The Minister of Finance (Canada), the Honourable Chrystia Freeland, presented the Government of Canada’s (the “Federal Government”) 2023 Federal Budget (“Budget 2023”) on March 28, 2023 (“Budget Day”). Budget 2023 contains significant proposals to amend the Income Tax Act (Canada) (the “ITA”) and the Excise Tax Act (the “ETA”) while also providing updates on previously announced tax measures and policies.
Significant Budget 2023 proposals and updates include:
- new or expanded investment tax credits relating to the production of clean energy;
- new rules to facilitate the use of employee ownership trusts to acquire and hold shares of a business;
- changes to the alternative minimum tax;
- amendments to the rules introduced by Bill C-208 to ensure the rules apply to genuine intergenerational transfers of a business;
- details on the new 2% tax that would apply on the net value of all types of equity repurchases by certain publicly-traded entities in Canada;
- substantive amendments to the general anti-avoidance rule (the “GAAR”) including the introduction of an economic substance test;
- the elimination of dividend received deductions in respect of dividends received by financial institutions on shares that are mark-to-market property;
- updates on the Canadian implementation of Pillars One and Two international tax reform; and
- various sales and excise tax measures.
Selected proposals and tax measures are detailed below:
- Business Income Tax Measures
- International Tax Measures
- Personal Income Tax Measures
- Sales and Excise Tax Measures
- Previously Announced Tax Measures
Business Income Tax Measures
Clean Technology Investment Tax Credit – Geothermal Energy
Budget 2023 proposes to expand the eligibility of the Clean Technology Investment Tax Credit (the “CTITC”), a 30% refundable tax credit which had been originally announced in the Federal Government’s 2022 Fall Economic Statement released on November 3, 2022 (the “2022 Fall Economic Statement”). Rather than starting the phase-out schedule in 2032, as announced in the 2022 Fall Economic Statement, the CTITC would be gradually phased out starting with property that becomes available for use in 2033 and would no longer be in effect for property that becomes available for use after 2034. The CTITC would therefore remain at 30% for property that becomes available for use in 2032 and 2033 and would be reduced to 15% in 2034.
The proposed expansion would effectively add equipment used primarily for the purpose of generating electrical energy or heat energy, or both, solely from geothermal energy, that are eligible for Class 43.1 of Schedule II of the Income Tax Regulations (Canada) to the following list of previously proposed eligible property:
- equipment to generate electricity from solar, wind and water energy;
- stationary electricity storage equipment that does not use fossil fuels in operation such as batteries, flywheels, supercapacitors, magnetic energy storage, compressed air energy storage, pumped hydroelectric energy storage, gravity energy storage, and thermal energy storage;
- active solar heating equipment, air-source heat pumps, and ground-source heat pumps;
- equipment to generate heat or electricity from concentrated solar energy or small modular nuclear reactors;
- non-road zero-emission vehicles (e.g., hydrogen or electric heavy-duty equipment used in mining or construction) and charging or refuelling equipment that is used primarily for such vehicles; and
- equipment used for geothermal energy projects that will co-produce oil, gas or other fossil fuels would not be eligible for the credit.
In addition, in order to qualify for the 30% rate under the CTITC, new prevailing wage and apprenticeship requirements (together referred to as “labour requirements”) would need to be met. Save for specific exceptions, failure to meet such requirements would reduce the credit rate to 20%.
Changes to expand eligibility would apply in respect of property that is acquired and becomes available for use on or after Budget Day, where it has not been used for any purpose before its acquisition. Work that is performed on or after October 1, 2023 would be eligible to meet the labour requirements.
Clean Electricity Investment Tax Credit
As a complement to the CTITC announced in the 2022 Fall Economic Statement, Budget 2023 proposes to introduce the Clean Electricity Investment Tax Credit (the “CEITC”), a 15% refundable tax credit for eligible investments in:
- non-emitting electricity generation systems such as wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors);
- abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035);
- stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and
- equipment for the transmission of electricity between provinces and territories.
Taxable and non-taxable entities such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and pension funds, would be eligible for the CEITC.
Just as for the CTITC, eligibility for the full 15% credit would be subject to labour requirements, including ensuring that wages paid are at the prevailing level, and that apprenticeship training opportunities are being created. Failure to meet such requirements would reduce the credit rate to 5%.
The CEITC would be available as of the day of Budget 2024 for projects that did not begin construction before Budget Day, and would not be available after 2034. As with the CTITC, work that is performed on or after October 1, 2023 would be eligible to meet the labour requirements. The Department of Finance (Canada) (“Finance”) indicated that it will engage with provinces, territories, and other relevant parties to develop the design and implementation details of the CEITC.
Investment Tax Credit for Clean Technology Manufacturing
Budget 2023 proposes to introduce a refundable investment tax credit equal to 30% of the capital cost of certain depreciable property that is used for eligible activities including the manufacturing of renewable energy equipment (solar, wind, water, or geothermal), nuclear energy equipment, electrical energy storage equipment used to provide grid-scale storage, equipment for air- and ground-source heat pump systems, zero-emission vehicles, batteries, fuel cells and recharging systems.
In addition, eligible activities would also include the extraction and certain processing activities related to six critical minerals essential for clean technology supply chains: lithium, cobalt, nickel, graphite, copper, and rare earth elements.
The Investment Tax Credit for Clean Technology Manufacturing would apply to property that is acquired and becomes available for use on or after January 1, 2024, would be gradually phased out starting with property that becomes available for use in 2032, and would no longer be in effect for property that becomes available for use after 2034. The credit would gradually phase out with a credit rate of 20% in 2032, 10% in 2033 and 5% in 2034.
Reduced Tax Rates for Zero-Emission Technology Manufacturers
Budget 2021 proposed to reduce the federal general corporate tax rate from 15% to 7.5% and the federal small business tax rate from 9% to 4.5% for qualifying zero-emission technology manufacturers for income from eligible manufacturing activities. Budget 2022 proposed to include the manufacturing of air-source heat pumps used for space or water heating as an eligible zero-emission technology manufacturing or processing activity.
Budget 2023 now proposes to further expand eligibility for the reduced tax rates by adding the manufacturing of nuclear energy equipment and nuclear fuel rods, and the processing or recycling of nuclear fuels and heavy water as eligible manufacturing activities.
The fully reduced rates would be available until 2031, and, for the federal small business tax rate and general corporate tax rate respectively, would be increased to 5.63% and 9.38% in 2032, 6.75% and 11.25% in 2033, and finally 7.88% and 13.13% in 2034.
Flow-Through Shares and Critical Mineral Exploration Tax Credit – Lithium from Brines
The flow-through share regime is designed to facilitate corporations raising equity to fund qualifying exploration and development expenses by enabling them to issue shares to investors at a premium. Under a flow-through share agreement, a corporation may renounce (or “flow-through”) qualifying exploration and development expenses to investors. The investor then deducts the expenses in computing the investor’s taxable income (and the corporation is prohibited from deducting the expenses in computing the corporation’s taxable income).
In addition to the normal flow-through deductions, investors who are individuals (other than trusts) may also claim the Critical Mineral Exploration Tax Credit (the “CMETC”), a 30% non-refundable tax credit, in respect of certain specified critical mineral exploration expenses incurred by the corporation and renounced to the individual.
Budget 2023 proposes to extend the flow-through share regime to qualifying expenses related to lithium from brines, such that corporations can incur such expenses and renounce them to investors and investors who are individuals (other than trusts) can claim the CMETC on such expenses.
The proposals allowing (i) corporations to incur and renounce qualifying expenses would apply to expenses incurred after Budget Day, and (ii) investors who are individuals (other than trusts) to claim the CMETC on qualifying expenses would apply to flow-through share agreements entered into after Budget Day and before April 2027.
Tax on Repurchases of Equity
The 2022 Fall Economic Statement announced the Federal Government’s intention to introduce a corporate-level 2% tax that would apply on the net value of all types of share buybacks by public corporations in Canada, similar to the 1% tax that came into effect in the United States on January 1, 2023.
A share buyback occurs when a company buys its own shares from existing shareholders. The Federal Government’s position is that while buying back shares legitimately returns value to shareholders, it has the disadvantage of diverting corporate resources from being reinvested in workers and businesses in Canada.
The details of this new tax are provided for in Budget 2023 including the broadening of the scope of the new tax beyond public corporations.
Under proposed section 183.3 of the ITA, “covered entities” will include Canadian resident corporations (other than mutual fund corporations), real estate investment trusts, SIFT trusts and SIFT partnerships, if at any time in a taxation year “equity” of the entity is listed on a designated stock exchange. Covered entities will also include listed entities that would be SIFT trusts or SIFT partnerships if their assets were situated in Canada.
For this purpose, equity of an entity means (a) a share of a corporation, (b) an income or capital interest in a trust, and (c) an interest as a member of partnership.
Generally, the 2% tax is applied to the difference between the total fair market value of equity of the covered entity (other than substantive debt) that is redeemed, acquired or cancelled (other than by a “reorganization or acquisition transaction”) in the taxation year by the covered entity, and the total fair market value of equity of the covered entity (other than substantive debt) that is issued (other than in the course of a “reorganization or acquisition transaction”) in the taxation year. For these purposes, certain non-voting, fixed value, fixed return equity is carved out.
Certain transactions involving specified affiliates of a covered entity that acquires equity of the covered entity are also subject to the new tax. Further, a specific anti-avoidance rule can apply to impose the new tax if it is reasonable to consider that one of the main purposes of a “transaction” (as defined for purposes of the GAAR), or series of transactions, is to cause a person or partnership to acquire equity of a covered entity to avoid the tax otherwise payable.
Another specific anti-avoidance rule can apply if equity is redeemed, acquired or cancelled or is issued by a covered entity as part of a transaction (as defined for purposes of the GAAR), or a series of transactions, and it can reasonably be considered that the primary purpose of the transaction or series is to cause a decrease in the value of the equity redeemed or to increase the value of the equity that is issued in the year.
A de minimis rule will exempt a covered entity from this new tax if the total fair market value of equity that is redeemed, acquired, or cancelled (other than by a “reorganization or acquisition transaction”) in the taxation year by the covered entity is less than $1 million (prorated for short taxation years). However, every covered entity that redeems, acquires, or cancels equity of the entity in a taxation year is required to file a tax return in prescribed form.
This new tax will apply to transactions that occur after 2023.
General Anti-Avoidance Rule
Finance published its GAAR public consultation paper on August 9, 2022. The consultation paper addressed various proposed approaches to prevent aggressive tax planning and improve tax fairness for Canadians. Finance sought feedback on possible solutions for each issue outlined in the paper until September 30, 2022. Budget 2023 proposes amendments to the GAAR in response to feedback from stakeholders as outlined below.
Budget 2023 proposes the addition of a preamble to the GAAR. The stated purpose of the new preamble is to resolve purported interpretive issues and to ensure that the GAAR applies as intended. The preamble clarifies that the GAAR is intended to strike a balance between a taxpayer’s need for certainty in planning their affairs and the Federal Government’s responsibility to protect the tax base and the fairness of the tax system. The preamble will also clarify that the GAAR is intended to apply regardless of whether a tax strategy is foreseen.
Budget 2023 proposes a new avoidance transaction standard for the GAAR. The threshold for the test would shift from a “primary purpose” test to a “one of the main purposes” test. The Federal Government notes that this is consistent with many modern anti-avoidance rules and is intended to enable GAAR to apply to transactions that have a significant tax avoidance intention, while excluding transactions where tax was merely taken into account.
Budget 2023 proposes the addition of an economic substance rule to the GAAR. This rule would provide for the consideration of economic substance during the "misuse or abuse" stage of the GAAR analysis prescribed by the Supreme Court of Canada, indicating that a significant lack of economic substance could suggest abusive tax avoidance.
The amendment would also include indicators for identifying a significant lack of economic substance in a transaction but would not replace the legal approach based on the arrangement's form. The indicators include (i) no change in the opportunity for profit or risk of loss due to (a) a circular flow of funds, (b) offsetting financial positions, or (c) the timing between steps in the series, (ii) where it is reasonable to conclude that the expected value of the tax benefit exceeds the expected non-tax economic return, and (iii) where it is reasonable to conclude that the entire, or almost entire, purpose for the undertaking or arranging the transaction or series was to obtain the tax benefit. This proposal effectively legislatively overrides the years of tax jurisprudence including jurisprudence from the Supreme Court of Canada, which confirmed that the GAAR is not an economic substance test.
There will be a new penalty of up to 25% of the tax benefit for transactions subject to GAAR which can be avoided by disclosing the transaction to the Canada Revenue Agency (the “CRA”) either as part of the proposed mandatory disclosure rules or voluntarily. Budget 2023 proposes a three-year extension to the normal reassessment period for GAAR assessments, unless the transaction was disclosed to the CRA. The Federal Government indicates that this extension of the normal reassessment period is necessary to reflect the complexity and difficulties in detecting GAAR transactions.
Interested parties can send their views on the proposed amendments to Finance by May 31, 2023, after which revised legislative proposals and the application date will be announced.
Dividend Received Deduction by Financial Institutions
Budget 2023 proposes to deny the dividend received deduction, typically allowed in computing the income of a corporation that receives dividends from a taxable Canadian corporation, where such dividends are received by financial institutions on shares that are mark-to-market property.
According to the Federal Government, while the dividend received deduction is part of the integrated tax system and is intended to limit the imposition of multiple levels of corporate taxation, the deduction results in an inconsistency with how capital gains of financial institutions are taxed on income account under the mark-to-market regime in respect of portfolio investments in corporate shares. The stated purpose of the change is to align the taxation of dividends received by financial institutions with the income treatment of gains on mark-to-market share investments.
Accordingly, this proposed compromise to an integrated tax system potentially results in shareholders of financial institutions bearing the economic impact of multiple levels of corporate taxation.
This measure would apply to dividends received after 2023.
Income Tax and GST/HST Treatment of Credit Unions
The definition of “credit union” under subsection 137(6) of the ITA specifically requires that all or substantially all (90% or more) of the revenue of a credit union to be derived from specified sources listed under paragraph (a) of the definition. The definition of “credit union” under subsection 123(1) of the ETA makes reference to the ITA definition and if the revenue threshold requirement in that definition is not satisfied, the credit union would not be entitled to certain preferential tax treatment under both the ITA and ETA.
Given that many credit unions have diversified the range of service offerings beyond the scope of those services contemplated under the ITA definition, Budget 2023 proposes to amend subsection 137(6) of the ITA to eliminate the revenue threshold requirement to accommodate the current business model adopted by many credit unions.
This amendment would apply in respect of taxation years of a credit union ending after 2016.
International Tax Measures
Budget 2023 provided an update on the Federal Government’s plans regarding the two-pillar tax reform plan being advanced by the Organization for Economic Co-operation and Development (OECD)/G20 Inclusive Framework under its “BEPS 2.0” initiative. Canada is among 138 jurisdictions in committing to adopt this international tax reform plan.
Pillar One – Reallocation of Taxing Rights
Pillar One proposes to allocate a portion of income of large multinational entities (“MNEs”) among countries for tax purposes based on revised rules that are asserted to be more appropriate in a digitalized economy with the aim of having MNEs generally pay greater tax in countries where their users and customers are located. The Pillar One proposals would only apply to MNEs with annual revenue exceeding €20 billion and profit margins exceeding 10%. The OECD has released draft model rules for public comment and countries have been working toward completing negotiations with a view to signing a multilateral convention by the middle of 2023 that would commence to apply in 2024. While Budget 2023 states that the Federal Government hopes and assumes that the Pillar One proposals will be implemented on schedule, it notes that a revised draft of its proposed Digital Services Tax will be imposed as of January 1, 2024 in respect of revenues earned starting January 1, 2022 if the Pillar One multilateral convention has not come into force by January 1, 2024.
Pillar Two – Global Minimum Tax
Pillar Two proposes a global minimum tax applicable to MNEs with annual revenues of €750 million or more. A minimum tax of 15% would be required to apply on profits of in-scope MNEs in each jurisdiction in which the MNE operates. The primary taxing rule is known as the Income Inclusion Rule (“IIR”) under which the jurisdiction of the ultimate parent entity of the MNE would impose a top-up tax on the ultimate parent entity in respect of MNE operations in any jurisdiction where the effective tax rate is below 15%. An Undertaxed Profits Rule (“UTPR”) applies as a backstop where the jurisdiction of an ultimate parent entity has not implemented the IIR. Other countries where the MNE operates that have adopted the UTPR would impose the top-up tax with an allocation of tax to those countries on a formulary basis. Pillar Two also contemplates a country enacting a domestic minimum top-up tax on low-taxed income of domestic entities.
Budget 2023 announced the Federal Government’s plan to release draft legislative proposals to implement the IIR and a domestic minimum top-up tax for Canadian entities of in-scope MNEs for public comment in the coming months, with draft UTPR proposals to follow at a later time. The IIR and domestic minimum top-up tax are to apply to fiscal years of MNEs that commence on or after December 31, 2023. The UTPR is to apply to fiscal years of MNEs beginning on or after December 31, 2024.
Personal Income Tax Measures
Employee Ownership Trusts
Employees are often the best persons to whom the ownership of a business can be transferred following an owner’s exit. However, individual employees frequently lack the funds necessary to acquire an active business from its owners on a one-time or up-front basis. This can lead to the business being sold to third parties instead of to employees who are not only familiar with the business but who have invested sometimes significant personal efforts in its growth and development.
Employee ownership trusts (“EOTs”) can provide a useful means to facilitate the transfer of ownership of a corporation to its employees without requiring individual employees to pay directly for corporate shares. The laws of other global jurisdictions include similar measures aimed at facilitating the transfer of a business to its employees in a more tax-favourable manner. Until Budget 2023, Canada was lagging in this regard.
Budget 2023 proposes new measures to enable the use of EOTs for the transfer of corporate shares to employees, provided the following conditions are satisfied:
- the EOT must be a Canadian resident trust (and not a deemed resident trust);
- the EOT must have only two purposes:
- holding shares of a qualifying business for the benefit of the beneficiaries of the trust (who are employees of the business); and
- distributing business earnings to the beneficiaries subject to a distribution formula that may only consider length of service and, remuneration and hours worked. Other than this distribution formula, all beneficiaries/employees would need to be treated in the same manner;
- the EOT must hold a controlling interest in the shares of the qualifying business, which would include a business in respect of which all or substantially all of the fair market value of its assets are attributed to assets used in an active business carried on in Canada;
- all or substantially all of the EOT’s assets must be shares of a qualifying business;
- only qualifying employees may be beneficiaries of the EOT; and
- the beneficiaries of the EOT must elect qualifying Canadian resident trustees once every five years.
An EOT that meets the requirements will not be subject to a deemed disposition and reacquisition of assets every 21 years, under subsection 104(4) of the ITA. Moreover, the capital gains reserve available for a business owner on the disposition of qualifying business shares to an EOT will be extended from the present five years to a ten-year period. The repayment period for amounts loaned by a qualifying business to an EOT to fund the purchase of qualifying shares will also be extended from the present one-year period to a fifteen-year period.
The EOT rules are the result of efforts by interest groups to promote EOTs as a means of business succession planning, and to provide business owners with an alternative to the more traditional or conventional business exit strategies or methods. The details and specific language of the new EOT rules will need to be carefully reviewed to ensure compliance.
These new measures concerning the use of EOTs are proposed to take effect as of January 1, 2024.
Retirement Compensation Arrangements
Under the ITA, a retirement compensation arrangement (“RCA”) is a type of employer-sponsored arrangement that generally allows an employer to provide supplemental pension benefits to its employees.
Employers can choose to pre-fund supplemental retirement benefits through contributions to a trust established under an RCA (“RCA Trust”). Under Part XI.3 of the ITA, a refundable tax is imposed at a rate of 50% on contributions to an RCA Trust, as well as on income and gains earned or realized by the trust. The tax is generally refunded as the retirement benefits are paid from the RCA Trust to the employee.
Employers who do not pre-fund supplemental retirement benefits through contributions to an RCA Trust, and instead settle retirement benefit obligations as they become due, can obtain a letter of credit (or a surety bond) issued by a financial institution in order to provide security to their employees. To secure or renew the letter of credit, the employer pays an annual fee or premium charged by the issuer. These fees or premiums are subject to the 50-per-cent refundable tax.
When retirement benefits become due from an unfunded plan, the employer pays the benefits out of corporate revenues. Consequently, there are no benefit payments from an RCA Trust to trigger a 50-per-cent refund, and employers are required to fund escalating refundable tax balances with no practical mechanism for recovery.
Budget 2023 proposes to amend the ITA so that fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for an RCA that is supplemental to a registered pension plan will not be subject to the refundable tax.
This change would apply to fees or premiums paid on or after Budget Day. Budget 2023 also proposes to allow employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit (or surety bonds) by RCA Trusts, based on the retirement benefits that are paid out of the employer’s corporate revenues to employees that had RCA benefits secured by letters of credit (or surety bonds). Employers would be eligible for a refund of 50% of the retirement benefits paid, up to the amount of refundable tax previously paid.
This change would apply to retirement benefits paid after 2023.
Alternative Minimum Tax for High-Income Individuals
The Alternative Minimum Tax (the “AMT”) is designed to ensure that higher-income individuals (including many types of trusts) pay a minimum amount of tax every year, notwithstanding the availability of various tax incentives. The AMT is calculated as 15% of an adjusted taxable income amount (adjusted to allow fewer deductions, exemptions, and credits than in computing normal taxable income) over a standard exemption amount of $40,000 (designed to exempt lower-income individuals). The individual then pays either normal tax for the year or the AMT, whichever is higher. The individual can generally carry forward the AMT paid in the year for seven years and credit it against normal tax (to the extent normal tax exceeds the AMT) for those years.
Budget 2023 proposes to amend the AMT to “better target [it] to high-income individuals” by:
- broadening the AMT base (i.e. the adjusted taxable income amount) by allowing fewer deductions, exemptions, and credits. Generally, the proposals would (i) include 100% (up from 80%) of capital gains and 100% of employee stock option benefits (even if the employee was entitled to a deduction on the benefit) in the AMT base, (ii) include 30% of capital gains on donations of publicly listed securities, (iii) disallow 50% of many deductions (e.g. child care expenses, interest expenses, non-capital loss carryforwards) from the AMT base, and (iv) allow only 50% of most non-refundable tax credits to reduce the AMT;
- increasing the AMT rate from 15% to 20.5%; and
- increasing the standard exemption amount from $40,000 to the start of the fourth federal tax bracket for the year, which is expected to be approximately $173,000 for the 2024 taxation year and would be indexed annually for inflation.
Budget 2023 did not include draft legislative amendments, and announced that further details will be released later in 2023 and that the proposals would apply to taxation years beginning after 2023.
Intergenerational Business Transfers
Subsection 84.1(1) of the ITA prevents an individual from engaging in certain “surplus stripping” transactions under which the individual converts income in a corporation, otherwise payable in the form of dividends, to a capital gain. An individual is typically liable for half the amount of tax in respect of a capital gain versus a dividend.
In particular, subsection 84.(1) of the ITA applies where: (i) a taxpayer (other than a corporation) resident in Canada (the “Transferor”) disposes of shares (“Subject Shares”) in a corporation resident in Canada (the “Subject Corporation”) to another corporation (the “Purchaser Corporation”); (ii) the Subject Shares are capital property of the Transferor; (iii) the Transferor does not deal at arm’s length with the Purchaser Corporation; and (iv) immediately after the disposition, the Subject Corporation is “connected” with the Purchaser Corporation.
If subsection 84.1(1) of the ITA applies to a transaction under which a Transferor disposes of Subject Shares to a Purchaser Corporation for non-share consideration (e.g. cash), the Transferor will typically be deemed to have received a dividend equal to the amount by which the non-share consideration exceeds the (“hard”) adjusted cost base (“ACB”) of the Subject Shares. If subsection 84.1(1) of the ITA applies to a transaction under which a Transferor disposes of Subject Shares to a Purchaser Corporation for share consideration, the paid-up capital of such shares will typically be reduced to an amount equal to the (“hard”) ACB of the Subject Shares immediately prior to the disposition of the Subject Shares.
In 2021, Bill C-208, a private member’s bill, received royal assent. The bill provides an exception in respect of the application of subsection 84.1(1) of the ITA to certain inter-generational transfers of businesses. In effect, the rules provide that subsection 84.1(1) of the ITA will not apply to a transfer of Subject Shares, by a Transferor to a Purchaser Corporation, if: (i) the Subject Shares are qualified small business corporation shares or shares of a family farm or fishing corporation; (ii) the Purchaser Corporation is controlled by one or more adult children or grandchildren of the Transferor; and (iii) the Purchaser Corporation does not dispose of the Subject Shares within 60 months of acquiring the shares.
Budget 2023 acknowledges that Bill C-208 facilitates inter-generational transfers of businesses but states that the exception introduced by Bill C-208 may apply to a transfer that does not constitute a genuine inter-generational transfer of a business. Budget 2023 proposes amendments to the rules introduced by Bill C-208 such that the exception, from the application of subsection 84.1(1), only applies to genuine intergenerational business transfers.
Under the proposed amendments, the exception would only apply to a disposition of Subject Shares by a Transferor to the extent that (i) certain common requirements are met, and (ii) the Transferor satisfies one of the following two tests: (a) an immediate intergenerational business transfer test; or (b) a gradual intergenerational business transfer test.
The requirements of these tests are summarized below.
The common requirements summarized below represent the requirements that all Transferors must satisfy for each test in addition to the test-specific requirements.
- Prior to the disposition of the Subject Shares (the “Disposition Time”), (i) the Transferor (either alone or together with a spouse or common-law partner) controls the Subject Corporation and (ii) no other person or group of persons controls, in law or in fact, the Subject Corporation.
- At the Disposition Time, (i) the Transferor is an individual (other than a trust), (ii) the Purchaser Corporation is controlled by one or more adult children (which would have an extended meaning including a niece or nephew) of the Transferor (the “Children”), and (iii) the Subject Shares are qualified small business corporation shares or shares of a family farm or fishing corporation.
- After the Disposition Time, the Transferor does not directly or indirectly own (either alone or together with a spouse or common-law partner) (i) 50% or more of any class of shares of the Subject Corporation or the Purchaser Corporation, or (ii) 50% or more of any class of equity interest in any Relevant Group Entity (as defined below). There are exceptions for certain non-voting preferred shares.
- Within 36 months of the Disposition Time, and all times thereafter, the Transferor and a spouse or common-law partner of the Transferor does not directly or indirectly own (i) any shares of the Subject Corporation or the Purchaser Corporation, or (ii) any equity interest in any Relevant Group Entity. There are exceptions for certain non-voting preferred shares.
- The Transferor and each of the Children make a joint election for the applicable exception to apply to the disposition of the Subject Shares and file the election with the Minister on or before the filing-due date for the Transferor’s tax return for the year of transfer. Note that, by making the elections, the Transferor and Children will be jointly and severally liable for any additional taxes payable by the Transferor to the extent that section 84.1 of the ITA is applicable in respect of the disposition of the Subject Shares.
Additional Requirements for Immediate Business Transfer Test
The additional requirements for the immediate business transfer test are as follows.
- After the Disposition Time, the Transferor does not control (either alone or together with a spouse or common-law partner), in law or fact, the Subject Corporation, the Purchaser Corporation, or any Relevant Group Entity.
- From the Disposition Time, until 36 months after that time, (i) the Children control the Subject Corporation and the Purchaser Corporation, (ii) at least one of the Children is actively engaged in a Relevant Business (as defined below) of the Subject Corporation or a Relevant Group Entity, and (iii) each Relevant Business of the Subject Corporation, and any Relevant Group Entity, is carried on as an active business.
- Within 36 months of the Disposition Time (or a greater period of time that is reasonable in the circumstances), the Transferor and a spouse or common-law partner of the Transferor take reasonable steps to (i) transfer management of each Relevant Business of the Subject Corporation and any Relevant Group Entity to the Children actively engaged in such businesses, and (ii) permanently cease to manage any Relevant Business of the Subject Corporation and any Relevant Group Entity.
Additional Requirements for Gradual Business Transfer Test
The additional requirements for the gradual business transfer test are as follows.
- After the Disposition Time, the Transferor does not control (either alone or with a spouse or common-law partner) the Subject Corporation, the Purchaser Corporation, or any Relevant Group Entity.
- Within 10 years after the Disposition Time (the “Final Sale Time”), the Transferor and a spouse or common-law partner of the Transferor reduce their interest in the Subject Corporation (and the Purchaser Corporation and any Relevant Group Entity) to below a certain fair market value percentage threshold.
- From the Disposition Time, until the later of 60 months after the Disposition Time and the Final Sale Time, (i) the Children control the Subject Corporation and the Purchaser Corporation, (ii) at least one of the Children is actively engaged in a Relevant Business of the Subject Corporation or a Relevant Group Entity, and (iii) any Relevant Business of the Subject Corporation, and any Relevant Group Entity, is carried on as an active business.
- Within 60 months of the Disposition Time (or a greater period of time that is reasonable in the circumstances), the Transferor and a spouse or common-law partner of the Transferor take reasonable steps to (i) transfer management of any Relevant Business of the Subject Corporation and any Relevant Group Entity to the Children actively engaged in such businesses, and (ii) permanently cease to manage any Relevant Business of the Subject Corporation and any Relevant Group Entity.
A Relevant Group Entity for purposes of these rules refers to a person or partnership that carries on, at the Disposition Time, an active business (a “Relevant Business”) relevant for the determination of whether the Subject Shares constitute qualified small business corporation shares or shares of a family farm or fishing corporation.
In addition to the amendments outlined above, Budget 2023 also proposes (i) new relieving rules applicable to a subsequent arm’s length transfer of shares on the death or disability of a child, (ii) an extension of the limitation period for the reassessment of a Transferor’s liability for tax payable as a result of a disposition of Subject Shares, and (iii) a ten-year capital gains reserve for genuine intergenerational share transfers satisfying the aforementioned requirements.
These new rules will apply to dispositions of shares that occur on or after January 1, 2024.
Sales and Excise Tax Measures
GST/HST Treatment of Payment Card Clearing Services
Services that fall within the definition of “financial service” are exempt for GST/HST purposes under the ETA. “Financial service” is currently defined under subsection 123(1) of the ETA to include services described under paragraphs (a) to (m) of the definition that are not excluded by one of the paragraphs (n) to (t) of the definition. More specifically, pursuant to paragraph (t) of the definition and section 4 of Financial Services and Financial Institutions (GST/HST) Regulations, administrative services are generally excluded from the definition of “financial service”.
While payment card clearing services rendered by payment card network operators (e.g. VISA) have generally been characterized by the CRA as administrative services that are taxable for GST/HST purposes, the recent Federal Court of Appeal decision in Canadian Imperial Bank of Commerce v. The Queen (2021 FCA 10) found instead that the payment card clearing services provided by VISA fell within the scope of the definition of “financial service” and were not excluded under paragraph (t) of the definition.
Budget 2023 proposes to amend the definition of “financial service” under subsection 123(1) of the ETA to clarify that payment card clearing services rendered by a payment card network operator are excluded from the definition such that these services will generally be subject to the GST/HST.
This measure will apply to a service rendered under an agreement for a supply of such card processing services if any consideration for the supply becomes due, or is paid without becoming due, after Budget Day.
This measure will also apply to a card processing service even if all of the consideration for the supply became due, or was paid, on or before Budget Day, except in situations where the following conditions are both satisfied:
- the supplier did not, on or before Budget Day, charge, collect or remit any amount as or on account of tax in respect of the supply; and
- the supplier did not, on or before Budget Day, charge, collect or remit any amount as or on account of tax in respect of any other supply that is made under the agreement and that includes the provision of a payment card clearing service.
Alcohol Excise Duty
Alcohol excise duties are automatically indexed to total Consumer Price Index inflation at the beginning of each fiscal year.
Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2%, for one year only, as of April 1, 2023.
Cannabis Taxation – Quarterly Duty Remittances
Budget 2023 proposes to allow all licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis, starting from the quarter beginning on April 1, 2023.
Previously Announced Tax Measures
Budget 2023 confirms the Federal Government’s intention to proceed with previously announced tax and related measure as modified in response to consultations and deliberations:
- legislative proposals released on November 3, 2022 with respect to excessive interest and financing expenses limitations and reporting rules for digital platform operators;
- tax measures announced in the 2022 Fall Economic Statement, for which legislative proposals have not yet been released, including extension of the residential property flipping rule to assignment sales;
- legislative proposals released on August 9, 2022 with respect to various tax measures;
- legislative proposals released on April 29, 2022 with respect to hybrid mismatch arrangements;
- legislative proposals released on February 4, 2022 with respect to the GST/HST treatment of cryptoasset mining;
- legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act (Canada);
- the transfer pricing consultation announced in Budget 2021;
- the income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletic trusts maturing in 2019 by one year, from eight years to nine years; and
- measures confirmed in Budget 2016 relating to the GST/HST joint venture election.
Budget 2023 reaffirms the Federal Government’s commitment to move forward as required with technical amendments to improve the certainty and integrity of the tax system.