Highlights from the Federal Fall Economic Statement

The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance delivered the federal government’s 2023 Fall Economic Statement (FES) on November 21, 2023. This year’s FES includes measures focused on affordability and housing challenges.

No personal or corporate income tax rate changes were announced. However, the Department of Finance (Department) presented various business tax and indirect tax measures. It also confirmed it intends to proceed with previously announced tax measures.

Following are the tax highlights from this year’s FES.

Business tax measures

Clean Hydrogen Investment Tax Credit

The main design elements of this investment tax credit were introduced in Budget 2023. The FES proposes further details on these elements, including:

• Eligibility criteria for ammonia production equipment, projects involving power purchase agreements, and projects involving renewable natural gas
• Carbon intensity assessment and validation requirements
• Compliance and recovery requirements

The government will continue its eligibility review for other low-carbon hydrogen production pathways leading up to the 2024 Federal Budget.

Clean Technology and Clean Electricity Investment Tax Credits

The Department previously proposed a 30 percent refundable Clean Technology Investment Tax Credit and a 15 percent refundable Clean Electricity Investment Tax Credit. The FES proposes to expand eligibility for these credits to support the generation of electricity and/or heat from waste biomass.

See the FES Tax Supplementary Information for full details on the above tax credits.

Employee ownership trusts

The FES proposes a temporary income tax exemption on the first $10 million in capital gains realized on a qualifying business sale to an employee ownership trust, subject to certain conditions. This measure would apply for the 2024 to 2026 tax years.

The Department will provide further details in the coming months.

Canadian Journalism Labour Tax Credit

The FES proposes to increase the upper limit on labour expenditures per eligible newsroom employee from $55,000 to $85,000. The tax credit rate is also proposed to temporarily increase to 35 percent (from 25 percent) for four years.

The changes would apply to qualifying labour expenditures incurred on or after January 1, 2023. Proposed transitional rules will allow these changes to be prorated where a business’s taxation year does not align with the calendar year.

Indirect tax measures

Underused Housing Tax

The Underused Housing Tax (UHT), which came into effect in 2022, is intended to tax vacant or underused residential property owned by non-resident non-Canadians. However, the rules as currently enacted require many Canadian corporations, partnerships and trusts — including those with no foreign ownership or foreign beneficiaries — that own residential property to file an annual return for each property even where no tax is payable.

Under current rules, significant penalties apply to those who fail to file or are late filing UHT returns.

To reduce the compliance burden, the Department proposes to expand the definition of an “excluded owner” to include “specified Canadian corporations,” partners of “specified Canadian partnerships,” and trustees of “specified Canadian trusts” (as defined in the Underused Housing Tax Act).

As excluded owners, these owners would no longer have UHT reporting obligations. The proposed changes would apply for 2023 and subsequent calendar years. These owners must still file UHT returns for the 2022 taxation year.

Additional technical changes were also announced in the FES:

• A new exemption for residential properties held as a place of residence for employees [effective for 2023 and subsequent calendar years]
• Unitized (condominiumized) apartment buildings are not to be considered residential property for UHT purposes [effective for 2022 and subsequent calendar years]
• An individual or a spousal unit is allowed to claim the vacation property exemption for only one residential property for a calendar year [effective for 2024 and subsequent calendar years]

The FES also proposes to reduce minimum penalties to $1,000 for individuals and $2,000 for corporations for each failure to file (currently $5,000 and 10,000, respectively). If enacted, this change would apply to 2022 and subsequent calendar years.

Dividend received deduction by financial institutions

Budget 2023 proposed to deny deductions for dividends received by financial institutions on shares that are mark-to-market property. The FES proposes an exception to this measure for dividends received on taxable preferred shares (as defined in the Income Tax Act, or ITA) after 2023.

Concessional loans

Concessional loans are generally loans that do not bear interest or bear interest at below-market rates. 

In response to a 2021 Tax Court of Canada decision, the FES proposes to amend the ITA to provide that bona fide concessional loans with reasonable repayment terms from public authorities will generally not be considered government assistance for income tax purposes. This measure would come into force on November 21, 2023.

Non-compliant short-term rentals

Effective January 1, 2024, the Department proposes to deny income tax deductions for expenses incurred — including interest expenses — to earn short-term rental income in provinces and municipalities that have prohibited short-term rentals. The denial of expenses will also apply where short-term rental operators are non-compliant with the applicable provincial or municipal licensing, permitting, or registration requirements.

Joint venture election

Under current Goods and Services Tax / Harmonized Sales Tax (GST/HST) rules, a joint venture (JV) is not a person and cannot register or account for tax.

Each participant in the JV is required to account for their proportionate share of tax separately. An election is available to help simplify tax accounting where the activities under the JV agreement meet the definition of eligible activities or prescribed activities in the Joint Venture (GST/HST) Regulations.

The FES proposes new rules intended to allow more participants to benefit from the simplified tax accounting available through this election. Key changes include:

• Replacing the current “eligible activities” requirement with an “all or substantially all commercial activities” condition
• Requiring all electing participants to be registered for GST/HST

The Department is seeking consultation on the proposed changes and transitional considerations in respect of this election. The changes are currently proposed to come into force upon royal assent.

Removing GST/HST from psychotherapist and counselling therapist services

The FES proposes to add psychotherapists and counselling therapists to the list of healthcare practitioners whose professional services rendered to individuals are exempt from the GST/HST. The proposed changes will apply on royal assent of the enacting legislation.

Removing GST from new co-op rental housing

Earlier this year, the government announced an enhanced GST rental rebate to remove the GST from new purpose-built rental housing projects. The FES announced that cooperative housing corporations that provide long-term rental accommodation would also be eligible for the removal of the GST on new rental housing, provided all other conditions have been met.

Previously announced measures

The FES confirmed the Department’s intention to proceed with several previously announced tax measures. The Department indicated these measures will consider consultations and deliberations from earlier releases.

Significant measures include the following:

• Strengthening the Intergenerational Business Transfer Framework 
• Clean energy investment tax credits and enhanced tax rates for zero-emission technology manufacturers
• Modernizing the general anti-avoidance rule (GAAR)
• Employee ownership trusts
• Substantive Canadian-controlled private corporations
• The excessive interest and financing expenses limitation (EIFEL) rules
• Digital services tax
• Global minimum tax

MNP has participated in consultations on many of these measures to highlight considerations and provide recommendations for implementing the proposals. You can view our latest submission here

Other business measures

Canada Emergency Business Account

As announced earlier this year, the repayment deadline for CEBA loans to qualify for partial loan forgiveness of up to $20,000 is extended from December 31, 2023, to January 18, 2024. A further extension to March 28, 2024, is available for CEBA loan holders who apply for refinancing with their financial institution by January 18, 2024.