mismatch rules are an integrity measure intended to prevent the erosion of the Canadian tax base by neutralizing the tax benefits of hybrid mismatch arrangements.
• Hybrid mismatch arrangements are cross-border tax avoidance structures that exploit differences in the income tax treatment of business entities or financial instruments under the laws of different countries to avoid taxes, by creating:
  • a "deduction/non-inclusion mismatch" (i.e., a deduction on a payment in one country with no taxable income for the recipient in another); or
  • a "double deduction mismatch" (i.e., deductions in multiple countries for a single expense).
• This measure implements recommendations from the G20/OECD Base Erosion and Profit Shifting (BEPS) Project. Several countries (e.g., the United States, the United Kingdom, Australia and the European Union member states) have implemented similar rules.

Questions & Answers

Q. Budget 2021 announced that the Government would release a second legislative package targeting additional Action 2 recommendations not addressed in the first package. What is the status of that second legislative package?

A. The Government remains committed to addressing inappropriate base erosion and profit shifting, including by implementing all the Action 2 recommendations that are relevant in the Canadian context. Draft legislation for the second package of rules will follow in due course, with an effective date to be announced at that time.

Q. What is the effective date for this first package of hybrid mismatch rules?

A. The hybrid mismatch rules apply to payments arising on or after July 1, 2022 (or, in certain cases January 1, 2023). Hybrid mismatch arrangements are aggressive tax planning structures, and it is not uncommon for anti-avoidance measures to apply as of the date of announcement or the release of draft legislation.

Budget 2021 announced that the first package would closely follow Chapters 1 and 2 of the BEPS Action 2 Report, with certain adaptations to the Canadian income tax context. Draft legislative proposals were subsequently released in April 2022. Stakeholders identified only one significant divergence in the April 2022 draft legislation, relating to non-interest-bearing loan structures. In recognition, the effective date for these structures is delayed by six months to January 1, 2023, which means taxpayers will have had eight months from the release of draft legislation to restructure and avoid application of the rules. Certain other narrow aspects of the proposals (related to foreign affiliates and reporting obligations) also apply later.

Otherwise, the recommendations in the BEPS Action 2 report are very detailed, such that taxpayers could reasonably have anticipated which structures would be targeted and would have generally had sufficient time (over 12 months) to restructure in advance of the July 2022 effective date.

Q. How many taxpayers are expected to be captured by the hybrid mismatch rules?

A. Hybrid mismatch arrangements are structures that are commonly used by large multinational enterprises (MNEs) making cross-border investments. Based on information from the Canada Revenue Agency (CRA), at the time the hybrid mismatch rules were announced in Budget 2021, the most common hybrid mismatch arrangement then in use by U.S.-based MNEs investing in Canada was used by at least 50 large corporate taxpayers.

Q. What is the revenue estimate for the hybrid mismatch rules?

A. As indicated in Budget 2021, it is projected that the hybrid mismatch rules will increase federal tax revenues by $775 million over the 2022-2023 to 2025-2026 fiscal years. This reflects $130 million in increased revenues in the 2022-2023 fiscal years and between $205 and $225 in each of the remaining fiscal years. 

Q. Why do the hybrid mismatch rules apply in respect of notional interest payments under non-interest-bearing ("NIB") loan structures, when such payments are not covered by the BEPS Action 2 report?

A. The Canadian hybrid mismatch rules apply where there is a foreign income tax deduction in respect of a notional interest expense on a debt issued to a Canadian resident that does not result in corresponding Canadian taxable income in respect of the notional interest expense. The BEPS Action 2 report recommendations do not extend to these structures for a specific technical reason: namely, because this form of deduction/non-inclusion mismatch does not involve an actual interest payment. However, from a policy perspective, the rules ought to apply to these structures, as it is arbitrary to distinguish between mismatches where there is an actual interest expense in respect of a debt and those where there is no such obligation.

Accordingly, to maintain policy consistency and ensure fairness, the hybrid mismatch rules apply in respect of notional interest expense deductions. Taxpayers were notified of this decision in the draft legislation released April 2022. A delayed application date of January 1, 2023 for this aspect of the rules has provided taxpayers sufficient time to unwind their these structures.

Q. Why do the hybrid mismatch rules apply dividend withholding tax in respect of interest payments by Canadian taxpayers, where a deduction in respect of the payment is denied under the hybrid mismatch rules?

A. Under Canada's long-standing thin capitalization rules, where a deduction in respect of an interest payment by a Canadian taxpayer is denied, those rules deem the payment to be a dividend for withholding tax purposes. Interest payments restricted under the hybrid mismatch rules are similar in policy terms, necessitating similar treatment for withholding tax purposes.

Q. Do aspects of the hybrid mismatch rules have the potential to disrupt Canadian capital markets or, in the case of hybrid regulatory capital issued by Canadian banks, frustrate OSFI regulatory objectives?

A. The hybrid mismatch rules generally apply to public issuances of debt and other financial instruments only if there is a structured arrangement. A structured arrangement is, in general terms, a transaction or series of transactions that reflects the tax benefit of a deduction/non-inclusion mismatch in the pricing of the transaction, or is otherwise designed to give rise to such a mismatch.

The "structured arrangement" rule is consistent with the recommendations in the Action 2 report and strikes a reasonable balance between ensuring the hybrid rules do not interfere with commercial transactions that would otherwise give rise to a hybrid mismatch, and preventing taxpayers from deliberately structuring transactions to achieve a hybrid mismatch. In the unusual case where a public issuance is structured to achieve a hybrid mismatch tax benefit, the Government considers the application of the hybrid mismatch rules to be appropriate.

Moreover, based on consultations with relevant stakeholders, the Government understands that ordinary capital markets transactions – e.g., certain regulatory capital issuances such as limited recourse capital notes – are highly unlikely to be within scope of the hybrid mismatch rules, because such transactions generally do not price in any mismatch ordinarily arising, and are not generally designed to generate a mismatch. As such, it is the Department's understanding that these legislative proposals are not currently disrupting Canadian capital markets or frustrating regulatory objectives.

Overview

Flow-through share agreements allow certain corporations to renounce or "flow through" both Canadian exploration expenses and Canadian development expenses to investors, who can deduct the expenses in calculating their taxable income (at a 100-per-cent and 30-per-cent rate on a declining-balance basis, respectively).

In addition to claiming the regular flow-through deductions, individuals (other than trusts) who invest in flow-through shares of a corporation can also claim the Critical Mineral Exploration Tax Credit – a 30-per-cent non-refundable tax credit – in respect of specified critical mineral exploration expenses incurred by the corporation and transferred to the individual under a flow-through share agreement.

This measure would amend the Income Tax Act to include all forms of lithium as a mineral resource (currently only lithium from hard rock is included), which would make all forms of lithium critical minerals by way of reference. This would allow relevant principal-business corporations that undertake certain exploration and development activities related to lithium from brines (or other deposits) to issue flow-through shares and renounce expenses to their investors, who if eligible, would also be able to claim the Critical Mineral Exploration Tax Credit.

Eligible expenses related to lithium from brines made after March 28, 2023 would qualify as Canadian exploration expenses and Canadian development expenses. The expansion of the eligibility for the Critical Mineral Exploration Tax Credit would apply to flow-through share agreements entered into after March 28, 2023.

Key Messages

• This measure would promote the exploration and development of lithium from brines, which is a form of lithium mining with growing interest, particularly in Western Canada.

• Lithium is one of the six key critical minerals identified under the Critical Minerals Strategy as having the most significant potential for Canadian Economic Growth.

• This measure would expand the eligibility of the Critical Mineral Exploration Tax Credit to flow-through share agreements for lithium from brines entered into after March 28, 2023.

• It would also provide corporations with the ability to issue flow-through shares related to lithium from brines exploration and development expenses made after March 28, 2023.

Questions & Answers

Q. Why Budget 2023 propose to expand the Critical Mineral Exploration Tax Credit to lithium from brines but not to other critical minerals?

A. Currently 15 critical minerals eligible for the Critical Mineral Exploration Tax Credit (CMETC) (copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium). These critical minerals are particularly important as they are used in the production of batteries and permanent magnets, both of which are used in zero-emission vehicles, or are necessary in the production and processing of advanced materials, clean technology, or semi-conductors.

Lithium found in hard-rock deposits is currently eligible for the CMETC but not lithium from brines. 

By expanding the eligibility of the flow-through share regime and the CMETC to lithium from brines and other deposits, the Government is supporting the exploration and development of alternative forms of lithium mining.

Q. What is the Critical Mineral Exploration Tax Credit?

A. The Critical Mineral Exploration Tax Credit provides an additional income tax benefit for individuals who invest in mining flow-through shares targeted at specified critical minerals, which augments the tax benefits associated with the flowed through deductions. This credit is equal to 30 per cent of certain mineral exploration expenses that are targeted at specified critical minerals, incurred in Canada and renounced to flow-through share investors. Like flow-through shares, the credit facilitates the raising of equity to fund exploration by enabling companies to issue shares at a premium.

Flow-through shares allow mining companies to renounce or "flow through" tax expenses associated with their Canadian exploration and development activities to investors, who can deduct the expenses in calculating their taxable income.

1(d) - Intergenerational Business Transfers

Key Messages

• This measure facilitates intergenerational business transfers while protecting the integrity of the tax system.
• Although the stated purpose of Bill C-208 was to facilitate intergenerational business transfers, the rules introduced by Bill C-208 contain insufficient safeguards and are available where no transfer of a business to the next generation takes place.
• The Budget 2023 proposals would ensure that the exception to the anti-surplus stripping rule is available only where a genuine intergenerational business transfer takes place. To provide flexibility, it is proposed that taxpayers who wish to undertake a genuine intergenerational share transfer may choose to rely on one of two transfer options:
  • an immediate intergenerational business transfer (three-year test) based on arm's length sale terms; or
  • a gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing the value of their economic interest in a corporation to allow future growth to accrue to their children while the parent's fixed economic interest is then gradually diminished by the corporation repurchasing the parent's interest).
• The immediate transfer rule would provide finality earlier in the process, though with more stringent conditions. In recognition of the fact that not all business transfers are immediate, the gradual transfer rule would provide additional flexibility for those who choose that approach.

Questions & Answers

Q. What is Bill C-208?

A. Private Member's Bill C-208 (effective June 29, 2021) from the 43rd Parliament introduced amendments to a specific anti-avoidance rule in the Income Tax Act (addressing the conversion of dividends into lower-taxed capital gains) in order to facilitate intergenerational business transfers.

Q. What are the problems with Bill C-208?

A. Bill C-208 amended the Income Tax Act in a manner that allows individuals to receive distributions from their private corporations in the form of tax exempt or lower-taxed capital gains in lieu of dividends without requiring that the transfer of a business takes place.

Though the stated purpose of Bill C-208 was to facilitate intergenerational business transfers, the rules introduced by Bill C-208 contain insufficient safeguards and are available where no transfer of a business to the next generation has taken place. More specifically, the amendments introduced by Bill C-208 do not require that:

• the parent cease to control the underlying business of the corporation whose shares are transferred,
• the child have any involvement in the business,
• the interest in the purchaser corporation held by the child continue to have value, or
• the child retain an interest in the business after the transfer.

Q. Do the intergenerational transfer rules maintain the "spirit" of Bill C-208?

A. Yes. These amendments would maintain the spirit of Bill C-208 by facilitating the intergenerational transfer of farming, fishing and other small businesses. The proposed amendments provide taxpayers with two options – an immediate and a gradual business transfer option – and make the relief available to nieces and nephews. The amendments also propose a new 10-year capital gain reserve (extended from 5 years) to transfers that satisfy the proposed conditions.

Q. What is the difference between the immediate and gradual business transfer options? (And why would someone pick one versus the other?)

A. The immediate transfer option applies over a 3-year period and would provide finality earlier in the process, though with more stringent conditions. The gradual transfer option would provide greater flexibility but would require more time to satisfy (between 5 to 10 years).

Q. Can a parent continue to work in a business that is transferred to their child's holding corporation?

A. Yes, however, under both the immediate and gradual transfer options, the parents must transfer management of the business to their children within a reasonable time based on the particular circumstances (with a 36 or 60-month safe harbour, respectively).

Q. If a parent holds a non-controlling minority interest in a business, can the parent use these rules to transfer that interest to their child?

A. Yes, the proposed rules allow the parent to transfer a minority interest in a business, provided that the other conditions in the rules are met. For example, this situation may arise where a parent who owns one-third of a business along with their 2 siblings wanted to use the intergenerational transfer rules to transfer their one-third interest to their child.

Q. The intergenerational transfer rules only allow a parent to transfer their interest in the business to their child once. If a parent has used the current Bill C-208 rules to transfer part of their business to a child already, can the parent transfer the rest of the business under the new intergenerational transfer rules?

A. Yes, provided that all of the other conditions in the intergenerational transfer rules are met, a parent that has undertaken a transaction under the current Bill C-208 rules can also rely on the proposed rules.

Overview

Financial institutions generally acquire and hold certain shares ("mark-to-market property") in the ordinary course of their business, with the income or profit from those shares supporting obligations arising in the ordinary course of their business. The existing mark-to-market rules in the Income Tax Act recognize the unique nature of a financial institution's business by treating gains arising from those shares as business income. Specifically, under the mark-to-market rules, any realized or unrealized gains (profit) on shares that are mark-to-market property are included in income when computing the financial institution's taxable income annually. Shares are generally mark-to-market property when a financial institution has less than ten percent of the votes or value of the corporation that issued the shares ("portfolio shares"). Although the mark-to-market rules treat gains on portfolio shares as business income, a financial institution may claim a deduction ("dividend received deduction") in respect of dividends received on portfolio shares issued by corporations resident in Canada (subject to certain existing limitations).  The dividend received deduction may allow financial institutions to earn business income tax-free when that income is received in the form of dividends from portfolio shares. 

This measure would deny the dividend received deduction for dividends received by financial institutions on portfolio shares. This would ensure that business income received by financial institutions in the form of dividends is subject to tax on the same basis as gains (profit) from those same shares. This measure also complements existing anti-avoidance rules that apply in cases where a corporation receives a dividend on a share in which its holds minimal risk.

Dividends received by financial institutions from shares that are not portfolio shares (e.g., shares of subsidiary corporations) would not be subject to these rules.  In addition, these rules provide an exception for dividends received on preferred shares. 

This measure would apply to dividends received on or after January 1, 2024.

Key Messages

• Budget 2023 proposed an integrity measure that would deny the dividend received deduction for dividends received by financial institutions on shares that are mark-to-market property.
• This measure ensures that business income received by financial institutions in the form of dividends on shares that are held in the ordinary course of their business is subject to tax on the same basis as gains (profit) from those same shares. This measure also complements existing anti-avoidance rules that apply in cases where a corporation receives a dividend on a share in which its holds minimal risk.
• This measure does not impose a new tax on financial institutions. Instead, this measure ensures that business income earned by financial institutions is taxed appropriately.
• These rules provide an exception for dividends received on preferred shares.

Questions & Answers

Q. What is the purpose of this measure? 

A. This measure is an integrity measure that provides certainty for both taxpayers and the Canada Revenue Agency with respect to the availability of the dividend received deduction for financial institutions (generally, banks and insurers) that are subject to the existing mark-to-market rules. The mark-to-market rules recognize the special nature of certain property that is considered "mark-to-market property" held in the ordinary course of a financial institution's business. Shares are generally mark-to-market property when a financial institution has less than ten percent of the votes or value of the corporation that issued the shares. Under the mark-to-market rules, gains on the disposition of shares that are mark-to-market property are taxed as ordinary income (instead of capital gains) and are included in income annually (instead of at the time of an actual disposition). However, as a result of the dividend received deduction, when income in respect of the share is recognized in the form of a dividend, it is effectively exempt from tax.

These rules address a policy objective of ensuring that all business income earned by financial institutions from shares that are mark-to-market property, whether in the form of dividends or gains from those shares, is subject to tax. These rules also support existing anti-avoidance rules that deny the dividend received deduction for dividends received on shares in which the financial institution holds minimal economic risk.

Q. Who does this measure apply to?

A. This measure only applies to corporations that are financial institutions subject to the existing mark-to-market rules in in the Income Tax Act. Financial institutions for these purposes generally include banks, registered securities dealers, insurance companies (both life insurers and property and casualty insurers), credit unions, certain corporations that provide trustee services, as well as corporations controlled by such financial institutions.

Q. What dividends received by financial institutions are subject to this measure?

A. Under this measure, financial institutions are denied the dividend received deduction for dividends received, or deemed to be received, from shares of other Canadian corporations that are mark-to-market property of the financial institution.

There is an exception for dividends received on certain preferred shares even if those shares are mark-to-market property.

Q. What is mark-to-market property?

A. Mark-to-market property includes certain kinds of shares, debt obligations and property that tracks the value of those shares or debt. Shares held by financial institutions are generally considered to be mark-to-market property if the financial institution holds less than ten per cent of the votes or value of the corporation that issued the shares, and the financial institution and corporation are not related.  Shares that are mark-to-market property are essentially portfolio shares and not shares of subsidiary corporations.

Q. Will this measure impact dividends received by financial institutions from corporations that are not resident in Canada?

A. No.

Q. Will this measure impact dividends received by financial institutions from their Canadian subsidiaries?

A. No.

Q. What is the coming into force of this measure?

A. The measure applies to dividends received by financial institutions on or after January 1, 2024.

Q. How are existing anti-avoidance rules complemented by this measure?

A. Budgets 1989, 2015 and 2018 introduced rules that deny the dividend received deduction in certain cases where a corporation holds minimal risk in the underlying share. Taxpayers (mostly financial institutions) have responded to these measures by engaging in new planning techniques in order to continue to claim the dividend received deduction.

This measure addresses the policy objective of ensuring that all business income earned by financial institutions from shares that are mark-to-market property, whether in the form of dividends or gains from those shares, is subject to tax. It also provides certainty by providing a straightforward denial of the dividend received deduction for dividends received on financial institutions' portfolio shares with limited exceptions.

Q. How does this measure affect the policy behind the dividend received deduction?

A. The dividend received deduction, in part, integrates individual and corporate income taxation by allowing dividends to be paid through a chain of corporations without triggering an additional level of corporate income taxation. However, the dividend received deduction is not available in all circumstances. For example, the dividend received deduction may be denied where the dividend is received by certain taxpayers on certain types of shares, or where the dividend is received by a corporation that does not have a material risk of loss or opportunity for gain or profit in respect of the share.

This measure does not undermine the policy behind the dividend received deduction. Rather it introduces an additional restriction on claiming the dividend received deduction that recognizes the nature of certain dividends received by financial institutions as ordinary business income. Consistent with its underlying policy, the dividend received deduction remains available where a financial institution receives dividends from corporate subsidiaries as shares of subsidiary corporations are not mark-to-market property.

Q. Why is the Government introducing rules impacting the financial sector after increasing the tax on banks and life insurers in Budget 2022?

A. This measure is fundamentally a tax integrity measure, aimed at ensuring that income received by financial institutions in the form of dividends is taxed similarly to other income and gains derived from portfolio shares. It supports existing anti-avoidance rules that prevent financial institutions from claiming the dividend received deduction on dividends paid on shares in which they hold minimal economic risk.

Overview

The Climate Action Incentive (CAI) payment is available to residents in provinces where the federal fuel charge applies: Alberta, Manitoba, Nova Scotia, New Brunswick, Newfoundland and Labrador, Ontario, Prince Edward Island, and Saskatchewan. A 10-per-cent rural supplement on baseline CAI payment amounts is provided to those living in small and rural communities. The proposed amendment would increase the rate of the rural supplement from 10 per cent to 20 per cent for the 2024-25 and subsequent fiscal years.

To qualify for the rural supplement under the rules in the Income Tax Act, an individual must live outside a Census Metropolitan Area (CMA) according to the most recent Census published by Statistics Canada before the taxation year. The proposed amendments provide that the CMA designations based on the 2016 Census continue to be used for the 2024-25 and 2025-26 fiscal years.

Key Messages

• By increasing the rate of the Climate Action Incentive payment rural supplement from 10 per cent to 20 per cent, this measure recognizes the increased energy needs and limited access to clean transportation options for rural Canadians. This measure would benefit individuals and families residing in small and rural communities in provinces where the federal fuel charge applies.
• By continuing to use the Census Metropolitan Area designations based on the 2016 Census for the 2024-25 and 2025-26 fiscal years to determine eligibility for the rural supplement, this measure would ensure that all those who are residing in a community that has been eligible for the rural supplement would maintain their eligibility and continue to benefit.

Questions & Answers

Q. Who will benefit?

A. In Alberta, Manitoba, Nova Scotia, New Brunswick, Newfoundland and Labrador, Ontario, and Saskatchewan, individuals and families residing in small and rural communities will benefit from the proposed increase in the rural supplement as part of their Climate Action Incentive (CAI) payments, starting in April 2024. In Prince Edward Island, all residents receive the same amount in CAI payments.

Overall, eight out of 10 Canadians in these provinces will continue to get more money back through CAI payments than they pay, with low- and middle-income households benefitting the most.

Q. How much more money will rural Canadians get because of the increased rural supplement?

A. Starting in April 2024, those living in small and rural communities will be eligible for an extra 20 per cent on their baseline CAI payment amounts for 2024-25. The 2024-25 CAI payment amounts will be announced by the Deputy Prime Minister and Minister of Finance in the coming months.

Q. Where do the funds for the increased rural supplement come from?

A. CAI payments, including the rural supplement, are fully sourced from carbon pricing proceeds. This will continue to be the case in 2024-25, when the rural supplement rate is proposed to increase to 20 per cent.

While final decisions about fuel charge proceeds allocations are yet to be made, as noted by the Prime Minister on October 26, at least part of the increase in the rural supplement is expected to be financed by an offset to the fuel charge proceeds envelope for small and medium-sized enterprises.

More information on the 2024-25 CAI payment amounts by province will be provided when the Deputy Prime Minister and Minister of Finance announces the amounts in the coming months.        

Q. Why is the Government announcing changes to the eligibility criteria for the rural supplement?

A. Eligibility for the rural supplement is based on living outside a Census Metropolitan Area (CMA) according to the most recent Census published by Statistics Canada before the taxation year. As 2021 Census data is now available, CMA designations based on this data would have been used for the first time, starting in April 2024, to determine eligibility for the supplement, as opposed to 2016 Census data. This would have resulted in certain municipalities no longer being eligible for the supplement, even though they have many rural characteristics.

To ensure that all those who are residing in a community that has been eligible for the rural supplement in the past would maintain their eligibility, the Government proposes to continue to use the CMA designations based on the 2016 Census for the 2024-25 and 2025-26 fiscal years.

Q. Why are the changes to the rural supplement eligibility criteria temporary?

A. While the proposal to continue to use the CMA designations based on the 2016 Census would apply only until the end of the 2025-26 fiscal year, the Government will continue to examine the eligibility criteria for the rural supplement to ensure that it appropriately targets residents living in rural and small communities.

Overview

This measure would implement the Carbon Capture, Utilization and Storage (CCUS) Investment Tax Credit, a new refundable investment tax credit for taxable Canadian corporations that incur eligible CCUS expenses.

The investment tax credit is proposed to be available to CCUS projects, in respect of the cost of purchasing and installing eligible equipment. Eligibility is also proposed to extend to dual use power and/or heat and water use equipment used in a qualified CCUS project.

From 2022 through 2030, the investment tax credit rates would be set at:

• 60 per cent for investments in equipment to capture CO2 in direct air capture projects;
• 50 per cent for investments in equipment to capture CO2 in all other CCUS projects; and
• 37.5 per cent for investments in equipment for transportation, storage and use.

These rates would be reduced by half for the period from 2031 through 2040.

Projects are only eligible to the extent that they permanently store captured CO2 through an eligible use. Eligible CO2 uses include dedicated geological storage and storage of CO2 in concrete, but do not include enhanced oil recovery. 

Dedicated geological storage must be in a jurisdiction deemed to have sufficient environmental laws and enforcement governing the permanent storage of captured CO2 (currently Saskatchewan, Alberta, and British Columbia). Storage in concrete must be validated by a third-party based on an International Organization for Standardization standard.

The CCUS Investment Tax Credit would be available for expenditures incurred on or after January 1, 2022, and would no longer be available after 2040.

Key Messages

• This measure would encourage investment in carbon capture, utilization and storage technologies to reduce carbon dioxide emissions.
• Carbon Capture, Utilization and Storage technologies are an important tool for reducing emissions in hard to abate sectors, such as concrete, plastics, or fuels.
• The investment tax credit is expected to work in tandem with incentives created by other measures under the Government's environmental framework, including carbon pricing and the Clean Fuel Regulations.
• This will support the Government's 2030 emission reduction target and goal of net-zero emissions by 2050.
• Significant consultations with stakeholders, which have taken place over the course of 2021 through 2023, have informed the design of the investment tax credit.

Questions & Answers

Q. How did you determine the rates for the CCUS investment tax credit? Aren't they very generous?

A. The Department of Finance held an extensive 90-day consultation with stakeholders on the design of the investment tax credit for CCUS.

The input received during the consultations was used to inform the final design of the investment tax credit, including the tax credit rates. Specifically, these credit rates are expected to be needed to achieve the Government's goal of at least a 15 megatonne annual emission reduction from CCUS that was announced in Budget 2021.

The lower tax credit rate for transportation, storage and use equipment reflects the lower risk and, therefore, lower support required for these project segments.

Q. Why is a higher investment tax credit rate being provided in respect of direct air capture equipment?

A. Direct air capture projects generally have much higher costs than other CCUS projects, and the technology will become increasingly important to support the goal of net-zero emissions by 2050.

As such, a higher investment tax credit rate is being provided for direct air capture equipment.

Q. Why is the rate of the investment tax credit being reduced after 2030?

A. It is important that the government recognize the risks associated with making investments in CCUS technologies now, and reward those who are first-movers to adopt the technology.

Over time, as environmental credit markets mature and the technology continues to develop, there will likely be less uncertainty, which reduces the need for direct CCUS support to incent ongoing investments in the technology post-2030.

The government will undertake a review of investment tax credit rates before 2030, to ensure that the proposed reduction in the level of tax support from 2031 to 2040 aligns with the government's environmental objectives.

Q. How will the federal government ensure that CO2 remains stored underground and what will happen in the event of a CO2 leak?

A. The investment tax credit will only be available to CCUS projects that store CO2 in geological formations that are authorized and regulated for the storage of captured carbon in a jurisdiction where there are sufficient safeguards in place to ensure that captured CO2 remains permanently stored.

Initially, this would include three provinces (Saskatchewan, Alberta and British Columbia), but could be expanded to other jurisdictions as regulatory frameworks are developed.

The management of subsurface areas is generally an area of provincial and territorial domain and jurisdictions are expected to manage the underground storage of CO2 and address the potential for leaks.

Q. Why is enhanced oil recovery explicitly excluded?

A. The Government is supporting the development and adoption of CCUS technologies to reduce Canadian GHG emissions. It is not intended to be a support to increase oil production.

Q. How many companies are expected to claim the investment tax credit? 

A. Ultimately, the number of companies that will be able to claim the investment tax credit will depend on the uptake of CCUS technologies.

It is expected that somewhere between 20-40 projects could be supported by the tax credit.

Q. Why are dedicated geological storage and storage of CO2 in concrete the only eligible uses?

A. Other uses could be made eligible in the future, if permanence of storage can be demonstrated and no incremental CO2 emissions result from the use of the product that is produced.

Q. When will taxpayers be able to claim the investment tax credit?

A. The CCUS Investment Tax Credit legislation needs to receive royal assent before taxpayers can begin to claim the credit. That said, as proposed the Investment Tax Credit will be retroactive to expenditures incurred starting on January 1, 2022.

Overview

The 2022 Fall Economic Statement proposed a 30 per cent Clean Technology Investment Tax Credit to incent the adoption of clean technologies and support Canada's emissions reduction targets and achieving net-zero emissions by 2050. Budget 2023 proposed to expand eligibility for the Clean Technology Investment Tax Credit to certain geothermal energy systems and extend the phase out period.

This measure would implement the Clean Technology Investment Tax Credit. It is a refundable credit that would be available to eligible taxpayers (meaning taxable Canadian corporations and real estate investment trusts) for eligible investments in:

• certain clean electricity generation equipment (i.e., energy system from solar photovoltaic, small modular nuclear reactors, concentrated solar, wind, and water (small hydro, run-of-river, wave, and tidal)),
• stationary electricity storage systems that do not use fossil fuels in their operation,
• low-carbon heat equipment (i.e., active solar heating, air-source heat pumps, and ground-source heat pumps),
• non-road zero-emission vehicles and related charging or refueling equipment, and
• geothermal energy systems that do not co-produce oil, gas or other fossil fuels.

The Clean Technology Investment Tax Credit would be available for eligible investments in property that is acquired and becomes available for use on or after March 28, 2023. The credit rate would be reduced to 15 per cent in 2034 and the credit would be unavailable after 2034.

Key Messages

• The Clean Technology Investment Tax Credit will encourage investments in clean technology assets in Canada ensuring Canadian businesses remain globally competitive and supporting Canada's emission reduction targets and achieving net-zero emissions by 2050. 
• The refundable Clean Technology Investment Tax Credit would be available retroactively for eligible investments in property that is acquired and becomes available for use on or after Budget Day 2023 (i.e., March 28, 2023).
• The tax credit will be subject to a phase-out beginning in 2034 and will not be available after that year.
• Significant consultations with stakeholders have occurred since the government first announced its intention to introduce a clean technology investment tax credit in Budget 2022.  Feedback received from stakeholders informed the design of the investment tax credit.

Questions & Answers

Q. Why is the government introducing this credit?

A. The credit would help Canadian companies adopt clean technologies, which will ensure Canadian businesses remain globally competitive, and reduce Canada's emissions at the same time.

Q. What are the benefits of this measure for businesses investing in eligible clean technologies?

A. Businesses investing in eligible clean technologies will benefit from a refundable tax credit of up to 30 per cent on the capital cost of their investment.

The credit could support clean technology investments that may not otherwise be economically feasible. The credit could also free up capital within Canadian businesses that are investing in clean technology such that they can make further investments in developing a net-zero economy in Canada.

Q. What technologies would be eligible for the credit?

A. As proposed in the 2022 Fall Economic Statement and Budget 2023, the Clean Technology Investment Tax Credit would be available to eligible investments in:

• certain clean electricity generation systems, including solar photovoltaic, small modular nuclear reactors, concentrated solar, wind, water (i.e., small hydro, run-of-river, wave, and tidal) and geothermal energy systems that do not co-produce oil, gas, or other fossil fuels;
• stationary electricity storage systems that do not use fossil fuels in their operation;
• low-carbon heat equipment, including active solar heating, air-source heat pumps, and ground-source heat pumps; and
• Non-road zero-emission vehicles and related charging or refueling equipment.

Q. The Atlantic Investment Tax Credit would apply to the same types of equipment in some cases. How do the two credits interact?

A. To preserve the incentive to invest in the Atlantic and Gaspé regions, the two credits would fully stack with one another. That is, if an investment is made in those regions that is eligible for both credits, then the taxpayer could claim both the 30-per-cent Clean Technology Investment Tax Credit and the 10-per-cent Atlantic Investment Tax Credit, for a combined 40-per-cent credit rate.

Q. How many companies are expected to benefit from the credit?

A. It is roughly estimated that up to 750 businesses may claim the Clean Technology Investment Tax Credit annually over the near term.

Overview

Budget 2023 announced that two separate labour requirements (the prevailing wage requirement and the apprenticeship requirement) would be attached to the proposed Investment Tax Credits (ITCs) for Clean Technology, Clean Hydrogen, Clean Electricity, and Carbon Capture, Utilization, and Storage. Meeting these labour requirements would offer businesses higher rates for the ITCs.

This measure would enact those labour requirements. Initially the requirements would be applicable to the Clean Technology and Carbon Capture, Utilization, and Storage ITCs. They could be extended to other ITCs when those ITCs are enacted.

To meet the prevailing wage requirement, a business would need to ensure that covered workers are compensated at a level that meets or exceeds the relevant regular wage plus standard benefits and pension contributions, as specified in an "eligible collective agreement".

Outside Quebec, an eligible collective agreement in a particular region, province or territory would be:

1. the most recent multi-employer collective bargaining agreement between a trade union and a group of employers who are accredited to bargain together and be bound by the same agreement that may reasonably be considered the industry standard for a given trade, in a region, province or territory; or
2. a project labour agreement that covers the work associated with the investments eligible for the investment tax credits and that has regular wages and standard benefits that are at least as high as the prevailing wages that would have been applicable if the project labour agreement had not been in place.

In Quebec, eligible collective agreements would be those negotiated in accordance with provincial law (i.e., the Act Respecting Labour Relations, Vocational Training, and Workforce Management in the Construction Industry).

To meet the apprenticeship requirement, a business would need to ensure that for a given taxation year, not less than ten per cent of the total labour hours performed by tradespeople are performed by registered apprentices in a Red Seal trade.

If a business does not satisfy the labour requirements, they may forfeit the highest ITC rates or be required to pay corrective remuneration to covered workers and additional taxes to the Receiver General based on the amount of the deficiency. If a business has been grossly negligent, the higher ITC rate would be denied and the business would be subject to penalties.

Businesses that demonstrate reasonable efforts to hire and train apprentices, but are unable to meet the apprenticeship requirement due to circumstances beyond their control, may be considered to have satisfied the requirement without having to pay the relevant additional taxes.

The labour requirements would apply to equipment installed on or after the date that the Notice of Ways and Means motion in respect of this section is tabled in the House of Commons.

Key Messages

• The labour requirements would ensure that when businesses receive financial support for clean energy investments, workers would also see the benefits.
• In order to be eligible for the highest rates under the investment tax credits, businesses would need to pay workers prevailing wages and create apprenticeship opportunities.
• The labour requirements would apply to work that is on or after the date that enabling legislation for these labour requirements is first tabled.
• The Department of Finance held consultations on the labour requirements with unions, businesses and provincial governments.

Questions & Answers

Q. Who would be responsible for ensuring compliance with the labour requirements?

A. Ultimately, the business that is claiming the ITC is responsible for ensuring compliance, including for any contractors and subcontractors that employ covered workers. Taxpayers are expected to communicate openly with their contractors and subcontractors about whether the labour requirements are applicable and how compliance may need to be demonstrated.

Q. Which workers would be covered by the labour requirements?

A. The labour requirements would apply in respect of workers engaged in project elements that are subsidized by the respective investment tax credit, whether they are engaged directly by the business or indirectly by a contractor or subcontractor.

The labour requirements would apply to workers whose duties are primarily manual or physical in nature (e.g., labourers and tradespeople). The labour requirements would not apply to workers whose duties are primarily administrative, clerical, supervisory, or executive.

Q. What types of compensation would be included in a prevailing wage?

A. The definition for prevailing wage is based on the total compensation package that is described in the relevant eligible collective agreement, which includes regular wages (without taking into account overtime), standard benefits (i.e., vacation and holiday pay, and health and welfare benefits) and pension contributions, all converted into a total amount per hour.

Q. Could the prevailing wage requirement be satisfied without paying benefits or pension contributions?

A. Yes. An employer would have flexibility to meet the prevailing wage requirement either by paying workers in accordance with an eligible collective agreement, or by paying workers at or above the equivalent prevailing wage. The requirement could be satisfied through different combinations of wages, pension contributions and benefits.

Q. What constitutes "reasonable efforts" for purposes of meeting the apprenticeship requirement?

A. Businesses that demonstrate reasonable efforts to hire and train apprentices, but are unable to meet the apprenticeship requirement due to circumstances beyond their control, may be considered to have satisfied the requirement without having to pay the relevant additional taxes.

Employers would be deemed to have taken such reasonable efforts in respect of apprenticeship hours for which they:

• post a job advertisement, including a commitment to facilitate participation of apprentices in a Red Seal (or equivalent) program, on multiple websites (including the federal Job Bank website) for 30 days, that is open to both existing employees and new hires,
• communicate with at least one secondary school or educational institution that can reasonably be expected to facilitate the hiring of the apprentice positions described in the job ad, and
• communicate with a qualifying union that can be expected to facilitate the hiring of the apprentice positions described in the job ad, and receive written confirmation from the union that they are unable to fulfill the request for apprentices; if an employer does not hear back from the union within 5 business days of their request, then written confirmation is not required.

These hiring efforts would need to be completed every 4 months.

Employers would also need to confirm that applications have been reviewed.

Q. What documentation or records will be required to demonstrate compliance?

A. The Canada Revenue Agency (CRA) is working on a priority basis to develop administrative guidance that would help stakeholders comply with the labour requirements.

Q. Are any investments exempt from the labour requirements?

A. Under the Clean Technology Investment Tax Credit, exemptions from the labour requirements would apply in respect of acquisitions of zero-emission vehicles and acquisitions and installations of low-carbon heat equipment.

These types of installations are generally expected to be small projects with relatively limited labour involved.

Overview

The Income Tax Act contains a definition of "credit union", which is used for both income tax and Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes. Under the existing legislation, a credit union must earn less than ten per cent of its revenue from sources other than certain specified sources (such as interest income from lending activities) in order to meet this definition of "credit union".

Most credit unions are currently full-service financial institutions that offer a comprehensive suite of financial products and services. As a result, the existing ten-per-cent revenue test may exclude some credit unions from meeting the definition, and thus excludes them from qualifying for the special income tax and GST/HST rules that govern them.

This measure, proposed in Budget 2023, would amend the Income Tax Act by eliminating the revenue test from the definition of "credit union" and changing that definition to accommodate how credit unions currently operate.

The amendment would be deemed to have come into force on January 1, 2016.

Key Messages

• The measure would revise an outdated legislative provision that may prevent some credit unions from being treated as such for income tax and GST/HST purposes.
• Removing the revenue test from the definition of "credit union" would ensure that credit unions continue to be subject to the tax rules that apply to them so they can continue to adequately serve their members' needs.
• The amendment would apply to taxation years ending after 2016.
• Representatives of the credit union system have expressed support for the measure.

Questions & Answers

Q. Why does the definition of credit union need to be amended in the Income Tax Act?

A. Most credit unions are full-service financial institutions that offer a comprehensive suite of financial products and services. As a result, the existing ten-per-cent revenue test may exclude some credit unions from meeting the definition, and thus excludes them from qualifying for the special income tax and GST/HST rules that govern them. Amending the definition would accommodate how credit unions currently operate.

Q. What would the amendment to the definition of credit union accomplish?

A. Amending the definition of "credit union" in the Income Tax Act would ensure that credit unions continue to be subject to the tax rules that apply to them.

Q. How would changing the definition of credit union in the Income Tax Acteffect the GST/HST treatment of credit unions?

A. The "credit union" definition in the Income Tax Act is also used for GST/HST purposes, thus allowing credit unions and caisses populaires to benefit from a special rule ("the GST/HST credit union rule") whereby they can make what would otherwise be taxable supplies of goods and services to one another on a GST/HST-exempt basis.  

Overview

A temporary measure, which expires on December 31, 2026, allows a qualifying family member, to open a Registered Disability Savings Plan (RDSP) and be the plan holder for an adult whose capacity to enter into an RDSP contract is in doubt.

A qualifying family member with respect to the RDSP is defined in the Income Tax Act as a spouse or common-law partner, parent, or, because of changes to this definition announced in Budget 2023 and implemented through Bill C-47, a sibling of the beneficiary.

This amendment would permit a qualifying family member to replace, as plan holder, a deceased qualifying family member who was the last remaining holder of the RDSP. As a result, family members would be able to replace each other and acquire successor rights as plan holder upon death, which is an intended outcome of expanding the definition of a qualifying family member in Budget 2023 to include siblings.

This amendment would apply as of royal assent.  It would expire after 2026 when broader rules permitting a qualifying family member to open an RDSP are set to expire.  Any qualifying family member who becomes a holder of an RDSP under this measure would generally be able to remain a holder after 2026.

Key Messages

• To help ensure the continued stewardship of funds held in Registered Disability Savings Plans (RDSPs) for the long-term financial security of beneficiaries, this measure would allow a qualifying family member (i.e., the spouse or common-law partner, parent, or sibling of the beneficiary) to replace, as plan holder, another qualifying family member who was the last remaining holder of the plan upon their death.
• As is the case under current rules, should the beneficiary be determined to be contractually competent or an entity be legally authorized to act on their behalf, the qualifying family member who is the replacement plan holder would cease to be the plan holder and replaced by that other individual.
• Budget 2023 expanded the definition of a qualifying family member to include siblings to improve access to RDSPs and to ensure family members would be able to replace each other as plan holder when one of them dies. The proposed change reflects this policy intent and also responds to requests made by stakeholders, including from the Canada Revenue Agency's Disability Advisory Committee.

Questions & Answers

Q. Why is the government proposing these changes now?

A. While the Income Tax Act allows, in certain circumstances, a qualifying family member to open an RDSP as the plan holder for an adult with a mental disability, it does not allow them to replace a plan holder when they die, which can leave some beneficiaries without anyone to manage their plan.

These changes address such a barrier to succession planning by allowing qualifying family members to replace each other as plan holder upon death of the last remaining plan holder.

This change responds to requests made by stakeholders, including from the Canada Revenue Agency's Disability Advisory Committee, to expand the qualifying family member provision, as committed to in Budget 2023, to reflect the role that siblings can play over the life of a person with a mental disability.

Q. Who can currently replace a deceased plan holder for an RDSP beneficiary?

A. Under current rules, if the beneficiary has reached the age of majority (age of 18) and is contractually competent to enter into a plan, the beneficiary can replace the plan holder; otherwise, only a legal representative of the beneficiary can replace the plan holder. This can include a guardian, tutor, curator or other individual who is legally authorized to act on behalf of the beneficiary, or a public department, agency or institution that is legally authorized to act on behalf of the beneficiary.

A legal parent, guardian or other entity legally authorized to act on behalf of the beneficiary can replace the plan holder if the beneficiary is a minor.

Q. Why is there an expiry date for the measure?

A. Since the introduction of the Qualifying Family Member provision in 2012, the federal government has maintained that this provision is intended as a stopgap for provinces and territories to develop more appropriate, long-term solutions to address RDSP legal representation issues for persons with disabilities. While most provinces and territories have made significant progress, others have not. The government continues to encourage provinces and territories that have not already done so to address issues surrounding guardianship for persons with disabilities.

As the rules that allow a qualifying family member to open an RDSP as plan holder for a beneficiary are intended to be temporary, modification to these rules through the proposed measure is also temporary in nature.

As such, the proposed measure would expire when broader rules permitting a qualifying family member to open an RDSP are set to expire (i.e., at the end of  2026).  Anyone who becomes a holder of an RDSP under this measure will generally be able to remain a holder after 2026.

Q. How much will this measure cost?

A. There is no cost associated with this measure. As the measure applies to existing RDSPs only, no new plans are expected to be opened as a result of this measure.

Q. When would the changes come into force?

A. This measure would come into effect upon royal assent of this bill.

Q. Would a qualifying family member, including a sibling of the RDSP beneficiary, have access to the funds within the RDSP on behalf of the beneficiary?

A. While plan holders, including qualifying family members can make a request for a withdrawal from an RDSP for the beneficiary, only the beneficiary or their legal representative can receive the actual payment.

Overview

The First Home Savings Account program (FHSA), launched in April 2023, gives prospective first-time home buyers the ability to contribute up to $8,000 per year (up to a $40,000 lifetime limit) on a tax-free basis. Contributions are tax-deductible and withdrawals to purchase a first home—including from investment income—are non-taxable. Legislation to implement the FHSA was enacted through Bill C-32, which received royal assent in December 2022.

This measure includes several amendments to the FHSA tax rules. These amendments would help to clarify the program for stakeholders (account holders, financial institutions, and the Canada Revenue Agency) and improve the interaction of the FHSA rules with other income tax rules. The amendments are largely technical in nature and do not reflect material policy changes relative to the existing rules.

Most of the amendments would apply as of April 1, 2023 (i.e., the date when the FHSA rules came into force). A small number of amendments would apply prospectively from the date they were announced.

Key Messages

• The FHSA program was successfully launched in April 2023. Its enacting legislation received Royal Assent in December 2022 (Bill C-32—Fall Economic Statement Implementation Act, 2022).
• These legislative improvements are generally neutral or relieving in nature for Canadians. They provide more certainty to financial institutions and the CRA in the administration of the program, which will facilitate the efficient rollout of the FHSA program to more Canadians.

Questions & Answers

Q. Why is the Government introducing changes to the legislation applicable to First Home Savings Accounts?

A. During the roll-out of the FHSA program in recent months, key stakeholders, including financial institutions and the Canada Revenue Agency, provided suggestions to the Department of Finance for legislative amendments to clarify various program design features or ease administrative and compliance concerns.

In addition, several of the amendments address the interaction between the new FHSA program and other tax rules. For example, amendments to the Income Tax Regulations confirm that the FHSA, like the TFSA and RRSP, is to be excluded from Common Reporting Standards reporting requirements.

Q. Are the requirements and benefits of the FHSA program relatively simple for Canadians to understand?

A. The FHSA program is based on longstanding tax-assisted savings accounts that are familiar to Canadians. The Canada Revenue Agency is providing educational and guidance materials, as it does for other registered plans. Financial institutions also play a key role, as they do with all registered plans, in advising their clients about the requirements to open an account, contribution limits, qualifying withdrawals to purchase a home, and more.

Overview

The 2022 Fall Economic Statement announced the federal government's intention to introduce a 2-per-cent tax on share buybacks by public corporations in Canada, in order to raise revenues and encourage corporations to reinvest their profits in their workers and business.

Budget 2023 announced that the proposed tax would apply to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada, including real estate investment trusts, specified investment flow-through (SIFT) trusts, and SIFT partnerships.

This measure would implement that tax, which would be equal to 2 per cent of the net value of an entity's repurchases of equity, defined as the fair market value of equity repurchased less the fair market value of equity issued from treasury, calculated on an annual basis, corresponding to the entity's taxation year. An entity would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million.

A number of exceptions exist to address situations where equity may be repurchased or cancelled outside of the context of a typical equity repurchase. For example, equity that is cancelled in a corporate reorganization is generally excluded from the netting rule. Similarly, shares issued in reorganizations and certain other contexts are not included in the netting rule. Preferred shares and other equity with debt-like characteristics are excluded from the tax.

The tax would apply in respect of repurchases and issuances of equity that occur on or after January 1, 2024.

Key Messages

• A share buyback occurs when a corporation buys its own stock back from existing shareholders. While buying back shares is one legitimate way that corporations can return value to their shareholders, it can also divert corporate resources away from making investments in their workers and businesses in Canada.
• The 2022 Fall Economic Statement announced the federal government's intention to introduce a 2-per-cent tax on share buybacks by public corporations in Canada, in order to raise revenues and encourage corporations to reinvest their profits in their workers and business.
• Budget 2023 announced that the proposed tax would apply as of January 1, 2024 to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada. A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million.

Questions & Answers

Q. Why is the government taxing share buybacks?

A. While buying back shares is one legitimate way that corporations can return value to their shareholders, it can also divert corporate resources away from making investments in their workers and businesses in Canada. The government is introducing this tax to raise revenues and encourage corporations to reinvest their profits in their workers and business.

Q. How does the tax work?

A. The tax would be equal to 2 per cent of the net value of an entity's repurchase of equity (meaning shares of the corporation or units of the trust or partnership), defined as the fair market value of equity repurchased less the fair market value of equity issued from treasury. This "netting rule" would apply on an annual basis, corresponding to the entity's taxation year.

Overview

A retirement compensation arrangement (RCA) is an employer-sponsored arrangement that generally allows an employer to provide non-registered pension benefits to its employees.

Under Part XI.3 of the Income Tax Act, a 50-per-cent refundable tax is imposed on contributions to an RCA trust. This tax is generally refunded as the retirement benefits are paid from the RCA trust to employees.

Employers who opt not to pre-fund supplemental retirement benefits through contributions to an RCA trust can provide security to their employees by obtaining a letter of credit or a surety bond. To secure or renew the letter of credit, the employer pays an annual fee or premium charged by the issuer (i.e., the financial institution). These fees are currently subject to the 50-per-cent refundable RCA tax.

As these plans secured by a letter of credit are unfunded, the employer pays the retirement benefits out of corporate revenues as they become due. As there are no funds in the trust for the benefit payments, the 50-per-cent refund of the refundable tax isn't triggered. Consequently, several employers have experienced escalating refundable tax balances with no practical mechanism for recovery.

This measure amends the Income Tax Act so that fees or premiums paid for the purposes of securing or renewing a letter of credit or a surety bond for certain RCAs (i.e., those that are supplemental to a registered pension plan) will not be subject to the refundable tax. This amendment would apply to fees or premiums paid on or after March 28, 2023.

This measure also allows employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit or surety bonds by RCA trusts, based on the retirement benefits that are paid out of the employer's corporate revenues to employees that had RCA benefits secured by letters of credit or surety bonds. Employers would be eligible in any taxation year for a refund of 50 per cent of the retirement benefits paid in that year, up to the amount of refundable tax previously paid. This change would apply to retirement benefits paid after 2023.

Key Messages

• This measure would exempt fees paid (on or after March 28, 2023) to secure or renew a letter of credit or a surety bond for certain Retirement Compensation Arrangements (RCAs) from a 50 per-cent refundable tax rule.
• This measure would also allow employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit or surety bonds by RCA trusts, based on the retirement benefits that are paid out of the employer's corporate revenues to employees that had RCA benefits secured by letters of credit or surety bonds.
• Employers would be able to request a refund of refundable taxes once the corresponding retirement benefits are paid out of corporate revenues to the beneficiaries whose benefits were secured by a letter of credit RCA. This would apply to benefits paid after 2023 and would cease when the employer's total refundable tax balance (with respect to letter of credit RCAs) is refunded.
• These amendments would solve several employers' problem of escalating and unrecoverable refundable tax balances which previously had no practical mechanism.

Questions & Answers

Q. Which types of Retirement Compensation Arrangements (RCAs) will benefit from this measure?

A. This measure provides relief to specified arrangements that are secured by a letter of credit or surety bond through an RCA (and are therefore subject to the RCA refundable tax rules). Specified arrangements are RCAs that provide annual retirement benefits that are supplemental to retirement benefits provided by certain registered plans.

Q. Why are certain RCAs being exempted from the refundable tax rules?

A. Currently, in order for RCAs to receive a refund of refundable tax previously paid, the retirement benefits must be paid out from the RCA trust. With respect to unfunded supplemental pension plans (i.e., RCAs secured by a letter of credit), the employer pays the retirement benefits out of corporate revenues (as there are no funds or assets held in the trust). Since there are no benefit payments from an RCA trust to trigger a refund, the RCA trust and the employer have no practical mechanism to recover the refundable taxes that they remitted to CRA in past years. In order to remedy this problem, letter of credit fees would be exempt from the RCA refundable tax rules.

Q. Why is this change being introduced now?

A. There has been a longstanding concern about the inability of employers to recover their refundable tax balances. There has been a perpetual accumulation over the years of refundable tax with no practical mechanism for recovery. In order to prevent the balance from growing any further, letter of credit fees would be exempt from the refundable tax rules as of March 28, 2023.

Overview

To ensure that taxpayer information is safeguarded, the income tax rules limit the use and disclosure of taxpayer information by the Canada Revenue Agency to specific circumstances.

To support implementation of the Canadian Dental Care Plan, the Income Tax Act, Excise Tax Act and the Excise Act, 2001 were amended as part of Bill C-47 in order for Health Canada and Employment and Social Development Canada to access taxpayer information for the purposes of delivering the Canadian Dental Care Plan.

This measure would amend the Income Tax Act to also provide legislative authority for the Canada Revenue Agency to share taxpayer information with an official of Public Services and Procurement Canada solely for the purposes of the administration or enforcement of the Canadian Dental Care Plan. This would allow Employment and Social Development Canada to engage the services of Public Services and Procurement Canada in administering the Canadian Dental Care Plan.

Similar amendments are proposed to the Excise Tax Act and the Excise Act, 2001.

These amendments would come into force upon royal assent.

Key Messages

• The government's Affordability Plan includes the Canada Dental Benefit, which is providing families with direct payments of up to $1,300 per child over the next two years to cover the cost of dental care for their children under 12.
• The government has committed to fully implementing a permanent Canadian Dental Care Plan to cover all uninsured Canadians with an annual family income under $90,000 by 2025.
• The tax statutes are being amended to provide Public Services and Procurement Canada with access to taxpayer information needed to assist in the delivery of the permanent Canadian Dental Care Plan.
• This will allow Employment and Social Development Canada to engage the services of Public Services and Procurement Canada to assist in administering the Canadian Dental Care Plan.

Questions & Answers

Q. Why is the Government proposing this change now?

A. Public Services and Procurement Canada may require access to taxpayer information in order to assist Employment and Social Development Canada with the delivery of the Canadian Dental Care Plan. The previous amendments to the tax statutes in Bill C-47 only permitted access to taxpayer information for Health Canada and Employment and Social Development Canada.

Q. What taxpayer information would be used to administer the Canadian Dental Care Plan?

A. Taxpayer information that would be used to administer the Canadian Dental Care Plan would include information on family net income, residency in Canada for tax purposes and children under the age of 18.

Q. How would this taxpayer information be safeguarded to ensure that the information is only used to administer the Canadian Dental Care Plan?

A. Consistent with other instances of the sharing of taxpayer information for the administration or enforcement of specific government programs, Memorandums of Understanding (MOUs) would be established between the CRA and the relevant department. These MOUs would contain specific conditions and safeguards for the exchange and use of this information to ensure the confidentiality of taxpayer information is maintained.

Q. Why is the Government proposing changes to the Excise Tax Act and Excise Act, 2001?

A. The proposed amendments to the Excise Tax Act and Excise Act, 2001 would help to ensure consistency across federal tax statutes and would align with the approach taken under the interim Canada Dental Benefit. Similar amendments to these acts were made in Bill C-47.

The changes to the Excise Act, 2001 would automatically update the information sharing rules for the fuel charge under Part 1 of the Greenhouse Gas Pollution Pricing Act, for the Underused Housing Tax Act and for the Select Luxury Items Tax Act, as those Acts refer to the Excise Act, 2001 rules.

Overview

The general anti-avoidance rule (GAAR) in the Income Tax Act is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction.

This measure would introduce several changes that are intended to strengthen the GAAR and make it a more effective tool to deter and combat aggressive tax avoidance.

• A preamble would be added to the GAAR, in order to help address interpretive issues and ensure that the GAAR applies as intended.
• The threshold for the avoidance transaction test in the GAAR would be reduced from a "primary purpose" test to a "one of the main purposes" test. This is consistent with the standard used in many modern anti-avoidance rules and strikes a reasonable balance, as it would apply to transactions with a significant tax avoidance purpose, but not to transactions where tax was simply a consideration.
• The amendments would provide that economic substance is to be considered at the "misuse or abuse" stage of the GAAR analysis and that a lack of economic substance tends to indicate abusive tax avoidance.
• A penalty would be introduced for transactions subject to the GAAR, equal to 25 per cent of the incremental tax payable due to the GAAR. The penalty could be avoided if the transaction is disclosed to the CRA, either as part of the proposed mandatory disclosure rules or voluntarily.
• A three-year extension to the normal reassessment period would be provided for GAAR assessments unless the transaction had been disclosed to the CRA. This extension reflects the complexity of many GAAR transactions, along with the difficulties in detecting them.

These amendments would generally apply to transactions that occur on or after January 1, 2024, except that the penalty would not apply to transactions that occur before royal assent.

Key Messages

• The GAAR is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction.
• When it was first enacted in 1988, the GAAR was intended to strike a balance between taxpayers' need for certainty in planning their affairs and the government's responsibility to protect the tax base and the fairness of the tax system. The proposed amendments are intended to allow the GAAR to better achieve its initial objectives.
• The proposed amendments would deliver on the government's commitment, first made in the 2020 Fall Economic Statement, to improve tax fairness and address sophisticated and aggressive tax planning by strengthening GAAR.

Questions & Answers

Q. What is the General Anti-Avoidance Rule (GAAR)?

A. The GAAR is an Income Tax Act provision that is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction.

Q. Why is the government proposing amendments to the GAAR?

A. Since the GAAR was added to the Income Tax Act in 1988, it has proven to be a reasonably effective tool for preventing abusive tax avoidance. Nonetheless, a consultation paper released by the Department of Finance in August 2022 outlined a number of specific issues related to the GAAR. These amendments would address many of those issues.

In particular, the amendments would strengthen and somewhat broaden the GAAR, including by adding an economic substance test. This is intended to make it more difficult for taxpayers to avoid tax by implementing highly artificial plans that are motivated entirely, or almost entirely, by tax objectives instead of real commercial or family objectives. The amendments are also intended to deter aggressive planning by adding a 25% penalty (which would not apply if a transaction was reported to the CRA). Finally, the optional reporting and extended reassessment period are intended to improve the CRA's ability to collect information in order to more effectively target aggressive tax planning. 

Q. Did the government consult with stakeholders to develop the proposed amendments to the GAAR?

A. The government consulted extensively with a wide range of stakeholders on these proposals. In August 2022, the government released a very detailed consultation paper on strengthening and modernizing the GAAR. This paper discussed the government's concerns with the current GAAR and proposed, for discussion purposes, many different potential solutions. Feedback received during that consultation period was used to develop these proposed amendments, which were announced for consultation in Budget 2023 and re-released for further consultation in August 2023.

Q. How much tax revenue would the GAAR amendments generate?

A. It is not feasible to quantify the potential fiscal impact of this measure. Nevertheless, to provide a sense of the significance of the provision, over fiscal years 2016 to 2021, $4.1 billion of tax was assessed by the CRA using the GAAR (as either the primary or the alternative assessing position). Although the final amount assessed and ultimately collected pursuant to the GAAR will be lower, it should also be recognized that the CRA cannot realistically audit, detect and reassess 100 per cent of abusive tax planning arrangements. Despite the fact that it does not deter or prevent all aggressive tax planning, the GAAR is an important safeguard against abusive tax avoidance and likely maintains the integrity of the tax system to a much greater extent than suggested by the assessed amounts above. It is expected that these amendments would ensure that the GAAR is a more effective tool for preventing abusive tax avoidance and that taxpayers will be increasingly deterred from undertaking such transactions.

Overview

This measure implements the Budget 2023 commitment to introduce rules to facilitate the creation of Employee Ownership Trusts (EOTs). An EOT is a form of employee ownership where a trust holds a controlling interest in a corporation for the benefit of its employees. While EOTs can exist under current tax rules, this measure proposes a tax framework with rules on governance and the identity and rights of beneficiaries. It also removes certain tax barriers to the creation of EOTs.

Notably, trust beneficiaries would be limited to current and former employees of a business controlled by the trust, with the exclusion of individuals who hold or held a significant interest in the corporation prior to its acquisition by the EOT. Distributions of trust income or capital must follow a distribution formula that can consider a combination of the employee's salary (up to a cap), hours worked, and tenure.

Prior to undertaking certain fundamental changes, trustees must receive approval from a majority of all beneficiaries currently employed by the business. Certain provisions would ensure that the trustees of an EOT contain representation from employees and sufficient independence from previous owners of the corporation.

This measure would come into force on January 1, 2024.

Key Messages

• An Employee Ownership Trust (EOT) is a form of employee ownership where a trust hold shares of a corporation for the benefit of the corporation's employees. It also provides another succession option for the owners of private corporations.
• This measure implements the government's Budget 2023 commitment to introduce rules for an Employee Ownership Trust (EOT) structure. While EOTs can exist under current tax rules, this measure introduces a standard framework on what constitutes an EOT and the associated tax treatment.
• These rules define which employees are eligible to be beneficiaries of an EOT and the rights beneficiaries possess in receiving trust distributions and voting on fundamental trust matters. It also contains provisions to prevent former owners of the corporation from participating as beneficiaries or having undue influence in EOT governance, or preventing trust distributions from favouring a particular set of beneficiaries.
• This measure was refined through feedback received from stakeholders, including members of the Canadian Employee Ownership Coalition, on draft legislation released earlier this year.

Questions & Answers

Q. What are Employee Ownership Trusts?

A. An Employee Ownership Trust is a vehicle that allows for employee ownership of a business. The trustees of an EOT hold shares in trust, on behalf of the employees of a business. Rather than being limited to a narrow subset of employees (e.g., senior executives), EOTs generally include a wide group of employees as beneficiaries.

EOTs also assist owners who plan on retiring by providing another option for business succession, in cases where they want to preserve the legacy of their business or do not have family members interested in taking over the business.

Q. What does this measure achieve?

A. This measure implements the government's Budget 2023 commitment to introduce rules for an Employee Ownership Trust (EOT) structure. This measure proposes introducing an EOT tax framework with rules on eligible trust property, the identity and rights of EOT beneficiaries, and EOT governance.

To facilitate the creation of EOTs, the government is introducing additional changes to the Income Tax Act. These changes remove obstacles to the financing and ongoing operation of EOTs.

Q. What types of businesses will be affected by this measure?

A. This measure is expected to support business succession in small-and-medium sized businesses. There are no restrictions on the minimum or maximum size of a business that can be EOT-owned.

Q. Does the Canadian model provide tax incentives to owners to sell to an EOT as in the United States and United Kingdom?

A. In the 2023 Fall Economic Statement, the government announced that there would be an exemption on the first $10 million of capital gains realized in a transaction where an EOT acquires a controlling interest.

Any business owner who sells shares in the year that the EOT first acquires a controlling interest, regardless of their level of shareholding, would be eligible to claim this benefit on their sale of shares. However, the $10 million limit would need to be shared among owners selling shares of the same business.

This incentive would be in effect for the 2024, 2025, and 2026 tax years.

Q. Is the tax incentive included in the final legislation?

A. No, the tax incentive is not included in this final legislation. The Department of Finance is finalizing details and will release draft legislative proposals for consultation at a later date.

Q. How many EOTs will be created as a result of this measure?

A. We anticipate that about 125 EOTs could be created by 2028-29 as a result of the actions taken by the government to support the creation of EOTs in Budget 2023 and the 2023 Fall Economic Statement. However, the eventual figure will largely depend on the familiarity that tax advisors have with the EOT and the circumstances of business owners identifying it as a succession option.

Q. How do employees benefit from the growth in a company's value with a Canadian EOT model?

A. The Canadian approach aims to provide a framework for EOTs but would give an EOT the freedom to decide how to reward beneficiaries. The distribution formula for an EOT permits distributions of income or capital. In certain businesses, beneficiaries may prefer receiving profit-sharing in the form of dividend payments. In other businesses, beneficiaries may want to invest in the growth of the business. In these cases, the EOT can distribute shares within the trust to employees. When beneficiaries cease employment, the EOT could use trust income to pay out the beneficiary's share value.

Q. What assets can an EOT hold?

A. An EOT would be required to principally hold shares in one or more qualifying businesses, which would be Canadian-controlled private corporations controlled by the EOT.

Q. Who is eligible to be an EOT beneficiary?

A. An EOT must generally include as a beneficiary all individuals who are employed by a qualifying business that is controlled by the EOT. It has the liberty to exclude as beneficiaries those employees who have not met a probationary period or former employees of a qualifying business.

The EOT may not include certain groups of beneficiaries:

• individuals who hold 10 per cent or more of the shares of a qualifying business, excluding through their beneficial interest in the EOT;
• individuals who own 50 per cent or more of the shares of a qualifying business in combination with related persons, including through their beneficial interest in the EOT; and
• individuals who owned 50 per cent or more of the shares of a qualifying business in combination with related persons, immediately prior to it becoming controlled by the EOT.

Q. How does the trust distribution formula operate and what does it achieve?

A. The trust distribution formula allows trustees to distinguish between beneficiaries for the purpose of a distribution of trust income or capital. This can be done on the basis of any combination of three criteria: an employee's salary, hours worked, and their tenure.

The distribution formula limits distributions that favour a subset of employees, particularly those that are high-income. There is a cap to the amount of an employee's salary which may be considered in the calculation of the distribution formula. This is an indexed cap equal to twice the highest marginal income tax bracket for a calendar year ($471,350 for 2023).

Q. How are employees' interests in the governance of an EOT safeguarded?

A. EOT trustees are prohibited from favouring the interests of one subgroup of beneficiaries at the expense of another subgroup. In addition, trustees must abide by the standards required of them under trust law. 

This measure also proposes that at least one-third of all EOT trustees must be currently employed by a qualifying business controlled by the EOT. Moreover, in the case that any trustee is appointed to the position, at least 60 per cent of all trustees must be sufficiently independent of all individuals who sold shares of a qualifying business to the EOT when the EOT acquired control of the business.

Q. On which fundamental changes must trustees receive beneficiary approval?

A. These fundamental changes include events which would result in at least 25 per cent of the beneficiaries who are employed by a qualifying business losing their status as a beneficiary employed by a qualifying business. This could be the case when an EOT sells its controlling interest in a qualifying business or if it terminates employment of a large subset of employees.

Additionally, there is a fundamental change when there is a winding-up, or amalgamation of a qualifying business, aside from transactions which involve only other entities controlled by the EOT. This could occur when there is an amalgamation of a qualifying business with a corporation not controlled by the EOT.

Q. What are the proposed changes to tax rules to facilitate the creation of EOTs and remove barriers to their operation?

A. These changes would include extending the capital gains reserve to ten years for qualifying sales of shares made to an EOT, providing an exception to shareholder loan rules, and exempting EOTs from the 21-year rule.

Q. How does a longer capital gains reserve period assist the creation of EOTs?

A. An EOT transaction may result in an owner receiving deferred consideration over an extended period. The capital gains reserve allows an individual the ability to defer taxation on capital gains when they have yet to fully receive the sale proceeds. Rather than the current five-year deferral period, this change would extend the deferral period to ten years. A minimum of 10 per cent of the capital gain must be brought into income each year. This amendment would allow the timing of the capital gains tax to better align with the receipt of proceeds.

Q. How will the exception to shareholder loan rules assist the creation of EOTs?

A. The exception to shareholder loan rules would permit the business to lend business profits to the EOT to repay acquisition debt (which could be done on an interest-free basis), instead of paying taxable dividends. The trust would then have 15 years to repay the shareholder loan to the business.

Q. How will an exception to the 21-year rule on deemed disposition of trust property assist the operation of EOTs?

A. The 21-year rule deems certain types of trusts to dispose of their capital property and recognize any accrued gains every 21 years. It is intended to protect against indefinite tax deferral. To the extent that a business intends to remain employee-owned for an extended period of time, it would not be appropriate to subject the EOT to this rule. A trust that would be subject to such a tax event must dedicate cashflow to manage tax liability that could reduce cashflow for operational needs.

Q. When will these rules come into force?

A. Trusts could qualify as EOTs, and the associated tax changes would apply, as of January 1, 2024.

Overview

 This measure would implement an integrity measure announced in Budget 2022.

The Canadian income tax system aims to achieve neutrality by ensuring that income earned directly by a Canadian-resident individual is taxed at roughly the same rate as income that is earned through a corporation. This objective is commonly referred to as integration.

The active business income of a private corporation is integrated only once dividends are paid out to shareholders. In contrast, additional refundable taxes apply to investment income earned by private corporations in the year in which it is earned. These taxes generally aim to remove any advantage for Canadian individuals of earning investment income in a private corporation (where the investment income would otherwise be subject to a lower tax rate compared to earning such income personally).

Some higher income Canadians were manipulating the status of their private corporations to avoid paying the additional refundable tax on investment income earned in their corporations. This could be done in various ways, such as by migrating the corporation into a foreign low-tax jurisdiction or by using foreign shell companies.

This measure would amend the Income Tax Act to ensure that investment income earned and distributed by private corporations that are, in substance, Canadian-controlled private corporations (CCPCs) would be subject to the same taxation as investment income earned and distributed by CCPCs. A "substantive CCPC" would be a private corporation (other than a CCPC) that is controlled by one or more Canadian residents, or that would be controlled by a Canadian resident if all the shares owned by Canadian resident individuals were aggregated. 

This measure would generally apply to taxation years that end on or after April 7, 2022.

Key Messages

• The measure proposes a new concept, the "substantive CCPC", which would include private corporations that are directly or indirectly controlled by Canadian resident individuals. Investment income earned and distributed by substantive CCPCs would be subject to the same income tax rules as Canadian-controlled private corporations (CCPCs). 
• This measure would not affect CCPCs or genuine non-CCPCs (i.e., private corporations that are ultimately controlled by public corporations or non-resident persons).
• This is an important measure that protects the integrity and fairness of the tax system.

Questions & Answers

Q. Why is the substantive CCPC measure necessary?

A. This measure is necessary to address the use of foreign corporations to defer Canadian tax on investment income. While the targeted tax planning could be challenged by the Canada Revenue Agency in court, these legal proceedings are costly for both the government and taxpayers. A specific legislative measure provides certainty for taxpayers and will assist the CRA to audit and reassess taxpayers that undertake this planning.

Q. How does the substantive CCPC measure impact small business in Canada?

A. Small businesses in Canada should not be affected by this measure, as it applies only to investment income and not active business income.

The measure applies to taxpayers that manipulate their CCPC status (often using foreign corporations) to defer tax otherwise payable on investment income. This additional refundable tax on investment income of a CCPC is intended to remove the benefit from wealthy Canadians moving their passive investment portfolios to their private corporations to take advantage of the lower general corporate tax rate.

One common example of the planning involves a wealthy Canadian legally continuing their private corporation under the corporate laws of the British Virgin Islands. Since the corporation is no longer incorporated in Canada, it ceases to be a CCPC. As a result, it avoids paying the additional refundable tax for CCPCs on its investment income even though it is still owned by Canadians, and is still resident in Canada for tax purposes.

Q. Why is the international part of the Substantive CCPC measure not included in this bill?

A. The second (international) part of the Substantive CCPC measure announced in Budget 2022 applies to certain Canadian corporations to the extent they earn investment income through subsidiaries resident in foreign jurisdictions – for instance, a passive investment portfolio could be transferred to, or acquired by, a subsidiary resident in the United States. While rules exist that tax the passive investment income of non-resident corporations in Canada on an accrual basis, the Substantive CCPC measure announced in Budget 2022 proposed to recalibrate these rules so that tax cannot be avoided by shifting the investment income offshore.

As part of the Department of Finance's consultation process, the government received submissions from stakeholders with respect to the international portion of the Substantive CCPC measure announced in Budget 2022 which are currently under consideration. Consequently, this part of the measure is not included in the bill.

Q. How many taxpayers will be affected by this measure?

A. A relatively small number of taxpayers will be affected by this measure. The affected taxpayers would generally be high-net-worth individuals and their private corporations undertaking tax planning that seeks to avoid the application of existing anti-deferral rules to their investment income.

Overview

Budget 2021 announced a temporary measure to reduce by half the corporate income tax rates for income from zero-emission technology manufacturing and processing. These reduced tax rates, which were enacted in 2022, are available for taxation years beginning after 2021. These reduced rates were scheduled to no longer be in effect for taxation years starting after 2031, subject to a phase-out starting in 2029.

This measure, announced in Budget 2023, would make two enhancements to these reduced tax rates.

First, it would extend the availability of these reduced rates by another three years, such that the reduced tax rates would no longer be in effect for taxation years starting after 2034, subject to a phase-out starting in 2032.

It would also extend eligibility for the reduced rates to include the manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels and heavy water, effective for taxation years beginning after 2023.

Key Messages

• To ensure that businesses have the runway they need to innovate and produce zero-emission technologies, Budget 2023 proposed enhancements to the reduced corporate tax rates for zero-emission technology manufacturers.
• The reduced tax rates apply to income of both small businesses and to large businesses.
• The reduced tax rates would be extended by another three years, such that the reduced tax rates would no longer be in effect for taxation years starting after 2034, subject to a phase-out starting in 2032.
• The reduced tax rates would be extended to include the manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels and heavy water, effective for taxation years beginning after 2023.

Questions & Answers

Q. What is considered manufacturing/processing for the purpose of the Reduced Tax Rates for Zero-Emission Technology Manufacturing?

A. In general, manufacturing involves the creation, shaping, stamping, or forming of an object (e.g. the assembling of electric vehicles); whereas processing involves the change in the characteristics of goods to increase their marketability (e.g. the reacting of lithium carbonate with cobalt oxide to produce lithium cobalt oxide, a cathode active material).

Information on the meaning of manufacturing and processing activities for tax purposes is available in the "Income Tax Folio S4-F15-C1, Manufacturing and Processing" on the Canada Revenue Agency website. These definitions exclude resource activities for critical minerals prior to the "prime metal stage or equivalent".

Q. How is eligible income determined for the Reduced Tax Rates for Zero-Emission Technology Manufacturers?

A. Eligible income is generally equal to a business' "adjusted business income" multiplied by the proportion of its total labour and capital costs that are used in eligible activities. A corporation's adjusted business income is, in general terms, its income from active business carried out in Canada.

Q. What activities are currently eligible for the reduced tax rates?

A. The following activities are currently eligible for the reduced tax rates:

• manufacturing of certain renewable energy equipment (solar, wind, water, or geothermal);
• manufacturing of certain electrical energy storage equipment;
• manufacturing of air- and ground-source heat pump systems;
• manufacturing of zero-emission vehicles, including vehicle conversions;
• manufacturing of recharging systems and hydrogen refuelling stations for zero-emission vehicles;
• manufacturing of equipment used to produce hydrogen from electrolysis;
• production of renewable fuels from waste material or ambient carbon dioxide; and
• manufacturing or processing of certain upstream components and sub-assemblies for the above activities.

Overview

The government first announced the proposed Digital Services Tax (DST) in the 2020 Fall Economic Statement of November 30, 2020. The DST was announced as an interim measure that would have effect from January 1, 2022 until the effective date of an acceptable internationally negotiated multilateral approach to tax and digitalization.

On October 8, 2021, Canada and 136 other members of the OECD/G20 Inclusive Framework agreed to a Statement on a two-pillar plan for international tax reform. This agreement included a standstill commitment not to impose any new DSTs before 2024, but it allowed pre-existing DSTs to continue. Concurrently, the government announced that the DST would be imposed as of January 1, 2024 if the treaty implementing Pillar One of the plan had not come into force. In that event, the DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022. In October and November of 2021, the United States agreed with seven countries with DSTs (Austria, France, India, Italy, Spain, Turkey and the United Kingdom) that, until the end of 2023, it would not take trade retaliation in return for a commitment to credit DST amounts that exceed a taxpayer's first year liability under an eventual multilateral approach.

On July 11, 2023, 138 countries conditionally agreed to a further one-year standstill on the imposition of new DSTs. Canada did not agree given the lack of any binding timeline for the implementation of a multilateral approach. It is now clear that a condition of this extension – that a critical mass of countries sign a multilateral treaty by the end of 2023 – will not be met. Therefore, there is no agreed restraint on DSTs after 2023.

These legislative proposals build on draft proposals which were released for public consultation on December 14, 2021 and on August 4, 2023. The main parameters are:

• Rate and Base: The DST would apply at a rate of 3 per cent on certain revenues from online business models reliant on the engagement, data and content contributions of Canadian users: online marketplaces, online targeted advertising, social media, and certain sales and licensing of user data.
• Thresholds: The DST would apply to an entity that meets, or is a member of a business group that meets, both of two thresholds:
  • Global revenue from all sources, for a fiscal year, equal to or greater than an amount prescribed by regulation (set at €750 million); and
  • In-scope revenue associated with Canadian users, for a calendar year, of more than an amount prescribed by regulation (set at $20 million).

The Digital Services Tax Act would come into effect through an order of the Governor in Council, but not earlier than January 1, 2024.

Key Messages

• The government first announced plans for a DST in the 2020 Fall Economic Statement. It was announced as an interim measure that would apply from January 1, 2022 until a multilateral approach comes into effect. Canada agreed in October 2021 to temporarily pause the DST until the end of 2023, to allow time for negotiations on Pillar One of the two-pillar plan on international tax reform.
• Canada reaffirms its desire to see the multilateral Pillar One system implemented and will continue to work with our international partners to bring the new system into effect as soon as a critical mass of countries is willing.
• Meanwhile, given the absence of a binding timeline for the implementation of Pillar One, and as other countries continue to collect tax under pre-2022 DSTs, the government proposes to introduce a DST to protect the interests of Canadians by ensuring that businesses pay their fair share of taxes.
• This legislation was released in draft in December 2021 and, with small revisions, in August 2023. As provided in those drafts, the new Act would come into force on a day to be set by Order in Council, no earlier than January 1, 2024.

Questions & Answers

General Questions

Q. Why is Canada moving ahead with a Digital Services Tax? Why not wait until a multilateral approach is agreed on?

A. Canada first announced plans to implement a Digital Services Tax (DST) in the November 2020 Fall Economic Statement. Extensive details of the proposed measure were outlined in Budget 2021. The tax was proposed to take effect on January 1, 2022.

In October 2021, Canada and 137 other members of the OECD/G20 Inclusive Framework agreed on a two-pillar plan for international tax reform. As part of that agreement, the federal government agreed to pause imposition of the DST until the end of 2023, in order to give time for negotiations on Pillar One to conclude. Meanwhile, at least seven other countries (Austria, France, India, Italy, Spain, Turkey, and the United Kingdom) have continued to apply their own DSTs.

Canada reaffirms its desire to see Pillar One implemented and will continue to work with our international partners to bring the new multilateral system into effect as soon as a critical mass of countries is willing. However, while the Government supports the multilateral treaty to implement Pillar One, given the lack of any firm timeline to implement it, the government is moving ahead with its longstanding plan to enact a DST. The Pillar One treaty, once implemented, will require national DSTs to be removed.

Q. When would the DST Act come into force?

A. The legislation provides that the Digital Services Tax Act would be brought into force on a date to be set by order of the Governor in Council, no earlier than January 1, 2024. This provision has been a feature of the proposed DST since the legislative proposals were first tabled in Parliament on December 14, 2021. This recognizes that this measure has always been connected to ongoing international negotiations.

As the Deputy Prime Minister indicated in her statement of July 12, 2023: "Two years ago, we agreed to pause the implementation of our own Digital Services Tax (DST), in order to give time and space for negotiations on Pillar One. But we were clear that Canada would need to move forward with our own DST as of January 1, 2024, if the treaty to implement Pillar One has not come into force." This remains the government's plan. Meanwhile, discussions with international partners, including the United States, continue.

Q. Have countries agreed to a "standstill" against imposing new DSTs?

A. Under the October 2021 agreement among members of the OECD/G20 Inclusive Framework on a two-pillar plan for international tax reform, countries like Canada without DSTs committed to a "standstill" on new DSTs. Specifically, they committed not to impose any newly enacted DSTs before the end of 2023, in order to allow more time for negotiations on Pillar One. The agreement did not impose any obligation on countries with pre-existing DSTs. On the basis of this agreement, Canada agreed to pause its DST until the end of 2023.

On July 12, 2023, 138 members of the Inclusive Framework conditionally agreed to a further one-year standstill (to the end of 2024) on the imposition of new DSTs. The Deputy Prime Minister announced that Canada was not able to agree to an extended standstill given the lack of a firm timeline for the implementation of Pillar One, and while other countries continue to impose tax under pre-2022 DSTs.

U.S. Treasury Secretary Yellen publicly acknowledged in October 2023 that due to outstanding issues regarding the multilateral treaty to implement Pillar One, and the U.S. need to consult, negotiations on Pillar One would need to continue into 2024.

Since it was a condition of the July 2023 standstill that a critical mass of countries (including the U.S.) have signed the convention by the end of 2023, this means that the standstill extension will not be triggered. Therefore, the current commitment not to impose newly enacted DSTs will expire at the end of 2023 for all countries.

DST Design

Q. What activity does the DST apply to?

A. The DST would apply at a rate of 3 per cent on revenue from certain digital services reliant on the engagement, data and content contributions of Canadian users. Any business (foreign or domestic) that meets certain size thresholds and engages in these activities would be subject to the DST. Specifically, it would apply to revenue from:

• online marketplaces that help match buyers and sellers of goods or services or facilitate transactions between them;
• social media services;
• online advertising targeted based on data gathered from users of an online platform; and
• the sale of or licensing of data gathered from users of an online marketplace, search engine or social media service.

Q. Is the DST focussed on foreign-based or domestic companies?

A. The DST would be focussed on online business models in which the leveraging of data and content contributions from Canadian users is a key value driver. This is an area in which both foreign and domestic businesses are active; the DST would apply equally to both. International trade agreements also generally require that Canadian sales by foreign and domestic businesses be treated equally.

Q. Why does the DST not apply to businesses that sell goods and services online for their own account, such as streaming digital content?

A. The DST is not a tax on online sales or e-commerce. It is focussed on online business models in which the leveraging of data and content contributions from Canadian users is a key value driver. This includes intermediation platforms that create online markets by exchanging information among buyers and sellers of goods or services. In these cases, gathering and sharing information from users is a key function of the platform. The tax would apply to the revenue earned by the platform from providing the marketplace and facilitating transactions by acting as an intermediary. The DST would not apply, however, to revenue earned by a seller that simply uses the marketplace.

More generally, the DST would not apply to revenue from the online supply of goods and services by a seller on its own account. This is so in the case of both traditional goods and of digital products including the sale, licensing or streaming of digital content such as audio, video, games, software, e-books, newspapers and magazines. The sales of such products in Canada is subject to GST/HST. However, the fact of such sales in Canada does not imply that the supplier is engaging in any production-side, or value creation activity, in Canada. This contrasts with the platforms in scope of the DST, which actively collect, manage and monetize data from Canadian users as a core value driver. However, if, for example, a video or music streaming service earns revenue from selling online advertising targeted with user data, that revenue would be within the scope of the DST.

Q. Why is the global revenue threshold for the DST set in euros?

A. The initial regulations provide that the DST would apply to businesses with global revenue from all sources of €750 million or more in the previous year. Several countries have used this threshold to define large businesses for DST purposes, since it is an internationally agreed threshold for large businesses under several OECD tax standards:

• It is the threshold for the requirement on large multinational enterprises to file country-by-country reports of tax and financial information with tax administrations (now part of Canadian law).
• It is also the threshold for purposes of the Pillar Two global minimum tax, which Canada is moving to implement.

Q. Why is the DST calculated retrospectively to 2022 and how does retrospectivity work?

A. The Government of Canada first announced plans to implement the DST in the Fall Economic Statement of November 30, 2020. The DST was proposed to take effect on January 1, 2022.

In October 2021, Canada and 137 other members of the OECD/G20 Inclusive Framework reached agreement on a two-pillar tax reform plan. As part of this agreement, countries without DSTs already in place, including Canada, committed not to impose a DST before the end of 2023, to allow time for negotiations on Pillar One.

Consistent with this agreement, the proposed DST would apply no earlier than January 1, 2024. However, for the first year of application, tax would apply to revenues earned from January 1, 2022 onward - the effective date originally announced in November 2020.

Thus, if the first year of application is 2024, the taxpayer's tax return for 2024 would report revenue for 2022, 2023 and 2024. It would effectively be a "catch-up" year. Taxpayers have been expecting this.

Q. What is the simplified compliance option for retrospective years?

A. A simplified compliance option is provided for the years prior to the first year of application of the DST – e.g., 2022 and 2023.  If the first year of application of the tax is 2024, under the simplified method, the taxpayer is not obliged to go through detailed records to calculate its taxable revenue for 2022, for example. It can elect instead to approximate it using a formula. It will have done a detailed calculation of Canadian digital services revenue for 2024. It can assume that its Canadian digital services revenue for 2022 is the same share of total revenue for that year, as its Canadian digital services revenue for 2024 is of total revenue for 2024.

Q. How does the DST interact with corporate income tax?

A. The DST is a charge, separate and distinct from corporate income tax, on online businesses that leverage data from Canadian users. It would apply in addition to any corporate income tax that may be paid by the firm in Canada or, for non-resident firms, in the jurisdiction where they are based. DST payments would be deductible for corporate income tax purposes based on the general principles that apply to other business expenses. In this way, the DST will be treated like other levies such as property taxes, payroll taxes and resource royalties, which are deductible but not creditable for income tax purposes. Canadian businesses will be treated equally with foreign-owned businesses which we anticipate will similarly receive an income tax deduction, but not a credit, in their home jurisdiction for Canadian DST paid.

Impacts

Q. What is the expected revenue from the DST? What will administration cost?

A. The DST is expected to raise $800-900 million per year.

A detailed revenue forecast for the DST, which was originally proposed to apply as of January 1, 2022, was set out in Budget 2021 (page 587):

When the government announced in October 2021 that it was pausing the DST for two years, it indicated that the DST would not apply before January 1, 2024 and would only apply if the treaty implementing Pillar One had not come into force. However, if the DST did come into effect, it would be payable in respect of revenues earned as of January 1, 2022.

Depending on the effective date of the DST determined by the government, revenues will not be recognized until at least 2024-25, so the time profile will need to be adjusted accordingly.

For administration, Budget 2021 allocated $24 million over two years for initial start-up costs and $4 million per year ongoing.

Q. How much revenue is expected to be received for 2024 and when would it be booked?

A. The DST is forecast to raise about $800 million for calendar year 2024. Firms would be required to file their DST return for a particular calendar year, and pay the associated tax liability, by June 30 of the following year. Therefore, tax amounts for calendar year 2024 would be collected in mid-2025 and would be booked in the 2024-25 fiscal year.

Q. Are companies likely to pass on the DST they pay to their users?

A. The DST would be imposed directly on corporations on the basis of their annual financial results; it is not a tax on individual sales. It is designed to help ensure that corporations that leverage data from Canadian users pay a fair share of tax in respect of their activity in Canada.

Some corporations may try to avoid the impact of the DST by passing on the cost to those that purchase their services, but we expect that market competition will limit that circumstance. While some corporations have purported to increase fees in response to DSTs in some countries, it is not possible to determine whether these price changes are actual consequences of the tax or justifications for increases that would have been made in any case.

Q. Is the government concerned about potential U.S. trade retaliation in response to the DST? 

A. The government has been engaging actively and constructively with the U.S. and other international partners since 2017 to develop an agreed multilateral approach to digital taxation. In the absence of a binding timeline for a multilateral approach, however, Canada – like many other countries – has concluded that it needs to take domestic action. The DST would operate on an interim basis until a multilateral system under Pillar One of the two-pillar plan comes into effect.

The proposed DST would not discriminate against corporations from the U.S. or any other country. It would apply to revenue earned by corporations – both domestic and foreign – from digital services that rely on data and content contributions from Canadian users.

The United States has been explicitly tolerating pre-2022 DSTs in at least seven other countries (Austria, France, India, Italy, Spain, Turkey and the United Kingdom) since the autumn of 2021. 

The government is actively engaging with the U.S. regarding the DST.

Q. Is the proposed DST consistent with Canada's international obligations?

A. The government is confident that the proposed DST is consistent with all of Canada's international obligations, including those under trade agreements and tax treaties.

Overview

A corporation without share capital, such as a limited liability company, possesses attributes of both corporations and partnerships (i.e., it has limited liability like a corporation and the income flow-through advantages of a partnership). 

This relieving measure expands the GST/HST definition of "financial instrument" to include equity interests in corporations without share capital. This ensures that supplies of equity interests in such entities are GST/HST-exempt supplies of financial services, similar to a supply of shares of a corporation or of interests in a partnership. 

The measure comes into force on August 10, 2022.

Key Messages

• The measure concerns equity interests (i.e., an ownership interest giving a right to receive capital, revenue or income) in corporations without share capital, such as a limited liability company. 
• Specifically, the measure includes such equity interests in the GST/HST definition of "financial instrument".
• This ensures that supplies of such equity interests are GST/HST-exempt supplies of financial services, as is already the case for supplies of shares of a corporation or interests in a partnership.

Overview

Financial institutions (FIs) are subject to special GST/HST rules. For GST/HST purposes, "FIs" include de minimis FIs. A person is generally a de minimis FI if: (1) its annual financial revenue exceeds both $10 million and 10 per cent of its total revenues; or (2) it has over $1 million per year in credit card and interest income. However, persons other than partnerships are generally entitled to exclude, from their financial revenue and interest income in these de minimis thresholdcalculations, interest and dividends received by the person from a corporation related to the person.

This relieving measure would likewise allow a partnership to exclude, from its financial revenue and interest income in these de minimis thresholdcalculations, interest and dividends received by the partnership from a corporation controlled directly or indirectly by the partnership.

The measure would apply to taxation years of a partnership beginning after August 9, 2022.

Key Messages

• This measure concerns the determination of which persons are considered to be "financial institutions" (FIs) for GST/HST purposes. An FI includes not only a traditional FI, such as a bank, but also other persons, referred to as de minimis FIs, that provide a significant amount of financial services.
• A person is generally a de minimis FI if: (1) its annual financial revenue (including interest and dividend income) exceeds both $10 million and 10 per cent of its total revenues; or (2) it has over $1 million per year in credit card and interest income.
• Persons other than partnerships are generally entitled to exclude, from their financial revenue and interest income in these de minimis thresholdcalculations, interest and dividends received from a corporation that the person has a controlling interest in (directly or indirectly).
• The measure would allow a partnership to likewise exclude, from the de minimis FI calculation, interest or dividends received from a corporation in circumstances in which the partnership would be related to the corporation if the partnership were itself a corporation. 

Overview

The GST/HST financial services election allows two corporations to make an election in respect of most supplies of property or services between them. To qualify, the corporations must be members of the same closely-related (generally 90 per cent cross-ownership) group of corporations, and at least one of the members of the group must be a financial institution. The election allows them to treat most otherwise taxable supplies of property or services between them as instead being exempt supplies of financial services.

Corporations may make such an election and can subsequently file to revoke it. Currently, there are no restrictions on the backdating of such a revocation (i.e., the revocation could be made effective on a date before the revocation is filed). This allows corporations to change their past supplies from exempt to taxable, allowing for possible tax planning and creating compliance issues for the CRA.

The measure is an integrity measure that would address this issue by ensuring that corporations may no longer backdate the revocation of a financial services election except with the permission of the Minister of National Revenue.

Key Messages

• This integrity measure concerns the GST/HST financial services election.

• This election allows two qualifying corporations to treat most otherwise taxable supplies of property or services between them as instead being exempt supplies of financial services.

• A financial services election that has been made by two corporations may be jointly revoked by them. Currently, there are no restrictions on backdating, which means that corporations can make the revocation effective on a date before the revocation is filed. This allows corporations to change their past supplies from exempt to taxable, allowing for possible tax planning and creating compliance issues for the Canada Revenue Agency (CRA).

• The measure addresses this issue by no longer allowing corporations to backdate the revocation of a financial services election unless they obtain the agreement of the Minister of National Revenue (i.e., the CRA).

Overview

The election for nil consideration allows two persons making only taxable supplies to elect to treat certain supplies between them as being made for no consideration. This election provides cash flow and administrative benefits to the parties since the supplier (seller) does not need to charge and remit GST/HST on such supplies and the recipient (buyer) does not need to pay the tax and claim input tax credits to recover it.

The election is limited to corporations and partnerships that are resident in Canada, that are registered for the GST/HST, that are part of the same closely-related (at least 90% cross-ownership) group and that are generally engaged exclusively in taxable activities.

The measure makes two technical relieving amendments to this election.

• Firstly, it removes an impediment that prevents two closely-related Canadian corporations from making the election because they are owned in multi-tiered ownership structures that include a non-resident partnership.
• Secondly, it removes a requirement that provides that the election only be used in the case of certain types of corporate reorganizations that are set out in the Income Tax Act. Instead, the election can be used in respect of a supply of property as part of a reorganization where all or substantially all the property is used before and after the reorganization in the making of taxable supplies.

The measure would generally come into force on August 9, 2022.

Key Messages

• This measure concerns a group relief provision: the election for nil consideration.
• The election allows qualifying Canadian-resident corporations and partnerships to elect to treat certain supplies between them as being made for no consideration in order to reduce cash flow and administrative costs.
• The measure makes two small but relieving technical amendments to this election to ensure that it can be accessed in circumstances that are consistent with the underlying policy of the election but where the current legislative wording of the election prevents its use.

Overview

This measure concerns the interaction of two GST/HST provisions, the GST/HST financial services election and the GST/HST imported supply rules for financial institutions (FIs).

The GST/HST financial services election allows two corporations to make an election in respect of most supplies of property or services between them. To qualify, the corporations must be members of the same closely-related (generally 90 per cent cross-ownership) group of corporations, and at least one of the members of the group must be a financial institution. The election allows them to treat most otherwise taxable supplies of property or services between them as instead being exempt supplies of financial services.

However, where the recipient corporation receives a supply of a service to which the financial services election applies but that service is performed partly inside and partly outside Canada, the recipient may be required to also self-assess tax under the separate imported supply rules. This is contrary to the policy intent of the financial services election and results in "double taxation" as not only is the recipient required to self-assess tax on the supply but the supplier is also required to pay non-recoverable tax on its inputs.

The measure addresses this issue by relieving the recipient from having to self-assess tax under the imported supply rules for FIs in respect of a supply that the financial services election has treated as an exempt supply of a financial service.

This relieving measure applies to supplies made since the introduction of the imported taxable supply rules in November 2005. Further, the measure allows a corporation that has been subject to this "double taxation" in respect of a past supply to be eligible to obtain recovery of tax that was self-assessed in respect of the supply.

Key Messages

• This measure addresses a "double taxation" issue that arises due to the interaction of two GST/HST provisions: the GST/HST financial services election and the GST/HST imported supply rules for financial institutions (FIs).
• The GST/HST financial services election allows two qualifying corporations  to treat most otherwise taxable supplies of property or services between them as instead being exempt supplies of financial services.
• However, where the recipient corporation receives a supply of a service that is performed partly inside and partly outside Canada, the recipient may nevertheless be required to self-assess tax under the separate imported supply rules even where the financial service election applies to the supply.
• This is contrary to the policy intent of the election and results in "double taxation" since not only is the recipient required to self-assess tax on the supply but the supplier is also required to pay tax on its inputs. The measure addresses this "double taxation" issue by relieving the recipient from having to self-assess tax under such circumstances.

Overview

This measure concerns the Financial Institution GST/HST Annual Information return that financial institutions are generally required to file if their total annual revenues exceed a certain threshold.

The measure would increase this total annual revenue threshold from $1 million to $2 million.

This relieving measure would apply in respect of fiscal years of a financial institution ending after August 9, 2022.

Key Messages

• This measure concerns the Financial Institution (FI) GST/HST Annual Information Return that financial institutions are generally required to file if their total annual revenue exceeds a certain threshold.
• The measure would increase this total annual revenue threshold from $1 million to $2 million.
• The measure reduces the compliance burden of small to medium-size FIs.

Overview

The measure concerns the time limit for the Minister of National Revenue to assess financial institutions (FIs). 

FIs are required to self-assess GST/HST under special imported supply rules that apply to FIs in respect of an outlay or expense incurred outside Canada. Currently, there is a seven-year time limit for the Minister of National Revenue to assess FIs in respect of the federal component of the GST/HST determined under these rules in respect of an outlay or expense. However, there is currently only a four-year time limit for the Minister to self-assess FIs providing financial services in multiple provinces in respect of these FIs' liability for the provincial component of the HST determined in respect of the same outlay or expense.

This measure would address this inconsistency by ensuring that the seven-year time limit for assessments that applies in respect of the federal component of the GST/HST determined under the imported supply rules for FIs in respect of an outlay or expense also applies to the provincial component of the HST determined in respect of the outlay or expense.

The measure would be deemed to have come into force on August 4, 2023.

Assessment Period Relating to Imported Supply Rules for FIs.

Key Messages

• This measure concerns the time limit for the Minister of National Revenue to assess financial institutions (FIs) for Goods and Services Tax/Harmonized Sales Tax (GST/HST) in respect of imported supplies.
• This time limit is generally four years from the end of an FI's reporting period, but in the case of GST (or federal component of the HST) determined under the imported supply rules for FIs in respect of an outlay or expense, this time limit is instead seven years.
• An FI that provides financial services in multiple provinces generally calculates its liability for the provincial component of the HST on a formula basis based in part on its liability for the federal component of the HST (i.e., the GST), including any federal component amount determined under the imported supply rules for FIs. However, the time limit for the Minister to assess the FI in respect of a provincial component amount determined by this formula is currently only four years.
• The measure would ensure that the seven-year time limit for assessments that applies in respect of the federal component of the GST/HST determined under the imported supply rules for FIs in respect of an outlay or expense also applies to the provincial component of the GST/HST determined in respect of the outlay or expense by this formula.

Overview

Under the GST/HST, services covered under a provincial public health care plan are exempt from the tax in that province. Exemptions are also provided for most services rendered to individuals by physicians, dentists and nurses and certain other health care practitioners, such as optometrists and midwives. The list of other health care practitioners whose services are GST/HST exempt is set out in Part II of Schedule V (Exempt Supplies) to the federal Excise Tax Act.

Part 3 amends Part II of Schedule V to the Excise Tax Act to add the professions of psychotherapy and counselling therapy to the list of health care practitioners whose professional services are exempt from the GST/HST when rendered to an individual.

In this way, a supply of psychotherapy or counselling therapy services such as assisting an individual in coping with an illness or disorder will be exempt from the GST/HST in a province if it is provided by a person who practice the profession of psychotherapy or counselling therapy that is licensed to practice in that province. Similarly, if a province has no such licensing requirements, psychotherapy and counselling therapy services will also be exempt from the GST/HST in that province, if the service is provided by a person that has the qualifications equivalent to those necessary to be so licensed in another province.

This new GST/HST exemption could reduce the cost of mental health care services and increase access to mental health care practitioners for patients.

This measure would apply on royal assent of the enacting legislation. 

Key Messages

• The new GST/HST exemption for psychotherapy and counselling therapy services could help reduce the cost of mental health care services and increase access to mental health care practitioners for patients.
• A supply of psychotherapy or counselling therapy services, such as assisting an individual in coping with an illness or disorder, would be exempt from the GST/HST in a province if it is provided by a person who practices the profession of psychotherapy or counselling therapy and is so licensed to practice in that province.
• Similarly, if a province has no such licensing requirements, psychotherapy and counselling therapy services will also be exempt from the GST/HST in that province, if the service is provided by a person that has the qualifications equivalent to those necessary to be so licensed in another province. 

Questions & Answers

Q. Why is the government providing a new GST/HST exemption for psychotherapy and counselling therapy services?

A. The Government appreciates that Canadians are concerned about the impact that the cost of mental health services has on their ability to access the health care they need. The new GST/HST exemption for psychotherapy and counselling therapy services is being provided to help reduce the cost of mental health care services and increase access to mental health care professionals for patients.

Q. Which psychotherapy and counselling therapy services will benefit from the exemption? / Will this measure be applicable across Canada?

A. A supply of psychotherapy or counselling therapy services, such as assisting an individual in coping with an illness or disorder, would be exempt from the GST/HST in a province if it is provided by a person who practices the profession of psychotherapy or counselling therapy and is so licensed to practice in that province.

Similarly, if a province has no such licensing requirements, psychotherapy and counselling therapy services will also be exempt from the GST/HST in that province, if the service is provided by a person that has the qualifications equivalent to those necessary to be so licensed in another province.

Q. Why not exempt psychotherapy and counselling therapy services immediately rather than waiting for royal assent?

A. Psychotherapy and counselling therapy services will be exempt from the GST/HST on royal assent of the enacting legislation. Practitioners may need some time to adjust their system in order to administer the proposed changes. This is because, when a service is exempt from the GST/HST, the supplier no longer needs to charge GST/HST on that service, but is not longer allowed to recover the GST/HST that it paid on its inputs to that service (e.g., rent and office utilities).

Overview

This measure concerns the GST/HST treatment of services of payment card network operators. A payment card network operator is an entity that operates or manages a payment card network such as Visa, MasterCard, American Express and Interac.

Following an adverse decision of the Federal Court of Appeal, the Government of Canada announced in Budget 2023, and implemented in Budget Implementation Act, 2023, No. 1 (Bill C-47), an amendment to the Excise Tax Act to reaffirm and restore the longstanding policy that payment card clearing services provided by a payment card network operator are taxable administrative services and not tax-exempt financial services. 

To ensure that certain services continue to be treated as GST/HST-exempt "financial services" and not inadvertently made taxable as a result of the Excise Tax Act provision introduced in Bill C-47, this measure prescribes the services of a payment card network operator that would be excluded from that provision. These services are generally:

• a service that a payment card network operator provides either as a card issuer or as an acquirer (a person that connects a merchant to a payment card network); and
• a service of paying — to the acquirer for a transaction made by payment card —the amount charged to the payment card for the transaction, where the card issuer has performed the service of paying the same amount to the operator.

This relieving measure would apply prospectively to supplies for which the consideration became due after March 28, 2023 (i.e., Budget Day 2023) and retroactively to supplies if all of the consideration became due before March 29, 2023.

Key Messages

• This relieving measure concerns the GST/HST treatment of services of payment card network operators, such as Visa, MasterCard, American Express and Interac.
• Budget 2023 announced an amendment to the Excise Tax Act that clarified and restored the longstanding policy that payment card clearing services provided by a payment card network operator are taxable administrative services and not GST/HST-exempt "financial services".
• This measure prescribes by regulation the services of a payment card network operator that would be excluded from the Budget 2023 provision.
• The measure ensures that these services, which have always been treated as GST/HST-exempt supplies of financial services, are not inadvertently made taxable as a result of the Budget 2023 provision.

Overview

The Joint Venture (GST/HST) Regulations list activities that are prescribed activities for purposes of the GST/HST joint venture election rules.

The GST/HST joint venture election rules permit an operator and a participant in a joint venture to elect to designate the operator as the person responsible for accounting for GST/HST on behalf of both parties in respect of activities under their joint venture agreement. However, the election is available only if the activities under their joint venture agreement are either the exploration or exploitation of a mineral deposit or an activity listed in the Joint Venture (GST/HST) Regulations.

On August 9, 2022, the Government announced a proposal to add the following activities - the operation of a pipeline, rail terminal or truck terminal used for the transportation of oil, natural gas or related or ancillary products - to the list of activities that are prescribed for purposes of the GST/HST joint venture election rules.

This amendment would be deemed to have come into force on January 1, 1991.

Key Messages

• The joint venture election simplifies GST/HST compliance by allowing joint venture participants to elect one person (the operator) to be responsible for accounting for tax in respect of their collective joint venture activities.
• The election is available, however, only if the joint venture activities are eligible activities listed in the Joint Venture (GST/HST) Regulations.
• On August 9, 2022, the Government announced it would add the following activities to the list of eligible activities in the Joint Venture GST/HST Regulations - the operation of a pipeline, rail terminal or truck terminal used for the transportation of oil, natural gas or related or ancillary products.
• This amendment would be deemed to have come into force on January 1, 1991.
• This coming into force date was chosen because the proposed new eligible activities are very similar to other activities that have been eligible activities since the introduction of the GST in 1991. Some affected businesses may have believed that their activities were already eligible activities and accounted for tax 'as if' a valid election were in effect. If so, the retroactive application of the changes will validate this. As it is an accounting simplification measure, there are no costs or revenues associated with it.

Questions & Answers          

Q. Why is the government amending the Joint Venture (GST/HST) Regulations?

A. The amendments would add new activities to the list of eligible joint venture activities for the purposes of the joint venture election. This will allow more participants access to the simplification benefits of the election.

Q. Why are these amendments retroactive until January 1991?

A. The proposed eligible new activities are very similar to eligible activities that have existed since the introduction of the GST in 1991.

Therefore, if participants had previously engaged in these kinds of joint venture activities, such as the operation of a crude oil pipeline, and they had accounted for tax 'as if' an election were in effect in respect of those activities, the retroactive application of the proposed changes will now validate that manner of accounting.

The joint venture election rules allow one person to account for tax on behalf of other persons but generally do not change the amounts of tax that must be accounted for. Adding new eligible activities would generally not have revenue implications.

Overview

The Input Tax Credit Information (GST/HST) Regulations describe information that businesses must obtain from their suppliers in order to support their input tax credit claims. These input tax credit information requirements are graduated, with progressively more information required when the amount paid or payable in respect of a supply equals or exceeds thresholds of $30 or $150.

In addition, under these input tax credit information rules, either the supplier or an intermediary must provide its business name and, depending on the amount paid or payable in respect of the supply, its GST/HST registration number in the supporting documents.

To simplify GST/HST compliance for businesses, Budget 2021 proposed to increase the input tax credit information thresholds to $100 (from $30) and $500 (from $150), and to allow billing agents to be treated as intermediaries for purposes of the input tax credit information rules.

These amendments would come into force on April 20, 2021.

Key Messages

• The Input Tax Credit Information (GST/HST) Regulations describe information that businesses must obtain from their suppliers to support their input tax credit claims.
• These requirements are graduated, with more information required when the consideration for a supply equals or exceeds thresholds of $30 or $150.
• To simplify GST/HST compliance, the amendments increase these threshold amounts to $100 (from $30) and $500 (from $150), and allow billing agents to be treated as intermediaries for purposes of the input tax credit information rules.
• These amendments would come into force on April 20, 2021.

Questions & Answers

Q. Why is the government amending the Input Tax Credit Information (GST/HST) Regulations?

A. The amendments would increase the threshold amounts for these information requirements and thereby simplify compliance for businesses.

The amendments would also allow billing agents to act as intermediaries for purposes of the rules, which should also simplify compliance for businesses.

Overview

On September 14, 2023, the Government of Canada announced that the Goods and Services Tax (GST) would be temporarily removed from new, purpose-built rental housing to encourage an increase in the construction of rental housing.

Bill C-56, the Affordable Housing and Groceries Act, which was tabled on September 21, 2023 and is currently before Parliament, proposes to modify the existing GST Rental Rebate by increasing the rebate rate from 36 per cent to 100 per cent and removing the rebate phase-out thresholds, for "purpose-built rental housing" projects, subject to definitions and conditions to be prescribed by regulation.

This measure introduces a deeming rule that would ensure that cooperative housing corporations are eligible to claim the 100-per-cent GST Rental Rebate in respect of purpose-built rental housing projects that begin construction after September 13, 2023 and before 2031, and that complete construction before 2036, if conditions to be prescribed by regulation are met.

This measure will be deemed to have come into force on September 14, 2023, if Bill C-56 receives royal assent.

Key Messages

• Bill C-56, the Affordable Housing and Groceries Act, which received royal assent on December 15, 2023, introduced a temporary 100-per-cent rebate of the Goods and Services Tax (GST)/federal component of the Harmonized Sales Tax (HST) on the cost of new purpose-built rental housing projects for which construction begins after September 13, 2023 and before 2031, and for which construction is substantially completed before 2036.
• The 100-per-cent rebate is intended to incentivize the construction of new purpose-built rental housing throughout Canada—to help create the necessary conditions to build the types of housing Canadians need, and want to live in.
• This measure would ensure that cooperative housing corporations that provide long-term rental accommodation would also be eligible for the 100-per-cent GST rebate for new purpose-built rental housing, provided the conditions for the rebate, including any prescribed conditions, have been met.

Questions & Answers          

Q. What cooperative housing corporations will qualify for the enhanced GST rental rebate?

A. A cooperative housing corporation that builds or purchases new purpose-built rental housing may qualify for the enhanced GST rental rebate, provided that the conditions of the rebate are met. For example, construction of the purpose-built rental housing must begin after September 13, 2023 but before 2031, and be substantially completed before 2036.

Other conditions will also be prescribed by regulations in the future. For example, as the measure is not intended to apply to cooperative housing corporations where occupants have an ownership or equity interest, regulations will also be needed to define the type of ownership or equity interest that would disqualify a cooperative housing corporation from qualifying for the rebate.

Q. What is purpose-built rental housing?

A. The legislation does not define purpose-built rental housing. The legislation provides that this term is to be defined by regulations. However, the government indicated on September 14, 2023, when the measure was announced, that it would encompass buildings:

• with at least four private apartment units (i.e., a unit with a private kitchen, bathroom, and living areas), or at least 10 private rooms or suites (e.g., a 10-unit residence for students, seniors, or people with disabilities); and
• where 90 per cent of residential units are designated for long-term rental.

Q. How will this enhanced rebate impact supply?

A. The measure is expected to have a meaningful impact on the cost of constructing purpose-built rental housing, and as such, is expected to contribute positively to housing supply.

That said, we cannot put an exact number on how many rental units will be constructed because there are many market forces affecting construction decisions. The impact on supply will also depend on what supplementary measures other levels of government put in place.

Overview

Under the Excise Tax Act, provinces can be provided relief from the federal excise tax on motive fuels, air conditioners in automobiles, and fuel inefficient vehicles (i.e., the "Green Levy"), which they purchase or import for their own use. Relief is provided through a rebate equal to the amount of tax paid, which can be claimed either by the province or by the vendor.

The rebate is only available in a province that does not have a reciprocal taxation agreement with the federal government under which, in general terms, the province and the federal government mutually agree to pay each other's taxes. Only one party (either the vendor or the province) is entitled to the rebate.

To clarify which party is eligible to claim the rebate, this measure proposes to create a joint election mechanism to specify that the vendor alone would be eligible to apply for the rebate only if they jointly elect with the province to be the eligible party. If no joint election were made, then by default only the province would be eligible to apply for the rebate. This measure would apply in respect of goods purchased or imported by a province after 2021.

Key Messages

• Currently, provinces can be provided relief from the federal excise tax on motive fuels, air conditioners in automobiles, and fuel inefficient vehicles (i.e., the "Green Levy") purchased or imported for their own use. Relief is provided through a rebate which can be claimed either by the province or by the vendor.
• This measure proposes to clarify which party is eligible to claim the excise tax rebate for goods purchased or imported by a province for their own use, by creating a joint election mechanism. The vendor may only apply for the rebate if both they and the province make such a joint election; otherwise and by default only the province would be eligible.
• The rebate is only available in a province that does not have a reciprocal taxation agreement with the federal government under which, in general terms, the province and the federal government mutually agree to pay each other's taxes.
• This measure would apply in respect of goods purchased or imported by a province after 2021.

Overview

The Government of Canada introduced a new excise duty framework for vaping products in October 2022.

In preparation for the implementation of the coordinated framework with participating jurisdictions, Part 4 amends the Excise Act, 2001 and related regulations to further facilitate compliance with the framework in relation to the stamping of vaping products. Additional amendments such as penalties for various infractions, changes in product labeling and a minimum age limit for a person importing vaping products (they must be at least 18 years old) are also included. These amendments are of a technical and administrative nature and would help to ensure the proper administration of the framework by the CRA and CBSA.

The amendments related to the stamping of vaping products are deemed to have come into force after 2023. Other amendments have various coming-into-force dates (for example, royal assent in the case of penalties and the age limit for importer).

Key Messages

• Budget 2022 introduced legislation and regulations to implement the new excise duty framework for vaping products, which received royal assent on June 23, 2022. The federal portion of the coordinated framework was implemented on October 1, 2022.
• In preparation for the implementation of the coordinated framework with participating jurisdictions, Part 4 amends the Excise Act, 2001 and related regulations to further facilitate compliance with the framework in relation to the stamping of vaping products. The proposed amendments would allow, effective January 1, 2024, vaping product licensees to import finished but unstamped vaping products for the purpose of stamping them in Canada and remitting excise duties to the CRA.
• The proposed amendments would also add a new obligation to include on the retail package the net quantity of a vaping product in a unit of measurement that would allow the determination of the excise duty owing on that product to help facilitate the CRA's enforcement of the framework and would come into force on the day that is six months after the first day of the month following the month in which this Act receives royal assent.
• Additional amendments such as penalties for various infractions and a minimum age limit for a person importing vaping products (they must be at least 18 years old) are also included. The proposed amendment would come into force on royal assent.
• The amendments are of a technical and administrative nature and would help to ensure the proper administration of the framework by the CRA and CBSA.

Questions & Answers          

Q. What do these new amendments do?

A. The proposals amend the Excise Act, 2001 and other related texts in relation to stamping of vaping products. Additional amendments such as penalties for various infractions, changes in product labeling and a minimum age limit for a person importing vaping products (they must be at least 18 years old) are also included. These amendments are of a technical and administrative nature and would help to ensure the proper administration of the framework by the CRA and CBSA.

Q. What do the stamping-related amendments do?

A. Currently, any finished imported vaping product must be stamped outside of Canada, with duties remitted at the border. With the upcoming implementation of a coordinated taxation framework with provinces and territories (PT), PT-specific stamps for each participating jurisdiction would have to be affixed to vaping products, based on their intended consumer markets. With the prospect of transitioning to multiple PT stamps, it would be more efficient for industry if imported products could be stamped in Canada. The proposed amendments would allow, effective January 1, 2024, vaping product licensees to import finished but unstamped vaping products for the purpose of stamping them in Canada and remitting excise duties to the Canada Revenue Agency.

Q. What is the new age limit?

A. The Returning Persons Exemption Regulations outline certain requirements that are necessary for a person to benefit from the exemptions from customs duties listed under heading No. 98.04 of the Schedule to the Customs Tariff (i.e., personal exemptions for returning persons). The proposed amendments would ensure that the exemption does not apply to vaping products imported by a person who has not attained 18 years of age.

Overview

The Government of Canada introduced an excise duty framework for the taxation of cannabis products in 2018, under which licensed cannabis producers must remit excise duties to the CRA, generally on a monthly basis.

Budget 2022 brought forward a measure that allowed certain smaller licensed cannabis producers to remit excise duties on a quarterly basis.

Part 4 amends the Excise Act, 2001 and related regulations to provide all licensed cannabis producers the option to remit excise duties on a quarterly rather than monthly basis, as proposed in Budget 2023. This proposal would be deemed to have come into force on April 1, 2023.

Key Messages

• Budget 2023 proposes to provide all licensed cannabis producers the option to remit excise duties on a quarterly basis, starting from the quarter beginning April 1, 2023.
• This measure is intended to better match excise duty remittance timelines to existing buyer payment terms, potentially relieving certain cash-flow and financial issues for licensed producers.
• The federal government will continue to work with provincial and territorial governments to monitor the financial health of the cannabis industry.

Questions & Answers          

Q. What does this quarterly remittance measure do?

A. The proposed measure would allow all licensed cannabis producers to remit on a quarterly rather than monthly basis. Previously, as introduced in Budget 2022, this option was only available to certain smaller producers.

Q. What does this measure accomplish?

A. The proposed measure is intended to better match excise duty remittance timelines to existing buyer payment terms, potentially relieving certain cash-flow and financial issues for licensed producers of cannabis products.

Overview

The measure makes two sets of technical amendments to the Budget Implementation Act, 2018, No. 1 (the Act).

The first set of amendments (Subdivision A) corrects minor discrepancies between the French and English provisions of the Act which authorize the Governor in Council to make regulations setting out the terms and conditions under which federally regulated financial institutions can engage in certain permitted non-financial business activities.

The second set of amendments (Subdivision B) clarifies that the amendments made in the Act, which modernized a number of provisions in the federal financial institution statutes related to the permitted information technology activities of federally regulated financial institutions, are limited to information technology.

Subdivision B – Virtual Meetings

Subdivision B of Division 1, Part 5 of Bill C-59 (Fall Economic Statement Implementation Act, 2023) introduces amendments to permit federally regulated financial institutions to hold virtual meetings with their owners without having to obtain a court order and to permit voting during those meetings by virtual means.

The amendments also clarify the authority to make regulations for virtual-only and hybrid meetings, which will ensure owners are able to appropriately participate in those meetings.

Currently, financial institutions may not hold virtual-only meetings unless they first obtain a court order. Federal financial institutions may hold meetings of owners in a hybrid format, unless their by-laws provide otherwise, whereby a meeting is held in-person and attendees may participate by virtual means (e.g., by telephone or electronically).

The corporate governance provisions in the financial institution statutes generally mirror the rules for federally incorporated companies set out in the Canada Business Corporations Act (CBCA), with some modifications to reflect the unique nature of financial institutions. Allowing virtual-only meetings would align the financial institution statutes with the CBCA, which permits federally incorporated companies to hold virtual-only shareholder meetings. 

This amendment follows public consultations on financial institution governance held in 2022 and the Budget 2023 announcement of the Government's intention to introduce statutory amendments to permit virtual-only meetings and allow for the introduction of conditions in regulations to ensure owners can participate adequately in those meetings.

Key Messages

• The measure makes two sets of technical amendments to the Budget Implementation Act, 2018, No. 1 (the Act).
• These technical amendments seek to (1) correct minor discrepancies between the French and English versions of the Act; and (2) clarify the scope of the permitted information technology activities of federally regulated financial institutions.

(2) Subdivision B – Virtual-Only Meetings

• Budget 2023 set out the Government's intention to introduce statutory amendments to permit federally regulated financial institutions to hold virtual-only owners meetings and to allow for the introduction of conditions to ensure adequate participation.
• The amendments would apply to all federally regulated financial institutions, which include banks, insurance companies, and credit unions. Depending on the type of financial institution, owners could be shareholders, credit union members or certain policyholders.
• Allowing virtual-only meetings would align the financial institution statutes with the Canada Business Corporations Act, which permits federally incorporated companies to hold virtual-only shareholder meetings.
• The proposed amendments would permit financial institutions to hold virtual-only owners meetings without obtaining a court order, so long as they comply with the regulations and their bylaws do not provide otherwise.
• The regulations would set out conditions aimed at ensuring owners can participate to the same extent as would be possible at in-person meetings. The amendments clarify that the regulations could be applied to hybrid meetings as well.

Questions & Answers

Q. What is the purpose of the measure?

A. The measure amends legislative changes made by Budget Implementation Act, 2018, No. 1 (the Act) to the Bank Act, Insurance Companies Act, and Trust and Loan Companies Act to clarify the scope of the permitted information technology activities of federally regulated financial institutions and to correct minor discrepancies between the French and English versions of the Act.

Subdivision B – Virtual-Only Meetings

Q. Why are virtual-only meetings of owners required now that COVID-19 social distancing measures have been removed? 

A. The COVID-19 pandemic has shown that in-person owners meetings are not always feasible, and that virtual-only meetings can be an effective substitute. The Canada Business Corporations Act (CBCA), and provincial securities laws provide flexibility to conduct virtual-only shareholder meetings. In recognition of the widespread acceptance, and use, of electronic communications, the proposed amendments would allow fully virtual meetings of shareholders and other owners for federally regulated financial institutions (FRFIs). 

Q. How will regulations ensure owner participation in corporate decision making?

A. The regulations will set out the policies and procedures that FRFIs need to implement before holding virtual-only meetings to ensure adequate accessibility and transparency for owners. The intent of the regulations is to ensure that owners attending virtual-only meetings can participate in the same degree as could reasonably be expected during an in-person meeting. For example, regulations could indicate meeting procedures and that the meetings must accommodate persons with disabilities.

Q. Why do virtual-only meetings for FRFI owners require specific conditions, when the CBCA and provincial securities laws do not impose such conditions?

A. Owners of FRFIs exercise during meetings some of their core rights as investors. To ensure the good governance of FRFIs and support a well-functioning financial sector, owners attending virtual-only meetings must be able to participate in the same degree as could reasonably be expected during an in-person meeting. 

Overview

Division 2 of Part 5 amends Part III (Labour Standards) of the Canada Labour Code (Code) and An Act to amend the Criminal Code and the Canada Labour Code (Bill C-3) to provide employees in the federally regulated private sector with three days of leave following a pregnancy loss, and eight weeks in the event of a stillbirth. Three days of leave would be paid for employees who have completed three consecutive months of continuous employment with their employer. This measure addresses the Minister of Labour's mandate letter and Budget 2023 commitments.

This division would also amend the bereavement leave under the Code to add protections that are consistent with other leaves to better support employees. These include:

• the right to be reinstated in the same (or comparable) position at the end of the leave;
• the right to be informed of training opportunities while on leave; and
• the right to accumulate benefits while on leave.

The new leave related to pregnancy loss and the amendments to bereavement leave would come into force on a day to be fixed by order of the Governor in Council, but no later than 540 days (18 months) after Royal Assent of this bill.

Key Messages

• The Government of Canada is committed to protecting and supporting the mental and physical health of workers.
• Dealing with pregnancy loss can be extremely challenging, and individuals who experience it often need time away from work to support their recovery. Without it, they are more at risk of developing prolonged mental health problems, such as clinical depression, anxiety disorders, and post-traumatic stress disorder.
• To better support federally regulated private sector employees during this difficult time, the Government is proposing changes to the Canada Labour Code to provide three days of paid leave following a pregnancy loss. In the event of a stillbirth, employees would be entitled to prolong their leave for a period of eight weeks without pay.
• The new leave will provide workers with greater job and income security while they recover. It will be available to the individual who was pregnant, the spouse or common-law partner, and any person who intended to be the legal parent of the child, including the biological parent and parents who were planning to have a child through adoption or surrogacy. The leave will be available to individuals who are employed in a federally regulated private sector workplace.

Questions & Answers

Q. What are the proposed amendments to the Canada Labour Code?

A. The Government is introducing amendments to Part III of the Canada Labour Code and other actsthat would

• provide three days of paid leave to employees who experience a pregnancy loss, in addition to eight weeks of unpaid leave for employees who experience a stillbirth;
• add protections (e.g., the right to be reinstated in the same (or comparable) position at the end of the leave) to better support employees who take bereavement leave.

Q. Why is the Government introducing a new leave related to pregnancy loss?

A. The Government recognizes that a significant portion of Canadian families experience a pregnancy loss each year. For some, this experience can be overwhelming. Without proper rest and recovery, persons who experience pregnancy loss could be at risk of prolonged mental health challenges, such as clinical depression, anxiety disorders, and post-traumatic stress disorder.

Establishing a leave related to pregnancy loss would allow employees to take the time that they need to rest and recuperate following the loss of a pregnancy – without fear of losing their jobs or losing pay.

In addition, this leave would raise public awareness and acknowledgement of the prevalence of pregnancy loss, and the impact it can have on individuals and families, helping to destigmatize the experience.

Q. What would the leave related to pregnancy loss provide for employees?

A. The proposed changes to the Canada Labour Code would allow employees in the federally regulated private sector to take three days of leave if they have experienced a pregnancy loss. In the event of a stillbirth, employees would be entitled to prolong their leave for eight weeks. If they have completed three consecutive months of continuous employment with their employer, the first three days of leave would be with pay.

The leave would be available to the individual who was pregnant, the spouse or common-law partner, and any person who intended to be the legal parent of the child, including the biological parent and parents who were planning to have a child through adoption or surrogacy. The leave would be available to an individual employed in a federally regulated private sector workplace.

An employee would be entitled to take the leave within the period that begins on the day on which the pregnancy loss occurs and ends 26 weeks after that day.

The leave would be event-based, meaning there would be no limit on the number of times an employee can take the leave in a calendar year. However, in circumstances of a pregnancy with multiples that has ended without a live birth in respect of at least one foetus, an employee would be entitled to take the leave only once.

Q. What would an employee need to do to access the leave related to pregnancy loss?

A. Employees who intend to take a leave related to pregnancy loss would need to provide notice to their employer as soon as possible.

Employees would not need to provide documentation to their employer to access the leave, such as a medical certificate. This approach is consistent with the existing entitlement to bereavement leave and the stillbirth amendments included in An Act to Amend the Criminal Code of Canada and the Canada Labour Code (Bill C-3), which do not entitle employers to request documentation.

This approach also aligns with what we heard from organizations supporting families experiencing a loss during consultations in October 2022 – namely, that a documentation requirement can create a barrier to accessing the leave as many pregnancy losses happen at home and do not require medical intervention.

Q. What does the Government mean by person who "intended to be the legal parent of the child"? Would all biological parents be entitled to the leave?

A. The leave related to pregnancy loss would be available to the individual who was pregnant, their spouse or common-law partner, and any person who intended to be the legal parent of the child.

"Any person who intended to be the legal parent of the child" could include parents who were planning to have a child through adoption or surrogacy, as well as biological parents who are not the spouse or common-law partner of the pregnant individual but had the intention of becoming the legal parent of the child.

Individuals who are egg and sperm donors who did not intend to be the legal parent of the child would not be eligible for the leave.

Employees would not need to provide documentation to their employer to access the leave or to prove their intention to become the legal parent of the child.

The eligibility for the leave is aligned with the approach in place in Alberta, Manitoba, Nova Scotia, and Prince Edward Island, where similar leave is provided.

Q. How will employees' privacy be protected when they take a leave related to pregnancy loss?

A. Employers in the federally regulated private sector are subject to the Personal Information Protection and Electronic Documents Act. This Act obligates businesses to obtain an individual's consent when they collect, use, or disclose the individual's personal information. Employers are also obligated to provide assurance that an individual's personal information is safeguarded. Employees who need to take a leave related to pregnancy loss would be protected by these provisions.

Q. Would the proposed amendments to Part III of the Canada Labour Code have cost implications for employers?

A. The proposed amendments to the Canada Labour Code may result in incremental costs to employers, though they are not expected to be significant. We estimate that introducing a new leave related to pregnancy loss would cost employers about $11.9 million annually, representing 0.02% of employers' annual payroll. It is important to note that this estimate assumes that all eligible employees would use the full three days of paid leave, representing an upper bound of the annual cost to employers.

Q. Would the new leave be available to all Canadians?

A. No. Responsibility for labour matters is constitutionally divided between the federal and provincial governments. The federal government has exclusive authority to legislate labour standards, including leaves, for workplaces in the federally regulated private sector via Part III of the Canada Labour Code. Therefore, the new leave would only apply to employees working in the federally regulated private sector.

Part III sets out minimum labour standards for approximately 990,000 employees, representing 6% of all Canadian employees, working for 19,150 employers in industries such as interprovincial and international transportation, banking, telecommunications and broadcasting, as well as some governance activities on First Nations reserves. Part III does not apply to the federal public service, the Canadian Armed Forces, the Royal Canadian Mounted Police, or to Parliamentary employees.

To provide all Canadians with access to leave related to pregnancy loss, every province and territory would need to amend their respective labour standards legislation accordingly.

Q. What other existing leaves could employees who experience a pregnancy loss access under the Canada Labour Code?

A. An employee who experiences a pregnancy loss may be eligible for various leaves under Part III of the Canada Labour Code:

• Maternity leave: Employees whose pregnancies end during or after 20 weeks' gestation may be eligible to take 17 weeks of unpaid maternity leave.
• Medical leave: As of December 1, 2022, employees are entitled to earn and take ten days of medical leave with pay per year. Employees could also be entitled to take up to 27 weeks of unpaid medical leave.
• Personal leave: Employees could be eligible to take five days of personal leave per calendar year, including three paid days if they have completed three months of employment with their employer.

Employees who experience a pregnancy loss could also be eligible to receive Employment Insurance sickness or maternity benefits while they are on unpaid leave.

Q. Do any provinces or territories provide for a leave related to pregnancy loss?

A. Alberta, Manitoba, Nova Scotia and Prince Edward Island provide leave related to pregnancy loss. The leaves are unpaid and range from three to five days, except for Prince Edward Island where one of the three days is paid. The leaves are generally available to the individual who was pregnant, the spouse or common-law partner, and any person who intended to be the legal parent of the child.

In Quebec, in the event of a miscarriage, the employee who was pregnant is entitled to three weeks of unpaid leave. In the event of a stillbirth, both parents may take five days of leave, including two days with pay.

In all provinces and territories, employees who experience a pregnancy loss can also access sick and/or maternity leave(s).

Q. How many people are expected to be impacted by the proposed leave?

A. The leave is expected to annually benefit up to 13,200 employees in the federally regulated private sector by helping them recover from a pregnancy loss without risk of losing their job or forfeiting income security.

Q. How will the new paid leave interact with other existing leaves that employees may take in the event of a pregnancy loss (i.e., maternity, medical and personal leaves)? How will it interact with EI benefits?

A. Employees who take paid leave following a pregnancy loss would still have access to other leaves under the Canada Labour Code, such as maternity, medical, and personal leaves, provided that they meet the eligibility requirements. Likewise, this proposal would have no impact on an employee's access to the Employment Insurance sickness or maternity benefits. However, any paid leave received would be considered as employment income and could have an impact on the amount of Employment Insurance benefits that can be paid during the same period.

Q. Will employers be required to stack the new paid leave with existing employer-sponsored benefits?

A. No. Employers who already provide employees with paid leave that can be taken specifically in circumstances of a pregnancy loss would not be required to provide additional leave, provided the existing leave is equivalent to or more generous than the leave established under the Canada Labour Code.

Employers who do not provide leave specifically for this purpose would need to adjust their internal policies and, where applicable, work with unions to modify collective agreements and make the necessary payroll and systems adjustments to align with any new provisions. That is because the Canada Labour Code establishes minimum labour standards – a floor – for all employees in the federally regulated private sector.

Q. Would the proposed amendments apply to federal public servants?

A. The proposed amendments would not apply to federal public servants, as they are not subject to Part III of the Canada Labour Code. Whether or not collective agreements are adjusted to provide leave related to pregnancy loss will be determined via the collective bargaining process.

Q. Why is the Government legislating three days of paid leave related to pregnancy loss instead of five days?

A. The Government committed to provide up to five paid leave days for federally regulated private sector employees who experience a miscarriage or stillbirth.

During consultations, employer representatives indicated that the duration of the paid leave for pregnancy loss should be the same as bereavement leave with pay, which is currently set to three days.

The proposed amendments would provide three days of paid leave to support employees who experience any type of pregnancy loss, not only in circumstances of miscarriage or stillbirth. This would represent the most generous leave of this kind among all jurisdictions in Canada.

In addition to the proposed leave, employees who experience a pregnancy loss could also be entitled to other paid leaves, such as 10 days of medical leave with pay, or three days of personal leave with pay if they have completed three months of continuous employment with their employer.

Q. Why is the Government providing eight weeks of unpaid leave in the event of a stillbirth, but not for all types of pregnancy loss?

A. The proposed legislative changes are aligned with the provisions included in An Act to amend the Criminal Code and the Canada Labour Code (Bill C-3) that received Royal Assent in December 2021. This act includes amendments to the Canada Labour Code that provide eight weeks of leave for employees who experience the death of a child or a stillbirth. The act does not provide leave provisions to cover the circumstances of a miscarriage or other types of pregnancy loss.

If an employee needs additional time off following a pregnancy loss other than a stillbirth, they could be entitled to take medical leave for up to 27 weeks, including 10 days with pay. In addition, an employee could be eligible to five days of personal leave, including three days with pay.

Q. Why did the Government expand the scope of the leave to cover all pregnancy losses?

A. Experts agree that any type of pregnancy loss can potentially be very difficult, including those that end by induced abortion whether for medical or non-medical reasons. Limiting eligibility for the leave to employees who experience a miscarriage or stillbirth could deny access to employees who also need time off to rest and recover.

Expanding the scope of the leave to cover all types of pregnancy loss is consistent with this expertise and acknowledges the complex and profound emotional impact that can accompany any type of pregnancy loss – not just miscarriage or stillbirth.

Stakeholders were generally supportive of expanding the leave to include all types of pregnancy loss during consultations held in October 2022.

Q. Has the Government consulted stakeholders on the proposed leave?

A. In the fall of 2022, the Labour Program held virtual consultation sessions with stakeholders, including representatives from employer organizations, labour groups, Indigenous groups and organizations supporting families experiencing a loss, to seek their views on a paid leave related to pregnancy loss. A discussion paper with questions for consideration was shared in advance of the sessions.

Stakeholders were generally supportive of expanding the leave to include all types of pregnancy loss. Employers did not have strong objections to expanding the scope to cover all pregnancy losses but expressed concerns regarding financial and operational impacts.

Q. When will the leave related to pregnancy loss come into force?

A. The Government is proposing that the new leave related to pregnancy loss comes into force on a day to be fixed by order of the Governor in Council, but no later than 18 months (540 days) after Royal Assent of this legislation.

This would provide the flexibility to prepare consequential amendments to the Canada Labour Standards Regulations and to the Administrative Monetary Penalties (Canada Labour Code) Regulations, develop educational materials, update information systems, and inform Labour Affairs Officers of the changes.

Q. What changes are being proposed to bereavement leave?

A. The Government is proposing to amend bereavement leave to add protections that are consistent with other leaves under the Canada Labour Code to better support employees.

These include:

• the right to be reinstated in the same (or comparable) position at the end of the leave;
• the right to be informed of training opportunities while on leave; and
• the right to accumulate benefits while on leave.

In addition, the Government is proposing to repeal the stillbirth provisions included under bereavement leave in An Act to Amend the Criminal Code of Canada and the Canada Labour Code (Bill C-3) to include them as part of the new leave related to pregnancy loss.

The amendments to bereavement leave would come into force on a day to be fixed by order of the Governor in Council, but no later than 18 months (540 days) after Royal Assent of this bill.

Overview

The proposed legislation is called the Canada Water Agency Act. That Act establishes the Canada Water Agency whose role is to assist the Minister of the Environment and Climate Change in exercising or performing that Minister's powers, duties and functions in relation to fresh water. The Division also makes consequential amendments to other Acts.

The Canada Water Agency would be listed under Schedule I.1 and Schedule IV of the Financial Administration Act, making it part of the core public service and subject to applicable laws, policies, and directives.

Creating a Canada Water Agency fulfills commitments in Speeches from the Throne in 2020 and 2021 and the mandate letters to the Minister of the Environment in 2019 and 2021. Budgets 2022 and 2023 provided funding for a Canada Water Agency, and Budget 2023 committed to introducing legislation to establish the Canada Water Agency as a standalone entity.

The Canada Water Agency would work to improve freshwater management in Canada by providing leadership, effective collaboration federally, and improved coordination and collaboration with provinces, territories, and Indigenous Peoples to proactively address national, and regional transboundary, freshwater challenges and opportunities.

This proposed legislation would come into force on a day or days to be fixed by Order(s) in Council.

Key Messages

• The proposed legislation enacts the Canada Water Agency Act, which would establish the Canada Water Agency as a standalone entity, reporting to the Minister of Environment.
• The Canada Water Agency would assist the Minister of the Environment in exercising or performing the Minister's powers, duties, and functions in relation to fresh water.
• Creating a Canada Water Agency fulfills commitments in Speeches from the Throne in 2020 and 2021 and the mandate letters to the Minister of Environment in 2019 and 2021. Budgets 2022 and 2023 provided funding for a Canada Water Agency, and Budget 2023 committed to introducing this proposed legislation that will fully establish the Canada Water Agency as a standalone entity. Budget 2023 committed to locating the headquarters of the Canada Water Agency in Winnipeg. Budget 2023 also committed funding towards a strengthened Freshwater Action Plan, which would support regionally responsive initiatives in eight waterbodies of national significance and which would be delivered by the Canada Water Agency in partnership with others.
• The Canada Water Agency would have a mandate to improve freshwater management in Canada by providing leadership, effective collaboration federally, and improved coordination and collaboration with provinces, territories, and Indigenous Peoples to proactively address national and regional transboundary freshwater challenges and opportunities.
• Through public consultations on the creation of the Canada Water Agency since 2020, more than 2,700 Canadians shared their views on Canada's most pressing freshwater challenges and the role the Agency could play to help sustainably manage fresh water across the country. Engagement on the Canada Water Agency occurred between 2020 and 2023 with representatives or advocates for over 750 Indigenous communities—including First Nations, Inuit, and Métis settlements and locals in regions throughout Canada. Environment and Climate Change Canada also engaged bilaterally with all provinces and territories.
• The proposed Canada Water Agency Act's preamble affirms the commitment of the Government of Canada to implementing the United Nations Declaration on the Rights of Indigenous Peoples.

Questions & Answers

Canada Water Agency Mandate

Q. What would be the mandate of the Canada Water Agency?

A. The mandate of the Canada Water Agency would be to improve freshwater management in Canada by providing leadership, effective collaboration federally, and improved coordination and collaboration with provinces, territories, and Indigenous Peoples to proactively address national, and regional transboundary, freshwater challenges and opportunities.

Q. What would be the functions of the Canada Water Agency?

A. The Canada Water Agency would deliver on key elements of the strengthened Freshwater Action Plan to improve freshwater outcomes; restore, protect, and manage waterbodies of national significance; and improve freshwater quality. The Freshwater Action Plan would deliver regionally responsive initiatives in the Great Lakes, Lake Winnipeg, Lake of the Woods, the St. Lawrence River, the Fraser River, the Wolastoq/Saint John River, the Mackenzie River, and Lake Simcoe.

The Canada Water Agency would also:

• provide policy leadership and develop whole-of-government approaches to freshwater challenges and opportunities
• make it easier to find federal freshwater resources
• promote federal-provincial-territorial collaboration
• support Canada-U.S. collaboration on transboundary waters
• support Indigenous inclusion and participation in freshwater activities
• leverage freshwater science and data to improve policy and program outcomes
• report regularly on the state of freshwater quality, quantity, availability and use in Canada
• support the development of the National Freshwater Data Strategy in collaboration with key partners and stakeholders

An early priority for the Canada Water Agency would be to advance the modernization of the Canada Water Act to reflect Canada's freshwater reality, including climate change and the rights of Indigenous Peoples. The first step will be to meet with provinces, territories, and Indigenous partners on how they would like to be engaged in this work, followed by engagement on policy objectives related to the purpose of the Act and recommendations related to how to modernize the Act.

Q. Is the Canada Water Agency bringing back the Prairie Farm Rehabilitation Administration (PFRA)?

A. During public engagement on creating the Canada Water Agency, the following priorities were the major areas of convergence (What We Heard Report, 2021):

• the importance of reconciliation;
• the need to be regionally-responsive to freshwater priorities that vary across the country;
• the need to reflect the impact of climate change on freshwater challenges;
• the importance of using a watershed-based approach;
• the need for stronger coordination within the federal government on whole-of-government approaches to freshwater challenges; and
• the opportunity to strengthen coordination on freshwater science and data.

As a result of these outcomes, the Canada Water Agency has the mandate and functions described in Q1 and Q2. While the Canada Water Agency is not a replacement for the Prairie Farm Rehabilitation Administration, it has taken important lessons from that organization in terms of using a regionally-responsive approach and recognizing the diversity of freshwater challenges across the country.

Q. Why do we need a Canada Water Agency?

A. After the government committed to create a Canada Water Agency, Environment and Climate Change Canada's first step was initiating a comprehensive engagement process with provinces, territories, Indigenous Peoples, stakeholders, and the public.

The creation of the Canada Water Agency will help to address a number of priorities, which was also heard in consultation (What We Heard Report, 2021), including:

• the importance of reconciliation;
• the need to be regionally-responsive to freshwater priorities that vary across the country;
• the need to reflect the impact of climate change on freshwater challenges;
• the importance of using a watershed-based approach;
• the need for stronger coordination within the federal government on whole-of-government approaches to freshwater challenges; and
• the opportunity to strengthen coordination on freshwater science and data.

Q. What is the advantage of establishing the Canada Water Agency as a standalone Agency?

A. The proposed Canada Water Agency would contribute to the coordination of federal efforts to promote sustainable freshwater management. We have also heard through the public engagement process and beyond, calls for an independent agency from some water groups and individuals to give dedicated resources and attention to advance collaboration in fresh water across Canada.

Q. Would all water-related functions in the federal government move into the Canada Water Agency?

A. No. There are over 20 departments and agencies in the federal government with water-related work that tie to those organizations' mandates and this will not change. The mandate of the Canada Water Agency is to assist the Minister of Environment under the Minister's existing authorities.

An important role for the Canada Water Agency would be to strengthen coordination among these federal organizations with water related work. For example, the Canada Water Agency would lead the formalization of a Federal Freshwater Committee that would support interdepartmental coordination, information sharing, and the development of whole-of-government approaches to freshwater challenges and opportunities.

Q. What relationship would the Canada Water Agency have with Environment and Climate Change Canada?

A. The proposed legislation would establish the Canada Water Agency as a Department distinct from Environment and Climate Change Canada, but also reporting to the Minister of Environment. Both Environment and Climate Change Canada and the Canada Water Agency would have a mandate to assist the Minister of Environment with respect to fresh water. For example, Environment and Climate Change Canada would continue its roles of conducting freshwater science and monitoring and these functions would not move to the Canada Water Agency.

Q. How would the Canada Water Agency respect provincial and territorial jurisdiction related to water?

A. From the outset of engagement on the creation of the Canada Water Agency, the federal government has been clear that the Agency's work would remain within federal jurisdiction and that the Agency would respect provincial and territorial jurisdiction and seek to work together in a collaborative manner.

The Agency would put this into action in several ways:

• The Agency would actively engage with provinces and territories as a core part of its mandate and in its work, including through leveraging existing mechanisms like the Canadian Council of Ministers of the Environment.
• The Agency would seek collaboration with provinces and territories in implementing Freshwater Ecosystem Initiatives, many of which already have long-standing collaborative arrangements.
• On initiatives such as advancing the modernization of the Canada Water Act, an important first step would be reaching out for early discussions with provinces and territories on how they would like to be engaged.

Q. How would the Canada Water Agency engage with Indigenous partners and foster reconciliation?

A. The preamble for the proposed legislation recognizes:

• the Government of Canada is committed to fostering reconciliation with Indigenous Peoples and to ensuring respect for their rights recognized and affirmed under section 35 of the Constitution Act 1982;
• the Government of Canada is committed to implement the United Nations Declaration on the Rights of Indigenous Peoples; and
• the importance of relying on scientific knowledge related to fresh water and of relying, through cooperation with the Indigenous Peoples of Canada, on Indigenous knowledge related to fresh water.

Engagement with Indigenous partners would be a critical component of implementing the Freshwater Action Plan, including Freshwater Ecosystem Initiatives in the Great Lakes, Lake Winnipeg, Lake of the Woods, St. Lawrence River, Fraser River, Wolastoq/Saint John River, Mackenzie River, and Lake Simcoe. Indigenous Peoples would be involved in all steps of the implementation of the Freshwater Action Plan, through engagement, and seeking Indigenous advisory expertise, especially from women who are the traditional "water carriers" in Indigenous communities.

On initiatives such as advancing the modernization of the Canada Water Act, an important first step would be reaching out for early discussions with Indigenous partners on how they would like to be engaged.

Canada Water Agency creation, location, and structure

Q. When would the Canada Water Agency be operational?

A. The proposed legislation would come into force on a day or days to be fixed by Order(s) in Council, which would control when the Canada Water Agency begins operations. The Government's intent is to move quickly to launch the Canada Water Agency.

Q. How does the proposed legislation relate to the Canada Water Agency that was created within the Department of Environment (Environment and Climate Change Canada) earlier in 2023?

A. The Canada Water Agency was created as a branch within Environment and Climate Change Canada in spring 2023 to support the implementation of Budget 2023 funding. The proposed legislation would transition the Canada Water Agency Branch (referred to as the "former agency" in the legislation) into the Canada Water Agency established under this Act (referred to as the "new agency" in the legislation).

Q. What type of organization would the Canada Water Agency be and how would the transition affect existing employees in the former agency (the Canada Water Agency within the Department of the Environment)?

A. The Canada Water Agency would be listed under Schedule I.1 and Schedule IV of the Financial Administration Act, making it part of the core public service. This means that employees of the former agency would maintain the same status and benefits when they transfer to the new Canada Water Agency.

The draft legislation also confirms that the employment status of an employee of the former Canada Water Agency within the Department of the Environment (Environment and Climate Change Canada) would not be affected in the transition to the new Canada Water Agency.

Q. What would be the location of the Canada Water Agency headquarters?

A. The proposed legislation specifies that the Canada Water Agency's head office location would be designated by the Governor in Council. In Budget 2023, the Government committed to locating the headquarters in Winnipeg. The Canada Water Agency would also have regional offices across Canada, reflecting the regional nature of freshwater issues.

Winnipeg is near one of the major Freshwater Ecosystem Initiatives in Lake Winnipeg.  It is an important hub for sustainable development and water in Canada, a base for Indigenous Peoples, and the broader region (the Prairies) is highly dependent on water for agriculture and vulnerable to climate change impacts.

Q. Who would lead the Canada Water Agency?

A. The proposed legislation provides that a President of the Canada Water Agency may be appointed by the Governor in Council. The President may hold office during pleasure for a renewable term of up to five years.

Q. When would the Canada Water Agency create an advisory committee?

A. The proposed legislation provides that the Minister of Environment may establish advisory committees in relation to fresh water and provide for their membership, duties, functions, and operation. Upon its creation, the initial priorities of the Canada Water Agency would be setting up its operations, implementing funding for the strengthened Freshwater Action Plan, and beginning to deliver on the Canada Water Agency mandate. The creation of an advisory committee would be explored at a later date.

Q. Will the creation of the standalone Canada Water Agency be cost effective?

A. To prepare for the transition of a branch to a standalone Agency, the Canada Water Agency has worked closely with other branches in Environment and Climate Change Canada to propose a structure that is cost effective while also ensuring that the appropriate structure is established and that policy requirements are met. This includes building on lessons learned from other small federal organizations. For instance, the Canada Water Agency would receive certain internal services from Environment and Climate Change Canada, which is more cost effective than the Agency providing those services on its own (see Q18 for information on services).

Q. How is the budget reduction process being applied in the context of creating the Canada Water Agency?

A. As noted above in Q15, Environment and Climate Change Canada has worked carefully to develop a lean, cost-effective structure for the Canada Water Agency. Please see centrally provided information on how the Government is implementing the budget reduction commitments.

Q. Would the Canada Water Agency receive services from other federal departments and vice versa?

A. The proposed legislation enables other federal departments, boards, and agencies to provide services and facilities to the Canada Water Agency that are necessary for carrying out the Agency's purpose. The Canada Water Agency would receive certain internal services from Environment and Climate Change Canada, including information management and information technology services and real property services, which is more cost effective than the Agency providing those services on its own. The Canada Water Agency would receive various other services from other federal organizations.

The proposed legislation also enables the Canada Water Agency to provide services and facilities to other federal departments, boards, and agencies. No such service provision is planned at this time.

Q. How many staff will the Canada Water Agency have?

A. The Government is in the process of implementing the funding received in Budget 2023 and once that process is complete, we will be able to confirm the expected number of employees in the Agency.

Engagement on the Creation of the Canada Water Agency

Q. How did Environment and Climate Change Canada engage with provinces, territories, Indigenous Peoples, stakeholders, and the public on the creation of the Canada Water Agency?

Engagement of provinces and territories

Environment and Climate Change Canada engaged bilaterally with all provinces and territories on freshwater priorities and the role of the Canada Water Agency in 2020 and 2021.

Engagement of Indigenous peoples

Engagement on the Canada Water Agency occurred between 2020 and 2023 with representatives or advocates for over 750 Indigenous communities—including First Nations, Inuit, and Métis settlements and locals in regions throughout Canada.

Environment and Climate Change Canada also organized four roundtables with a total of 34 Indigenous water experts from across Canada on Northern Environments and Arctic Issues; Transboundary Water Management; Climate Change Impacts on Fresh Water – Inuit Perspectives; and Climate Change Impacts on Fresh Water – First Nations Perspectives.  Environment and Climate Change Canada also participated in various information sharing opportunities provided by First Nations groups.

Engagement of stakeholders and the public

Environment and Climate Change Canada led comprehensive public and stakeholder engagement on freshwater priorities and the creation of a Canada Water Agency in 2020 and 2021. A Discussion Paper was released in 2020, and from January to February 2021, the federal government held a National Forum, six Regional Forums and expert workshops on freshwater science and data. 

Through this process, more than 2,700 Canadians shared their views on Canada's most pressing freshwater challenges and the role the Agency could play to help sustainably manage fresh water across the country. A What We Heard report summarizing this input was published in June 2021. The vast majority of Canadians consulted support the creation of the Canada Water Agency, and believe it has the potential to enhance freshwater management in Canada.

Q. How did Environment and Climate Change Canada engage with provinces, territories, Indigenous Peoples, stakeholders, and the public on the creation of the Canada Water Agency?

A. Environment and Climate Change Canada conducted significant engagement with Indigenous Peoples (see response to Q20) and has reflected on the input received from First Nations. Officials have been meeting with representatives or advocates for First Nations communities who made submissions on the Canada Water Agency to discuss how First Nations input informed the creation, mandate, and operations of the Agency.

Furthermore, in meetings with the Assembly of First Nations, Environment and Climate Change Canada has pledged to work closely with Indigenous partners on key mandate commitments going forward. This includes the commitment to advance the modernization of the Canada Water Act to reflect Canada's freshwater reality, including climate change and Indigenous rights, as well as the commitment to implement a strengthened Freshwater Action Plan. The first step will be to meet with provinces, territories, and Indigenous partners on how they would like to be engaged in this work, followed by engagement on policy objectives related to the purpose of the Act and recommendations related to how to modernize the Act.

Budget 2023 committed to involving Indigenous Peoples "in all steps of the implementation of the Freshwater Action Plan, which includes work on major lakes and rivers through greater engagement, and seeking Indigenous advisory expertise, especially from women who are the traditional "water carriers" in Indigenous communities. Environment and Climate Change Canada would collaborate with Indigenous Peoples to develop respectful and meaningful engagement approaches for these important freshwater commitments.

Relationship to other water legislation

Q. How does the creation of the Canada Water Agency relate to the development of drinking water legislation by Indigenous Services Canada?

A. The creation of the Canada Water Agency is separate from the First Nations- and Indigenous Services Canada-led efforts related to replacing the Safe Drinking Water for First Nations Act. The Canada Water Agency would continue to coordinate with Indigenous Services Canada in areas where the legislation and Canada Water Agency activities are linked.

Q. How does the proposed legislation relate to the Canada Water Act?

A. The proposed legislation is separate from the Canada Water Act. The Government has committed to advance the modernization of the Canada Water Act to reflect Canada's freshwater reality, including climate change and Indigenous rights. The Canada Water Agency would undertake this work to advance the modernization of the Canada Water Act as an early priority.The first steps in this process would be pre-engagement with provinces, territories, and Indigenous Peoples on policy objectives and recommendations related to how to modernize the Act.

Overview

According to 2021 data, approximately 3.8 million Canadians smoke cigarettes – about 12% of the population over the age of 12. The total public health costs due to tobacco use in Canada, including both direct and indirect costs, are estimated at more than $11 billion per year. In 2021, tobacco industry-reported wholesale revenue was approximately $4.6 billion.

For decades, the Government of Canada has been taking action to address the health hazards of using tobacco and vaping products. The government dedicates $66 million annually to its federal tobacco and vaping activities. These activities include regulating tobacco and vaping products, educating the public on the health hazards of using tobacco and vaping products; and providing funding to First Nations, Inuit, and the Métis Nation to develop and implement their own self-determined, culturally appropriate and distinct approaches to reducing commercial tobacco use based on their own needs and priorities.

The Tobacco and Vaping Products Act and its supporting regulations are key to carrying out the Government of Canada's tobacco and vaping activities. The purpose of the Act is to provide a legislative response to a national public health problem of substantial and pressing concern and to protect the health of Canadians in light of conclusive evidence implicating tobacco use in the incidence of numerous debilitating and fatal diseases.

While the Government of Canada has cost recovery frameworks in place for other regulated products such as cannabis products, drugs and medical devices, and pesticides, there has never been a comprehensive federal cost recovery framework that highlights the connection between the tobacco and vaping product industries and the costs of implementing and enforcing our legislative and regulatory framework. The tobacco and vaping product industries continue to benefit from the ability to sell their products through the government's comprehensive legislative and regulatory framework, in addition to other relevant legislation.

In the 2023 Fall Economic Statement, the government announced its intention to amend the Tobacco and Vaping Products Act to enable the fixing of fees or charges and related compliance and enforcement tools to implement a tobacco cost recovery framework.

The amendments would provide the authority to develop and implement tobacco and vaping cost recovery frameworks. If the amendments are adopted, these cost recovery frameworks would help minimize the cost burden on taxpayers of funding federal tobacco and vaping activities. They would also highlight the connection between the tobacco and vaping product industries and the costs of federal tobacco and vaping activities. Before making any regulations and implementing cost recovery frameworks, Health Canada would consult with partners, stakeholders, and other interested parties.

Division 4 of Part 5 amends the Tobacco and Vaping Products Act to, among other things,

• authorize the making of regulations respecting fees and charges to be paid by tobacco and vaping product manufacturers for the purpose of recovering the costs incurred by His Majesty in right of Canada related to carrying out the purpose of that Act;
• provide for related administration and enforcement measures; and
• require information relating to the fees or charges to be
• made available to the public.

Key Messages

• Tobacco use continues to be the leading preventable cause of illness and premature death. More than 46,000 people in Canada die because of tobacco use every year; that is one Canadian every 11 minutes.
• The total public health costs due to tobacco use in Canada, including both direct and indirect costs, are estimated at more than $11 billion per year. In 2021, the tobacco industry's total wholesale revenue in Canada was approximately $4.6 billion.
• For decades, the Government of Canada has undertaken activities to address the national public health problem of tobacco use and to protect the health of Canadians from tobacco-related disease.
• The Government conducts activities aimed at preventing vaping product use from leading to the use of tobacco products by young persons and non-users of tobacco products, among other activities.
• The Government commits $66 million annually towards federal tobacco and vaping activities.
• These activities include regulating tobacco and vaping products, educating the public on the health hazards of using tobacco and vaping products, and providing funding to First Nations, Inuit, and the Métis Nation to develop and implement their own self-determined, culturally appropriate and distinct approaches to reducing commercial tobacco use based on their own needs and priorities.
• Today, the costs of federal tobacco and vaping activities are paid entirely by taxpayers. There has never been a comprehensive federal cost recovery framework that highlights the connection between the tobacco and vaping product industries and the costs of implementing and enforcing the legislative and regulatory framework.
• That is why the government announced in the Fall Economic Statement its intention to amend the Tobacco and Vaping Products Act to enable the fixing of fees or charges and related compliance and enforcement tools to implement a tobacco cost recovery framework.
• While the proposed amendments would provide the authority to develop and implement tobacco and vaping cost recovery frameworks, Health Canada is currently exploring a phased approach to the implementation of cost recovery frameworks for tobacco and vaping. The initial priority would be implementing the framework for tobacco.
• If adopted, the amendments would help minimize the cost burden on taxpayers of funding federal tobacco and vaping activities.
• Prior to considering the implementation of a vaping recovery framework, Health Canada would gather lessons learned from the development and implementation of the tobacco cost recovery framework, and would look at the impacts of new federal regulations on vaping products.
• Before making any regulations and implementing cost recovery frameworks, Health Canada would consult with partners, stakeholders, and other interested parties.
• The Government of Canada undertakes many activities to address the national public health problem of tobacco use, to protect the health of Canadians from tobacco-related disease, and to prevent vaping product use from leading to the use of tobacco products by young persons and non-users of tobacco products, among other activities.
• These activities include regulating tobacco and vaping products, educating the public on the health hazards of using tobacco and vaping products, and providing funding to First Nations, Inuit, and the Métis Nation to develop and implement their own self-determined, culturally appropriate and distinct approaches to reducing commercial tobacco use based on their own needs and priorities.  The Government of Canada commits $66 million annually to its federal tobacco and vaping activities.
• While the Government of Canada has cost recovery frameworks in place for other regulated products such as cannabis products, drugs and medical devices, and pesticides, there has never been a comprehensive federal cost recovery framework that highlights the connection between the tobacco and vaping product industries and the costs of implementing and enforcing its legislative and regulatory framework.
• If the legislative amendments are adopted, developing tobacco and vaping cost recovery frameworks would help minimize the cost burden on Canadian taxpayers of funding federal tobacco and vaping activities. Before making any regulations and implementing cost recovery frameworks, Health Canada would consult with partners, stakeholders, and other interested parties.

Questions & Answers

Q. What is the key objective of the proposed legislative amendments?

A. Cost recovery is the practice of establishing and collecting fees to recover part or all of the costs associated with cost recoverable services or activities. This ensures that businesses pay their fair share.

The objective of these proposed legislative amendments is to provide the responsible minister the regulations-making powers necessary to develop, implement, and administer cost recovery frameworks to recoup the costs of federal tobacco and vaping activities.

If the legislative amendments are adopted, developing and implementing tobacco and vaping cost recovery frameworks would help minimize the financial burden of federal tobacco and vaping activities on taxpayers.

Comprehensive federal tobacco and vaping cost recovery frameworks would highlight the connection between the tobacco and vaping product industries and the costs of implementing and enforcing our legislative and regulatory framework.

Q. What tobacco and vaping activities does the Government of Canada conduct?

A. The Government of Canada undertakes many activities to address the national public health problem of tobacco use, to protect the health of Canadians from tobacco-related disease, and to prevent vaping product use from leading to the use of tobacco products by young persons and non-users of tobacco products, among other activities.

These activities include, but are not limited to, regulating tobacco and vaping products, educating the public on the health hazards of using tobacco and vaping products, and providing funding to First Nations, Inuit, and the Métis Nation to develop and implement their own self-determined, culturally appropriate and distinct approaches to reducing commercial tobacco use based on their own needs and priorities.

Federal tobacco and vaping activities are conducted by Health Canada, the Public Health Agency of Canada, Public Safety Canada, the Royal Canadian Mounted Police, the Canada Border Services Agency, the Canada Revenue Agency, and Indigenous Services Canada.

The Government of Canada commits $66 million annually toward federal tobacco and vaping activities.

Q. How much money will be cost recovered from the tobacco and vaping industries? Will the full amount allocated to federal tobacco and vaping activities ($66M per year) be cost recovered?

A. The proposed legislative amendments would permit the development of tobacco and vaping cost recovery frameworks. This would be the first step of the cost recovery process.

Health Canada's approach to cost recovery includes: confirming the existence of necessary legislative authorities, transparent fee setting and costing methodologies, meaningful and inclusive stakeholder engagements, established processes for regularly reviewing and updating fees, and consideration of fee mitigation measures, where appropriate.

These steps of the cost recovery process, including consultations, would clarify details of the framework like which activities would be cost recovered, how much the industry would pay, and potential fee mitigation measures.

While the proposed amendments would provide the authority to develop and implement tobacco and vaping cost recovery frameworks, Health Canada is currently exploring a phased approach to the implementation of cost recovery frameworks for tobacco and vaping.

Implementing a cost recovery framework for tobacco would be the initial priority. Prior to considering the implementation of a vaping cost recovery framework, Health Canada would gather lessons learned from the development and implementation of the tobacco cost recovery framework, and would look at the impacts of new federal regulations on vaping products.

With a phased approach, only the costs of all eligible federal tobacco activities would be analysed and considered for recovery at this time as well as the costs to administer the tobacco cost recovery framework.

If pressed on the amount to be recovered:

The proposed legislative amendments would provide the minister the authority to make regulations respecting fees or charges to be paid by tobacco and vaping product manufacturers. This would allow the Government to recover the appropriate amount of eligible tobacco and vaping activities costs.

Any details relating to the activities that would be cost recovered would be subject to consultation with partners, stakeholders, and other interested parties before making any regulations.

Q. How much will it cost to implement the tobacco and vaping cost recovery frameworks?

A. Through Budget 2023, the Government committed approximately $7M from 2023-24 to 2025-26 to develop and implement a tobacco cost recovery framework.

If the proposed amendments are adopted, the development and implementation of the tobacco cost recovery framework would be completed using existing departmental resources at Health Canada. Once the tobacco cost recovery framework is implemented, annual operating costs would be fully recovered, along with the costs of eligible tobacco control activities.

Q. Who will be required to pay the fees? Will it apply to tobacco and vaping product retailers?

A. The proposed amendments to the Tobacco and Vaping Products Act would provide the minister the authority to make regulations respecting fees or charges to be paid by tobacco and vaping product manufacturers for the purpose of recovering the costs incurred by the Government of Canada related to carrying out the purpose of the Act.

The definitions of both "manufacturer" and "manufacture" of the Tobacco and Vaping Products Act are relevant to know who may be required to pay potential tobacco or vaping cost recovery fees or charges. The Act also makes a distinction between retailers and manufacturers.

Before making any regulations, Health Canada would consult with partners, stakeholders, and other interested parties on any details related to the fee or charges, including potential fee mitigation measures and the activities that would be cost recovered.

While the proposed amendments would provide the authority to develop and implement tobacco and vaping cost recovery frameworks, Health Canada is currently exploring a phased approach to the implementation of cost recovery frameworks for tobacco and vaping.

Implementing a cost recovery framework for tobacco would be the initial priority. Prior to considering the implementation of a vaping recovery framework, Health Canada would gather lessons learned from the development and implementation of the tobacco cost recovery framework, and would look at the impacts of new federal regulations on vaping products.

If pressed on the definition of "manufacturer" or "manufacture":

The Act defines a manufacturer as "in respect of a tobacco product or vaping product, includes any entity that is associated with a manufacturer, including an entity that controls or is controlled by the manufacturer or that is controlled by the same entity that controls the manufacturer."

"Manufacture" is defined as "in respect of a tobacco product or vaping product, includes the manufacture of a tobacco product or vaping product for export, as well as the packaging, labelling, distributing and importing of a tobacco or vaping product for sale in Canada."

Within the Act, a "retailer" is defined as a person who is engaged in a business that includes the sale of tobacco products or vaping products to consumers.

Q. Is the recovery of costs for federal vaping product control activities included in the proposed legislative amendments? Will the costs of vaping activities be recovered at the same time?

A. The proposed amendments to the Tobacco and Vaping Products Act would provide the minister the authority to make regulations respecting fees or charges to be paid by tobacco and vaping product manufacturers for the purpose of recovering the costs incurred by the Government of Canada related to carrying out the purpose of the Act.

While the proposed amendments would provide the authority to develop and implement tobacco and vaping cost recovery frameworks, Health Canada is currently exploring a phased approach to the implementation of cost recovery frameworks for tobacco and vaping.

Implementing a cost recovery framework for tobacco would be the initial priority. Prior to considering the implementation of a vaping recovery framework, Health Canada would gather lessons learned from the development and implementation of the tobacco cost recovery framework, and would look at the impacts of new federal regulations on vaping products.

Before making any regulations, Health Canada would consult with partners, stakeholders, and other interested parties on any details related to the fee or charges, including potential fee mitigation measures and the activities that would be cost recovered.

Q. Why is it necessary to seek authority to implement a vaping cost recovery framework now?

A. The Tobacco and Vaping Products Act and its supporting regulations are a key component in carrying out the Government of Canada's tobacco and vaping activities. This Act regulates the manufacture, sale, labelling and promotion of tobacco products and vaping products sold in Canada.

It is important to reflect the entire legislative and regulatory framework of the Act, which regulates both tobacco and vaping products, within the proposed amendments. This maintains consistency throughout the Act.

Q. What would hold the Government accountable to not exponentially increase its costs/expenditures?

A. As is currently the case, any increase in expenditures on tobacco and vaping activities would require parliamentary approval (e.g., through a Budget).

If Parliament decided to increase funding for federal tobacco and vaping activities, Health Canada would increase appropriately the amount to be recovered.

Q. Do we already have a tobacco cost recovery framework in place via tobacco excise duties?

A. Taxation and cost recovery frameworks do not serve the same purpose. Tobacco excise duties, for example, have been recognized as an element of tobacco control, to discourage smoking for public health purposes. They are not specifically tied to the Government's expenditures for tobacco and vaping activities.

In contrast, cost recovery is the practice of establishing and collecting fees to recover part or all of the costs associated with eligible services or activities. This ensures that businesses pay their fair share while minimizing the burden on taxpayers.

While the Government of Canada has cost recovery frameworks in place for other regulated products such as cannabis products, drugs and medical devices, and pesticides, there has never been a comprehensive federal cost recovery framework that highlights the connection between the tobacco and vaping product industries and the costs of implementing and enforcing our legislative and regulatory framework.

The proposed legislative amendments would provide the minister the authority to make regulations respecting fees or charges to be paid by tobacco and vaping product manufacturers. This would allow the Government to recover the appropriate amount of eligible tobacco and vaping activities costs.

Q. How will Health Canada calculate the fees? Will the calculations be based on market share?

A. If adopted, the proposed amendments would provide the minister the authority to make regulations to fix fees or charges or provide for the manner to calculate the fees or charges.

Health Canada's approach to cost recovery is guided by specific principles. These guiding principles are accountability and transparency, predictability and sustainability, and stewardship and fairness.

This approach includes transparent fee setting and costing methodologies, meaningful and inclusive stakeholder engagements, established processes for regularly reviewing and updating fees, and consideration of fee mitigation measures, where appropriate.

Before making any regulations, Health Canada would consult with partners, stakeholders, and other interested parties on any details related to the fee or charges, including potential fee mitigation measures and the activities that would be cost recovered.

Q. What will be the impact of the cost recovery frameworks on small businesses?

A. The proposed amendments to the Tobacco and Vaping Products Act would provide the minister the authority to make regulations respecting fees or charges to be paid by tobacco and vaping product manufacturers for the purpose of recovering the costs incurred by the Government of Canada related to carrying out the purpose of the Act.

Health Canada's approach to cost recovery is guided by specific principles. These guiding principles are accountability and transparency, predictability and sustainability, and stewardship and fairness.

As part of stewardship and fairness, one of Health Canada's objectives is to consider fee mitigation measures, where appropriate.

If the proposed amendments are adopted, Health Canada would consult on details related to potential fee mitigation measures, such as those for small businesses. Affected parties would have the opportunity to provide feedback prior to Health Canada making any regulations.

Q. Will any of the money coming in through the cost recovery framework go to Indigenous communities?

A. Cost recovery is the practice of establishing and collecting fees to recover part or all of the costs associated with cost recoverable services or activities.

Any tobacco and vaping fees would recover the costs associated with the conduct of eligible federal tobacco and vaping activities. It is important to note that the amounts to be recovered would be based on actual expenditures.

The Government of Canada commits $66 million annually to its federal tobacco and vaping activities, which are needed to address the health hazards of using tobacco and vaping products.

This includes providing over $9M per year in funding to First Nations, Inuit, and the Métis Nation to develop and implement their own self-determined, culturally appropriate and distinct approaches to reducing commercial tobacco use based on their own needs and priorities.

This approach supports the self-determination of First Nations, Inuit and the Métis Nation to identify needs and priorities of individuals, families, communities, and health systems, and supports Indigenous control over culturally appropriate service design and delivery.

Any increase in expenditures, such as increased funding to First Nations, Inuit, and the Métis Nation, would require parliamentary approval (e.g., through a Budget).

If Parliament decided to increase this funding, Health Canada would increase appropriately the amount to be recovered.

Q. What is the anticipated impact of the tobacco cost recovery framework on consumers? Is there a risk of driving consumers towards illicit markets?

A. Any price increase resulting directly from the proposed legislative amendments, if adopted, is expected to be minimal.

If the costs are passed directly onto consumers, the fees could be anticipated to add up to roughly 5 cents per pack of cigarettes, based on our current estimates.

This would be significantly less than price increases the tobacco industry has passed on to consumers in recent years.

For example, in 2021 the tobacco industry increased the average price of  20 cigarettes in Canada by 32 cents. This is more than 6 times larger than the price increase that would result from the tobacco cost recovery framework, if the tobacco industry passed the costs on to consumers.

If pressed on the illicit market:

Funding received in Budget 2018 is enabling Public Safety Canada to maintain Indigenous and non-Indigenous capacity to address illicit tobacco and its associated links with organized crime.

RCMP, CBSA and local law enforcement work closely together to detect, disrupt and prevent the illicit tobacco market. Efforts are well-integrated and intelligence-led. This collaboration has led to substantial disruption of the illicit tobacco market and this work would continue.

Q. When will this be implemented?

A. Health Canada's approach to cost recovery is guided by specific principles. These guiding principles are accountability and transparency, predictability and sustainability, and stewardship and fairness.

With regards to accountability and transparency, Health Canada's objectives are to ensure meaningful and inclusive stakeholder engagements and ongoing stakeholder communication.

If the legislative authorities are adopted, the department would proceed with consultations and the drafting of the regulations. These steps would take place before the tobacco cost recovery framework is implemented.

If pressed on timing of implementation:

Pending the completion of those steps, it is anticipated that the collection of fees could begin in 2026-2027.

Q. What is the consultation and engagement plan?

A. Throughout the policy development process, Health Canada met with partner departments that conduct tobacco and vaping activities, as well as Government of Canada cost recovery experts. Health Canada also met with international counterparts, including the US Food and Drug Administration.

Health Canada also sought comments from Canadians, experts and other stakeholders on this mandate commitment through the second legislative review of the Tobacco and Vaping Products Act in fall 2023.

Health Canada looks forward to hearing feedback on the proposed legislative amendments to the Tobacco and Vaping Products Act throughout the parliamentary process.

If the proposed legislative amendments are adopted, Health Canada would consult with partners, stakeholders, and other interested parties prior to making any regulations.

Details of the frameworks, including those related to the fee or charge calculation methodologies, potential fee or charge mitigation measures, and the activities that would be cost recovered would be included in those consultations.

In addition, Health Canada would work with Indigenous Services Canada and Crown-Indigenous and Northern Affairs Canada to engage with Indigenous partners on a distinctions basis.

Overview

The government is amending the Canadian Payments Act to expand membership eligibility in Payments Canada to payment service providers that will be supervised by the Bank of Canada under the Retail Payment Activities Act, credit unions that are part of a credit union central, and operators of clearing houses designated under the Payment Clearing and Settlement Act and overseen by the Bank of Canada. Expanding access to Payments Canada's core payments systems will allow these new entities to better serve their clients with enhanced low-cost electronic payment services, such as faster and more predictable transfers to and from a non-affiliated investment or savings account. Over time, these new members are also expected to deliver new and innovative services to consumers and businesses, such as automated payment reconciliation and faster, lower cost cross-border transactions.

The amendments to the Canadian Payments Act will also clarify that Payments Canada's Stakeholder Advisory Council must not include any Payments Canada members. This was already the case in practice, but the amendments will ensure that the Stakeholder Advisory Council continues to represent the views of broader payments system users, including merchants, in its advice to Payments Canada's Board of Directors. The legislative amendments also include a provision to ensure a formal review of the Canadian Payments Act takes place in four years, once newly eligible members have joined and gained experience with Payments Canada's systems and governance.

In conjunction with the continued progress to stand up the Retail Payments Activities Act regime, expanding membership eligibility represents an important step forward in delivering on the Government's 2019 election platform commitment to modernize Canada's payment systems to deliver faster, secure, and lower cost options to pay bills and transfer money. The Department of Finance has had extensive and ongoing engagement with consumer groups, banks, credit unions, merchant associations, and payment service providers on expanding membership eligibility in Payments Canada since 2015. Overall, there is broad support for expanding membership eligibility and stakeholders expect these amendments to be made as soon as possible.

The new provisions related to membership expansion will come into force on a date to be fixed by order of the Governor in Council, with the exact date still to be determined. The delayed coming into force will allow Payments Canada to make the necessary updates to its by-laws, rules, and frameworks to accommodate the new members.

Key Messages

• The government is amending the Canadian Payments Act to expand membership eligibility in Payments Canada to three sets of regulated entities:
  • Payment service providers that will be supervised by the Bank of Canada under the Retail Payment Activities Act;
  • Credit union locals that are part of a credit union central; and,
  • Operators of clearing houses designated under the Payment Clearing and Settlement Act and overseen by the Bank of Canada.
• Providing payment service providers and credit union locals access to Payments Canada's core payment systems will enable them to better serve their clients with enhanced low-cost electronic payment services, including faster and more predictable transfers to and from non-affiliated accounts.
• This measure demonstrates concrete progress in the government's payments modernization commitment and is broadly supported by stakeholders.

Questions & Answers

Q. Under the proposed amendments, which entities will be eligible to become members of Payments Canada? 

A. Membership eligibility would be expanded to three types of regulated entities:

• Payment service providers that will be supervised by the Bank of Canada under the Retail Payment Activities Act;
• Credit unions that are part of a credit union central; and
• Operators of clearing houses designated under the Payment Clearing and Settlement Act and overseen by the Bank of Canada.

Q. When will the newly-eligible members be able to join Payments Canada?

A. The provisions related to membership expansion will come into force on a date to be fixed by order of the Governor in Council.

As a next step, Payments Canada will be reviewing its by-laws and rules and then proposing changes to reflect newly eligible members.

The Retail Payment Activities Act regime, under which payment service providers will be regulated and supervised by the Bank of Canada, will also need to be up and running before payment service providers can become members.  This is set for 2025.

Q. With the proposed amendments, will credit unions that become members of Payments Canada be eligible to access Bank of Canada liquidity support?

A. With the proposed amendments, the government and the Bank of Canada are reviewing the policies for access to Bank of Canada liquidity facilities and will have more details later.

Overview

Competition Act Measures in the Fall Economic Statement 2023

Competition benefits Canadians by driving innovation, lowering prices, and encouraging better product quality and choice. The federal Competition Act (the "Act") is an economic framework law that promotes greater competition through civil and criminal provisions that address various forms of harmful anti-competitive conduct in the marketplace.The Act is administered and enforced by the Competition Bureau (the "Bureau"), an independent law enforcement agency that protects and promotes competitive markets and enables informed consumer choice.

Over the last several years, and most recently in response to the "Consultation on the Future of Competition Policy in Canada" launched by the Government in late 2022, many stakeholders and members of the public have voiced concerns over the growing state of corporate concentration in Canada, rising prices, and the outsized power of corporate giants. After having already introduced a first set of amendments to address the most immediate affordability concerns through Bill C-56, the Housing Affordability and Groceries Act, the Government is now responding with a comprehensive package of amendments to the Act to help rebalance the marketplace.

These amendments improve many aspects of our country's competition law regime, empowering the Bureau to better serve the public in its role as watchdog and advocate of dynamic markets, and allowing the country to reap their well-documented benefits. The proposed package comprises carefully selected areas that can directly contribute to addressing longstanding issues, delivering on the Government's commitment to significantly update the Act.

Modernize merger review for our globalized, increasingly digital economy

The importance of merger review, as the first line of defence against market concentration in our competition law framework, cannot be understated. A diverse array of stakeholders shared their views on various aspects of merger review through the Consultation, with clear themes emerging about the need to guard against further concentration in certain critical industries, such as grocery and telecommunications, so as to preserve affordability and consumer choice, while also minimizing administrative burden and unnecessary intervention. The Government proposals would:

• Help detect "killer acquisitions" and other potentially harmful transactions by increasing the limitation period for non-notified transactions from one to three years. While the Competition Bureau, through its own intelligence gathering, can sometimes identify and thereafter review non-notifiable mergers, timely detection of competitive harm is often unrealistic where one year is short enough for larger firms to delay post-merger price increases.
• Ensure the most relevant mergers are notified to the Bureau, notably by better accounting for relevant factors in a borderless economy, such as sales into Canada. This will help ensure that a foreign merger that affects a great deal of commerce into Canada, such as is typical with digital markets, does not fall outside the notification threshold.
• Prevent parties from making a transaction irremediable by allowing a temporary bar on closing before the Bureau has had the chance to make even a preliminary case. Where the Commissioner of Competition has asked for an injunction to prevent closing, usually because it will be contesting the merger before the Competition Tribunal, this would bar the merging parties from taking further steps to finalize the deal before that injunction has been ruled upon.
• Repeal the provision of the Act that expressly prohibits the Tribunal from concluding that a merger is likely to harm competition "solely on the basis of evidence of concentration or market share". This would permit, but not require, the Tribunal to make intuitive inferences about market shares in highly concentrated markets, and help relieve the Bureau of some unnecessary burden.
• Make remedies for non-compliance, such as a failure to notify a notifiable transaction or breach of a consent agreement, more accessible by supplementing existing criminal remedies – which can be difficult to enforce – with civil injunctions and penalties.

Revamp the enforcement framework to foster a culture of compliance

There has been, and continues to be, a growing need to consider whether the Act's substantive legal tests, investigative procedures, remedies and private enforcement mechanisms are fit to hold today's well-resourced and sophisticated global firms, and the individuals who run them, accountable. Consequences for anti-competitive conduct, whether in the form of monetary sanctions, behavioural or structural remedies or damages, must be meaningful to the parties involved, feasible to administer, and proportionate to the negative impact of the conduct identified. To this end, the Government proposes to:

• Incentivize private enforcement by relaxing the leave threshold and allowing the Tribunal to issue monetary payment orders, broadening the reach of the law beyond the Bureau's capacity, mostly covering major cases of national importance. The current leave threshold that requires a business to be "directly and substantially affected" in order to bring a claim has proven to be too inflexible so much so that such a business would not have the resources to bring a claim.
• Prevent harmful competitor collaborations from escaping liability by simply terminating an existing anti-competitive agreement. The Government proposes to expand the scope of competitor collaborations to include past conduct and allow monetary penalties where harm has occurred. Past conduct currently escapes scrutiny and therefore incentivizes gaming the rules until ordered to stop.
• Protect workers and small businesses from retaliation by allowing anti-reprisal injunctions and imposition of monetary penalties against the perpetrators. The real or perceived threat of reprisals has been identified as a reason why smaller businesses are hesitant to complain to, or cooperate with, the Bureau.
• More clearly prohibit false discounts by basing ordinary price claims on the vendor's price, not the market price. This would lessen the undue analytical burden on the Bureau and increase the ability to verify price data.
• Limit cost awards against the Crown to situations where confidence in the justice system would be harmed, or the opposing party's ability to carry on business is threatened.  

Better respond to emerging issues

Throughout the Consultation, there were calls to incorporate additional lenses, such as for sustainability or labour, into all aspects of the Bureau's enforcement efforts. Specifically, numerous stakeholders highlighted a desire for the Act to be stronger in its response to deceptive or unverifiable environmental or sustainability claims, so called "greenwashing". There were also calls to include refusal by manufacturers to provide information and means of repair into the competition law framework. Finally, considering the significant impact that mergers can have on workers, there were calls to give due consideration to effects on labour markets in merger review. In response, the Government proposes to:

• Deter "greenwashing" by subjecting sustainability claims to the requirement that representations be based on proper testing. The onus would be on the claimant to prove that proper testing has been undertaken prior to making the representation.
• Encourage environmentally-beneficial collaborations by allowing their pre-clearance as competitively benign by the Bureau and providing greater certainty to businesses that work together towards environmental objectives. This would establish a pre-clearance framework similar to advance ruling certificates available for merger transactions, and prevent the risk of prosecution.
• Clarify that labour markets are relevant to merger review by adding a specific mention in the criteria.
• Remove barriers to repair by including refusal to provide means of repair as a potentially remediable act under the refusal to deal section of the Act.

Housekeeping Changes

The Government proposes to complement these substantive reforms by a number of technical changes that would tackle irritants that can make the law more difficult to enforce and less practical. These changes are to:

• Increase flexibility in challenging anti-competitive conduct by allowing the Commissioner of Competition to apply for relief under any combination of civil provisions.
• Close a potential loophole with regards to anti-spam enforcement by specifically including drip-pricing in the relevant provisions.
• Provide additional clarity vis-à-vis solicitor-client privilege by ensuring that the Commissioner is not given access to records under a privilege claim unless the claim is invalid.
• Limiting unnecessary bifurcation of proceedings when an individual being charged alongside a corporation selects a trial by jury.

Key Messages

For several years, stakeholders and members of the public have voiced serious concern over growing corporate concentration, rising prices, and the power of corporate giants. The Government is responding to these concerns with comprehensive competition reforms following a public consultation.

• Competition is a well-known driver of economic prosperity, spurring innovation and a greater variety of better product and service offerings at lower prices.
• Complementing the changes introduced in Bill C-56, these amendments will provide Canadians with a more modern and effective competition law. They will, among other things, help prevent harmful mergers and anti-competitive collaborations, and better hold large firms to account for their conduct.
• The amendments will benefit consumers by keeping prices low, creating better protection against false discounts and greenwashing claims, and enabling repairs. They will benefit businesses, notably SMEs, by ensuring markets are contestable and empowering smaller players to take cases directly to the Competition Tribunal. They will also benefit workers, by fostering economic dynamism and clarifying that labour markets are relevant to merger analysis.
• The amendments are informed by the comprehensive review of the Competition Act undertaken by the Government over the past two years, and offer a carefully crafted balance of the views of stakeholders.
• The rules enacted by the amendments are clear, objective, and predictable to provide the certainty the marketplace needs to thrive and for the law to be effective. They will also bring Canada more in line with key comparable jurisdictions.

Questions & Answers

General

Q. Why is the Government proceeding with amendments to the Competition Act at this time?

A. This is the second and most comprehensive response to the "Consultation on the future of Competition Policy in Canada". These amendments seek to enhance competition to improve affordability and consumer choice across Canada.

When Bill C-56 was introduced in September, the Government committed to the introduction of further changes to modernize Canada's competition framework. Recently, the Competition Bureau published its report on the state of competition across the country, and concluded that more must be done to reduce barriers to competition in the Canadian economy. Together with stakeholder feedback during the extensive consultation that was conducted, the Bureau's report makes the case for continued reforms to the Competition Act.

Q. What will the proposed amendments do?

A. The proposed set of amendments would modernize the merger review process, revamp enforcement, address environmental and labour concerns, and ensure that the Act is internally consistent and in line with Canada's legal framework as well as international best practice.

Q. How do these reforms respond to the recent public consultation?

A. The Consultation on the Future of Competition Policy in Canada garnered significant interest, receiving over 130 submissions from identified stakeholders, as well as more than 400 responses from members of the general public. These submissions raised over 100 potential reform proposals.  The general sense emanating from stakeholders was that the Competition Act must be revised, having failed to prevent concentration from forming in various industries and resulting in lacklustre enforcement.

The proposed reforms constitute a comprehensive response to those concerns. The review process also raised a number of procedural issues that may warrant further technical consultations. The Government will work together with the Competition Bureau on identifying the best way forward on these matters.

Q. How will the proposed amendments benefit consumers?

A. The reforms will strengthen enforcement and promote fair competition in the Canadian economy. This will encourage product innovation, better quality, and lower prices for consumers. The reforms notably include a number of amendments that may be of specific interest to consumers. The revision of the ordinary price provision will more clearly prohibit false discounts and facilitate the ability of the consumer (and the Competition Bureau) to verify price data. The inclusion of refusal to provide means of repair as a remediable act will also help improve access to a broader array of cost-saving repair options through third-party repair shops.

Q. How will the proposed amendments benefit businesses?

A. The reforms will generally strengthen enforcement and promote fair competition in the Canadian economy. This will make markets more contestable and enable entrepreneurs to "win on the merits".  The amendments notably include a number of reforms that may be of specific interest to smaller businesses. Broadening private Tribunal access and allowing monetary orders will lead to more self-policing in the market. Anti-reprisal provisions and the imposition of administrative monetary penalties will also protect firms that choose to report and cooperate with investigations by prohibiting any action taken by other firms in retaliation to punish or disadvantage.

Q. How will the proposed amendments benefit workers?

A. The reforms will generally strengthen enforcement and promote fair competition in the Canadian economy. This will apply both to monopoly and monopsony effects, thus ensuring better competition in the procurement of labour, and therefore more dynamic employment opportunities. Notably, effects on labour markets will now be considered explicitly as a factor in the merger remedy test.

Q. How do these amendments compare to international best practice?

A. The proposed amendments will bring Canada more in line with its trading partners, like the European Union and the United States. The merger review process will now have limitation periods and temporary restraints on the parties closing mergers that more closely resemble international norms. Similarly, the ability to review past collaborative conduct and to issue monetary penalties will more closely resemble the economy-wide enforcement framework currently in place abroad. Broadening access to private enforcement for violations of competition laws will also better approximate remedies available in other developed nations. All in all, the proposed amendments will close gaps between Canada's Competition Act and international norms, and ensure that our laws are modernized so as to be attuned to a globalized economy.

Q. When will the amendments come into force?

A. Most amendments will come into force upon  Royal Assent. However those broadening the reach of the private Tribunal Access regime, as well as the remedies that it will introduce, are delayed until a year following Royal Assent to ensure that both businesses and the Tribunal can adequately prepare for the new regime.

Merger Review

Q. Why and how is the Government proposing to revise the way mergers are reviewed in Canada?

A. Building on Bill C-56's abolition of the efficiencies defence, the amendments seek to protect market dynamism and lead to sustainable and broad-based benefits for Canadians.

Specific amendments include extending the limitation period for non-notified mergers to detect killer acquisitions and better observe market effects, updating notification rules to ensure the most relevant mergers are notified, allowing temporary restraints on closing before the Competition Bureau is able to make even a preliminary case, enabling inferences based on market share in highly concentrated markets to relieve the burden on the Bureau, and making remedies for non-compliance more accessible.

The objective of these amendments is to modernize the merger review process, taking into account new and growing industries such as digital markets, and to ensure that anti-competitive harm is minimized while permitting firms to conduct their legitimate operations freely in an open economy.

Q. What role will market share play in the new merger review framework?

A. Currently, there is a provision that prohibits the Competition Tribunal from rejecting a merger solely on the basis of concentration or market shares, which imposes an unnecessary burden on the Competition Bureau to find other evidence to prove a substantially lessening or prevention of competition, even when the sheer degree of concentration should be extremely relevant in making a case. It also prohibits the Tribunal from  making intuitive inferences about merger proposals in highly concentrated markets (e.g., online search), and to develop appropriate assumptions around competitive harm that might facilitate adjudication, as occurs for example in the United States.

This does not mean that market share alone will always be sufficient to establish significant harm to competition in every case, but rather, this allows the Tribunal to be more flexible in its assessment of the "substantially lessening or prevention of competition" standard.

Q. How will merger review be better adapted to digital markets?

A. Digital markets are particularly prone to "killer acquisitions", where incumbents purchase a firm with the sole intention of terminating their operations to pre-empt competition. Acquisitions in an intangible economy can also be difficult or impossible to untangle, for example if user accounts or personal data have been merged. The types of merger that are important to review can similarly be different in a borderless economy, where value of sales can stem from intellectual property or products can be imported in large quantities without necessarily requiring significant assets in the country.

Specific changes to the merger review process include increasing the limitation period for non-notified transactions from one to three years so as to give the Competition Bureau more time to detect harmful transactions; creating a temporary restraint to prevent mergers from closing before an injunction can even be considered by the Tribunal; and updating pre-merger notification rules to include sales into Canada from the assets being acquired for threshold calculations.

Q. What does the amendment mean for the future of merger enforcement?

A. It is expected that an updated statutory framework will influence the actions of private parties, including decisions as to whether and how to proceed with a given merger, as well as the actions of the Commissioner of Competition. As such, it is expected the amendment will have a positive impact on the marketplace, but not necessarily on the number of challenges brought forward by the Bureau. 

Enforcement

Q. Why and how is the Government proposing to bolster the Act's enforcement framework?

A. The proposed amendments will, among other things: incentivize private enforcement by relaxing the threshold for leave and expanding the class of leave application; allow the Competition Tribunal to issue compensatory orders in privately brought cases; expand the scope of reviewable competitor collaborations to include past conduct; and introduce more remedies for harmful competitor collaborations so that they cannot escape consequences by simply terminating existing anti-competitive agreements.

Together, these changes will facilitate access to private enforcement and remove barriers for the Competition Bureau to pursue cases of anti-competitive concern, ultimately seeking to foster a culture of compliance throughout the Canadian economy.

Q. How will the Act better restrain abuse by dominant players?

A. The proposed amendments contain certain important changes to addressing conduct by dominant firms.

First, provisions will be enacted to prevent reprisal. This means that if a firm has testified, cooperated, or assisted with investigations of the Bureau, any action taken by the investigated firm (often a dominant player) in retaliation will be prohibited. Upon finding that a firm has engaged in reprisal action, the court will be permitted to issue an administrative monetary penalty in addition to a prohibition order.

Secondly, the ability for private applications to receive a monetary award will incentivize more cases to be brought by smaller businesses that are affected by abusive conduct from a dominant player.

Q. Why is the Government enlarging private access, and what will be the impact on Canada's competition framework?

A. Currently, the Competition Bureau is the initiator of proceedings before the Tribunal in most cases. Given its limited resources, it has to  prioritize cases of national importance. This means that anti-competitive conduct at a smaller scale (e.g., regional), or occurring in novel circumstances, may be left unaddressed, even when they are causing harm to the marketplace, small businesses, and/or consumers.

Expanding the class of permitted applicants, injecting more flexibility into the leave threshold, and allowing the Competition Tribunal to issue monetary payment orders where appropriate, will altogether incentivize private enforcement. A greater enforcement capacity will encourage compliance throughout the Canadian economy.

Q. What safeguards are in place to prevent potential abuse of the new regime?

A. Despite incentivizing private enforcement, there will still be thresholds to obtain leave from the Tribunal to bring a given case. Together with the absence of class actions before the Tribunal, this will help ensure that businesses are not opened up to a flood of strategic litigation or "settlement hunting". The Canadian legal system also protects against a court or Tribunal hearing more than one proceeding on the same facts.

As occurs under other provisions of the Act, the Competition Tribunal will consider all facts of any case before ordering penalties, including a history of compliance and the lucrativeness of anti-competitive conduct. Essentially, financial awards, including administrative monetary penalties being introduced for anti-competitive collaborations, are aimed principally at intentional conduct that currently cannot be easily remedied.

Q. What is changing in the approach to reviewing agreements between businesses?

A. Currently, the only potential consequence facing businesses entering into an anti-competitive agreement that is not criminally prohibited is to be subject to a Bureau investigation and ordered by the Tribunal to stop. This can incentivize businesses to take their chances, or to restart the conduct after an investigation ceases. To prevent these situations and ensure broad-based compliance, the scope of reviewable collaborations will be expanded to include conduct that occurred within the past three years, and the Competition Tribunal will be able to issue administrative monetary penalties where appropriate when competitive harm has already taken place.

Emerging Priorities

Q. How will the proposed changes benefit the environment?

A. Two changes are being made to support environmental initiatives.

First, agreements between competitors are currently either subject to criminal prosecution if they involve price fixing, market allocation or output restriction. Other agreements between competitors are civilly reviewable to assess competitive effects. This creates uncertainty and potential liability for firms that may be competitors, but want to collaborate to address environmental concerns. The proposed changes will allow firms to seek pre-clearance from the Competition Bureau for competitor collaborations that have an environmental objective and do not harm competition. This will shield parties from criminal prohibitions under the Act and encourage firms to engage in environmentally-beneficial collaborations so long as they do not harm competition. This echoes initiatives that have been taken in various forms by other jurisdictions around the world such as the United Kingdom and the European Union.

Second, as consumers include sustainability considerations in their purchasing decisions, environmental claims in marketing schemes will require more stringent verifiability. The proposed changes will deter "greenwashing" by prohibiting environmental claims that are not based on adequate and proper testing, which the vendors must be able to demonstrate.

Q. How will the proposed changes support Canadians' access to repair?

A. The rising cost of goods, and environmental awareness, have led many Canadians to consider repair over replacement. However, manufacturers have often restricted access to information or to the parts required for repair, limiting access only to select service providers.

The proposed changes will include the refusal to provide the means necessary for repair as an explicit form of "refusal to deal" under the Competition Act. Where the terms of that provision are met (e.g. a business is substantially affected in its operations and willing to meet usual trade terms, and competition is being harmed) an order will be possible for refusal to provide means of repair.

Overview

In the aftermath of the Laurentian University insolvency, Canadians have raised concerns with the Government of Canada about the challenges faced by public post-secondary educational institutions (PSEIs) in insolvency and restructuring situations. Recognizing these concerns, the Minister of Innovation, Science and Industry was mandated to engage with the provinces and territories and to seek feedback from universities, colleges, experts, lenders, and other post‑secondary education stakeholders to explore ways to better protect the public interest functions of public PSEIs in these situations.

Based on the findings of these consultations, amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) are proposed to exclude public PSEIs from becoming the subject of proceedings under either Act.  The amendments would promote the public interest served by PSEIs by encouraging early dialogue and negotiation to promote PSEI financial stability and reduce PSEI insolvency risk, instead of urgent restructurings under BIA or CCAA insolvency proceedings.  PSEIs could not commence CCAA or BIA proceedings unilaterally, which would encourage them to seek alternative solutions before reaching a financial crisis.

Given the broad variety of public PSEIs across Canada, and provincial and territorial jurisdiction over post-secondary education, a regulatory process is proposed to develop a definition or list of excluded PSEIs, which will allow for input from provincial and territorial governments and other stakeholders. To provide time for the regulatory consultations, the amendments would come into force by Order in Council, no later than two years following royal assent.

Key Messages

In the aftermath of the Laurentian University insolvency, Canadians have raised concerns with the Government of Canada about the challenges faced by public post-secondary educational institutions (PSEIs) in insolvency and restructuring situations. Recognizing these concerns and after receiving feedback from PSEI stakeholders and provincial and territorial governments, the Government is proposing to amend the Bankruptcy and Insolvency Act (BIA)and the Companies' Creditors Arrangement Act (CCAA) to exclude public PSEIs from becoming subject to proceedings under these laws.

• Canada's PSEIs play an essential role in our country's social and economic development.  Federal, provincial, and territorial governments and other post-secondary education stakeholders share a common interest in fostering a sustainable, high‑quality post‑secondary educational system.
• The Government has heard the concerns raised by Canadians about the challenges presented when a public PSEI becomes insolvent. 
• The Government has engaged with provinces and territories and sought feedback from universities, colleges, experts, and lenders and other post-secondary education stakeholders to explore ways to better protect the public interest functions of post-secondary institutions in insolvency and restructuring situations. 
• Based on this feedback, the Government is proposing amendments to exclude public post-secondary educational institutions from the jurisdiction of federal insolvency laws.
• These amendments encourage preventative solutions to financial distress that take into account the important public interest functions of these institutions, as well as provincial and territorial jurisdiction over post-secondary education.

The Government looks forward to continued dialogue with provincial and territorial counterparts and other PSEI stakeholders on the implementation of these amendments.

Questions & Answers

Q. What changes to federal insolvency laws are being proposed by the Government?

A. The Government is proposing to amend the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) to exclude public post-secondary educational institutions (PSEIs) from becoming subject to proceedings under either Act.

Q. What will be the effect of these amendments?

A. Public PSEIs would not be able to commence insolvency proceedings under the BIA or the CCAA. In addition, creditors would not be able to petition public PSEIs into bankruptcy or receivership under the BIA.

Q. Which institutions would be affected by this change?

A. The amendments will apply to prescribed public PSEIs.  Given the broad variety of public PSEIs across Canada, and provincial and territorial jurisdiction over post-secondary education, a definition or list of excluded PSEIs will be developed through a regulatory process that will allow for input from provincial and territorial governments and other stakeholders. To provide time for the regulatory consultations, the amendments would come into force by Order in Council, no later than two years following royal assent.

Q. Why is the Government proposing these changes now? Did the Government seek feedback from Canadians?

A. In the aftermath of the Laurentian University insolvency, Canadians have raised concerns about the challenges faced by public PSEIs in insolvency and restructuring situations. Recognizing these concerns, between May and October 2023 the Government engaged with the provinces and territories and sought feedback from universities, colleges, experts, lenders, and other post-secondary education stakeholders to explore ways to better protect the public interest functions of public PSEIs in these situations.  Based on the feedback from these consultations, the Government is proposing to amend the BIA and CCAA to exclude public PSEIs from the jurisdiction of these Acts.

Q. How will excluding public post-secondary educational institutions from insolvency proceedings better protect the public interest served by these institutions?

A. Public PSEIs, like other large and complex organizations, can face financial distress arising from debt and liquidity challenges that can threaten their ability to serve important public interests. In commercial and not‑for‑profit contexts, BIA and CCAA proceedings can effectively address a financial crisis. However, different considerations can apply in resolving financial distress among PSEIs because of their unique, hybrid status. PSEIs receive significant public funding and the tuition they can charge are regulated; at the same time, they can have considerable autonomy to incur financial obligations, meaning that governments are not always responsible for PSEI debts and other obligations. While insolvency proceedings expressly recognize creditor financial interests, it is more difficult to safeguard the public interest goals of PSEIs and the significant investments by governments and the interests of other stakeholders such as students and communities served by PSEIs in urgent insolvency proceedings.

The amendments would promote the public interest served by PSEIs by encouraging early dialogue and negotiation to promote PSEI financial stability and reduce PSEI insolvency risk, instead of urgent restructurings under BIA or CCAA insolvency proceedings.  PSEIs could not commence CCAA or BIA proceedings unilaterally, which would encourage them to seek alternative solutions before reaching a financial crisis.

Q. How will these changes to federal insolvency law interact with provincial and territorial jurisdiction over post-secondary education?

A. While the amendments would exclude public PSEIs from federal insolvency proceedings, provincial and territorial jurisdiction over post-secondary education remains unchanged.  Provincial and territorial jurisdiction over post-secondary education provides broad scope for legislative initiatives to promote PSEI financial sustainability and reduce their insolvency risk.  Some provinces and territories control PSEI insolvency risk with legislative oversight of PSEI deficits, borrowing, and major expenditures.  Provinces and territories also have jurisdiction to enact legislation that would allow them to administer or take over a financially-distressed PSEI in appropriate circumstances.  The regulatory process to determine which public PSEIs will be excluded from the BIA and CCAA will allow for provincial and territorial input and consideration of measures within provincial and territorial jurisdiction to promote public PSEI financial stability.

Overview

The Government of Canada is committed to maintaining a strong Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Regime that protects Canadians and the integrity of financial system. 

The 2023 Fall Economic Statement proposes legislative amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and the Criminal Code to continue strengthening the AML/ATF Regime with measures to address sanctions evasion, support operational effectiveness, combat trade-based money laundering and environmental crime, and expand the framework to address risks related to white-label ATMs.

Addressing Sanctions Evasion

• The international community has undertaken unprecedented efforts to isolate Russia, and those who enable its war in Ukraine, with aggressive sanctions. The focus of Canada, and its international partners in this effort, is to combat efforts to evade our collective sanctions.
• Budget 2023 announced that the Government would consider a potential role for the Financial Transactions and Reports Analysis Center of Canada (FINTRAC) to help deter sanctions evasion.
• The 2023 Fall Economic Statement proposes amendments to the PCMLTFA to enable FINTRAC to receive reports of suspected sanctions evasion, disclose findings to enforcement partners, as appropriate, and prepare intelligence products outlining indicators and typologies of sanctions evasion.
• The obligation to report suspicious transactions would come into force sixty days following Royal Assent to allow the industry time to come into compliance, while the other changes would come into force upon Royal Assent.

Supporting the Operational Effectiveness of the AML/ATF Regime

• A successful AML/ATF Regime includes effective investigations, prosecutions, and asset forfeiture.  
• The 2023 Fall Economic Statement proposes changes to the Criminal Code that would improve the operational effectiveness of the AML/ATF Regime by:
  • Adding provisions to the offence of laundering proceeds of crime to address challenges related to the investigation and prosecution of third-party money laundering (i.e. individuals or businesses who offer money laundering services to criminals but who are distinct from, and may be ignorant of, the specifics of the predicate offense leading to proceeds of crime); 
  • Updating provisions related to the search, seizure, and restraint of proceeds of crime to facilitate the recovery of proceeds of crime while preserving safeguards that protect privacy rights and interests in property; and
  • Adapting production orders for financial data so that it more effectively applies to accounts relating to digital assets. 
• These amendments would come into force ninety days following Royal Assent.

Combating Trade-Based Money Laundering

• Trade-based money laundering is the process of concealing and moving illicit funds through the legitimate international trade in goods and is one of the largest and most pervasive means of laundering money globally, including in Canada.
• To build on investments announced in Budget 2019 and ensure that Canada does not become a hub for trade-based financial crime, the 2023 Fall Economic Statement proposes amendments to the PCMLTFA and the Customs Act to enhance the Canada Border Service Agency's (CBSA's) authority to regulate the compliance of traders, report suspicions to law enforcement, and use regulatory tools to enforce compliance. 
• The amendments would come into force upon Order in Council.
• To carry out these new authorities, the 2023 Fall Economic Statement announces the Government's intention to create a Trade Transparency Unit to analyze trade data and work with domestic and international partners to detect, deter, and disrupt trade-based financial crime.

Expanding the AML/ATF Framework to Address Risks

• The rapidly evolving and complex nature of financial crime requires ongoing updates to the AML/ATF legislative and regulatory framework to address emerging risks. 
• White-Label Automated Teller Machines (ATMs) are privately-owned and operated cash machines that connect to payment networks by linking with "acquirers". 
• White-Label ATMs are highly vulnerable to money laundering.  The machines can be loaded with illicit cash, withdrawn by the public, while financial institutions reimburse the machine's owner with effectively 'clean' funds.
• To address this risk, the 2023 Fall Economic Statement proposes amendments to the PCMLTFA to designate acquirers of White Label ATMs as reporting entities.  The amendments would come into force upon Order in Council.
• The 2023 Fall Economic Statement also proposes measures to address AML/ATF risks in the real estate sector.  Specifically, risks relating to title fraud and money laundering risks related to real estate transactions, in particular those involving unrepresented parties. These will be implemented exclusively via amendments to regulations under the PCMLTFA and are not included in the proposed bill. 

Other PCMLTFA Amendments to Strengthen the AML/ATF Regime

• The 2023 Fall Economic Statement proposes other amendments to the PCMLTFA to:
  • combat environmental crime by enabling the FINTRAC to share financial intelligence with Environment and Climate Change Canada and the Department of Fisheries and Oceans;
  • improve FINTRAC's strategic intelligence products by allowing it to list names of foreign entities; and
  • make technical amendments to the PCMLTFA to address inconsistencies and close loopholes.
• These amendments would come into force upon Royal Assent. 

Key Messages

• The Government of Canada is committed to maintaining a strong Anti-Money Laundering and Anti-Terrorist (AML/ATF) Regime that protects Canadians and the integrity of the financial system.     
• The 2023 Fall Economic Statement proposes legislative amendments to continue strengthening the AML/ATF framework with measures to address sanctions evasion, support operational effectiveness, combat trade-based financial crime and environmental crimes, and address risks related to white-label ATMs.
• Regarding sanctions, the 2023 Fall Economic Statement proposes to amend to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) to enable the Financial Transactions and Reports Analysis Center of Canada (FINTRAC) to combat sanctions evasion by employing its expertise to develop intelligence products, and, where appropriate, disclose its findings to law enforcement partners.
• Regarding operational effectiveness, the 2023 Fall Economic Statement proposes changes to the Criminal Code to: to better target third-party money laundering; update provisions related to the search, seizure, and restraint of proceeds of crime; and adapt the production order for financial data so that it more effectively applies to accounts relating to digital assets.
• Regarding trade-based money-laundering, the 2023 Fall Economic Statement proposes amendments to the PCMLTFA and the Customs Act to enhance the Canada Border Service Agency's authority to regulate the compliance of traders, report suspicions to law enforcement, and use regulatory tools to enforce compliance.
• Regarding white-label ATMs, the 2023 Fall Economic Statement broadens the PCMLTFA framework to apply to intermediary companies, known as 'acquirers,' offering cash withdrawal services for white-label ATMs. 
• To combat environmental crime, the 2023 Fall Economic Statement proposes to amend the PCMLTFA to enable FINTRAC to share intelligence with Environment and Climate Change Canada and the Department of Fisheries and Oceans.
• Finally, the 2023 Fall Economic Statement proposes to amend the PCMLTFA to improve FINTRAC's strategic intelligence products by allowing it to list names of foreign entities, including persons, and address technical inconsistencies and close loopholes.

Questions & Answers

Q. What is the 2023 Fall Economic Statement proposing in relation to financial crimes?

A. The 2023 Fall Economic Statement announces the government's intention to introduce legislative and regulatory measures to continue strengthening Canada's Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) framework, including to: address sanctions evasion, support operational effectiveness, combat trade-based financial crime and environmental crime, and expand the framework to address risks related to white-label Automatic Teller Machines (ATMs) and in the real estate sector. 

Q.  Why is the government proposing these legislative amendments?

A. The Government of Canada is committed to maintaining a strong AML/ATF Regime that protects Canadians and the integrity of financial system. 

The 2023 Fall Economic Statement proposes legislative amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and the Criminal Code to continue strengthening the AML/ATF framework with measures to address sanctions evasion, support operational effectiveness, combat trade-based financial crime and environmental crime, and expand the framework to address risks related to white-label ATMs.

Announcement in the 2023 Fall Economic Statement related to addressing risks in the real estate sector will be implemented exclusively via amendments to regulations under the PCMLTFA and are not included in the proposed bill. 

These proposals respond to findings of the Commission of Inquiry into Money Laundering in British Columbia, known as the 'Cullen Commission'.

Q.  Will these measures fix the problem of financial crimes in Canada? 

A. The rapidly evolving and complex nature of financial crime requires ongoing changes to the legislative and regulatory framework to provide effective tools to confront new money laundering and terrorist financing techniques.  

In recent years, the government has taken a series of measures and investments to strengthen and modernize the AML/ATF Regime, including announcements and commitments in Budget 2022 and Budget 2023. 

The 2023 Fall Economic Statement builds on previous measures by proposing legislative amendments to address sanctions evasion, improve investigations and prosecutions, combat trade-based financial crime, and expand the framework to address risks related to white-label ATMs.

The government takes financial crimes seriously and will continue to adapt and strengthen the AML/ATF Regime to respond to new and emerging challenges.  

Q. Why are changes to address sanctions evasion necessary?

A. Canada, and the international community, have applied aggressive sanctions to isolate Russia from the international financial sector and impose an economic cost on their unjustified and illegal invasion of Ukraine.

The Russia Elites Proxies and Oligarchs (REPO) Task Force has observed that Russia is employing complex methods to circumvent sanctions.

In Budget 2023, the government committed to return in the Fall Economic Statement with an update as to how the Financial Transactions and Reports Analysis Centre (FINTRAC) can play a greater role in combatting sanctions evasion.

The 2023 Fall Economic Statement proposes changes to ensure FINTRAC can use its expertise to effectively analyse their data holdings and flag suspected sanctions evasion to law enforcement as well as inform the financial sector of indicators of evasion.

Q.  Is FINTRAC capable of identifying sanctions evasion?

A. The 2023 Fall Economic Statementproposes to combat sanctions evasion by permitting FINTRAC to use its expertise to develop intelligence products, and, where appropriate, disclose its findings to law enforcement partners.

FINTRAC has an established track record of developing intelligence and public facing material based upon the analysis of information provided by reporting entities. 

Canada and its international partners, through the Russia Elites Proxies and Oligarchs (REPO) Task Force, released an advisory on March 9, 2023, highlighting trends in the methods employed by designated persons to evade sanctions, which share common characteristics with laundering money.

Since the illegal invasion of Ukraine, FINTRAC has released two bulletins on Russian money laundering trends and FINTRAC is well placed to undertake further work specific to sanctions evasion. 

Q. Why is the government proposing amendments to the Criminal Code in the 2023 Fall Economic Statement?

A. The government is proposing amendments to the Criminal Code to support the investigation and prosecution of financial crimes, including third party money laundering.

The Criminal Code contains Canada's offence of laundering proceeds of crime and a wide range of related offences.

It also sets out the investigative authorities relied on by law enforcement and a framework for dealing with proceeds of crime.

Q. Did the government consult Canadians on changes to the Criminal Code?

A. The government publicly released a consultation paper and solicited input from citizens and stakeholders over the course of summer 2023. The Department of Justice included a chapter on ideas for Criminal Code reforms and held roundtables and meetings with a variety of justice-sector stakeholders.

Among points raised by stakeholders in their feedback on the Criminal Code, most stakeholders recognized the need for up-to-date investigative measures for law enforcement provided that these are consistent with Charter-protected rights. Consultations also indicated some support for incremental reforms to the offence of laundering proceeds of crime.

Justice Canada continues to assess stakeholder input.  

Q. What amendments are proposed to the Criminal Code?

A.   The proposed amendments would:

• Add a legislated inference to the offence of laundering proceeds of crime to enable a court to infer that the accused had knowledge of the criminal origin of the property laundered based on the unusual nature of the accused's methods of dealing with the property, and adapt the specific evidentiary requirements relating to the criminal origin of the proceeds of crime. These changes aim to better respond to third party money laundering.
• Adapt the production order for financial data so that it more effectively applies to accounts relating to digital assets. 
• Update the special search, seizure and restraint provisions for proceeds of crime to better support the recovery of proceeds of crime while maintaining essential safeguards, including the Attorney General's role in bringing applications for seizure and restraint and the court's oversight role. 

Q. Are these changes consistent with rights and freedoms protected under the Canadian Charter of Rights and Freedoms?

A. The Minister of Justice will table a Charter Statement that will identify potential effects that these amendments may have on rights and freedoms guaranteed by the Charter. The Minister has also reviewed these amendments for inconsistency with the Charter as required by s. 4.1 of the Department of Justice Act.

Q. What is trade-related financial crime?

A. Trade-related financial crime is the process of disguising illicit funds and moving value between jurisdictions through international trade transactions in an attempt to legitimize their illicit origins. Complicit sellers and buyers in different jurisdictions use a variety of techniques to misrepresent the price, value, quantity, or quality of imports or exports to move the value across borders.

Q. What threat does trade-related financial crime pose to Canada?

A. The laundering of proceeds of crime through Canada's trade system threatens Canada's national and economic security, revenue collection, and international reputation. A 2020 assessment by the Canada Border Services Agency (CBSA) estimated that, at a minimum, hundreds of millions of dollars are laundered through trade to and through Canada each year.

Trade-related financial crime fuels global crime and terrorism by providing a mechanism to launder the proceeds of crime and evade international sanctions. These funds are used by often sophisticated threat actors who have the capability and the intention to perpetrate a variety of criminal acts against Canada and Canadians. 

Q. How will this help the CBSA and law enforcement address trade-related financial crime?

A. Although the CBSA can mitigate some risks at the border, it has no legal authority to address money laundering and terrorist financing. These legislative changes will provide CBSA the ability to: require people and entities who import or export goods to Canada to report and declare that these goods are not related to proceeds of crime; report suspicions of trade-related financial crime to law enforcement; and use regulatory tools to enforce compliance. Bringing forward these legislative changes now will allow the government to respond directly to one of the largest vulnerabilities identified by the Cullen Commission.

Q. Will the changes to address trade-related financial crime increase regulatory burden for legitimate companies?

A. Since this proposal relies on existing customs documents to assess compliance for goods under the PCMLTFA, it is unlikely to impose new regulatory burdens on traders conducting legitimate business activity.

Q. Is creating a Trade-Transparency Unit necessary?

A. Yes. Establishing a Trade-Transparency Unit (TTU) in the CBSA will allow Canada to enter into agreements with foreign governments and cross-reference trade data to identify anomalies that will assist in detecting patterns indicative of money laundering, the financing of terrorist activities, and sanctions evasion. A TTU will allow the CBSA to fully use their expertise in trade to protect Canada's trade system from those who want to exploit it.

Q. What is environmental crime?

A. Environmental crime refers to criminal offenses that harm the environment, including: illegal wildlife and natural resource harvesting, extraction, and trading; illegal waste dumping; and other pollution-related crimes. 

While the full scale of environmental crime is complex and its impacts are constantly evolving, it is among the most profitable crimes in the world, generating US$110-281 billion in criminal gains per year.

In Canada, as outlined in the 2023 Updated Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada, there is particular concern that organized crime groups have infiltrated the waste management sector. They may also be involved in the trafficking of electronic waste and importation of counterfeit products that do not meet Canada's environmental standards. There is also an established illicit market for certain Canadian species, including bears, moose, wolves, reptiles, and narwhals.

Q. How will the 2023 Fall Economic Statement combat environmental crime?

A. The 2023 Fall Economic Statement proposes amendments to the PCMLTFA to combat environmental crime by enabling FINTRAC to share financial intelligence with Environment and Climate Change Canada and the Department of Fisheries and Oceans, which have their own enforcement programs.

Q.  What are white-label ATMs? What are white-label ATMs acquirers?

A. White-label ATMs are Automated Teller Machines (ATMs) that are not owned or operated by a bank or credit union. Of the approximately 70,000 ATMs in Canada, roughly 43,700 are white-label ATMs. They are usually located in small retail locations, such as gas stations, bars, and convenience stores and do not display labels from financial institutions on the machine.

Following a 1996 Competition Bureau decision, privately-owned and operated white-label ATMs were allowed to access the Interac network by linking with "acquirers".

White-label acquirers are entities that connect white-label ATMs to a payment card network (e.g., Interac) to facilitate transactions.

Q. Are white-label ATMs vulnerable to money laundering?

A. Yes, the 2023 Updated Assessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada found that white-label ATMs are "highly vulnerable" to money laundering. White-label ATMs can be loaded with illicit cash, withdrawn by the public, while financial institutions reimburse the machine's owner with effectively 'clean' funds. In addition, companies owning and loading white-label ATMs for themselves, or for other legitimate businesses, may be criminally controlled.

A 2008 RCMP Strategic Intelligence Assessment concluded that organized crime groups had infiltrated the white-label ATM industry, and estimated $315 million, and potentially up to $1 billion, could be laundered through white-label ATMs each year. The RCMP continues to report that white-label ATMs are suspected of being associated with criminality in RCMP investigations. 

Q. Who else has commented on money laundering risks associated with white-label ATMs? What did they recommend?

A. The Financial Action Task Force (FATF), an international standard setting body on AML/ATF, highlighted white-label ATMs as a notable gap in Canada's AML/ATF regime.

In 2018, the House of Commons Standing Committee on Finance also recommended that the white-label ATM sector be included in the PCMLTFA framework.

British Columbia's 2022 Cullen Commission also examined white-label ATMs, but ultimately recommended against provincial regulation, noting that white-label ATM regulation would be more appropriate at the federal level.

Q. Why only measures for title insurers and real estate representatives? Where can these legislative amendments be found?

A. Title insurers have access to a wide variety of information on the insured individual or entity and the insured property, giving them a unique line of sight into real estate transactions.

Successive reviews of Canada's AML/ATF framework, including findings from the Cullen Commission, have supported title insures being subject to formal AML/ATF obligations.

Real estate representatives are already regulated under the PCMLTFA. The proposal would strengthen real estate representatives' obligation to verify the identity of an unrepresented party in a transaction and determine if there is a third party involved. This would help address the opaque nature of real estate transactions involving unrepresented parties.

Announcements related to title insurers and real estate representatives will be implemented exclusively through amendments to regulations under the PCMLTFA and are not included in the proposed bill. 

Q. Why is FINTRAC allowed to name foreign entities, including persons, but not Canadians in its strategic intelligence products?  Does it raise any privacy concerns?

A. The ability to name foreign entities, including persons, will enable FINTRAC to improve the effectiveness of its intelligence products, which help to identify and respond to international threats.  The change only pertains to FINTRAC's strategic intelligence products. It does not change what information FINTRAC is already allowed to receive from reporting entities.

FINTRAC is prohibited from naming any Canadian citizen, permanent resident, person in Canada or entity with a place of business in Canada in its strategic intelligence products. This ensures that Charter and privacy rights continue to be respected.

Q. What technical amendments are included in this package, and how will they strengthen the AML/ATF framework?

A. Technical amendments included in the 2023 Fall Economic Statement include:

1. an amendment to ensure that the recently implemented structuring offence applies to casino specific reporting;
2. an amendment to ensure consistent language on account holders for electronic funds transfer reporting; and
3. amendments that address a typo in the 2023 Budget Implementation Act

These technical amendments close potential gaps in the AML/ATF framework and help to ensure consistent application of rules across sectors.

Overview

The Federal-Provincial Fiscal Arrangements Act (FPFAA) provides authority for Canada to pay provinces and territories amounts in respect of major transfers and tax administration agreements or arrangements. The Budget Implementation Act, 2023, No. 1 introduced a new requirement (under Section 42) to publish the details of all amounts authorized to be paid under the FPFAA on the Department of Finance's website as soon as feasible after payment. 

The implementation of the requirement presents certain challenges given the broad scope of payments that it applies to and the lack of specificity on the details required.

This measure would amend Section 42 of the FPFAA to only require the publication of information on payments related to the major transfers. These are made under Parts I (Equalization), I.1 (Territorial Formula Financing), II (Fiscal Stabilization), and V.1 (Canada Health Transfer and Canada Social Transfer) of the FPFAA. This amendment also specifies the details to be published as being the amount, recipient name and date of each payment, and the vehicle for publication as being a Government of Canada website. The amendment would be deemed to have come into force on June 22, 2023.

The specification of the payment details and the vehicle for publication aims to facilitate the operationalization of the requirement and would result in increasing the frequency of existing reporting for the regular payments for major transfers, and timeliness of publication of one-time transfer payments.

By carving out payments related to tax administration agreements and arrangements under the FPFAA, the proposed amendment would address concerns with publishing details on such payments. Under various tax administration agreements, Canada makes payments to a province, territory or Indigenous government as the administrator of that government's tax system. The initial enactment of Section 42 did not provide the opportunity to consult with and obtain consent from provincial, territorial and Indigenous governments, whose tax revenues would be subject to publication in detail by the federal government. There is also a risk of direct or indirect disclosure of confidential taxpayer information when publishing payment information due to some payments being very small. The frequency of payments and the varying basis upon which they are issued under the different tax arrangements could result in a complex landscape for a public audience to navigate, risks data misinterpretation in the absence of supports and imposes a new, un-resourced administrative burden for reporting purposes. Tax-related payments are already published annually as part of Canada's Public Accounts.

Key Messages

• The purpose of the amendment to the Federal-Provincial Fiscal Arrangements Act is to clarify the Government's intention to publish details on payments related to major transfer programs to fulfill the publication obligations set out in section 42.
• The proposed amendment ensures that Canadians will have access to up-to-date detailed information on Equalization and other major transfers payments to provinces and territories. 
• The proposed amendment confirms that payment information will be released for major transfers and specifies the details and the tool to be used for publication.
• The publication obligation under Section 42 is not intended to apply to tax-related payments made by Canada to provinces, territories and Indigenous governments, as the administrator of their tax system. Publication of detailed information on these payments raises concerns in terms of disclosure of sensitive taxpayer information, appropriate prior consultations with impacted governments and potential misinterpretation of information being provided.

Questions & Answers

Q. Is the Government of Canada complying with its obligations under section 42?

A. The Department of Finance has taken steps since September 2023 to publish on its website details of monthly payments made to provinces and territories for the major transfers.  The monthly payments since April 1, 2023 have been posted on the Department of Finance's website.

An amendment is being proposed to clarify that section 42 does not apply to payments made to provincial, territorial and Indigenous governments in relation to tax administration agreements and arrangements.

Q. Which payments is the Government planning to exclude from publication?

A. The proposed amendment would focus on the publication of payment information on major transfers and would not apply to tax administration payment streams under Parts III, III.1, III.2, III.3, IV, IV.01, IV.1, IV.11, IV.2, IV.3, IV.4, VII, and VIII of the Federal-Provincial Fiscal Arrangements Act. Excluded tax arrangements include Tax Collection Agreements, Indigenous tax administration agreements, sales and excise tax agreements (e.g., Comprehensive Integrated Tax Coordination Agreements for GST/HST, Coordinated Cannabis Taxation Agreements and Coordinated Vaping Product Taxation Agreements); Reciprocal Taxation Agreements; and revenue sharing arrangements for certain federal taxes.

Information related to these tax arrangements is published in aggregated form annually in the Public Accounts of Canada.

Q. Why is the Government changing its approach so soon after enacting the publication requirement? Is the public not entitled to access information of all payments under the FPFAA?

A. The proposed amendments are necessary to clarify the payment streams and specify the information to be published. This will ensure that Canadians can access key, up-to-date detailed information on payments of Equalization and major transfers to provinces and territories.

Payments to provincial, territorial and Indigenous governments are largely related to the direct administration of taxes by the federal government on behalf of these governments. Many of the tax payments, unlike transfer payments, are fiscally neutral and do not have a net impact on the federal fiscal framework. There are concerns that publishing detailed information on tax-related payments could potentially disclose directly or indirectly sensitive taxpayer information (especially for Indigenous governments where there can be a small number of tax filers). As well, the legislative amendment did not provide for consulting and obtaining the approval from Indigenous governments and provinces and territories to release details related to their tax revenues. The measure also imposes an administrative burden across all payment arrangements that are in place with those governments.

Of note, the Government of Canada already publishes in aggregated form information on tax payments annually in the Public Accounts of Canada.

Overview

Part 5 of Division 10 amends the Public Sector Pension Investment Board Act to expand the Board of Directors from 11 to 13 members, with the two new seats to be filled by representatives of organized labour.

Amendments come into force upon Royal Assent.

Key Messages

In Budget 2023, the Government re-affirmed its Budget 2022 commitment to add two seats to the Board of Directors of the Public Sector Pension Investment Board (PSPIB) for representatives of organized labour, in keeping with the current recruitment rules for filling positions for board members.

Board Composition

• As announced in Budget 2022 and 2023, the Government is proposing to move forward with the expansion of the membership on the Public Sector Pension Investment Board from 11 to 13 members, with the Board's new seats filled by representatives of organized labour.
• The PSPIB is founded on the principle of independent, professional management of the investments for the pension plans in the interest of the beneficiaries and contributors.
• Its Board was established to support its arms-length relationship that results in investment decisions which are focused on maximising return without undue risk of political or outside influence.
• Amendments to the Board membership seek to preserve the high threshold of qualification required to participate on the Board, while permitting greater representation on it. 

Questions & Answers

Q. Why is the Government expanding the Public Sector Pension Investment Board (PSPIB)?

A. The federal government is committed to continuously improving the governance, transparency, and accountability of its pension plans.  As first announced in Budget 2022, and reaffirmed in Budget 2023, the government is proposing to add two seats to the PSPIB board of directors for representatives of organized labour, in keeping with the current recruitment rules for filling positions for board members.

Q. Will these amendments increase the accountability of the PSPIB for its investment decisions?

A. The PSPIB is a non-agent Crown corporation established under the PSPIB Act that is accountable to Parliament through the President of the Treasury Board. It is one of Canada's largest pension investment managers with more than $243 billion in net assets under management (as of March 31, 2023). PSPIB operates independently from the federal government. Under this governance structure, its board of directors is accountable for managing the affairs of the organization. Expanding the board of directors would allow for representatives of organized labour to share accountability in managing the PSPIB's affairs.

Q. What process would be in place to ensure that the new Board members represent organized labour?

A. All PSPIB directors are appointed by the Governor in Council on the recommendation of the President of the Treasury Board. The recommendation must be made from a list of qualified candidates identified by the statutory Nominating Committee, which currently includes bargaining agent representation.

These PSPIB Act amendments would require that, when considering potential candidates to fill the two new positions on the Board, the Nominating Committee must consider any qualification factors provided to it by the portion of the National Joint Council of the Public Service of Canada that represents employees in addition to the established criteria under the PSPIB Act. As well, after forming the list of qualified candidates to recommend to the President of the Treasury Board, the Nominating Committee must consult the representatives on the National Joint Council once more on the list to ensure the representation of organized labour.

Q. What criteria must new Board members meet before taking their seat on the Board?

A. All directors of the PSPIB are Governor-in-Council appointments. This means that the obligations related to that kind of appointment would continue to exist for these proposed two new directors. The Government of Canada is also committed to ensuring that highly qualified, skilled, and diverse individuals are selected. The Nominating Committee seeks persons with proven financial ability or relevant work experience to ensure that the Board can meet its objectives. It uses a rigorous candidate selection process to vet candidates next to the appropriate merit and disqualification criteria, including those legislated in the PSPIB Act, as well as any additional criteria it determines to help ensure that the Board of Directors remains engaged, relevant, balanced, and reflective of Canada's diversity.

All directors are subject to the same grounds for disqualification. This means that a candidate would not qualify to sit on the Board if they are: 

• under 18 years of age
• of unsound mind
• not a natural person
• an employee of the Board 
• an agent or employee of His Majesty in right of Canada
• a member of the Senate or House of Commons or a member of provincial legislature
• anyone who is entitled to or is receiving a pension benefit from one of the four public sector pension plans 
• anyone who is an agent or employee of a foreign government
• anyone who is not a resident of Canada 

These criteria are in place to protect the independence of the PSPIB and maintain its distinct role in the governance structure of the public sector plans. 

Q. Why increase the size of the Board to only introduce representation from organized labour? Why not capture other pension plan stakeholder interests, such as including representation for retirees and pensioners? 

A. The PSPIB Act disqualifies certain persons from serving as Board directors, including employees of the federal public service and those entitled to benefits from the pension plans to ensure the independence and impartiality of the PSPIB.

Q. What is the associated cost of the addition of the 2 seats? 

A. Provisions of the PSPIB Act require the Board to set the remuneration for its directors at a level comparable to the compensation received by persons having similar responsibilities and engaged in similar activities. Currently, the annual retainer for each director, other than the Board Chair, is $75,000. In addition, attendance fees and certain travel fees, each in the amount of $1,500, are paid for each Board or committee meeting. 

Overview

This measure will constitute the Department of Housing, Infrastructure and Communities under Schedule I of the Financial Administration Act.

The Department of Housing, Infrastructure and Communities Act formalizes the mandate and role of the department to advance national housing outcomes, reduce and prevent homelessness, and support and promote public infrastructure in order to foster inclusive, sustainable, and prosperous communities. It establishes two statutory Ministers – a Minister of Infrastructure and Communities and a Minister of Housing – both supported by one department and a single deputy head, and enabled by authorities to:

• establish, recommend, coordinate and implement initiatives, programs and projects;
• make grants and contributions;
• collaborate or enter into agreements with other orders of government, organizations, persons or other entities;
• undertake, coordinate and promote research activities;
• collect, analyze, interpret, publish or distribute information; and
• establish advisory committees and provide for their remuneration and reimbursement of expenses.

The implementation of this Act cements the integral links between public infrastructure, housing and homelessness and will help ensure the department is equipped to deliver its broadened mandate, which has expanded and evolved since the creation of the Office of Infrastructure of Canada in 2002.

The coming-into-force date of the measure will be effective immediately upon the Royal Asset of the Fall Economic Statement Implementation Act, 2023.

Key Messages

• This legislation establishes the Department of Housing, Infrastructure and Communities and its mandate to advance national housing outcomes, reduce and prevent homelessness, and support and promote public infrastructure in order to foster inclusive, sustainable, and prosperous communities.  
• Through this legislation, Infrastructure Canada will become the Department of Housing, Infrastructure and Communities. The Act will establish a Minister of Infrastructure and Communities and a Minister of Housing, both supported by the Department and a single deputy minister, and the authorities necessary to support them in carrying out their roles and responsibilities.
• This legislation will set out the powers, duties, and functions of both Ministers and provide a framework for the activities to be undertaken by the department, notably managing government programs, distributing funding, convening partners, conducting research, collecting and publishing data, and establishing and remunerating advisory committees or councils. 
• Enabling legislation will not create additional bureaucracy. Rather, it demonstrates that the federal government is aligning itself to address infrastructure and housing priorities in an integrated fashion, and ensures the department is equipped to deliver on its broadened mandate.
• The Department of Housing, Infrastructure and Communities Act supports greater coordination between all orders of government, in partnership with developers, community housing providers, Indigenous peoples and the business community, and meaningful collaboration that will help address the housing crisis and support integrated planning for future infrastructure investments.
• Growing and vibrant Canadian communities require affordable homes as well as other infrastructure like public transit, modern water and wastewater systems, and community centres. The Department of Housing, Infrastructure and Communities will support the government improving housing outcomes and enhancing public infrastructure.

Questions & Answers

Q. Why does Infrastructure Canada need departmental legislation?

A. Infrastructure Canada, created in 2002, is currently designated as an Office, defined by the Financial Administration Act as a division or branch within the Government of Canada. Its authorities stem from a 2004 Order in Council that allow for the Minister to enter into transfer payment agreements and contracts related to infrastructure initiatives in Canada.

Since its creation, Infrastructure Canada's mandate has expanded considerably, most recently with the addition of housing and homelessness policy and program development, and its role has evolved from a passive funder of infrastructure projects to a more strategic and informed investor.

Through this legislation, Infrastructure Canada will become the Department of Housing, Infrastructure and Communities. The Act will set out clear areas where the Department is responsible for driving federal outcomes and for supporting communities across Canada. Enabling legislation will help ensure the department is equipped to deliver a broadened mandate and signal the alignment of housing, homelessness, and infrastructure under one portfolio.

Q. Will legislation help address the housing crisis?

A. Canada is facing serious housing supply and affordability challenges, and the federal government is mobilizing all the tools at its disposal to help alleviate these pressures, while recognizing the provincial and municipal jurisdiction in this matter and working collaboratively to address this issue. Departmental legislation will send a clear signal that Infrastructure Canada is a committed and long-term partner in the housing, homelessness, and public infrastructure spaces, while acknowledging that public infrastructure and housing objectives are best achieved through cooperation between governments and the meaningful involvement of local communities.    

Establishing a federal department with responsibility for housing, demonstrates that the government is committed to address this priority in an integrated way. Legislation is not a solution to the housing crisis, but provides a mechanism to cement the important link between housing and infrastructure and underscores the role of public infrastructure investments in complementing and strengthening federal action on housing and homelessness priorities.

Q. How does the legislation address homelessness?

A. A key element of the Minister of Housing's mandate under this Act is to reduce and prevent homelessness across Canada. By integrating housing, homelessness, and infrastructure under one portfolio, the legislation acknowledges the important links between them, and that investments in one area can be mutually-reinforcing.

The aims of the legislation with respect to homelessness are underpinned by key programs and initiatives such as Reaching Home: Canada Homelessness Strategy, the Veteran Homelessness Program and other National Housing Strategy initiatives focused on increasing affordable housing options for Canadians.

Q. How does the proposed legislation benefit Canadians?

A. The Department of Housing, Infrastructure and Communities Act brings a number of benefits for Canadians. The legislation will:

1. establish a clear role for the department in supporting communities across Canada through investments in infrastructure that provide services and benefits directly accessible to and for use by the public;
2. reinforce the important link between public infrastructure and housing, and underpin the federal commitment to leverage infrastructure investments to increase housing supply and affordability – an issue of keen interest to Canadians;                                
3. enable the delivery of departmental activities and investments that support the creation of complete, inclusive, and environmentally sustainable communities

Q. Will the legislation impact Indigenous rights?

A. Pursuant to the United Nations Declaration of the Rights of Indigenous Peoples Act (UNDA), a review of the legislation was undertaken by departmental officials in consultation with Department of Justice officials, which did not identify any potential inconsistencies with, or impacts on Indigenous rights or interests, as set out in the UN Declaration.

The legislation will formalize the current role and activities of the department, and will not displace the role or programming of Canada Mortgage and Housing Corporation (CMHC), Infrastructure Canada (INFC) or other federal departments, notably Indigenous Services Canada and Crown Indigenous Relations and Northern Affairs Canada.

Q. Would the establishment of a Minister of Housing override existing acts?

A. The Act establishes in statute a Minister of Housing, with powers, duties and functions that will complement, but not override, the housing-related authorities of other Ministers that are set out in existing legislation. For example, the powers, duties and functions of the Minister of Housing will not carve out (a) the Minister of Finance's mandate under the National Housing Act; (b) existing authorities under the Canada Mortgage and Housing Corporation Act; or, (c) the Minister of Families, Children and Social Development's s mandate as it relates to social development and the Poverty Reduction Act, recognizing the helpful mandate overlap between homelessness and poverty reduction.

The Act will amend the National Housing Strategy Act (NHSA) to transfer responsibility of the administrative support for the National Housing Council from CMHC to the Department of Housing, Infrastructure and Communities, within two years after the Act comes into force. This amendment is proposed to support the transition of housing policy and program development from CMHC to Infrastructure Canada.

Q. How does the department deliver on its mandate to support communities?

A. The Department of Housing, Infrastructure and Communities Act provides a mandate for the Department to advance national housing priorities, reduce and prevent homelessness, and support and promote infrastructure projects and initiatives that are in the public interest.

The inclusion of communities in the Department's mandate recognizes that housing and public infrastructure are interrelated and essential to fostering prosperous, inclusive and environmentally sustainable communities. Communities will be asked to develop long-term plans that clearly note how they will leverage their infrastructure investments to drive housing outcomes.

The department will use an integrated planning process, which asks communities to develop Housing Needs Assessments that provide the Government of Canada with crucial baseline data on local and regional housing needs. Moving forward, the department will use communities as a unit of analysis in our assessment of the evolving needs and priorities of Canada's infrastructure that will help to link our investments with outcomes.

Infrastructure Canada is driving towards investing in place-based solutions that are attuned to the regional and local needs of Canadian communities and integrate supports and services within the built environment. Through this approach, housing, homelessness, and infrastructure projects work in tandem to improve the quality of life of Canadians.

For example, building transit near housing and community centres makes it easier for people to get from their homes to work, health services and recreational activities while minimizing the environmental impact of our transit systems. Linking climate resilience infrastructure to housing ensures that our communities are protected from the impacts of climate change. Projects aimed at reducing homelessness take into account local community infrastructure and services in order to ensure they truly meet the needs of people experiencing homelessness. All of these things contribute to a sense of community, where people have the services and supports needed to thrive in their everyday lives.

Q. Why are there separate roles for a Minister of Housing and a Minister of Infrastructure and Communities?

A. The legislation establishes two distinct Ministerial roles – one for Housing and one for Infrastructure and Communities. The Minister of Housing is responsible for advancing national housing priorities and reducing and preventing homelessness. The Minister of Infrastructure and Communities is responsible for supporting and promoting infrastructure projects and initiatives that are in the public interest.

This approach allows for the current context where a single Minister is responsible for exercising the powers, duties and functions of both roles, as well as a future decision to appoint two ministers, with neither subordinate to the other.

This structure highlights the importance of each ministerial mandate, provides permanency for the roles, while preserving the Prime Minister's flexibility on Cabinet design. A similar approach is found in the enabling legislation for other federal departments, notably Economic and Social Development Canada, Global Affairs Canada, and Crown-Indigenous Relations and Northern Affairs Canada.

Q. Will this Act impact provincial / territorial jurisdiction in infrastructure and

housing?

A. The legislation will respect provincial and territorial (PT) jurisdiction with respect to housing, infrastructure and communities. Legislation will help clarify the federal role in housing and infrastructure, while signaling the importance of greater collaboration with other levels of government. Canada is facing serious housing supply and affordability challenges, and the federal government is mobilizing all the tools at its disposal to help alleviate these pressures, while recognizing the provincial and municipal jurisdiction in this matter and working collaboratively to address this issue. Departmental legislation demonstrates that the department is a committed and long-term partner in the housing and public infrastructure space, while acknowledging that public infrastructure and housing objectives are best achieved through cooperation between governments and the meaningful involvement of local communities.

Q. Will this proposed legislation result in new spending or bureaucracy?

A. Legislation is a non-spending measure that will not cost taxpayers more money. It is not growing the federal bureaucracy; rather, it clarifies the mandate of Infrastructure Canada - a department that already exists.

Integrating housing and infrastructure under one portfolio creates synergies and fosters the delivery of infrastructure investments that directly supports housing outcomes (i.e., supply, affordability, complete communities). Departmental legislation aligns with the recommendation of the Senate Standing Committee on National Finance that Infrastructure Canada be designated as the federal infrastructure funding department.

Q. How does this legislation impact the role of the Canada Infrastructure Bank and alternative finance?

A. The Canada Infrastructure Bank will continue to be governed by the Canada Infrastructure Bank Act; however, the Department of Housing, Infrastructure and Communities Act recognizes the role and importance of promoting the use of innovative financial tools in attracting investment from the private sector and institutional investors in public infrastructure projects. Wherever possible, current and future Infrastructure Canada housing and infrastructure programs will encourage and incent the use of alternative finance investments, including through the Canada Infrastructure Bank, to attract private capital and reduce fiscal pressures on governments.

Q. Why does the legislation include amendments and repeals to existing legislation?

A. The Act includes transitional, amendment, repeal and coming into force provisions needed to ensure a seamless transition from the Office of Infrastructure of Canada to the Department of Housing, Infrastructure and Communities on the day the Act comes into force.

This includes transitional provisions to ensure that employees, supplies, and appropriations transfer over into the new structure as well as consequential amendments to ensure that:

• authorities for the Minister of Infrastructure and Communities for statutory programs and funds (i.e. the Canada Community-Building Fund) are consolidated within this Act;
• references to the Office of Infrastructure of Canada are removed from other legislation (e.g. Financial Administration Act, Privacy Act, Access to Information Act) and references to the Department of Housing, Infrastructure and Communities are added; and,
• responsibility for the National Housing Council secretariat function is transferred from the Canada Housing and Mortgage Corporation to the Minister of Housing (supported by the Department of Housing, Infrastructure and Communities).

The Act also includes the repeal of the Canada Strategic Infrastructure Fund Act; all of the funding under the Canada Strategic Infrastructure Fund has been fully committed, making existing authorities under the Canada Strategic Infrastructure Fund Act obsolete.

Overview

The proposed measure would respond to the Government of Canada's commitment to "introduce a new 15-week benefit for adoptive parents," as outlined in the 2021 mandate letter to the then Minister of Employment, Workforce Development and Disability Inclusion.

Amendments to the Employment Insurance Act

Division 12 of Part 5 would amend the Employment Insurance Act to introduce a new, shareable 15-week benefit for parents who qualify for Employment Insurance (EI) and who become parents of a child(ren) through adoption or surrogacy.

The benefit would focus on responsibilities carried out by parents related to the placement of a child(ren) for the purpose of adoption or related to the arrival of a child(ren) under their care in situations such as surrogacy. As such, parents could receive the benefit within a period that would begin the earlier of five weeks prior to the week of the expected placement of the child(ren) for the purpose of adoption or arrival of the child(ren) into their care or the week in which the actual placement or arrival occurs. Benefits would be payable up to 17 weeks after the week of the actual placement or arrival. This period would provide flexibility to parents to claim the benefit in a way that best suits their needs.

Parents could combine the new benefit with the parental benefit, making the total number of weeks of income support the same as that of birth parents who can combine maternity and parental benefits.

The benefit would come into force on a day fixed by Order of the Governor in Council and would be available to claimants who experience a new placement or a new arrival of a child(ren) on or after the coming into force date.

Amendments to the Canada Labour Code

Division 12 of Part 5 would amend Part III (Standard Hours, Wages, Vacations and Holidays) of the Canada Labour Code to provide employees in the federally regulated private sector with up to 16 weeks of unpaid leave for carrying out responsibilities related to the placement of a child into their care. The leave could be taken by an employee who adopts a child or who is the intended parent of a child born through surrogacy.

The objective of the leave would be to ensure that employees accessing the new benefit under the Employment Insurance Act could take job-protected leave while carrying out responsibilities related to the placement of a child into their care. Employees would have the flexibility to take their 16-week leave within a period of up to six weeks before the week of the expected date of the placement and no later than 17 weeks following the week of the actual date of the placement. Additionally, if the child is placed more than six weeks in advance of the expected date of placement, an employee could begin the leave on the week of the actual date of placement. The 16-week leave period will ensure that employees benefit from job protection during the waiting period for the EI benefit and for the duration of the period during which they will receive the benefit.

The leave would come into force at the same time as the Employment Insurance benefit.

Key Messages

• In November 2023, the Fall Economic Statement announced that a new Employment Insurance (EI) benefit would be introduced to support approximately 1,700 Canadian families each year that form their families through adoption or surrogacy. This new benefit would address the 2021 mandate commitment of the then Minister of Employment, Workforce Development and Disability Inclusion to "introduce a new benefit for adoptive parents." Following this, the Fall Economic Statement Implementation Act proposed amendments to the EI Act that would be required to implement this new benefit, along with corresponding changes to the Canada Labour Code to ensure job-protected leave.

Amendments to the Employment Insurance Act

• The new EI benefit would provide 15 weeks of shareable income support to parents who qualify for EI and who become parents through adoption or surrogacy.
• The benefit would focus on the responsibilities carried out by parents related to the placement of a child(ren) for the purpose of adoption or, in situations such as surrogacy, related to the arrival of a child(ren) under their care.  
• To ensure eligible parents can access the benefit in a way that best suits their needs, the benefit would be payable during a period beginning the earlier of five weeks prior to the week of the expected placement of the child(ren) for the purpose of adoption or the arrival of the child(ren) into their care, or the week of the actual placement or arrival. It could be paid up to 17 weeks after the week of the actual placement or the arrival.
• The EI program is designed to be inclusive of the different ways families are formed in Canada. The various types of placements for the purpose of adoption covered under the Employment Insurance Act for parental benefits would also apply to this new benefit, including those who adopt under the laws governing adoption in the province in which they reside, Indigenous customary adoptions, and placements under a foster-to-adopt or other similar programs. Parents through surrogacy who do not have to engage in a formal adoption process would also be covered.
• Parents through adoption or surrogacy could combine the new benefit with the parental benefit, making their total number of weeks of income support the same as that of birth parents who can combine maternity and parental benefits. Parents who choose standard parental benefits (of up to 40 weeks of benefits paid at a rate of 55% of average weekly insurable earnings) could share up to 55 weeks of benefits in total. Parents who choose the extended parental benefits (of up to 69 weeks paid at rate of 33% of average weekly insurable earnings) could share up to 84 weeks of benefits in total.
• Introducing the new EI benefit would bring EI more in line with benefits offered through the Quebec Parental Insurance Plan through the welcome and support benefit relative to an adoption and the adoption benefit. The Government of Canada would continue to work with the Government of Quebec to ensure continued coordination.

Amendments to the Canada Labour Code

• The Government proposes to amend the Canada Labour Code to align with the new EI benefit so that employees in the federally regulated private sector can take up to 16 weeks of unpaid job-protected leave while carrying out responsibilities related to the placement of a child into their care. The leave would support employees who are adopting a child or who are the intended parent of a child born through surrogacy.
• The purpose of the leave would be to ensure that employees accessing the new EI benefit can take job-protected leave while carrying out responsibilities related to the placement of a child into their care. More than one employee can share the leave, for a total of 16 weeks.
• Like the EI benefit, the leave is intended to be inclusive of the different ways families are formed and would be available to employees who adopt a child under the laws governing adoption in the province in which they reside, as well as employees who adopt a child through Indigenous customary adoptions, foster-to-adopt programs or other similar programs.
• Employees would have the right to take the leave no earlier than six weeks before the week of the expected date of the placement and no later than 17 weeks following the week of the actual date of the placement. Additionally, if the child is placed more than six weeks in advance of the expected date of placement, an employee could begin the leave on the week of the actual date of placement. This period ensures that employees benefit from job protection during the waiting period for the EI benefit and for the duration of the period during which they would receive the benefit.
• The leave for placement of a child could be combined with parental leave. An employee who decides to take both leaves could take a total of 77 weeks. If multiple employees are sharing the leaves, the combined leaves would be 85 weeks.