Language selection

Government of Canada / Gouvernement du Canada

Search

Briefing binder created for the Deputy Minister of Finance on the occasion of his appearance before the Standing Committee on Finance on March 21, 2024 on 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, and the Main Estimates 2024-25

Previous

On this page:

Carbon Capture, Utilization, and Storage Investment Tax Credit

Issue

Bill C-59 would implement the Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credit, a refundable investment tax credit for taxable Canadian corporations that incur eligible CCUS project expenses.

Key points

Anticipated Questions and Answers

  1. Is the investment tax credit for CCUS a fossil fuel subsidy?

    The investment tax credit for carbon capture, utilization and storage is not an inefficient fossil fuel subsidy.

    Under the government's Inefficient Fossil Fuel Subsidies Assessment Framework, the measure is efficient as it both enables significant net greenhouse gas emissions reductions in Canada and supports abated production processes (with the captured CO2 not being used for the purposes of enhanced oil recovery).

    The government is committed to phasing out or rationalizing inefficient fossil fuel subsidies.

  2. Why is enhanced oil recovery explicitly excluded?

    The government is supporting the development and adoption of CCUS technologies to decarbonise industry and reduce Canadian GHG emissions. The tax credit is not intended to be a support to increase oil production.

    As such, it will only be provided to the extent that projects send captured CO2 to eligible uses such as dedicated geological storage or storage in concrete.

  3. Why does the CCUS Investment Tax Credit extend out to 2040 while the other clean economy Investment Tax Credits extend only to 2034?

    A longer availability period for the CCUS Investment Tax Credit reflects the fact that CCUS projects typically have longer planning and construction timelines. While costs of employing the technology may come down in the future, it is important that the technology continue to advance in the context of net zero emissions by 2050, being one of the few technologies that can achieve negative emissions.

Background

The CCUS Investment Tax Credit was announced in Budget 2021 with design details being proposed in Budget 2022. Budget 2023 introduced further enhancements to the tax credit, including an expansion of eligible equipment and the addition of B.C. as an eligible jurisdiction.

Significant consultations with stakeholders, which have taken place over the course of 2021 through 2023, have informed the design of the investment tax credit.

Once legislated, the tax credit will be retroactively available to businesses that have incurred eligible expenses, as of January 1, 2022.

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

Credit rates would be reduced by 50 per cent over the period from 2031 through 2040 with the tax credit is no longer available after 2040.

Eligible CO2 uses include dedicated geological storage and storage of CO2 in concrete, but do not include enhanced oil recovery.

The investment tax credit would work in tandem with other incentives to invest in CCUS under the government's environmental framework, including regulatory measures such as carbon pricing and the Clean Fuel Regulations and other government funding that may be available to support decarbonisation.

Labour requirements would be attached to the CCUS ITC.

Delivery Timeline for Clean Economy Investment Tax Credits

The clean economy investment tax credits will be implemented as follows, subject to the results of consultations. This table reflects updates since the 2023 Fall Economic Statement:

Carbon Capture, Utilization, and Storage (CCUS):

  • Enabling legislation was introduced in Parliament on November 30, 2023, in Bill C-59.
  • The tax credit would be available from January 1, 2022.

Clean Technology:

  • Enabling legislation was introduced in Parliament on November 30, 2023, in Bill C-59.
  • The tax credit would be available from March 28, 2023.

Clean Hydrogen:

  • Consultations on draft legislation were held from December 20, 2023, to February 5, 2024.
  • The government is targeting to introduce legislation in Parliament in early 2024.
  • The tax credit would be available from March 28, 2023.

Clean Technology Manufacturing:

  • Consultations on draft legislation were held from December 20, 2023, to February 5, 2024.
  • The government is targeting to introduce legislation in Parliament in early 2024.
  • The tax credit would be available from January 1, 2024.

Clean Electricity (Except for Publicly-Owned Utilities):

  • Design and implementation details will be published in early 2024.
  • Consultations on draft legislation will launch in summer 2024.
  • The government is targeting to introduce legislation in Parliament in fall 2024.
  • The tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Clean Electricity (For Publicly-Owned Utilities):

  • Consultations with provinces and territories will take place in 2024.
  • The government is targeting to introduce legislation in Parliament in fall 2024.
  • The tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Expanding Eligibility for the Clean Technology and Clean Electricity Investment Tax Credits to Support Using Waste Biomass to Generate Heat and Electricity:

  • Consultations on draft legislation will launch in summer 2024.
  • The government is targeting to introduce legislation in Parliament in fall 2024.
  • The expansion of the Clean Technology investment tax credit would be available from the day of the 2023 Fall Economic Statement.
  • The expansion of the Clean Electricity investment tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Labour Requirements

Budget 2023 announced that labour requirements to pay prevailing union wages and provide apprenticeship training opportunities will need to be met in order to receive the maximum credit rate of the Clean Technology, Clean Hydrogen, Clean Electricity, and CCUS investment tax credits.

  • Legislation to implement the labour requirements was introduced in Parliament on November 30, 2023, in Bill C-59.
  • The effective date for the labour requirements will be November 30, 2023.

Carbon Capture, Utilization and Storage Investment Tax Credit

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:

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.

Questions & Answers

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

  1. 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.

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

  1. 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.

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

  1. 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.

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

  1. 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.

  1. Why is enhanced oil recovery explicitly excluded?
  1. 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.
  1. How many companies are expected to claim the investment tax credit?

  1. 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.

  1. Why are dedicated geological storage and storage of CO2 in concrete the only eligible uses?
  1. 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.
  1. When will taxpayers be able to claim the investment tax credit?
  1. 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.

Clean Technology Investment Tax Credit

Issue

Bill C-59 would implement the Clean Technology Investment Tax Credit, a 30 per cent refundable investment tax credit to incent the adoption of clean technologies and support Canada's emissions reduction targets and achieving net-zero emissions by 2050.

Key points

Anticipated Questions and Answers

  1. *Redacted*

  2. When will the expansion of the Clean Technology and Clean Electricity ITCs to waste biomass systems be implemented?

    The 2023 Fall Economic Statementannounced that the government will target introducing enabling legislation for this expansion in Fall 2024, and that consultations on this legislation will take place in Summer 2024.

    Once legislated, the expansion of the Clean Technology ITC would be available from the day of the 2023 Fall Economic Statement (November 21, 2023) and the expansion of the Clean Electricity ITC would be available from the day of Budget 2024 for projects that did not begin construction before the day of Budget 2023 (March 28, 2023).

  3. *Redacted*

  4. Why is [insert technology] not eligible for the credit? Does the government intend to add new technologies over time?

    Going forward, the government will continue to review eligibility for relevant technologies, including additional ones.

Background

The Clean Technology Investment Tax Credit was announced in the 2022 Fall Economic Statement.

Labour requirements would be attached to the Clean Technology ITC.

Delivery Timeline for Clean Economy Investment Tax Credits

The clean economy investment tax credits will be implemented as follows, subject to the results of consultations. This table reflects updates since the 2023 Fall Economic Statement:

Carbon Capture, Utilization, and Storage (CCUS):

  • Enabling legislation was introduced in Parliament on November 30, 2023, in Bill C-59.
  • The tax credit would be available from January 1, 2022.

Clean Technology:

  • Enabling legislation was introduced in Parliament on November 30, 2023, in Bill C-59.
  • The tax credit would be available from March 28, 2023.

Clean Hydrogen:

  • Consultations on draft legislation were held from December 20, 2023, to February 5, 2024.
  • The government is targeting to introduce legislation in Parliament in early 2024.
  • The tax credit would be available from March 28, 2023.

Clean Technology Manufacturing:

  • Consultations on draft legislation were held from December 20, 2023, to February 5, 2024.
  • The government is targeting to introduce legislation in Parliament in early 2024.
  • The tax credit would be available from January 1, 2024.

Clean Electricity (Except for Publicly-Owned Utilities):

  • Design and implementation details will be published in early 2024.
  • Consultations on draft legislation will launch in summer 2024.
  • The government is targeting to introduce legislation in Parliament in fall 2024.
  • The tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Clean Electricity (For Publicly-Owned Utilities):

  • Consultations with provinces and territories will take place in 2024.
  • The government is targeting to introduce legislation in Parliament in fall 2024.
  • The tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Expanding Eligibility for the Clean Technology and Clean Electricity Investment Tax Credits to Support Using Waste Biomass to Generate Heat and Electricity:

  • Consultations on draft legislation will launch in summer 2024.
  • The government is targeting to introduce legislation in Parliament in fall 2024.
  • The expansion of the Clean Technology investment tax credit would be available from the day of the 2023 Fall Economic Statement.
  • The expansion of the Clean Electricity investment tax credit would be available from the day of Budget 2024 for projects that did not begin construction before March 28, 2023.

Labour Requirements

Budget 2023 announced that labour requirements to pay prevailing union wages and provide apprenticeship training opportunities will need to be met in order to receive the maximum credit rate of the Clean Technology, Clean Hydrogen, Clean Electricity, and CCUS investment tax credits.

  • Legislation to implement the labour requirements was introduced in Parliament on November 30, 2023, in Bill C-59.
  • The effective date for the labour requirements will be November 30, 2023.

Clean Technology Investment Tax Credit

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:

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.

Questions & Answers

  1. Why is the government introducing this credit?
  1. 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.
  1. What are the benefits of this measure for businesses investing in eligible clean technologies?

  1. 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.

  1. What technologies would be eligible for the credit?

  1. 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.
  1. The Atlantic Investment Tax Credit would apply to the same types of equipment in some cases. How do the two credits interact?
  1. 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.
  1. How many companies are expected to benefit from the credit?
  1. It is roughly estimated that up to 750 businesses may claim the Clean Technology Investment Tax Credit annually over the near term.

Digital Services Tax (DST)

Issue

Some stakeholders have expressed concern that Canada is abandoning the multilateral process and "going it alone" with the DST, and that this risks trade retaliation from the U.S.

Key points

Anticipated Questions and Answers

  1. Are companies likely to pass on the cost of the DST to Canadian users?
    • Some companies may try to pass on some of the cost through increased fees, but there are limiting factors.
    • The DST is not a tax on individual sales like GST or sales tax; it would be imposed directly on corporations on their annual financial results.
    • Also, many of the revenues subject to DST are fees paid by other businesses rather than consumers. For example, fees paid by advertisers for digital ads.
    • In a concentrated industry, firms with market power would be already optimizing prices, which limits the scope to pass on increased costs.
    • Even if it were possible to pass on the cost, the effect on consumer prices would generally be small.
      • Assume you rent a hotel room through a platform. Even if the platform fee was as high as 10% of the room rate, the DST is 3% of that 10% - so it would be 0.3% of the room rate.
    • Some companies have purported to increase fees in response to DSTs, but it's not possible to determine to what extent these price changes are actual consequences of the tax or increases that would have been made in any case.
  2. When will the DST to start to apply?
    • The bill provides that the DST Act would be brought into force on a date to be set by Order in Council.
    • In line with previous announcements, since the multilateral treaty unfortunately did not come into force before the end of 2023, our plan is that the tax would apply as of calendar year 2024.
    • The first year would include corporate revenue earned since January 1, 2022.
  3. Will the DST apply retroactively?
    • The DST is not retroactive – taxpayers have been give due notice of the tax.
    • The Government announced in November 2020 that the DST would take effect on January 1, 2022. Full details were provided in Budget 2021.
    • The government agreed in 2021 that it would hold off on the DST for two years. But made clear that if a multilateral treaty was not in force by the end of 2023, the DST would apply to revenues back to 2022.
    • Draft legislation was released in December 2021 and again in August 2023.
    • Businesses have known what is coming and had ample time to prepare.
  4. Will different DSTs in different countries provide opportunities for tax avoidance by digital companies?
    • We are committed to ensuring that all corporations pay a fair share of taxes.
    • Canada's preference has been, and remains, a multilateral approach.
    • The DST is relatively simple in design, and therefore more robust against avoidance than more complicated taxes like corporate income tax.
    • It will apply to companies with digital platforms that leverage data and content contributors from Canadian users, regardless of where the company is based.

Background

Digital Services Tax

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:

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

Questions & Answers

General Questions

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

  1. 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.

  1. When would the DST Act come into force?

  1. 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.

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

  1. 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

  1. What activity does the DST apply to?

  1. 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.
  1. Is the DST focussed on foreign-based or domestic companies?
  1. 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.
  1. Why does the DST not apply to businesses that sell goods and services online for their own account, such as streaming digital content?

  1. 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.

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

  1. 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.
  1. Why is the DST calculated retrospectively to 2022 and how does retrospectivity work?

  1. 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.

  1. What is the simplified compliance option for retrospective years?
  1. 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.
  1. How does the DST interact with corporate income tax?
  1. 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

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

  1. 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) (page 733):

    ($ millions) 2021-2022 2022-2023 2023-2024 2024-2025 2025-2026 Total
    DST -200 -700 -800 -800 -900 -3,400

    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.

  1. How much revenue is expected to be received for 2024 and when would it be booked?
  1. 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.
  1. Are companies likely to pass on the DST they pay to their users?

  1. 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.

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

  1. 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.

  1. Is the proposed DST consistent with Canada's international obligations?
  1. 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.

Excessive Interest and Financing Expenses Limitation (EIFEL)

Issue

Stakeholders continue to request relief (e.g., grandfathering of existing debt, specific exemptions for specific private sector industries) from the Excessive Interest and Financing Expenses Limitation (EIFEL) rules currently before Parliament in Bill C-59, suggesting that, absent such relief, the EIFEL rules could increase the cost of living for Canadians and result in decreased investment in Canada.

Key points

Anticipated Questions and Answers

  1. Why don't the EIFEL rules exempt any specific private sector industries?

    Consistent with the approach under the recommendations in the BEPS Action 4 report, the EIFEL rules do not provide exemptions for any private sector industries. Instead, the rules provide several exemptions that are available to all taxpayers meeting certain conditions that reflect a low risk of tax base-eroding interest payments – and that do not favour certain industrial sectors over others. Taxpayers that come within the scope of the EIFEL rules have various forms of relief, including group ratio relief that would consider a corporate group's overall level of third-party debt.

  2. Why do the EIFEL rules provide an exemption for Public Private Partnerships (P3s), but not for specific private sector industries?

    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, rather than the private sector partner. This distinguishes P3 projects from other arrangements and justifies exempting them from the rules.

    The P3 exception is not limited to a particular industry. For example, an energy project, a construction project, a low-cost housing project or an information technology project could each qualify for the exception if they meet the requirements (including public sector ownership of (or an interest in) the project).

Background

The Excessive Interest and Financing Expenses Limitation rules (EIFEL rules) generally restrict the amount of net interest expense that a corporation or trust may deduct in computing its taxable income to no more than 30% of its earnings. An elective "group ratio" rule allows taxpayers in highly leveraged industries (including real estate, infrastructure, regulated utilities, and clean energy) to deduct interest above this 30% fixed ratio where the worldwide corporate group has a higher ratio of net third-party interest-to-earnings.

The draft EIFEL rules were released and publicly consulted on three times: in February 2022, November 2022, and August 2023. Requests for sector specific exemptions were considered by the Department during each consultation, and in each case the Deputy Prime Minister approved the Department's recommendation not to provide any such exemptions.

The EIFEL rules (currently before Parliament in Bill C-59) do not provide sector specific exemptions. Instead, consistent with the BEPS Action 4 report, the EIFEL rules include the elective "group-ratio" rule – which includes a 10% up-lift to the group ratio calculation – that benefits all highly leveraged groups including those in real estate, infrastructure, regulated utilities or clean energy.

The EIFEL rules also include general relieving rules that are equally available across all sectors, including:

Excessive Interest and Financing Expenses Limitation

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.

Questions & Answers

Overview

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

  1. 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.

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

  1. 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.

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

  1. At present, most of our major trading partners have adopted (or are in the process of adopting) interest deductibility restrictions in line with the recommendationslaid 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

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

  1. 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

  1. Who do the EIFEL rules apply to?

  1. 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.
  1. Do the EIFEL rules apply to small businesses?

  1. 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.

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

  1. 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?)

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

  1. 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.

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

  1. 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

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

  1. 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.

  1. What relief is available under the Rules?

  1. 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.
  1. What is the Group Ratio Rule?

  1. 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.

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

  1. 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.

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

  1. 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.

Previous

Page details

2024-07-19