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T2 Corporation – Income Tax Guide – What's New

From: Canada Revenue Agency

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This guide gives you basic information on how to complete the T2 Corporation Income Tax Return. This return is used to calculate federal income tax and credits. Corporations that have a permanent establishment in any province or territory other than Quebec or Alberta also use this return to report provincial and/or territorial income taxes and credits. Corporations with a permanent establishment in Quebec or Alberta must file a separate provincial return.

What's new

Bill C – 59

The following were included in Bill C‑59. The bill had not received royal assent at the time of publishing:

Federal, provincial, and territorial budgets for 2023

New items in this guide are outlined in boxes. These include changes introduced in the 2023 federal, provincial or territorial budgets. This guide may contain changes that had not yet become law at the time of publishing.

Excessive interest and financing expenses limitation (EIFEL) rules

In general terms, the proposed EIFEL rules limit the amount of net interest and financing expenses (that is, the taxpayer's interest and financing expenses net of its interest and financing revenues) that may be deducted in computing a taxpayer's income to no more than a fixed ratio of earnings before interest, taxes, depreciation and amortization. Generally, the proposed EIFEL rules apply directly to taxpayers that are corporations or trusts. They also apply indirectly in respect of partnerships, as interest and financing expenses and revenues of a partnership are attributed to members that are corporations or trusts, in proportion to their interests in the partnership.

The proposed EIFEL rules generally apply to tax years that begin on or after October 1, 2023.

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 two or more countries to produce mismatches in tax results.

New sections 12.7 and 18.4 and subsection 113(5), and proposed changes to the definition of foreign accrual property income (FAPI) under subsection 95(1) and paragraph 95(2)(f.11) are the core provisions of the new hybrid mismatch rules. These rules are intended to neutralize mismatches in tax results that come from hybrid mismatch arrangements.

Currently, the Income Tax Act addresses deduction/non-inclusion mismatches that come from payments under three types of arrangements:

In general terms, these arise when a country allows a deduction for a cross-border payment, the receipt of which is not fully included in ordinary income in the other country. Ordinary income generally means income that is subject to income tax at the recipient's full tax rate and is not effectively sheltered from tax.

New sections 18.4 and 12.7 serve to restrict the amount deductible by a taxpayer for a payment under a hybrid mismatch arrangement, or to include an amount in income of a taxpayer who receives such a payment.

Subsection 113(5) restricts a taxpayer's ability to deduct certain amounts under section 113 for dividends received by the taxpayer from a foreign affiliate out of the affiliate's exempt, hybrid, taxable and pre-acquisition surpluses, generally to the extent that a foreign income tax deduction is available for the dividend to the affiliate or certain other entities.

The rules generally apply to payments arising, and dividends received after June 30, 2022. There are three exceptions to this general effective date found in subsection 12.7(3); subsections 18.4(21) and 113(7); and subsection 95(1) and paragraph 95(2)(f.11). For example, the provisions of the hybrid mismatch rules that apply in computing the FAPI of a foreign affiliate of a taxpayer apply only for payments arising after June 30, 2024.

General anti-avoidance rule

The general anti-avoidance rule will be amended by:

Zero-emission passenger vehicles 

For zero-emission passenger vehicles (new and used) acquired on or after January 1, 2023, the prescribed amount is increased from $59,000 to $61,000, before sales tax. The previous increase was from $55,000 to $59,000, effective January 1, 2022. See the details.

Immediate expensing deduction

The immediate expensing deduction does not need to be prorated for a short tax year, as the immediate expensing deduction is already limited to the corporation's prorated immediate expensing limit for the tax year. This applies to tax years ending after April 18, 2021. See Designated immediate expensing property.

Flow-through shares and critical mineral exploration tax credit – Lithium from brines

Eligible expenses related to lithium from brines made on or after March 28, 2023, qualify as Canadian exploration expenses and Canadian development expenses. The eligibility to the critical mineral exploration tax credit is expanded to include this mineral resource. See Canadian exploration expenses and Canadian development expenses.

Income tax treatment of credit unions

The definition of credit union under the Income Tax Act is modified. Under the previous legislation, a credit union that did not earn all or substantially all (generally 90% or more) of its revenues from sources specified in the definition could have been excluded from the definition. This condition is removed effective January 1, 2016. See Schedule 17.

Dividend received deduction by financial institutions

The dividend received deduction will be denied for dividends received after 2023 by financial institutions on shares that are mark-to-market property or tracking property. As an exception, this measure does not apply to dividends received on taxable preferred shares (as defined in the Income Tax Act). See Line 320.

Rate reduction for zero-emission technology manufacturers

This measure has been extended by three years. The reduced rates will be 4.5% until 2031, 5.625% in 2032, 6.75% in 2033, and 7.875% in 2034 for income eligible for the small business deduction. For other eligible income, the reduced rates will be 7.5% until 2031, 9.375% in 2032, 11.25% in 2033, and 13.125% in 2034. These new measures will be fully phased out for tax years starting after 2034. For tax years starting after 2023, the rate reduction will be expanded to apply to nuclear manufacturing and processing activities. See Line 616.

Clean economy investment tax credits

New investment tax credits (ITCs) have been announced:

At the time of publishing, legislation had not been tabled for the clean hydrogen, clean electricity and clean technology manufacturing ITCs. Businesses will be able to claim only one of these ITCs if a property is eligible for more than one. However, more than one clean economy ITC could be available for the same project, if the project includes different types of eligible property. Businesses will be able to fully benefit from both the clean economy ITCs (other than the CCUS ITC) and the Atlantic investment tax credit.

To achieve the maximum tax credit rates for all ITCs other than the clean technology manufacturing ITC, businesses will have to meet certain labour requirements – prevailing wage requirements and apprenticeship requirements. Otherwise, the credit rate will be reduced by 10 percentage points. Exemptions will apply for the clean economy ITCs for acquisitions of off-road zero-emission vehicles and acquisitions and installations of low carbon heat equipment.

CCUS ITC

New design details were added to the credit regarding:

These measures apply to eligible expenses incurred after 2021 and before 2041. See the details. 

Tax on repurchases of equity

A corporate-level 2% tax has been introduced that will apply on the net value of all types of share repurchases by certain entities. The tax will not apply to an entity in a tax year if the total fair market value of equity that is redeemed, acquired, or cancelled in that tax year (prorated for short tax years) is less than $1 million. The tax will apply for repurchases and issuances of equity that occur after 2023. See Part II.2 – Tax on repurchases of equity.

Eligible dividend designation

In some situations, the late designations of eligible dividends can now be made within the six year period following the day on which the designation was first required to be made. It was previously three years. See Eligible dividend.

Canadian journalism labour tax credit 

The 2023 Fall Economic Statement announced the government's intention to increase the cap on labour expenditures per eligible newsroom employee from $55,000 to $85,000. It also announced the government's intention to temporarily increase the tax credit rate from 25% to 35% for a period of four years. These measures would apply after 2022. See the Line 798.

Newfoundland and Labrador all spend film and video production tax credit

Effective April 7, 2022, a new all‑spend film and video production tax credit has been introduced. The 40% tax credit applies to total eligible production costs, with a maximum credit of $10 million for an eligible production in a tax year. See Newfoundland and Labrador all spend film and video production tax credit.

Nova Scotia capital investment tax credit

Effective October 1, 2022, the maximum aggregate amount of tax credits that can be claimed by a corporation for an approved project is increased from $30 million to $100 million.  See Nova Scotia capital investment tax credit.

Ontario small business deduction

Ontario paralleled the federal change in the small business deduction phase-out, first announced in the 2022 federal budget. The deduction will not be reduced to nil until a Canadian-controlled private corporation and its associated corporations have a combined taxable capital of $50 million. This change is effective for tax years starting after April 6, 2022. See Ontario small business deduction.

Ontario film and television tax credit

Productions supported by Ontario tax credits must now provide on-screen acknowledgement of this support in their end credits. The eligibility for the credit was extended to professional film and television productions that are distributed only online if eligibility requirements are met. See Ontario film and television tax credit.

Ontario production services tax credit

Productions supported by Ontario tax credits must now provide on-screen acknowledgement of this support in their end credits. The eligibility for the credit was extended to professional film and television productions that are distributed only online if eligibility requirements are met. Effective November 15, 2022, expenditures for leasing real property in Ontario for on location filming no longer must meet the “ordinarily engaged in” requirement for eligible tangible property expenditures. Expenditures must be reasonable in the circumstances and paid to an arm's length party. The maximum eligible expenditures for leasing real property for on-location filming is 5% of the production's qualifying production expenditures, net of these location costs. See Ontario production services tax credit.

Ontario made manufacturing investment tax credit

A new 10% refundable corporation income tax credit has been introduced for qualifying investments of up to $20 million a tax year made by eligible corporations, for a maximum credit of $2 million a year. This applies to investments made after March 22, 2023, or before for buildings meeting specific criteria. Qualifying investments are expenditures for certain capital property included in capital cost allowance class 1 or 53. Eligible corporations are Canadian-controlled private corporations that have a permanent establishment in Ontario. See Ontario made manufacturing investment tax credit.

Manitoba interactive digital media tax credit

Effective April 1, 2023, the eligible expenditures are expanded to allow for more flexible forms of employee compensation and incentives as eligible labour expenditures for this credit. This does not include labour expenditures such as bonuses tied to profits or revenues, stock options or signing bonuses, which are still not eligible. See Manitoba interactive digital media tax credit.

Manitoba green energy equipment tax credit

This credit, which was set to end June 30, 2023, is now permanent. See Manitoba green energy equipment tax credit.

British Columbia farmers' food donation tax credit

This credit, which was set to end December 31, 2023, has been extended three years to December 31, 2026. See British Columbia farmers' food donation tax credit.

British Columbia interactive digital media tax credit

This credit, which was set to end August 31, 2023, has been extended five years to August 31, 2028. See British Columbia interactive digital media tax credit.

Yukon business carbon price rebate

Starting in 2023, the Yukon business carbon price rebate also includes the mining business carbon price rebate. See Yukon business carbon price rebate.

Carbon taxation – Atlantic provinces 

New Brunswick has opted to adopt the federal carbon backstop for carbon taxation effective July 1, 2023. Previously, the Province had applied its own approach to carbon taxation.

Newfoundland and Labrador, Prince Edward Island and Nova Scotia are subject to the federal carbon backstop for carbon taxation. See Line 795 – Return of fuel charge proceeds to farmers tax credit.

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