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Investment tax credits
Budget 2023 proposed the creation of new investment tax credits, some previously announced in the Fall Economic Statement 2022, along with modifications to the carbon capture, utilization, and storage investment tax credit (ITC).
Interactions with other federal tax credits
Businesses would be able to claim only one of the following tax credits if a particular property is eligible for more than one of the credits:
- clean electricity ITC
- clean hydrogen ITC
- clean technology ITC
- clean technology manufacturing ITC
- carbon capture, utilization and storage ITC
However, multiple tax credits could be available for the same project, if the project includes different types of eligible property.
Businesses would be able to fully benefit from both the Atlantic investment tax credit and the following credits:
- clean electricity ITC
- clean hydrogen ITC
- clean technology manufacturing ITC
Labour requirements related to certain investment tax credits
To achieve the maximum tax credit rates, businesses will have to meet certain specific labour requirements regarding prevailing wage and apprenticeship. If a business does not meet these requirements, the applicable credit rate for each of the following investment tax credits (ITCs) will be reduced by 10%, down to a minimum of zero:
- clean electricity ITC
- clean hydrogen ITC
- clean technology ITC
Exemptions would apply for the clean technology ITC for acquisitions of zero-emission vehicles and acquisitions and installations of low-carbon heat equipment.
The government announced that it also intends to apply labour requirements to the carbon capture, utilization, and storage ITC (details to be announced later).
Clean electricity ITC
A new 15% refundable tax credit, the clean electricity investment tax credit is introduced, to support eligible entities that make eligible investments to accelerate the supply and transmission of clean electricity. The credit would be available as of the day of the federal budget 2024, for projects that did not begin construction before March 28, 2023. The credit would not be available after 2034. Businesses would be able to fully benefit from both this credit and the Atlantic investment tax credit. The Department of Finance will engage with provinces, territories, and other relevant parties to develop the design and implementation details of the credit.
Clean hydrogen ITC
A new refundable tax credit, the clean hydrogen investment tax credit, is introduced to support investments in clean hydrogen production. The credit is equal to between 15% and 40% of eligible project costs, depending on the carbon intensity of the production process. Processes with the lowest carbon intensity (measured as kg of carbon dioxide equivalent (CO2e) per kg of hydrogen produced) will earn the highest rate. The credit will not apply when the carbon intensity is equal to or greater than 4.0 kg. The credit would apply to property that is acquired and that becomes available for use after March 27, 2023. It will be reduced by half for property that becomes available for use in 2034 and will not apply after 2034. Businesses would be able to fully benefit from both this credit and the Atlantic investment tax credit.
Clean technology ITC
A new refundable clean technology investment tax credit is introduced. The credit is equal to 30% of the capital cost of eligible clean technology equipment. The budget proposes to expand the eligibility of the credit to include property described in CCA class 43.1 that is used primarily for generating electrical energy or heat energy, or both electrical and heat energy, solely from geothermal energy. Equipment used in geothermal energy projects that co-produce oil, gas or other fossil fuels would not be eligible for the credit. The credit would apply to property that is acquired and that becomes available for use after March 27, 2023.
Clean technology manufacturing ITC
A refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing is introduced. The clean technology manufacturing investment tax credit is equal to 30% of the capital cost of eligible property associated with eligible activities. Eligible property would generally include machinery and equipment, including certain industrial vehicles, used in manufacturing, processing, or critical mineral extraction, as well as related control systems. The credit would not be available for property used in the production of battery cells or modules if such production benefits from direct support through a Special Contribution Agreement with the Government of Canada.
Businesses would be able to fully benefit from both this credit and the Atlantic investment tax credit. The credit would apply to property that is acquired and becomes available for use after 2023 and would be gradually phased out starting with property that becomes available for use in 2032 as follows: 30% in 2024 to 2031, 20% in 2032, 10% in 2033, and 5% in 2034. The credit would no longer be in effect for property that becomes available for use after 2034.
Carbon capture, utilization and storage ITC
Following consultations, additional design details for this credit were proposed regarding:
- the expansion of eligible equipment
- the addition of British Columbia as an eligible jurisdiction
- the validation of concrete storage requirement
- the treatment of refurbishment costs
- the recovery of refurbishment investment tax credits
- the knowledge sharing and climate risk disclosure
These measures would apply to eligible expenses incurred after 2021 and before 2041.
Dividend received deduction by financial institution
For dividends received after 2023, it was proposed to deny the dividend received deduction for dividends received by financial institutions on shares that are mark-to-market property.
Flow-through shares and critical mineral exploration tax credit – Lithium from brines
Eligible expenses related to lithium from brines made after March 28, 2023, will 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. This will apply to flow-through share agreements entered into after March 28, 2023, and before April 2027.
General anti-avoidance rule (GAAR)
Following consultations, it was proposed to amend the GAAR by:
- introducing a preamble to address interpretative issues
- lowering the avoidance transaction standard
- introducing an economic substance rule
- introducing a 25% penalty and extending the reassessment period by three years
A consultation period will remain open for comments until May 31, 2023, following which the government intends to publish revised legislative proposals and announce the application date of the amendments.
Income tax treatment of credit unions
The definition of credit union under the Income Tax Act will be modified. Under the existing legislation, a credit union that does not earn all or substantially all (generally 90% or more) of its revenues from sources specified in the definition may be excluded from the definition. This condition will be removed for tax years of a credit union ending after 2016.
Tax on repurchases of equity
A corporate-level 2% tax is introduced that would apply on the net value of all types of share repurchases by:
- a corporation resident in Canada (other than a mutual fund corporation) whose shares are listed on a designated stock exchange at any time in the tax year
- a mutual fund trust whose units are listed on a designated stock exchange at any time in the tax year and that is one of the following:
- a real estate investment trust
- a specified investment flow-through (SIFT) trust
- a partnership where the partnership unit is listed on a designated stock exchange at any time in the tax year and that is a SIFT partnership
- publicly traded entities that would be SIFT trusts or SIFT partnerships if their assets were located in Canada
The tax would not apply to a covered 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 would apply for repurchases and issuances of equity that occur after 2023.
Zero-emission technology manufacturers
The rate reduction for zero emission technology manufacturers is extended by three years. The reduced rates will be gradually phased out starting in tax years that begin in 2032 and fully phased out for tax years that begin after 2034, as follows: 4.5% until 2031, 5.625% in 2032, 6.75% in 2033, and 7.875% in 2034.
For tax years starting after December 31, 2023, the eligible activities that qualify for the reduced tax rates will be expanded to include the following nuclear manufacturing and processing activities:
- manufacturing of nuclear energy equipment
- processing or recycling of nuclear fuels and heavy water
- manufacturing of nuclear fuel rods
Underused housing tax (UHT)
[2023-03-27 News release]
Although the deadline for filing the UHT return and paying the UHT payable is still April 30, 2023, no penalties or interest will be applied for UHT returns and payments that the CRA receives before November 1, 2023.
Zero-emission passenger vehicles
[2022-12-16 News release]
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 from $55,000 to $59,000, effective January 1, 2022, had been announced in a 2021-12-23 News release.
Mandatory disclosure rules
[2022-11-03 News release]
In order to fully assess the feedback received as part of the public consultation on mandatory disclosure rules launched August 9, 2022, the government intends to delay the coming into force date of the reporting requirements for reportable transactions and notifiable transactions until the date on which a bill implementing these changes receives royal assent. The coming into force date for uncertain tax treatments would remain the same as described in August (that is, tax years beginning after 2022, with penalties only applying after royal assent).
British Columbia farmers' food donation tax credit – This credit, which was set to end December 31, 2023, is extended three years to December 31, 2026.
British Columbia interactive digital media tax credit – This credit, which was set to end August 31, 2023, is extended five years to August 31, 2028.
Manitoba green energy equipment tax credit – This credit, which was set to end June 30, 2023, is made permanent.
Manitoba interactive digital media tax credit – Effective April 1, 2023, the eligible expenditures will be expanded to allow for more flexible forms of employee compensation and incentives as eligible labour expenditures for this tax credit.
New Brunswick – Carbon taxation – The province decided to adopt the federal carbon backstop for carbon taxation. Up until recently, the province had applied its own approach to carbon taxation.
[2023-02-22 Regulation 44/2023]
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.
Ontario film and television tax credit – Productions supported by Ontario tax credits will have to provide on-screen acknowledgement of this support in their end credits. The eligibility for the credit will be extended to professional film and television productions that are distributed exclusively online. (See Draft regulatory amendments to O. Reg. 37/09 released 2023-02-21—available for public comment until 2023-04-11).
Ontario made manufacturing investment tax credit – A new 10% refundable income tax credit is introduced for qualifying investments of up to $20 million a tax year made by Canadian-controlled private corporations that have a permanent establishment in Ontario. Qualifying investments will be expenditures for CCA class 1 for the construction, renovation, or acquisition of buildings that become available for use after March 22, 2023, and expenditures for machinery and equipment included in class 53 that are acquired and become available for use after March 22, 2023, and before 2026. The buildings and machinery and equipment must be used for the manufacturing or processing of goods in Ontario. After 2025, qualifying investments in machinery and equipment will be expenditures for assets included in paragraph (a) of class 43 that are used in the manufacturing or processing of goods for sale or lease.
Ontario production services tax credit – Productions supported by Ontario tax credits will have to provide on-screen acknowledgement of this support in their end credits. The eligibility for the credit will be extended to professional film and television productions that are distributed exclusively online. (See Draft regulatory amendments to O. Reg. 37/09 released 2023-02-21—available for public comment until 2023-04-11).
[Yukon Carbon Price Rebate Amendments Act (2022) – Royal assent 2022-10-24]
Yukon carbon rebate – Starting in 2023, the Yukon business carbon price rebate also includes the mining business carbon price rebate.
All EFILE registrations or renewals now require a representative identifier (RepID).
Previously announced measures
Many measures announced before the 2022 federal budget are being implemented:
- Anti-avoidance rules
- Canadian film or video production tax credit
- Capital cost allowance (CCA)
- CCA for clean energy equipment (classes 43.1 and 43.2)
- Immediate expensing for CCPCs
- Electronic correspondence from the CRA
- Film or video production services tax credit
- Hybrid mismatch arrangements
- Mandatory disclosure rules
- Mandatory electronic filing threshold
- Mandatory electronic payments
- Rate reduction for zero-emission technology manufacturers
- Signature for Form T183CORP
Additional tax on banks and life insurers
For tax years that end after April 7, 2022, an additional tax of 1.5% of the taxable income is introduced for members of bank and life insurer groups (determined in the same way as the Canada recovery dividend). A $100 million taxable income exemption could be allocated by agreement amongst group members. For a tax year that includes April 7, 2022, the additional tax would be prorated based on the number of days after April 7, 2022.
Air-source heat pumps – Clean technology tax incentives
Capital cost allowance (CCA) for clean energy equipment
CCA classes 43.1 and 43.2 are expanded to include air source heat pumps primarily used for space and water heating. This applies to property that is acquired and that becomes available for use after April 6, 2022.
Rate reduction for zero-emission technology manufacturers
A temporary measure to reduce the corporate tax rates on the manufacturing profits from qualifying zero-emission technology is available for tax years starting after 2021. The manufacturing of air-source heat pumps used for space or water heating is now included as a qualified zero-emission technology manufacturing activity.
Application of the general anti-avoidance rule (GAAR) to tax attributes
For transactions that occur on or after April 7, 2022, or for transactions where notices of determination are issued on or after April 7, 2022, the GAAR can apply to tax attributes that have not yet become relevant to the computation of tax. The changes to GAAR include changes to the definition of tax benefit. This is important in determining whether there is an avoidance transaction for the purposes of the reportable transaction rules.
Canada recovery dividend on banks and life insurers
Under new Part VI.2 of the Income Tax Act, a Canada recovery dividend (CRD) is introduced in the form of a one-time 15% tax on bank and life insurer groups. The one‑time tax will apply to the 2020 and 2021 average taxable income (before any deductions for non‑capital losses or net capital losses) of any member in the group that is a bank, life insurer or other related financial institution at any time during its 2021 tax year. A proration rule would be provided for short tax years.
A $1 billion taxable income exemption could be allocated by agreement amongst group members. The CRD tax would be imposed for the 2022 tax year and would be payable in equal amounts over five years, starting in 2022.
Carbon capture, utilization, and storage (CCUS)
Investment tax credit for CCUS
CCUS is a suite of technologies that capture carbon dioxide (CO2) emissions from fuel combustion, industrial processes, or directly from the air, to either store the CO2 or use it in industry. A new CCUS refundable tax credit is proposed for businesses that incur eligible expenses after 2021 and before 2041.
Capital cost allowance for CCUS
Four new classes of depreciable property are proposed.
Class 57 would have an 8% declining balance rate. It would apply to expenses incurred for certain property that is part of a CCUS project (including monitoring or control equipment) and that is to be used solely for capturing CO2, for transporting captured carbon, or for storing captured carbon in a geological formation.
Class 58 would have a 20% declining balance rate. It would apply to expenses incurred for certain property that is part of a CCUS project, such as equipment that is used solely for using CO2 in industrial production (including monitoring and control equipment).
Class 59 would have a 100% rate and apply to expenses incurred after 2021 for determining the existence, location, extent, or quality of a geological formation to permanently store captured carbon in Canada (excluding enhanced oil recovery). This includes expenses for environmental studies or community consultations.
Class 60 would have a 30% declining balance rate and apply only to expenses incurred after 2021 in drilling, converting, or completing a well in Canada for the permanent storage of captured carbon (excluding enhanced oil recovery), and various other related expenses.
Critical mineral exploration tax credit
A new 30% critical mineral exploration tax credit (CMETC) is introduced for specified minerals: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. The credit would apply to expenditures renounced under eligible flow through share agreements entered into after April 7, 2022, and on or before March 31, 2027. Eligible expenditures would not benefit from both the CMETC and the existing mineral exploration tax credit.
Flow-through shares for oil, gas and coal activities
The flow-through share regime is being eliminated for oil, gas, and coal activities, effective for expenditures under flow-through share agreements entered into after March 31, 2023.
Hedging and short selling by Canadian financial institutions
Measures are proposed to prevent taxpayers that are in financial groups that include a registered securities dealer from using hedging and short selling arrangements to get artificial tax deductions. These measures would apply to dividends and related dividend compensation payments that are paid or become payable after April 6, 2022. If the relevant hedging transactions or related securities lending arrangement were in place before April 7, 2022, the measures would apply to dividends and related dividend compensation payments that are paid after September 2022.
International taxation – Interest coupon stripping
Modifications to the interest withholding tax rules are introduced to ensure that the total interest withholding tax paid under an interest coupon stripping arrangement (ICSA) is the same as if the arrangement had not been undertaken and instead the interest had been paid to the non-resident lender. This measure would apply to interest accrued after April 6, 2022, that is paid or payable as a result of an ICSA, with one exception.
Small business deduction (SBD)
For tax years starting after April 6, 2022, the range over which the business limit of a CCPC and its associated corporations is reduced based on their taxable capital employed in Canada is extended. The new range is $10 million to $50 million. It was previously $10 million to $15 million.
Substantive CCPCs and CCPC-related changes to foreign accrual property income (FAPI) rules
A private corporation that is a Canadian-controlled private corporation (CCPC) is subject to refundable Part I tax on certain types of passive income. To avoid the imposition of the refundable tax, tax planning strategies have developed that rely on a loss of CCPC status in anticipation of earning investment income. The concept of substantive CCPC has been proposed to eliminate the potential advantages from manipulating CCPC status by taxing the passive income as if the private corporation had remained a CCPC.
Changes are also proposed to the FAPI rules (the changes would apply to both CCPCs and substantive CCPCs) to remove the tax deferral advantage that was available to CCPCs and their shareholders earning investment income through a controlled foreign affiliate.
Aside from these two measures, a private corporation that is a substantive CCPC would generally continue to be treated as non‑CCPC for other purposes of the Income Tax Act.
Substantive CCPCs – Eligible dividend: Low rate income pool (LRIP)
Under proposed changes, the investment income earned by substantive CCPCs will be added to their LRIP so that distributions of such income will not entitle the shareholders to the enhanced dividend tax credit.
Substantive CCPCs – Reassessment period
Under proposed changes, the reassessment period for substantive CCPCs would be extended one year beyond the normal reassessment period for any resulting assessment of Part IV tax because of a corporation being assessed or reassessed a dividend refund. This measure would generally apply to tax years that end after April 6, 2022, with some exceptions.
Underused housing tax
An annual 1% tax is introduced on the value of non‑resident, non‑Canadian‑owned residential real estate in Canada that is considered to be vacant or underused, with some exceptions. This tax is effective for the 2022 and later calendar years. The initial Form UHT-2900, Underused Housing Tax Return and Election Form, for the 2022 calendar year, will have to be filed on or before April 30, 2023. Any tax payable will have to be remitted on or before that date. Corporations that are liable for this tax (and certain prescribed persons) must file this annual return separately from their T2 Corporation Income Tax Return.
British Columbia clean buildings tax credit – Effective February 23, 2022, a new temporary tax credit is introduced for retrofits that improve the energy efficiency of multi-unit residential buildings with four or more dwellings and prescribed types of commercial buildings. The refundable credit is equal to 5% of qualifying expenditures made before April 1, 2025, and incurred under an agreement entered into after February 22, 2022.
British Columbia production services tax credit – The pre-certification filing deadline is extended from 60 days to 120 days after the production's first accredited BC labour expenditure (ABCLE). Corporations have 120 days to notify Creative BC that they intend to claim the tax credit. This applies to productions incurring their first ABCLE on or after February 22, 2022. For productions incurring their first ABCLE between July 1, 2020, and February 21, 2022, corporations will be allowed to claim ABCLE incurred up to 120 days before filing the pre‑certification notice, regardless of how many days after the first incurred ABCLE the pre-certification notice was filed.
British Columbia scientific research and experimental development tax credit – This credit, which was set to end August 31, 2022, has been extended five years to August 31, 2027.
British Columbia shipbuilding and ship repair industry tax credit – This credit, which was set to end December 31, 2022, has been extended two years to December 31, 2024. See Bill 4 below for another change.
British Columbia training tax credit – This credit, which was set to end December 31, 2022, has been extended two years to December 31, 2024. See Bill 4 below for another change.
British Columbia shipbuilding and ship repair industry tax credit – For an employer to be able to claim this credit, the employee will have to be registered in a prescribed program administered through SkilledTradesBC, the new name for the BC Industry Training Authority.
British Columbia training tax credit – For an employer to be able to claim this credit, the employee will have to be registered in a prescribed program administered through SkilledTradesBC, the new name for the BC Industry Training Authority.
Manitoba community enterprise development tax credit – This credit, which was set to end December 31, 2022, is now permanent.
Manitoba film and video production tax credit – Film producers are able to get advance credits before the completion of a film if they submit proper documentation.
Manitoba small business venture tax credit – This credit, which was set to end December 31, 2022, is now permanent.
Newfoundland and Labrador
Newfoundland and Labrador film and video industry tax credit – This credit, which was set to end December 31, 2021, is now permanent.
Newfoundland and Labrador all spend film and video production tax credit – A new all spend film and video production tax credit is introduced. The 30% tax credit applies to total eligible production costs, with a maximum credit of $10 million annually for each project. This credit will be administered by the province.
Newfoundland and Labrador green technology tax credit – Effective April 7, 2022, a new 20% green technology tax credit is introduced for Canadian‑controlled private corporations (CCPCs) that invest in equipment for green activities, such as energy conservation, clean energy generation, and efficient use of fossil fuels, if the equipment is located in, and for use in a business operated in, the province. The maximum credit is $1 million annually, of which 40% is refundable.
Newfoundland and Labrador manufacturing and processing investment tax credit – Effective April 7, 2022, a new 10% manufacturing and processing investment tax credit is introduced. This credit will encourage the manufacturing and production, fishery, farming, and forestry sectors to invest in capital equipment located in, and for use in a business operated in, the province. In the case of CCPCs, up to 40% of the credit is refundable.
[Bill 227 – Royal assent 2022-11-09]
Nova Scotia capital investment tax credit – This credit, which was set to end December 31, 2024, has been extended to December 31, 2029. The amount of the tax credit was increased from 15% to 25% of the capital cost for qualified property acquired after September 30, 2022.
[2022-09-13 Regulation 212/2022]
Nova Scotia corporate tax reduction for new small businesses – To be eligible for the reduction, a corporation must have at least two employees, one of whom is not related to a specified shareholder of the corporation. The criteria to be a full-time employee was replaced with a requirement that one or more employees not related to a shareholder have at least 1,300 total paid hours of employment in a 12-month period, or an equivalent amount prorated for a short tax year.
[2022-11-14 Fall Economic Statement]
Ontario small business deduction (SBD) – Ontario announced that, subject to the approval of the Legislative Assembly of Ontario, it will parallel the federal change in the SBD phase-out, first announced in the 2022 federal budget. The SBD 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 beginning after April 6, 2022.
Ontario book publishing tax credit – The requirement for a literary work to be published in an edition of at least 500 copies of a bound book has been removed for books published in 2020 and later.
Ontario computer animation and special effects tax credit – Eligible labour expenditures may include remote work done by employees, if the work is done in Ontario and the employee is an Ontario resident who reports to and is under the direction of an eligible tax credit applicant with a permanent establishment in Ontario.
Ontario interactive digital media tax credit – Eligible labour expenditures may include remote work done by employees, if the work is done in Ontario and the employee is an Ontario resident who reports to and is under the direction of an eligible tax credit applicant with a permanent establishment in Ontario.
Ontario production services tax credit – Effective for expenditures incurred after November 14, 2022, the definition of eligible tangible property expenditures is amended to remove the “ordinarily engaged in” requirement for expenditures for leasing real property for on-location filming. Location fees paid to homeowners and business owners who are not ordinarily engaged in the business of selling or leasing their homes or businesses now qualify for the credit.
Ontario regional opportunities investment tax credit – The temporary increase of this credit to 20% is extended to the end of 2023.
[Bill 89 – Royal assent 2022-11-14]
Lower rate of Saskatchewan income tax – The rate is extended at 0% retroactive to July 1, 2022. On July 1, 2023, the rate will move to 1% and on July 1, 2024, the rate will return to 2%.
[2022-03-23 O.I.C. 2022/52]
Yukon carbon rebate – For tax years ending after 2021, the list of assets eligible for the Super Green Credit under the carbon rebate program for non‑mining businesses includes Yukon assets in capital cost allowance class 56.
COVID-19 support programs
Subsidies were set up as financial support during the COVID-19 pandemic. See the details.
The subsidies are taxable. You have to report the total amount as income in the year in which you received the subsidy.
The government proposed to provide tourism, hospitality and other hard-hit organizations with support under three new programs:
- the Tourism and Hospitality Recovery Program
- the Hardest-Hit Business Recovery Program
- the Local Lockdown Program
Zero-emission passenger vehicles
[2021-12-23 News release]
For zero-emission passenger vehicles (new and used) acquired on or after January 1, 2022, the prescribed amount will be increased from $55,000 to $59,000, before sales tax.
Beginning on October 1, 2021, Canadian corporations required to file Form RC4649, Country-by-Country Report, must do so electronically.
Direct deposit request
You can no longer start direct deposit nor update your banking information when filing your T2 return. Lines 910, 914, and 918 were removed.
[2021-12-14 Economic and Fiscal Update]
Return of fuel charge proceeds to farmers tax credit
Beginning in the 2021-2022 fuel charge year, the government introduced a refundable tax credit as a means to return fuel charge proceeds under the federal carbon pollution pricing system directly to eligible farming businesses that incur total farming expenses of $25,000 or more, all or a portion of which are attributable to provinces that do not currently meet the federal stringency requirements, that is, the following designated provinces: Ontario, Manitoba, Saskatchewan, and Alberta.
The credit for an applicable fuel charge year is equal to eligible farming expenses attributable to the designated provinces in the calendar year when the fuel charge year starts, multiplied by a payment rate, as specified by the minister of Finance for the fuel charge year. Businesses can claim these credits through their tax returns that include the 2021 and 2022 calendar years.
Small businesses air quality improvement tax credit
For eligible expenses incurred between September 1, 2021, and December 31, 2022, the government introduced the new small businesses air quality improvement tax credit. The credit is equal to 25% of eligible expenses related to the purchase or upgrade of mechanical heating, ventilation, and air conditioning (HVAC) systems and the purchase of standalone devices designed to filter air using high efficiency particulate air filters (HEPA), up to $10,000 per location and $50,000 in total.
Underused housing tax
The government introduced a national, annual 1% tax on the value of non-resident, non-Canadian-owned residential real estate in Canada that is considered to be vacant or underused, subject to certain exceptions. This tax is effective for 2022 and later calendar years. The initial Underused Housing Tax returns, for the 2022 calendar year, would be required to be filed on or before April 30, 2023.
For more details on the budget, see Annex 6: Tax Measures - Supplementary Information. The budget includes proposed measures that had not yet become law as of December 31, 2021. On February 4, 2022, the Department of Finance released for public comment legislative proposals that include 2021 budget measures (for example, immediate expensing for CCPCs). The legislation must be tabled in the House of Commons before you can include any claims with your T2 Return.
Avoidance of tax debts
The Act contains an anti-avoidance rule that is intended to prevent corporations from avoiding their tax liabilities by transferring their assets to non-arm's length persons for insufficient consideration. Some corporations are engaging in complex transactions that attempt to circumvent this rule.
For transfers of property that occur after April 18, 2021, the budget proposed to enhance this rule with measures regarding:
- the deferral of tax debts
- the avoidance of non-arm's length status
- the valuations of the property transferred and the consideration given for the property
The budget also proposed a penalty for planners and promoters of tax debt avoidance schemes. The penalty would be equal to the lesser of:
- 50% of the tax that is attempted to be avoided
- $100,000, plus the promoter's or planner's compensation for the scheme
Base erosion and profit shifting (BEPS)
Budget 2021 proposed to implement the best practices recommended by the Organisation for Economic Co-operation and the Group of 20 in the BEPS Action Plan, on interest deductibility limitations and hybrid mismatch arrangements.
Interest deductibility limitations
A new rule would limit the net interest expense that a corporation may deduct in calculating its taxable income to no more than a fixed ratio of "tax EBITDA". Tax EBITDA is the corporation's taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization, as determined for tax purposes.
Interest expense and interest income would include not only amounts that are legally interest, but also certain payments that are economically equivalent to interest, and other financing-related expenses and income.
The rule would be phased in, with a fixed ratio of 40% of tax EBITDA for tax years starting on or after January 1, 2023, and before January 1, 2024 (the transition year) and 30% for tax years starting on or after January 1, 2024. The rule would not apply to either Canadian-controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million, or to groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.
Interest expense and interest income related to debts owing between Canadian members of a corporate group would generally be excluded. Under certain conditions, interest denied under the earnings-stripping rule could be carried forward for up to 20 years or back for up to 3 years.
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.
The two main forms of hybrid mismatch arrangements addressed by the BEPS Action Plan are deduction/non-inclusion mismatches and double deduction mismatches. There are existing Canadian income tax rules that can be used to challenge certain hybrid arrangements. The new measures would provide certainty by adopting a common approach for all such arrangements.
Payments made by Canadian residents would not be deductible for Canadian income tax purposes when they give rise to a further deduction in another country or are not included in income or the ordinary income of a non-resident recipient. Conversely, when a payment made under such a mismatch arrangement by an entity that is not resident in Canada is deductible for foreign income tax purposes, no deduction for the payment would be permitted against the income of a Canadian resident. Any amount of the payment received by a Canadian resident would also be included in income, and, if you elect, reduce your expenses. You may also have the payment is a dividend, it would not be eligible for the deduction otherwise available for certain dividends received a government loan. The loan itself is not taxable; however, any part of the loan that is forgivable is taxable in the year in which the loan is received from foreign affiliates.
Other rules such as those on branch mismatch arrangements, imported mismatch arrangements and reverse hybrids would be introduced to the extent relevant and appropriate in the Canadian context.
Rules to neutralize hybrid mismatch arrangements would be introduced in two steps: a first set of rules would apply as of July 1, 2022, and a second set no earlier than 2023.
Capital cost allowance (CCA)
- CCA for clean energy equipment
- Immediate expensing for Canadian-controlled private corporations (CCPCs)
CCA for clean energy equipment
To support investment in clean technologies, under proposed legislative changes:
- CCA classes 43.1 and 43.2 would be expanded for new types of property that are acquired and become available for use after April 18, 2021 (for example, pumped hydroelectric storage equipment)
- access to classes 43.1 and 43.2 would be restricted for certain fossil-fuelled and low efficiency waste-fuelled electrical generation equipment that become available for use after 2024 (for example, fossil‑fuelled cogeneration systems)
Immediate expensing for Canadian-controlled private corporations (CCPCs)
In addition to the enhanced CCA deductions available under existing rules, such as the full expensing for classes 43.1, 43.2, and 53, the budget proposed to provide temporary immediate expensing for certain property acquired by a CCPC. It would be limited to $1.5 million per tax year. The half‑year rule would be suspended for such property.
This measure would apply to all capital property that is subject to CCA rules, other than property included in classes 1 to 6, 14.1, 17, 47, 49, and 51. The eligible property would have to be acquired after April 18, 2021, and become available for use before 2024.
Digital services tax
The budget proposes to implement a new tax on corporations providing digital services. The tax would apply at a rate of 3% on in-scope revenue, that is, revenue from certain digital services, such as online marketplaces, social media, and online advertising, and revenue from user data. It was later announced that the tax would apply as of January 1, 2024, and only if an acceptable multilateral option has not taken effect by December 31, 2023. The tax would be payable as of 2024 in respect of revenues earned as of January 1, 2022.
The new tax would apply to an entity that meets, or is a member of a business group that meets, both of the following revenue thresholds:
- global revenue from all sources of €750 million or more in the previous calendar year
- in-scope revenue associated with Canadian users of more than $20 million in the current calendar year
The corporation would have to file an annual return following the end of the reporting period, on a calendar year basis.
Electronic correspondence from the CRA
Effective on the date of royal assent, the default method of correspondence for businesses that use the CRA's My Business Account portal will be changed to electronic.
Employee stock option – Employer deduction for non-qualified securities
Canada's tax treatment of employee stock options granted after June 30, 2021, applies a $200,000 annual limit in a calendar year on employee stock option grants that can receive preferred tax treatment. Generally, the employee stock option benefits will remain uncapped for non-Canadian-controlled private corporation employers with annual gross revenue of $500 million or less and Canadian-controlled private corporations.
For employee stock options of more than the $200,000 limit, the employer subject to the new rules would be entitled to an income tax deduction for the stock option benefit included in the employee's income.
Film or video production tax credits
Canadian film or video production tax credit
For productions for which eligible expenditures were incurred in tax years ending in 2020 or 2021, due to COVID-19, the budget proposed a 12-month temporary extension for:
- the determination of the production starting time
- the deadline for submitting the certificate of completion
- the deadline to show the production in Canada under a written agreement
You have to send a waiver to the Canada Revenue Agency (CRA) to extend the assessment limitation period for the relevant years to take into account this 12‑month extension.
Film or video production services tax
For productions for which eligible expenditures were incurred in tax years ending in 2020 or 2021, due to COVID-19, the budget proposed a 12-month temporary extension to the period in which the aggregate expenditure threshold must be met.
You have to send a waiver to the CRA to extend the assessment limitation period for the relevant years to take into account this 12‑month extension.
Investment tax credit for carbon capture, utilization, and storage
Starting in 2022, the budget proposes the introduction of an investment tax credit for capital invested in carbon capture, utilization, and storage projects.
Mandatory disclosure rules
Note: It was later announced that the application of these new measures would be delayed to 2023.
Effective in 2022, it was proposed that the existing reportable transaction rules be strengthened and that new requirements be introduced:
- to report notifiable transactions. The minister of National Revenue would have the authority to designate, with the concurrence of the Minister of Finance, a transaction as a notifiable transaction. Reporting requirements (and exception to the rule) similar to those for reportable transactions would apply with the inclusion of a prescribed form
- for a specified corporation to report uncertain tax treatments (as reflected in audited financial statements) with the T2 return for the tax year, where certain conditions are met, including having at least $50 million in assets at the end of the financial year that coincides with the tax year
The budget proposed new penalties for each failure to meet these reporting requirements. The penalties would apply to transactions that occur as of the date of royal assent.
Mandatory electronic filing threshold
All corporations with annual gross revenue of more than $1 million have to file their T2 Return electronically, with some exceptions. The budget proposed to eliminate this threshold for tax years starting after 2021. Most corporations would have to file their return electronically. It was later announced that this would apply to tax years starting after 2023.
Mandatory electronic payments
For payments made after 2021, the budget proposed that remittances over $10,000 be made electronically. It was later announced that this would apply to payments made after 2023.
Rate reduction for zero-emission technology manufacturers
A temporary measure to reduce the corporate tax rates on manufacturers of qualifying zero-emission technology has been proposed for tax years starting after 2021. Income that would otherwise be subject to the 15% general corporate rate would be taxed at a 7.5% rate, and income that would otherwise be taxed at the 9% small-business rate would be reduced to 4.5%. The reduced rates would be gradually phased out starting in 2029 and ending after 2031.
At least 10% of the corporation's gross revenue from all active businesses carried on in Canada must be derived from eligible activities. Under proposed changes, the amount of eligible income that is subject to the reduced tax rate would be calculated based on a proportion of the corporation's cost of labour and capital used in the eligible activities to the total cost of labour and capital.
Signature for Form T183CORP
As of the date of royal assent, signatures may be electronic on Form T183CORP, Information Return for Corporations Filing Electronically.
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