Table of Contents
- Tax Measures: Supplementary Information
- Personal Income Tax Measures
- Tax-Free First Home Savings Account
- Home Buyers’ Tax Credit
- Multigenerational Home Renovation Tax Credit
- Home Accessibility Tax Credit
- Residential Property Flipping Rule
- Labour Mobility Deduction for Tradespeople
- Medical Expense Tax Credit for Surrogacy and Other Expenses
- Annual Disbursement Quota for Registered Charities
- Charitable Partnerships
- Amendments to the Children’s Special Allowances Act and to the Income Tax Act
- Borrowing by Defined Benefit Pension Plans
- Reporting Requirements for RRSPs and RRIFs
- Business Income Tax Measures
- Canada Recovery Dividend and Additional Tax on Banks and Life Insurers
- Investment Tax Credit for Carbon Capture, Utilization, and Storage
- Clean Technology Tax Incentives – Air-Source Heat Pumps
- Critical Mineral Exploration Tax Credit
- Flow-Through Shares for Oil, Gas, and Coal Activities
- Small Business Deduction
- International Financial Reporting Standards for Insurance Contracts (IFRS 17)
- Hedging and Short Selling by Canadian Financial Institutions
- Application of the General Anti-Avoidance Rule to Tax Attributes
- Genuine Intergenerational Share Transfers
- Substantive CCPCs
- International Tax Measures
- Sales and Excise Tax Measures
- Other Tax Measures
- Previously Announced Measures
- Notice of Ways and Means Motion to amend the Income Tax Act and Other Legislation
- Notice of Ways and Means Motion to amend the Excise Tax Act
- Notice of Ways and Means Motion to amend the Excise Act, 2001
- Notice of Ways and Means Motion to amend the Excise Act
This annex provides detailed information on tax measures proposed in the Budget.
Table 1 lists these measures and provides estimates of their fiscal impact.
The annex also provides Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act, the Excise Act, 2001, the Excise Act and other legislation and draft amendments to various regulations.
In this annex, references to “Budget Day” are to be read as references to the day on which this Budget is presented.
|Personal Income Tax|
|Tax-Free First Home Savings Account||-||-||55||215||225||230||725|
|Home Buyers’ Tax Credit||30||125||130||130||130||130||675|
|Multigenerational Home Renovation Tax Credit||-||5||25||25||25||25||105|
|Home Accessibility Tax Credit||3||15||15||15||15||15||78|
|Residential Property Flipping Rule||-||-4||-15||-15||-15||-15||-64|
|Labour Mobility Deduction for Tradespeople||25||110||110||115||115||120||595|
|Medical Expense Tax Credit for Surrogacy and Other Expenses||4||15||15||15||15||15||79|
|Annual Disbursement Quota for Registered Charities||-||-||-||-||-||-||-|
|Amendments to the Children’s Special Allowances Act and to the Income Tax Act||-||-||-||-||-||-||-|
|Borrowing by Defined Benefit Pension Plans||-||-||-||-||-||-||-|
|Reporting Requirements for RRSPs and RRIFs||-||-||-||-||-20||-30||-50|
|Business Income Tax|
|Canada Recovery Dividend||-||-810||-810||-810||-810||-810||-4,050|
|Additional Tax on Banks and Life Insurers||-||-290||-460||-430||-430||-445||-2,055|
|Investment Tax Credit for Carbon Capture, Utilization, and Storage||-||35||70||285||755||1,455||2,600|
|Clean Technology Incentives – Air Source Heat Pumps||-||9||15||10||10||9||53|
|Critical Mineral Exploration Tax Credit||-||65||45||110||90||90||400|
|Flow-Through Shares for Oil, Gas, and Coal Activities||-||-||-1||-2||-3||-3||-9|
|Small Business Deduction||-||10||165||160||160||165||660|
|International Financial Reporting Standards for Insurance Contracts (IFRS 17)||-||-||-575||-630||-565||-580||-2,350|
|Hedging and Short Selling by Canadian Financial Institutions||-||-65||-135||-140||-145||-150||-635|
|Application of the General Anti-Avoidance Rule to Tax Attributes||-||-||-||-||-||-||-|
|Genuine Intergenerational Share Transfers||-||-||-||-||-||-||-|
|International Tax Measures|
|International Tax Reform|
Pillar One – Reallocation of Taxing Rights3
Pillar Two – Global Minimum Tax4
|Exchange of Tax Information on Digital Economy Platform Sellers||-||-||-||-||-||-||-|
|Interest Coupon Stripping||-||-80||-125||-140||-145||-150||-640|
|Sales and Excise Tax Measures|
|GST/HST Health Care Rebate||-||3||3||3||3||4||16|
|GST/HST on Assignment Sales by Individuals||-||-10||-10||-10||-10||-10||-50|
|Taxation of Vaping Products||-||-69||-145||-145||-145||-150||-654|
|Cannabis Taxation Framework and General Administration under the Excise Act, 2001||-||-||-||-||-||-||-|
|WTO Settlement on the 100-per-cent Canadian Wine Exemption||-||-55||-80||-80||-85||-90||-390|
|Other Tax Measure|
|Amendments to the Nisga’a Final Agreement Act to Advance Tax Measures in the Nisga’a Nation Taxation Agreement||-||-||-||-||-||-||-|
1 A positive amount represents a decrease in revenue; a negative amount represents an increase in revenue.
Personal Income Tax Measures
Tax-Free First Home Savings Account
Budget 2022 proposes to create the Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home. Contributions to an FHSA would be deductible and income earned in an FHSA would not be subject to tax. Qualifying withdrawals from an FHSA made to purchase a first home would be non-taxable.
Some key design features of the FHSA are described below. The government will release its proposals for other design elements in the near future.
To open an FHSA, an individual must be a resident of Canada, and at least 18 years of age. In addition, the individual must not have lived in a home that they owned either:
- at any time in the year the account is opened, or
- during the preceding four calendar years.
Individuals would be limited to making non-taxable withdrawals in respect of a single property in their lifetime.
Once an individual has made a non-taxable withdrawal to purchase a home, they would be required to close their FHSAs within a year from the first withdrawal and would not be eligible to open another FHSA.
The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000. The full annual contribution limit would be available starting in 2023.
Unused annual contribution room could not be carried forward, meaning an individual contributing less than $8,000 in a given year would still face an annual limit of $8,000 in subsequent years.
An individual would be permitted to hold more than one FHSA, but the total amount that an individual contributes to all of their FHSAs could not exceed their annual and lifetime FHSA contribution limits.
Withdrawals and Transfers
Amounts withdrawn to make a qualifying first home purchase would not be subject to tax. Amounts that are withdrawn for other purposes would be taxable.
To provide flexibility, an individual could transfer funds from an FHSA to a registered retirement savings plan (RRSP) (at any time before the year they turn 71) or registered retirement income fund (RRIF). Transfers to an RRSP or RRIF would not be taxable at the time of transfer, but amounts would be taxed when withdrawn from the RRSP or RRIF in the usual manner. Transfers would not reduce, or be limited by, the individual’s available RRSP room. Withdrawals and transfers would not replenish FHSA contribution limits.
If an individual has not used the funds in their FHSA for a qualifying first home purchase within 15 years of first opening an FHSA, their FHSA would have to be closed. Any unused savings could be transferred into an RRSP or RRIF, or would otherwise have to be withdrawn on a taxable basis.
Individuals would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the $40,000 lifetime and $8,000 annual contribution limits. These transfers would not restore an individual’s RRSP contribution room.
Home Buyers’ Plan
The home buyers’ plan (HBP) allows individuals to withdraw up to $35,000 from an RRSP to purchase or build a home without having to pay tax on the withdrawal. Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year in which the withdrawal was made.
The HBP will continue to be available as under existing rules. However, an individual will not be permitted to make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase.
The government would work with financial institutions to have the infrastructure in place for individuals to be able to open an FHSA and start contributing at some point in 2023.
Home Buyers’ Tax Credit
First-time home buyers who acquire a qualifying home can obtain up to $750 in tax relief by claiming the First-Time Home Buyers’ Tax Credit (HBTC). The value of this non-refundable credit is calculated by multiplying the credit amount of $5,000 by the lowest personal income tax rate (15 per cent in 2022). Any unused portion of the HBTC may be claimed by an individual’s spouse or common-law partner as long as the combined total does not exceed $750 in tax relief.
An individual is a first-time home buyer if neither the individual nor the individual’s spouse or common-law partner owned and lived in another home in the calendar year of the home purchase or in any of the four preceding calendar years. This credit is also available for certain acquisitions of a home by or for the benefit of an individual who is eligible for the Disability Tax Credit, even if the first-time home buyer condition is not met.
A qualifying home is one that the individual or individual’s spouse or common-law partner intends to occupy as their principal residence no later than one year after its acquisition.
Budget 2022 proposes to double the HBTC amount to $10,000, which would provide up to $1,500 in tax relief to eligible home buyers. Spouses or common-law partners would continue to be able to split the value of the credit as long as the combined total does not exceed $1,500 in tax relief.
This measure would apply to acquisitions of a qualifying home made on or after January 1, 2022.
Multigenerational Home Renovation Tax Credit
Budget 2022 proposes to introduce a new Multigenerational Home Renovation Tax Credit. The proposed refundable credit would provide recognition of eligible expenses for a qualifying renovation. A qualifying renovation would be one that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a qualifying relation. The value of the credit would be 15 per cent of the lesser of eligible expenses and $50,000.
Seniors and adults with disabilities would be considered eligible persons for the purpose of the Multigenerational Home Renovation Tax Credit.
- Seniors are individuals who are 65 years of age or older at the end of the taxation year that includes the end of the renovation period.
- Adults with disabilities are individuals who are 18 years of age or older at the end of the taxation year that includes the end of the renovation period, and who are eligible for the Disability Tax Credit at any time in that year.
For the purposes of this credit, a qualifying relation, in respect of an eligible person, would be an individual who is 18 years of age or older at the end of the taxation year that includes the end of the renovation period and is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the eligible person (which includes the spouse or common-law partner of one of those individuals).
The Multigenerational Home Renovation Tax Credit may be claimed by:
- an individual who ordinarily resides, or intends to ordinarily reside, in the eligible dwelling within twelve months after the end of the renovation period and who is:
- an eligible person;
- the spouse or common-law partner of the eligible person;
- a qualifying relation, in respect of an eligible person; or
- a qualifying relation, in respect of an eligible person, who owns the eligible dwelling.
Where one or more eligible claimants make a claim in respect of an eligible renovation, the total of all amounts claimed in respect of the qualifying renovation must not exceed $50,000. If the claimants cannot agree as to what portion of the amounts each can claim, the Minister of National Revenue would be allowed to fix the portions.
For the purposes of this credit, an eligible dwelling would be defined as a housing unit that is:
- owned (either jointly or otherwise) by the eligible person, the spouse or common-law partner of the eligible person or a qualifying relation in respect of the eligible person; and
- where the eligible person and a qualifying relation in respect of the eligible person ordinarily reside, or intend to ordinarily reside, within twelve months after the end of the renovation period.
An eligible dwelling would include the land subjacent to the housing unit and the immediately contiguous land, but would not include the portion of that land that exceeds the greater of ½ hectare and the portion of that land that the individual establishes is necessary for the use and enjoyment of the housing unit as a residence.
For the purposes of this credit, a qualifying renovation would be defined as a renovation or alteration of, or addition to, an eligible dwelling that is:
- of an enduring nature and integral to the eligible dwelling; and
- undertaken to enable an eligible person to reside in the dwelling with a qualifying relation, by establishing a secondary unit within the dwelling for occupancy by the eligible person or the qualifying relation.
A secondary unit would be defined as a self-contained dwelling unit with a private entrance, kitchen, bathroom facilities and sleeping area. The secondary unit could be newly constructed or created from an existing living space that did not already meet the requirements to be a secondary unit. To be eligible, relevant building permits for establishing a secondary unit must be obtained and renovations must be completed in accordance with the laws of the jurisdiction in which an eligible dwelling is located.
One qualifying renovation would be permitted to be claimed in respect of an eligible person over their lifetime.
For the purposes of this credit, the renovation period means a period that:
- begins at the time that an application for a building permit for a qualifying renovation is submitted; and
- ends at the time when the qualifying renovation passes a final inspection, or proof of completion of the project according to all legal requirements of the jurisdiction in which the renovation was undertaken is otherwise obtained.
The credit would be available to be claimed for the taxation year that includes the end of the renovation period.
Expenses would be eligible for the Multigenerational Home Renovation Tax Credit if they are made or incurred during the renovation period, for the purpose of a qualifying renovation, and are reasonable in the context of that purpose (i.e., enabling an eligible person to reside in the dwelling with a qualifying relation).
Eligible expenses would include the cost of labour and professional services, building materials, fixtures, equipment rentals and permits. Items such as furniture, as well as items that retain a value independent of the renovation (such as construction equipment and tools), would not be integral to the dwelling and expenses for such items would therefore not qualify for the credit.
The following are examples of other expenses that would not be eligible for the Multigenerational Home Renovation Tax Credit:
- the cost of annual, recurring or routine repair or maintenance;
- expenses for household appliances and devices, such as audio-visual electronics;
- payments for services such as outdoor maintenance and gardening, housekeeping or security;
- the costs of financing a renovation (e.g., mortgage interest costs);
- goods or services provided by a person not dealing at arm’s length with the claimant, unless that person is registered for Goods and Services Tax/Harmonized Sales Tax purposes under the Excise Tax Act; and
- any expenses not supported by receipts.
Expenses that may be included in a claim must be reduced by any reimbursement or any other form of assistance that an individual is or was entitled to receive, including any related rebates, such as those for Goods and Services Tax/Harmonized Sales Tax. Expenses would not be eligible for the Multigenerational Home Renovation Tax Credit if they are claimed under the Medical Expense Tax Credit and/or Home Accessibility Tax Credit.
Coming into Force
This measure would apply for the 2023 and subsequent taxation years, in respect of work performed and paid for and/or goods acquired on or after January 1, 2023.
Home Accessibility Tax Credit
The Home Accessibility Tax Credit is a non-refundable tax credit that provides recognition of eligible home renovation or alteration expenses in respect of an eligible dwelling of a qualifying individual. A qualifying individual is an individual who is eligible to claim the Disability Tax Credit at any time in a tax year, or an individual who is 65 years of age or older at the end of a tax year. The value of the credit is calculated by applying the lowest personal income tax rate (15 per cent in 2022) to an amount that is the lesser of eligible expenses and $10,000.
To better support independent living, Budget 2022 proposes to increase the annual expense limit of the Home Accessibility Tax Credit to $20,000. This enhancement would provide additional tax support for more significant renovations undertaken to improve accessibility, such as building a bedroom and/or a bathroom to permit first-floor occupancy for a qualifying person who has difficulty accessing living spaces on other floors.
This measure would apply to expenses incurred in the 2022 and subsequent taxation years.
Residential Property Flipping Rule
Property flipping involves purchasing real estate with the intention of reselling the property in a short period of time to realize a profit. Profits from flipping properties are fully taxable as business income, meaning they are not eligible for the 50-per-cent capital gains inclusion rate or the Principal Residence Exemption.
The Government is concerned that certain individuals engaged in flipping residential real estate are not properly reporting their profits as business income. Instead, these individuals may be improperly reporting their profits as capital gains and, in some cases, claiming the Principal Residence Exemption.
Budget 2022 proposes to introduce a new deeming rule to ensure profits from flipping residential real estate are always subject to full taxation. Specifically, profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months would be deemed to be business income.
The new deeming rule would not apply if the disposition of property is in relation to at least one of the life events listed below:
- Death: a disposition due to, or in anticipation of, the death of the taxpayer or a related person.
- Household addition: a disposition due to, or in anticipation of, a related person joining the taxpayer’s household or the taxpayer joining a related person’s household (e.g., birth of a child, adoption, care of an elderly parent).
- Separation: a disposition due to the breakdown of a marriage or common-law partnership, where the taxpayer has been living separate and apart from their spouse or common-law partner because of a breakdown in the relationship for a period of at least 90 days.
- Personal safety: a disposition due to a threat to the personal safety of the taxpayer or a related person, such as the threat of domestic violence.
- Disability or illness: a disposition due to a taxpayer or a related person suffering from a serious disability or illness.
- Employment change: a disposition for the taxpayer or their spouse or common-law partner to work at a new location or due to an involuntary termination of employment. In the case of work at a new location, the taxpayer’s new home must be at least 40 kilometres closer to the new work location.
- Insolvency: a disposition due to insolvency or to avoid insolvency (i.e., due to an accumulation of debts).
- Involuntary disposition: a disposition against someone’s will, for example, due to, expropriation or the destruction or condemnation of the taxpayer’s residence due to a natural or man-made disaster.
Where the new deeming rule applies, the Principal Residence Exemption would not be available.
Where the new deeming rule does not apply because of a life event listed above or because the property was owned for 12 months or more, it would remain a question of fact whether profits from the disposition are taxed as business income.
The measure would apply in respect of residential properties sold on or after January 1, 2023.
Labour Mobility Deduction for Tradespeople
Temporary relocations to obtain employment may not qualify for existing tax recognition for moving or travel expenses, particularly if they do not involve a change in an individual’s ordinary residence and the employer does not provide relocation assistance.
Budget 2022 proposes to introduce a Labour Mobility Deduction for Tradespeople to recognize certain travel and relocation expenses of workers in the construction industry, for whom such relocations are relatively common. This measure would allow eligible workers to deduct up to $4,000 in eligible expenses per year.
For the purposes of this deduction, an eligible individual would be a tradesperson or an apprentice who:
- makes a temporary relocation that enables them to obtain or maintain employment under which the duties performed by the taxpayer are of a temporary nature in a construction activity at a particular work location; and
- ordinarily resided prior to the relocation at a residence in Canada, and during the period of the relocation, at temporary lodging in Canada near that work location.
Eligible Temporary Relocation
To qualify as an eligible temporary relocation:
- the temporary lodging must be at least 150 kilometres closer than the ordinary residence to the particular work location;
- the particular work location must be located in Canada; and
- the temporary relocation must be for a minimum duration of 36 hours.
To ensure that the measure does not subsidize long-distance commuting or expenses of those who choose to live far from where they typically work, it would further be required that the particular work location not be in the locality in which the eligible individual principally works (i.e., carries on employment or business activity).
Eligible expenses in respect of an eligible temporary relocation would be reasonable amounts associated with expenses incurred for:
- temporary lodging for the eligible individual near the particular work location;
- transportation for the individual for one round trip from the location where the individual ordinarily resides to the temporary lodging; and
- meals for the individual in the course of travel while making one round trip to and from the temporary lodging.
An individual would not be permitted to claim lodging expenses for a period of time under this measure unless they maintain an ordinary residence elsewhere that remains available for their or their immediate family’s use during that time period.
An individual would not be allowed to claim expenses in respect of which they received financial assistance from an employer that is not included in income. The maximum amount of expenses that could be claimed in respect of a particular eligible temporary relocation would be capped at 50 per cent of the worker’s employment income from construction activities at the particular work location in the year. Flexibility would be provided by allowing expenses to be claimed in a tax year before or after the year they were incurred provided they were not deductible in a prior year. This would enable workers to claim expenses in the tax year they earned the associated employment income and address cases where expenses related to a relocation span two tax years.
Amounts claimed under the Labour Mobility Deduction for Tradespeople would not be deductible under the existing Moving Expense Deduction. Similarly, amounts that are otherwise deducted could not be claimed under the Labour Mobility Deduction for Tradespeople.
Coming into Force
This measure would apply to the 2022 and subsequent taxation years.
Medical Expense Tax Credit for Surrogacy and Other Expenses
The Medical Expense Tax Credit (METC) is a 15-per-cent non-refundable tax credit that recognizes the effect of above-average medical or disability-related expenses on an individual’s ability to pay tax. For 2022, the METC is available for qualifying medical expenses in excess of the lesser of $2,479 and three per cent of the individual’s net income. Eligible expenses must generally be in respect of products and services received by the patient, defined as the taxpayer, the taxpayer’s spouse or common-law partner or certain dependants of the taxpayer.
Individuals who intend to be parents may pursue a number of approaches to build their families, including the use of assisted reproductive technologies. Many of the costs related to the use of reproductive technologies are already eligible expenses for the METC. For example, in vitro fertilization procedures and associated expenses are generally recognized as eligible expenses of the taxpayer under the credit, provided that the expenses relate to the patient, as described above. However, some approaches to building a family involve medical expenses for individuals other than the intended parents. Budget 2022 proposes to broaden the METC to recognize these circumstances.
Medical Expenses Related to a Surrogate Mother or Sperm, Ova or Embryo Donor
Budget 2022 proposes to provide a broader definition of patient in cases where an individual would rely on a surrogate or a donor in order to become a parent. In these cases, patient would be defined as:
- the taxpayer;
- the taxpayer’s spouse or common-law partner;
- a surrogate mother; or
- a donor of sperm, ova or embryos.
This broader definition would allow medical expenses paid by the taxpayer, or the taxpayer’s spouse or common-law partner, with respect to a surrogate mother or donor to be eligible for the METC. For example, expenses paid by the intended parent to a fertility clinic for an in vitro fertilization procedure with respect to a surrogate mother or for hormone medication for an ova donor would be eligible for the METC.
Reimbursement of Medical Expenses Incurred by a Surrogate Mother or Sperm, Ova or Embryo Donor
In Canada, it is illegal to pay consideration to surrogate mothers or donors; however, surrogate mothers and donors may receive reimbursement from intended parents of certain out-of-pocket expenses, including some medical expenses. Under current tax rules, reimbursements for medical expenses with respect to these individuals are not currently eligible to be claimed by the intended parents.
Budget 2022 proposes to allow reimbursements paid by the taxpayer to a patient, under the expanded definition proposed above, to be eligible for the METC, provided that the reimbursement is made in respect of an expense that would generally qualify under the credit. For example, the METC could be available for reimbursements paid by the taxpayer for expenses incurred by a surrogate mother with respect to an in vitro fertilization procedure or prescription medication related to their pregnancy.
Fees Paid to Acquire Donated Human Sperm or Ova
Budget 2022 also proposes to allow fees paid to fertility clinics and donor banks in order to obtain donor sperm or ova to be eligible under the METC. Such expenses would be eligible where the sperm or ova are acquired for use by an individual in order to become a parent.
Only expenses incurred in Canada would be eligible. In Canada, surrogacy and gamete and embryo donation are regulated under the Assisted Human Reproduction Act. The Reimbursement Related to Assisted Human Reproduction Regulations outline which reimbursements are permissible under the Assisted Human Reproduction Act. All expenses claimed under the METC would be required to be in accordance with the Assisted Human Reproduction Act and associated regulations.
Coming into Force
This measure would apply to expenses incurred in the 2022 and subsequent taxation years.
Annual Disbursement Quota for Registered Charities
Registered charities are generally required to expend a minimum amount each year, referred to as the disbursement quota (DQ). The DQ is currently equal to 3.5 per cent of the registered charity’s property not used directly in charitable activities or administration. The DQ is designed to ensure the timely disbursement of tax-assisted funds towards charitable purposes, while allowing for reasonable asset growth within the charitable sector to support charitable activities in the future.
Budget 2022 proposes to make a number of changes to increase expenditures by larger charities, and to improve the enforcement and operation of the DQ rules.
Modifying the Rate of the DQ
Budget 2022 proposes to increase the DQ rate from 3.5 per cent to 5 per cent for the portion of property not used in charitable activities or administration that exceeds $1 million. This would increase expenditures by charities overall, while accommodating smaller grant-making charities that may not be able to realize the same investment returns as larger charities.
In addition, Budget 2022 proposes to amend the Income Tax Act to clarify that expenditures for administration and management are not considered qualifying expenditures for the purpose of satisfying a charity’s DQ.
Relief for Certain Circumstances
Where a charity is unable to meet its DQ, it may apply to the CRA and request relief from the DQ requirement. If granted, a charity is deemed to have a charitable expenditure for the tax year.
To better reflect actual expenditures on charitable activities, Budget 2022 proposes to amend the existing rule such that the CRA will have the discretion to grant a reduction in a charity’s DQ obligation for any particular tax year. In addition, to improve transparency with respect to charities that have a reduction to their DQ, Budget 2022 proposes to allow the CRA to publicly disclose information relating to such a decision.
The Income Tax Act alsoallows a charity to apply to the CRA for permission to accumulate property for a specific purpose. If granted, any property accumulated in accordance with the approval, including any income earned, is not included in calculating a charity’s DQ.
Given prior changes that simplified the DQ by removing a number of spending requirements, as well as existing provisions, which provide relief to charities, the accumulation of property rule is no longer necessary. Accordingly, Budget 2022 proposes to remove the accumulation of property rule.
Coming into Force
These measures would apply to charities in respect of their fiscal periods beginning on or after January 1, 2023. The amendment removing the accumulation of property rule would not apply to approved property accumulations resulting from applications submitted by a charity prior to January 1, 2023.
Under the Income Tax Act, registered charities are limited to devoting their resources to charitable activities they carry on themselves or providing gifts to qualified donees. Where charities conduct activities through an intermediary organization (other than a qualified donee), they must maintain sufficient control and direction over the activity such that it can be considered their own.
Budget 2022 proposes a number of changes to improve the operation of these rules, allowing charities to make qualified disbursements to organizations that are not qualified donees, provided that they meet certain accountability requirements under the Income Tax Act. Additional measures designed to ensure compliance by charities with these new rules are forthcoming.
Budget 2022 proposes to allow charities to make qualifying disbursements to organizations that are not qualified donees, provided that these disbursements are in furtherance of the charity’s charitable purposes and the charity ensures that the funds are applied to charitable activities by the grantee.
In addition, in order to be considered a qualifying disbursement, charities will be required to meet certain mandatory accountability requirements defined in the Income Tax Act that are designed to ensure that their resources will be used for charitable purposes, including:
- Conducting a pre-grant inquiry sufficient to provide reasonable assurances that the charity’s resources will be used for the purposes set out in the written agreement. This will include a review of the identity, past history, practices, activities and areas of expertise of the grantee.
- Having a written agreement between the charity and the grantee, including:
- the terms and conditions of the funding provided;
- a description of the charitable activities that the recipient will undertake;
- a requirement that any funds not used for the purposes for which they were granted be returned to the charity; and
- a requirement that records relating to the use of the charity’s resources be maintained and accessible for a minimum of six years following the end of the relevant taxation year.
- Monitoring the grantee, which would include receiving periodic reports on the use of the charity’s resources, at least annually (e.g., details on the use of the funds, compliance with the terms of the grant, and progress made toward the purposes of the grant) and taking remedial action as required.
- Receiving full and detailed final reports from the grantee, including outlining the results achieved with the charity’s resources, detailing how the funds were spent, and providing sufficient documentary evidence to demonstrate that funds were used for the purposes for which they were granted. The charity would also be required to demonstrate that these final reports and supporting documentation were reviewed and approved by the charity.
- Publicly disclosing on its annual information return information relating to grants above $5,000.
Books and Records
To ensure that the CRA is able to verify that charitable resources have been applied to the purposes for which they have been granted, Budget 2022 proposes to require charities to, upon request by the CRA, take all reasonable steps to obtain receipts, invoices, or other documentary evidence from grantees to demonstrate amounts were spent appropriately.
Modifications to the current framework could increase the risk of a charity acting as a conduit for donations to other organizations. To address this issue, Budget 2022 proposes to extend an existing provision in the Income Tax Act, which currently applies to registered Canadian amateur athletic associations and registered journalism organizations, to registered charities. This rule would prohibit registered charities from accepting gifts, the granting of which was expressly or implicitly conditional on making a gift to a person other than a qualified donee.
Coming into Force
These changes would apply as of royal assent of the enacting legislation.
Amendments to the Children’s Special Allowances Act and to the Income Tax Act
As a consequence of An Act respecting First Nations, Inuit and Métis children, youth and families, which came into force on January 1, 2020, Budget 2022 proposes legislative amendments to the Children’s Special Allowances Act and its regulations and to the Income Tax Act to ensure that the special allowance, the Canada Child Benefit and the Canada Workers Benefit amount for families continue to support children in need of protection. Budget 2022 also proposes to amend the Income Tax Act to ensure consistent tax treatment of kinship care providers and foster parents who receive financial assistance from Indigenous communities.
Children’s Special Allowance
The Government of Canada pays the Children’s Special Allowance in respect of children who are in the care of, and maintained by, a federal, provincial, territorial or First Nations agency or institution (e.g., a child protection agency).
The Children’s Special Allowances Act currently requires an agency or institution to be licensed, or authorized to operate, under a federal, provincial or territorial law in order to be eligible for the special allowance.
Budget 2022 proposes to amend the Children’s Special Allowances Act and its regulations to allow the payment of the special allowance in respect of a child who is maintained under Indigenous laws where an Indigenous governing body has provided notice of intent to exercise its legislative authority in relation to child and family services to the Government of Canada (or has done so implicitly by requesting to enter into a coordination agreement for such services), under An Act respecting First Nations, Inuit and Métis children, youth and families (referred to hereafter as an “Indigenous governing body”).
Proposed amendments would also provide for adjustments to be made to the definition of Indigenous governing body, for the purpose of the special allowance, through the regulations. This would provide some flexibility for the Government of Canada to adapt to future developments in this evolving area as Indigenous communities work to establish their delivery models for child and family services.
Budget 2022 also proposes to amend the Children’s Special Allowance Regulations to allow:
- An Indigenous governing body to be recognized, where all other eligibility requirements are met, as:
- an eligible applicant for the special allowance; and
- maintaining a child for the purpose of the special allowance.
- For the exchange of information between the Government of Canada and an Indigenous governing body for the purpose of the administration of a social, income assistance or health insurance program of the Indigenous governing body, under certain conditions.
Tax Measures for Kinship Care Providers and Foster Parents of Indigenous Children
To ensure consistent treatment between kinship care providers and foster parents receiving financial assistance from an Indigenous governing body and those receiving such assistance from a provincial/territorial government, Budget 2022 proposes to amend the Income Tax Act to:
- clarify that a kinship care provider may be considered to be the parent of a child in their care for the purposes of the Canada Workers Benefit amount for families and the Canada Child Benefit, regardless of whether they receive financial assistance from an Indigenous governing body, provided they meet all other eligibility requirements; and
- ensure that financial assistance payments for the care of a child received by kinship care providers or foster parents from an Indigenous governing body are neither taxable, nor included in income for the purposes of determining entitlement to income-tested benefits and credits.
Coming into Force
These measures would apply for the 2020 and subsequent taxation years.
Borrowing by Defined Benefit Pension Plans
The rules in the Income Tax Regulations currently restrict a registered pension plan from borrowing money, except in limited circumstances. First, borrowing is allowed for the acquisition of income-producing real property where the borrowed amount does not exceed the cost of the real property and only the real property is used as security for the loan. Second, borrowing is permitted where the term of the loan does not exceed 90 days and the property of the plan is not pledged as security for the loan (unless the money is borrowed to avoid the distress sale of plan assets). Temporary rules permit borrowing for terms longer than 90 days if repaid by April 30, 2022.
Budget 2022 proposes to provide more borrowing flexibility to administrators of defined benefit registered pension plans (other than individual pension plans) by maintaining the borrowing rule for real property acquisitions and replacing the 90-day term limit with a limit on the total amount of additional borrowed money (for purposes other than acquiring real property), equal to the lesser of:
- 20 per cent of the value of the plan’s assets (net of unpaid borrowed amounts); and
- the amount, if any, by which 125 per cent of the plan’s actuarial liabilities exceeds the value of the plan’s assets (net of unpaid borrowed amounts).
The new borrowing limit would be redetermined on the first day of each fiscal year of the plan, based on the value of assets and unpaid borrowed amounts on that day and the actuarial liabilities on the effective date of the plan’s most recent actuarial valuation report. Each redetermined limit would not apply to borrowings entered into before that time.
Plan administrators must continue to comply with the provisions of federal or provincial pension benefit standards legislation which ensure that pension funds are administered with a duty of care, investments are made in a reasonable and prudent manner and the plan is funded in accordance with prescribed funding standards. These standards are designed to manage the risks to the promised benefits of plan members and ensure the stability of registered pension plans. They would be unaffected by the proposed measure.
This measure would apply to amounts borrowed by defined benefit registered pension plans (other than individual pension plans) on or after Budget Day.
Reporting Requirements for RRSPs and RRIFs
Registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) form an important part of Canada’s retirement income system. The tax deferral provided by these savings vehicles assists and encourages Canadians to save for retirement and achieve their retirement income goals.
Financial institutions are currently required to report annually to the Canada Revenue Agency the payments out of, and contributions to, each RRSP and RRIF that they administer. By comparison, financial institutions file a comprehensive annual information return in respect of each tax-free savings account that they administer, which includes the fair market value of property held in the account.
Budget 2022 proposes to require financial institutions to annually report to the Canada Revenue Agency the total fair market value, determined at the end of the calendar year, of property held in each RRSP and RRIF that they administer. This information would assist the Canada Revenue Agency in its risk-assessment activities regarding qualified investments held by RRSPs and RRIFs.
This measure would apply to the 2023 and subsequent taxation years.
Business Income Tax Measures
Canada Recovery Dividend and Additional Tax on Banks and Life Insurers
Budget 2022 proposes to introduce the one-time Canada Recovery Dividend (CRD) and an additional tax on banks and life insurers.
Canada Recovery Dividend
Budget 2022 proposes to introduce the CRD in the form of a one-time 15-per-cent tax on bank and life insurer groups. A group would include a bank or life insurer and any other financial institution (for the purposes of Part VI of the Income Tax Act) that is related to the bank or life insurer.
The CRD would be determined based on a corporation’s taxable income for taxation years ending in 2021. A proration rule would be provided for short taxation years. Bank and life insurer groups subject to the CRD would be permitted to allocate a $1 billion taxable income exemption by agreement amongst group members.
The CRD liability would be imposed for the 2022 taxation year and would be payable in equal amounts over five years.
Additional Tax on Banks and Life Insurers
Budget 2022 proposes to introduce an additional tax of 1.5 per cent of the taxable income for members of bank and life insurer groups (determined in the same manner as the CRD). Bank and life insurer groups subject to the additional tax would be permitted to allocate a $100 million taxable income exemption by agreement amongst group members.
The proposed additional tax would apply to taxation years that end after Budget Day. For a taxation year that includes Budget Day, the additional tax would be prorated based on the number of days in the taxation year after Budget Day.
Investment Tax Credit for Carbon Capture, Utilization, and Storage
Carbon capture, utilization, and storage (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 (typically deep underground) or use the CO2 in industry.
Budget 2022 proposes to introduce an investment tax credit for CCUS (the CCUS Tax Credit). The CCUS Tax Credit would be refundable and available to businesses that incur eligible expenses starting on January 1, 2022.
The CCUS Tax Credit would be available in respect of the cost of purchasing and installing eligible equipment (see “Eligible Equipment” section) used in an eligible CCUS project (see “Eligible Project” section), so long as the equipment was part of a project where the captured CO2 was used for an eligible use (see “Eligible CO2 Uses” section).
The project would also be subject to the required validation and verification process (see “Validation and Verification” section), would need to meet the storage requirements (see “Storage Requirements” section), and a climate-related financial disclosure report would need to be produced (see “Climate Risk Disclosure” section), in order for the CCUS Tax Credit to be claimed.
The following rates would apply to eligible expenses incurred after 2021 through 2030:
- 60 per cent for eligible capture equipment used in a direct air capture project;
- 50 per cent for all other eligible capture equipment; and
- 37.5 per cent for eligible transportation, storage, and use equipment.
Eligible expenses that are incurred after 2030 through 2040 would be subject to the lower rates set out below:
- 30 per cent for eligible capture equipment used in a direct air capture project;
- 25 per cent for all other eligible capture equipment; and
- 18.75 per cent for eligible transportation, storage, and use equipment.
Equipment that will be used solely to capture, transport, store, or use CO2 as part of an eligible CCUS project would be considered eligible equipment.
Investors in CCUS technologies would be able to claim the CCUS Tax Credit on eligible expenses in respect of the tax year in which the expenses are incurred, regardless of when the equipment becomes available for use. The CCUS Tax Credit would not be available for equipment in respect of which a previous owner has received the CCUS Tax Credit.
CCUS equipment would be included in two new capital cost allowance classes:
- 8-per-cent capital cost allowance rate on a declining-balance basis:
- capture equipment: equipment that solely captures CO2, including required processing and compression equipment (not including dual purpose equipment that supports CCUS and production);
- transportation equipment: pipelines or dedicated vehicles for transporting CO2;
- storage equipment: injection and storage equipment; and
- 20-per-cent capital cost allowance rate on a declining-balance basis:
- use equipment: equipment required for using CO2 in an eligible use.
These classes would also include the cost of:
- converting existing equipment for use in a CCUS project or refurbishing eligible equipment;
- equipment for monitoring and tracking CO2; and
- buildings or other structures that solely support a CCUS project.
These classes would be eligible for enhanced first year depreciation under the Accelerated Investment Incentive.
Equipment that is required for hydrogen production, natural gas processing, acid gas injection or that does not support CCUS would be ineligible.
Other expenses that may be related to a CCUS project would not be eligible for the CCUS Tax Credit, including feasibility studies, front end engineering design studies and operating expenses.
Exploration and development expenses associated with storing CO2 would also not be eligible for the CCUS Tax Credit. Nonetheless, in recognition of these expenses that relate to a CCUS project, two new capital cost allowance classes would be established for intangible exploration expenses and development expenses associated with storing CO2. These would be depreciable at rates of 100 per cent and 30 per cent respectively, on a declining-balance basis.
An eligible CCUS project is a new project that captures CO2 that would otherwise be released into the atmosphere, or captures CO2 from the ambient air, prepares the captured CO2 for compression, compresses and transports the captured CO2, and stores or uses the captured CO2. Direct air capture projects, which are eligible for a higher credit rate on capture equipment, must capture CO2 directly from the ambient air. Taxpayers may be involved in one or more of the activities that constitute a CCUS project.
Equipment will only be eligible if it is part of a CCUS project and is put in use in Canada. CO2 must be captured in Canada but can be stored or used outside of Canada (provided the project satisfies the requirements discussed under the “Eligible CO2 Uses” section and is located in a jurisdiction that satisfies the requirements discussed under the “Storage Requirements” section).
CCUS projects would not be eligible where emissions reductions are necessary in order to achieve compliance with the Reduction of Carbon Dioxide Emissions from Coal-fired Generation of Electricity Regulations and the Regulations Limiting Carbon Dioxide Emissions from Natural Gas-fired Generation of Electricity.
Eligible CO2 Uses
The extent to which the CCUS Tax Credit is available for eligible equipment would depend on the end use of the CO2 being captured. Eligible uses would initially include dedicated geological storage and storage in concrete. Enhanced oil recovery would not be eligible.
Where eligible equipment is part of a project that plans to store CO2 through both eligible and ineligible uses, the CCUS Tax Credit would be reduced by the portion of CO2 expected to go to ineligible uses over the life of the project, as set out in initial project plans.
Once the project begins operating, taxpayers would be required to track and account for the amount of CO2 being captured, and the portions that end up going to eligible and ineligible uses. To the extent that the portion of CO2 going to an ineligible use exceeds what was set out in the initial project plans, taxpayers may be required to repay CCUS Tax Credit amounts that were previously paid.
Recovery of the CCUS Tax Credit
Once projects begin to capture CO2, they would be assessed at five-year intervals, to a maximum of 20 years, to determine if a recovery of the CCUS Tax Credit is warranted. Assessments would be based on the total amount of CO2 going to an ineligible use over the five-year period being assessed.
A recovery would be calculated if the portion of CO2 going to an ineligible use is more than five percentage points higher than set out in the initial project plans (i.e., the basis on which the CCUS Tax Credit was paid).
Specific design features of the recovery will be released at a later date.
In the case of qualifying dedicated geological storage, the CCUS Tax Credit will only be available to projects in jurisdictions where there are sufficient regulations to ensure that CO2 is permanently stored as determined by Environment and Climate Change Canada. Initially, the CCUS Tax Credit will only be available to CCUS projects that store the CO2 in Saskatchewan or Alberta. All projects will be subject to relevant federal, provincial and territorial regulations.
For storage in concrete to be considered an eligible use, the process for using and storing CO2 in concrete must be approved by Environment and Climate Change Canada and demonstrate that at least 60 per cent of the CO2 that is injected into the concrete is mineralized and locked into the concrete produced. The CCUS Tax Credit would be available in all jurisdictions so long as the process for storing CO2 in this manner is approved.
Validation and Verification
Projects that expect to have eligible expenses of $100 million or greater over the life of the project based on project plans would generally be required to undergo an initial project tax assessment. The tax assessment would identify the expenses that are eligible for the CCUS Tax Credit, and the tax credit rate that is expected to apply, based on initial project design. Projects could also choose to undergo an initial project tax assessment on a voluntary basis.
Prior to claiming CCUS Tax Credit amounts, eligible expenses would need to be verified by Natural Resources Canada. Verification would occur as soon as possible after the end of the taxpayer’s tax year, and in advance of filing its tax return, in order for the refund to be processed upon filing. Administrative details of this process would be provided at a later date.
CCUS projects that expect to have eligible expenses of $250 million or greater over the life of the project based on project plans would be required to contribute to public knowledge sharing in Canada in order to be eligible for the CCUS Tax Credit.
Details on this process and information to be shared would be provided at a later date.
Climate Risk Disclosure
In order to be eligible for the CCUS Tax Credit, taxpayers would be required to produce a climate-related financial disclosure report highlighting how their corporate governance, strategies, policies and practices will help manage climate-related risks and opportunities and contribute to achieving Canada’s commitments under the Paris Agreement and goal of net zero by 2050.
Details on this process and information to be shared would be provided at a later date.
Coming into Force
This measure would apply to eligible expenses incurred after 2021 and before 2041.
Strategic Environmental Assessment Statement
This measure is expected to have a positive environmental impact by encouraging investment in technologies that would reduce emissions of greenhouse gases. This would help advance the government's Federal Sustainable Development Strategy target to reduce greenhouse gas emissions by 40 to 45 per cent below 2005 levels by 2030, and achieve net-zero greenhouse gas emissions by 2050.
Clean Technology Tax Incentives – Air-Source Heat Pumps
An air-source heat pump is a device that uses electrical energy to provide interior space heating or cooling by exchanging heat with the outside air. As a means to displace the use of fossil fuels for heating, or of providing a more efficient means of heating with electricity (e.g., compared to electric baseboard heaters), air-source heat pumps can play a role in reducing emissions of greenhouse gases and air pollutants associated with heating buildings in Canada.
Capital Cost Allowance for Clean Energy Equipment
Under the Income Tax Act, taxpayers are entitled to deduct a portion of the capital cost of a depreciable property, as capital cost allowance (CCA), in computing their income for each taxation year. With some exceptions, CCA deductions are claimed by class of property and are calculated on a declining-balance basis.
Under the CCA regime, Classes 43.1 and 43.2 of Schedule II to the Income Tax Regulations provide accelerated CCA rates (30 per cent and 50 per cent, respectively) for investments in specified clean energy generation and energy conservation equipment. Property in these classes that is acquired after November 20, 2018 and that becomes available for use before 2024 is eligible for immediate expensing while property that becomes available for use after 2023 and before 2028 is subject to a phase-out from these immediate expensing rules.
In addition, if the majority of the tangible property in a project is eligible for inclusion in Class 43.1 or 43.2, certain intangible project start-up expenses (e.g., engineering and design work, and feasibility studies) are treated as Canadian Renewable and Conservation Expenses. These expenses can generally be deducted in full in the year incurred, carried forward indefinitely for use in future years, or transferred to investors using flow-through shares.
Budget 2022 proposes to expand eligibility under Classes 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating. Eligible property would include equipment that is part of an air-source heat pump system that transfers heat from the outside air, including refrigerant piping, energy conversion equipment, thermal energy storage equipment, control equipment and equipment designed to enable the system to interface with other heating and cooling equipment. Eligible property would not include:
- buildings or parts of buildings;
- energy equipment that backs up an air-source heat pump system; or
- equipment that distributes heated or cooled air or water within a building.
This expansion of Classes 43.1 and 43.2 would apply in respect of property that is acquired and that becomes available for use on or after Budget Day, where it has not been used or acquired for use for any purpose before Budget Day.
Rate Reduction for Zero-Emission Technology Manufacturers
Budget 2021 proposed a temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers. Specifically, taxpayers would be able to apply reduced tax rates on eligible zero-emission technology manufacturing and processing income of:
- 7.5 per cent, where that income would otherwise be taxed at the 15-per-cent general corporate tax rate; and
- 4.5 per cent, where that income would otherwise be taxed at the 9-per-cent small business tax rate.
The reduced tax rates would apply to taxation years that begin after 2021, subject to a phase-out starting in taxation years that begin in 2029, and would be fully phased out for taxation years that begin after 2031.
Budget 2022 proposes 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. Eligible activities would include the manufacturing of components or sub-assemblies only if such equipment is purpose-built or designed exclusively to form an integral part of an air-source heat pump.
Strategic Environmental Assessment Statement
These measures are expected to have a positive environmental impact by encouraging investment in a technology that would reduce emissions of greenhouse gases and air pollutants. These measures would also contribute to the Federal Sustainable Development Strategy goal of growing the clean technology industry in Canada.
Critical Mineral Exploration Tax Credit
Flow-through share agreements allow corporations to renounce or "flow through" specified expenses to investors, who can deduct the expenses in calculating their taxable income.
The Mineral Exploration Tax Credit (METC) provides an additional income tax benefit for individuals who invest in mining flow-through shares, which augments the tax benefits associated with the deductions that are flowed through. The METC is equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The METC facilitates the raising of equity to fund exploration by enabling companies to issue shares at a premium.
Budget 2022 proposes to introduce a new 30-per-cent Critical Mineral Exploration Tax Credit (CMETC) for specified minerals. The specified minerals that would be eligible for the CMETC are: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. These minerals are used in the production of batteries and permanent magnets, both of which are used in zero-emission vehicles, or are necessary in the production and processing of advanced materials, clean technology, or semi-conductors.
Eligible expenditures would not benefit from both the proposed CMETC and the METC. The administration of the CMETC would generally follow the rules in place for the METC. However, the CMETC would only apply in relation to exploration expenditures for the minerals listed above.
In order for exploration expenses to be eligible for the CMETC, a qualified person (as defined under National Instrument 43-101 published by the Canadian Securities Administrators as of Budget Day) would need to certify that the expenditures that will be renounced will be incurred as part of an exploration project that targets the specified minerals. If the qualified person cannot demonstrate that there is a reasonable expectation that the minerals targeted by the exploration are primarily specified minerals, then the related exploration expenditures would not be eligible for the CMETC. Any credit provided for ineligible expenditures would be recovered from the flow-through share investor that received the credit.
The CMETC would apply to expenditures renounced under eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.
Strategic Environmental Assessment Statement
Mineral exploration, as well as new mining and related processing activities that could follow from successful exploration efforts, can be associated with a variety of environmental impacts to soil, water and air and, as a result, could have an impact on the targets and actions in the Federal Sustainable Development Strategy. All such activities, however, are subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments.
Flow-Through Shares for Oil, Gas, and Coal Activities
Flow-through share agreements allow corporations to renounce or “flow through” both Canadian exploration expenses and Canadian development expenses to investors, who can deduct the expenses in calculating their taxable income (at a 100-per-cent or 30-per-cent rate on a declining-balance basis, respectively). This facilitates the raising of equity to fund eligible exploration and development by enabling companies to issue shares at a premium.
Budget 2022 proposes to eliminate the flow-through share regime for oil, gas, and coal activities by no longer allowing oil, gas and coal exploration or development expenditures to be renounced to a flow-through share investor.
This change would apply to expenditures renounced under flow-through share agreements entered into after March 31, 2023.
Strategic Environmental Assessment Statement
Oil, gas and coal exploration and development is associated with environmental impacts, including the release of air and water contaminants, the emission of greenhouse gases and the disturbance of natural habitat and wildlife. The tax treatment of oil, gas and coal exploration and development costs is only one of many factors that influence investment decisions, but to the extent that the revised treatment impacts investment decisions, this measure could reduce environmental impacts. This measure supports Canada’s international commitments to phase out or rationalize inefficient fossil fuel subsidies, and indirectly supports the targets and actions in the Federal Sustainable Development Strategy, including those related to reducing emissions of greenhouse gases.
Small Business Deduction
Small businesses may benefit from a reduced corporate income tax rate of 9 per cent – a preference relative to the general corporate income tax rate of 15 per cent. This rate reduction is provided through the “small business deduction” and applies on up to $500,000 per year of qualifying active business income (i.e., the “business limit”) of a Canadian-controlled private corporation (CCPC). There is a requirement to allocate the business limit among associated CCPCs.
In order to target the preferential tax rate to small businesses, the business limit is reduced on a straight-line basis when:
- the combined taxable capital employed in Canada of the CCPC and its associated corporations is between $10 million and $15 million; or
- the combined “adjusted aggregate investment income” of the CCPC and its associated corporations is between $50,000 and $150,000.
The business limit is the lesser of the two amounts determined by these business limit reductions.
The reduction in the business limit can significantly increase a CCPC’s marginal tax rate as the combined taxable capital of the CCPC and its associated corporations increases from $10 million to $15 million.
In order to facilitate small business growth, Budget 2022 proposes to extend the range over which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations. The new range would be $10 million to $50 million (see Chart 1 below). This change would allow more medium-sized CCPCs to benefit from the small business deduction. Furthermore, it would increase the amount of qualifying active business income that can be eligible for the small business deduction. For example, under the new rules:
- a CCPC with $30 million in taxable capital would have up to $250,000 of active business income eligible for the small business deduction, compared to $0 under current rules; and
- a CCPC with $12 million in taxable capital would have up to $475,000 of active business income eligible for the small business deduction, compared to up to $300,000 under current rules.
This measure would apply to taxation years that begin on or after Budget Day.
Current and Proposed Reductions of the Business Limit Based on Taxable Capital
International Financial Reporting Standards for Insurance Contracts (IFRS 17)
On January 1, 2023, IFRS 17, the new accounting standards for insurance contracts, will substantially change financial reporting for all Canadian insurers. In broad terms, generally accepted accounting principles typically serve as the basis for computing a corporation’s income for tax purposes. With the introduction of a new IFRS 17 reserve, known as the contract service margin (CSM), a large portion of the profits earned on underwritten insurance contracts will be deferred and gradually released into income over the estimated life of the insurance contracts. The CSM arises primarily for insurance contracts greater than one year. If deductible for tax purposes, the CSM would lead to an undue income tax deferral.
On May 28 2021, the Government issued a news release (May 2021 Release) to announce that it intends to generally support the use of IFRS 17 accounting for income tax purposes. However, adjustments would be made to recognize underwriting profits as taxable income so that it remains aligned with economic activities. More specifically, the CSM would not be considered a deductible reserve for tax purposes. The Government’s overall objective is to recognize income for tax purposes when the key economic activities occur.
Following extensive consultations with the insurance industry, Budget 2022 proposes to maintain the policy intent described in the May 2021 Release, but proposes to make certain relieving modifications, as well as consequential changes to protect the minimum tax base for life insurers.
Segregated funds are life insurance policies as a matter of law because they are in effect a pooled investment product with a death benefit or living benefit guarantees for the policyholder. The income-earning activities for segregated funds are primarily investment management activities rendered to policyholders after inception of the contract. Currently, fee income on segregated funds is recognized as earned each year, and expenses are deducted when incurred. Budget 2022 proposes that the CSM associated with segregated funds be fully deductible on the basis that this income will continue to be recognized as the relevant economic activities occur.
Ten per cent of CSM Deductible
Consistent with the May 2021 Release, the CSM would not be deductible for tax purposes (with the exception of the CSM for segregated funds). However, in recognition of future so-called non-attributable expenses that are included in deductible reserves at the inception of the contract under current rules, Budget 2022 proposes that ten per cent of the CSM associated with life insurance contracts (other than segregated funds) be deductible for tax purposes. The ten-per-cent deductible portion of the CSM will be included in income for tax purposes when the non-attributable expenses are incurred in the future.
Budget 2022 proposes transitional rules in the following circumstances:
- A transition period of five years to smooth out the tax impact of converting insurance reserves from IFRS 4 to IFRS 17, including the non-deductible portion of the CSM on transition;
- A transition period of five years for the mark-to-market gains or losses on certain fixed-income assets on the effective date, since insurers will also be required to adopt IFRS 9 effective January 1, 2023; and
- Certain reserves will be reclassified from insurance contracts under IFRS 4 to investment contracts under IFRS 17. A deduction for the investment contract amount will be allowed on transition since the premiums for these contracts have been included in income for accounting and tax purposes.
Adjustments to Maintain Minimum Tax
The Part VI federal tax is a capital-based tax on large financial institutions, which ensures that they pay a minimum amount of tax to the federal government each year. The Part VI tax base is partly comprised of surplus which includes after-tax retained earnings.
The Part VI tax base for life insurers will decrease as a consequence of IFRS 17. This is attributable primarily to the increase in total reserves, including the CSM, and the reclassification of gains and losses on certain fixed income assets from retained earnings to accumulated other comprehensive income (AOCI).
Deferred tax assets are income taxes anticipated to be recovered in future periods when temporary differences between income for accounting and tax purposes reverse. Deferred tax assets often arise because insurance contract liabilities recognized for accounting purposes exceed the amount of insurance reserves claimed for tax purposes. Deferred tax assets are currently deducted from the Part VI minimum tax base.
In order to avoid the erosion of the Part VI tax base due to IFRS 17, Budget 2022 proposes to include the non-deductible CSM and AOCI in the tax base. In addition, deferred tax assets will not be deducted from the minimum tax base for life insurers.
Mortgage and Title Insurance
Consistent with the changes for long-term insurance contracts, Budget 2022 proposes a deduction of ten per cent of the CSM for mortgage and title insurance contracts. The deductible portion of the CSM will be included in income when the non-attributable expenses are incurred in the future in the same manner described above in the context of life insurers.
Budget 2022 also proposes a transition period of five years to smooth out the tax impact of the non-deductible portion of the CSM.
Property and Casualty (P&C) Insurance
Budget 2022 proposes to maintain the current tax treatment for P&C insurance contracts (other than title and mortgage insurance contracts) on the basis that the CSM reserve is largely insignificant for these short-term contracts that are typically not longer than a year.
Budget 2022 also proposes a transition period of five years to smooth out the tax impact of converting P&C insurance reserves from IFRS 4 to IFRS 17.
Coming into Force
Budget 2022 proposes that all of these measures, including the transitional rules discussed above, would apply as of January 1, 2023.
Hedging and Short Selling by Canadian Financial Institutions
The Income Tax Act generally permits a Canadian corporation, in computing its taxable income, to claim a deduction (the “dividend received deduction”) for the amount of a taxable dividend received on a share (a “Canadian share”) that it holds in another Canadian corporation. This dividend received deduction is intended to limit the imposition of multiple levels of corporate taxation on earnings distributed from one corporation to another. There are exceptions from the availability of this deduction, including under certain circumstances where the economic exposure (that is, the risk of loss or opportunity for gain or profit) with respect to the share accrues to someone other than the taxpayer. In addition, under the securities lending arrangement rules, registered securities dealers are allowed to claim a deduction for two-thirds of a dividend compensation payment. This is an exception to the general rule whereby dividend compensation payments are not deductible.
The Government is concerned that certain taxpayers in financial institution groups are engaging in aggressive tax planning arrangements whereby a dividend received deduction is claimed in circumstances giving rise to an unintended tax benefit. For example, where a Canadian bank owns Canadian shares, a registered securities dealer in the Canadian bank’s corporate group will borrow identical shares under a securities lending arrangement and sell the borrowed shares short. The corporate group thereby eliminates its economic exposure to the Canadian shares. The registered securities dealer will generally hold the short position during the entire period that the Canadian bank owns the Canadian shares.
In this scenario, the Canadian bank claims a dividend received deduction for the dividends received on the Canadian shares, resulting in tax-free dividend income. The registered securities dealer deducts two-thirds of the amount of the dividend compensation payments made to the lender that reflect the same dividends paid on the shares. In sum, the Canadian banking group generates an artificial tax deduction under the arrangement equal to two-thirds of the amount of dividend compensation payments made to the lender over the term of the arrangement.
A registered securities dealer could carry out a similar transaction on its own with respect to Canadian shares owned by it. That is, it could borrow and sell short identical shares, claiming both the dividend received deduction for dividends received on its shares and a two-thirds deduction for dividend compensation payments made to the lender.
Although these arrangements can be challenged by the Government based on existing rules in the Income Tax Act, these challenges could be both time-consuming and costly. Accordingly, the Government is introducing specific legislation to prevent taxpayers from realizing artificial tax deductions through the use of these hedging and short selling arrangements.
Budget 2022 proposes amendments to the Income Tax Act to
- deny the dividend received deduction for dividends received by a taxpayer on Canadian shares if a registered securities dealer that does not deal at arm’s length with the taxpayer enters into transactions that hedge the taxpayer's economic exposure to the Canadian shares, where the registered securities dealer knew or ought to have known that these transactions would have such an effect;
- deny the dividend received deduction for dividends received by a registered securities dealer on Canadian shares that it holds if it eliminates all or substantially all of its economic exposure to the Canadian shares by entering into certain hedging transactions; and
- provide that in the above situations, the registered securities dealer will be permitted to claim a full, rather than a two-thirds, deduction for a dividend compensation payment it makes under a securities lending arrangement entered into in connection with the above hedging transactions.
The proposed amendments would apply to dividends and related dividend compensation payments that are paid, or become payable, on or after Budget Day, unless the relevant hedging transactions or related securities lending arrangement were in place before Budget Day, in which case the amendment would apply to dividends and related dividend compensation payments that are paid after September 2022.
Application of the General Anti-Avoidance Rule to Tax Attributes
The general anti-avoidance rule (GAAR) is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction. The GAAR is generally applied by the Canada Revenue Agency (CRA) on an assessment of tax.
Where the GAAR applies to a transaction, the Income Tax Act contains a set of rules that are intended to allow the CRA to determine the amount of a tax attribute, such as the adjusted cost base of a property and the paid-up capital of a share, relevant for the purpose of computing tax. This is done through a notice of determination which, like a notice of assessment, is subject to rights of objection and appeal. The objective of these rules is that when these determined amounts become relevant to the future computation of tax, such determinations are to be binding on the taxpayer and the CRA.
A 2018 Federal Court of Appeal decision held that the GAAR did not apply to a transaction that resulted in an increase in a tax attribute that had not yet been utilized to reduce taxes. The reasoning behind this decision has been applied in subsequent cases. The limitation of the GAAR to circumstances where a tax attribute has been utilized runs counter to the policy underlying the GAAR and the determination rules. This limitation also reduces certainty for both taxpayers and the CRA, as they could have to wait several additional years to confirm the tax consequences of a transaction.
To address these concerns, Budget 2022 proposes that the Income Tax Act be amended to provide that the GAAR can apply to transactions that affect tax attributes that have not yet become relevant to the computation of tax. For greater certainty, determinations made before Budget Day, where the rights of objection and appeal in respect of the determination were exhausted before Budget Day, would remain binding on taxpayers and the CRA.
This measure would apply to notices of determination issued on or after Budget Day.
Genuine Intergenerational Share Transfers
The Income Tax Act contains a rule to prevent people from converting dividends into lower-taxed capital gains using certain self-dealing transactions—a practice referred to as “surplus stripping.” Private Member’s Bill C-208, which received Royal Assent on June 29, 2021, introduced an exception to this rule in order to facilitate intergenerational business transfers. However, the exception may unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer takes place.
Budget 2022 announces a consultation process for Canadians to share views as to how the existing rules could be modified to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers. The government is committed to bringing forward legislation to address these issues, which would be included in a bill to be tabled in the fall after the conclusion of the consultation process.
The Department of Finance is interested to hear from all stakeholders, and will engage directly with key affected sectors, in particular the agriculture industry. Please send your comments. Comments should be received by June 17, 2022.
The Canadian income tax system aims to achieve neutrality by ensuring that income earned directly by a Canadian-resident individual is taxed at roughly the same rate as income that is earned through a corporation.
The active business income of a private corporation is integrated only once dividends are paid out to shareholders. In contrast, additional refundable taxes apply to investment income earned by private corporations in the year in which it is earned. These taxes generally aim to remove any advantage for Canadian individuals of earning investment income in a private corporation (where the investment income would otherwise be subject to a lower tax rate compared to earning such income personally). These refundable taxes form part of an integrated system of measures that link the taxation of income earned by private corporations and their individual shareholders. More specifically:
- portfolio dividends earned by all private corporations are subject to a special refundable tax under Part IV of the Income Tax Act; and
- other passive income (e.g., capital gains, interest, rent, royalties and amounts in respect of foreign accrual property income (FAPI)), referred to below as “investment income”, earned by Canadian-controlled private corporations (CCPCs) is subject to a special refundable tax mechanism under Part I of the Income Tax Act.
These taxes under Parts I and IV of the Income Tax Act are fully or partially refundable to corporations to the extent that they pay taxable dividends.
Deferring Tax Using Foreign Entities
Some taxpayers are manipulating the status of their corporations in an attempt to avoid qualifying as a CCPC to achieve a tax-deferral advantage on investment income earned in their corporations. The approach taken may involve effecting a change in status of the corporation in anticipation of capital gains on a sale of assets. Some planning may seek to avoid “Canadian corporation” status by, for example, continuing a corporation under foreign corporate law (while maintaining Canadian residency by maintaining central management and control in Canada). Other planning may seek to avoid “Canadian-controlled” status by interposing a non-resident corporation in the corporate structure or by issuing options to a non-resident. If effective, avoiding either status would mean that the corporation would no longer qualify as a CCPC and thus would not be subject to the refundable tax mechanisms under Part I of the Income Tax Act.
Although the manipulation of CCPC status can be challenged by the Government based on existing rules in the Income Tax Act, these challenges can be both time-consuming and costly. As a result, the Government is proposing a specific legislative measure.
Budget 2022 proposes targeted amendments to the Income Tax Act to align the taxation of investment income earned and distributed by “substantive CCPCs” with the rules that currently apply to CCPCs. Substantive CCPCs would be private corporations resident in Canada (other than CCPCs) that are ultimately controlled (in law or in fact) by Canadian-resident individuals. Similar to the CCPC definition, the test would contain an extended definition of control that would aggregate the shares owned, directly or indirectly, by Canadian resident individuals, and would therefore deem a corporation to be controlled by a Canadian resident individual where Canadian individuals own, in aggregate, sufficient shares to control the corporation. This measure would address tax planning that manipulates CCPC status without affecting genuine non-CCPCs (e.g., private corporations that are ultimately controlled by non-resident persons and subsidiaries of public corporations). It would also cause a corporation to be a substantive CCPC in circumstances where the corporation would have been a CCPC but for the fact that a non-resident or public corporation has a right to acquire its shares.
Substantive CCPCs earning and distributing investment income would be subject to the same anti-deferral and integration mechanisms as CCPCs, with respect to such income. Specifically, investment income would be subject to a federal tax rate of 38 ⅔ per cent, of which 30 ⅔ per cent would be refundable upon distribution. Furthermore, the investment income earned by substantive CCPCs would be added to their “low rate income pool” such that distributions of such income would not entitle the shareholders to the enhanced dividend tax credit. Substantive CCPCs would continue to be treated as non-CCPCs for all other purposes of the Income Tax Act.
In other words, investment income earned and distributed by corporations that are, in substance, CCPCs would be taxed in the same manner as CCPCs. This would ensure that private corporations cannot effectively opt out of CCPC status and inappropriately circumvent the existing anti-deferral rules applicable to CCPCs.
In addition, these new rules would be supported by:
- a targeted anti-avoidance rule to address particular arrangements or transactions where it is reasonable to consider that the particular arrangement, transaction, or series of transactions was undertaken to avoid the anti-deferral rules applicable to investment income; and
- targeted amendments to facilitate administration of the rules applicable to investment income earned and distributed by substantive CCPCs, including a one year extension of the normal reassessment period for any consequential assessment of Part IV tax that arises from a corporation being assessed or reassessed a dividend refund.
This measure would apply to taxation years that end on or after Budget Day. To provide certainty for genuine commercial transactions entered into before Budget Day, an exception would be provided where the taxation year of the corporation ends because of an acquisition of control caused by the sale of all or substantially all of the shares of a corporation to an arm’s length purchaser. The purchase and sale agreement pursuant to which the acquisition of control occurs must have been entered into before Budget Day and the share sale must occur before the end of 2022.
Deferring Tax Using Foreign Resident Corporations
The FAPI rules aim to prevent Canadian taxpayers from gaining a tax deferral advantage by earning certain types of highly-mobile income (including investment income) through controlled foreign affiliates (i.e., a non-resident corporation in which the taxpayer has, or participates in, a controlling interest). The rules do this by including the Canadian shareholder’s participating share of the foreign affiliate’s FAPI in the Canadian shareholder’s income in the year it is earned. If the Canadian shareholder is a CCPC, this amount is subject to the same additional refundable tax described above. In other words, the FAPI regime seeks to address any deferral advantage by subjecting FAPI earned in a controlled foreign affiliate to tax on a current basis and at the same level as if it was earned in Canada.
To avoid double taxation, such income inclusions in respect of FAPI are subject to a deduction in respect of foreign tax paid in respect of the FAPI (referred to as “foreign accrual tax”). This deduction is a proxy for a foreign tax credit on the FAPI amount included in the Canadian resident taxpayer’s income. The proxy amount is calculated based on the amount of foreign income that was subject to a sufficient level of foreign tax, determined based on the “relevant tax factor”. The relevant tax factor is calibrated to the tax rate to which the taxpayer would have been subject had the income been earned in Canada. To account for the fact that different types of taxpayers are generally subject to different tax rates in Canada, there are two different relevant tax factors:
- the relevant tax factor applicable to corporations (and partnerships all the members of which, other than non-resident persons, are corporations) is 4. As a result, the corporate relevant tax factor, when multiplied by the foreign accrual tax, provides for a deduction that fully offsets FAPI income inclusions where the foreign tax rate equals or exceeds 25 per cent; and
- the relevant tax factor applicable to all other taxpayers, including individuals, is 1.9. As a result, a foreign tax rate lower than 52.63 per cent will result in net FAPI income inclusions for other taxpayers.
Unlike the domestic anti-deferral rules, the FAPI rules (and more specifically the relevant tax factor) do not differentiate between different tax rates applicable to different types of Canadian corporations. This provides a tax-deferral advantage for CCPCs and their individual shareholders earning passive investment income through non-resident corporations.
In addition, the inclusion of certain amounts in respect of FAPI in a CCPC’s “general rate income pool” entitles the CCPC to distribute FAPI in the form of lower-taxed eligible dividends, providing a further advantage on a fully distributed basis (compared to investment income earned by a CCPC in Canada and distributed as higher-taxed non-eligible dividends).
Budget 2022 proposes targeted amendments to the Income Tax Act to eliminate the tax-deferral advantage available to CCPCs and their shareholders earning investment income through controlled foreign affiliates. The deferral advantage would be addressed by applying the same relevant tax factor to individuals, CCPCs and substantive CCPCs (i.e., the relevant tax factor currently applicable to individuals). This relevant tax factor is calibrated based on the highest combined federal and provincial or territorial personal income tax rate and would thus eliminate any tax incentive for CCPCs and their shareholders to earn investment income in a controlled foreign affiliate.
This rule would be accompanied by amendments to address the integration of FAPI as it is repatriated to and distributed by CCPCs and substantive CCPCs to their individual shareholders. Under the current rules, amounts repatriated from foreign affiliates to CCPCs and distributed to individual shareholders are generally integrated through the system of deductions available for dividends received from foreign affiliates and the enhanced gross-up and dividend tax credit. However, due to the new relevant tax factor for CCPCs and substantive CCPCs, the current rules would not effectively integrate such amounts.
Integration would be addressed by adding an amount to the capital dividend account (from which amounts may be received tax-free by Canadian resident individual shareholders) of a CCPC or a substantive CCPC. The amount added would approximate the portion of the after-tax earnings repatriated to the corporation from its foreign affiliate to the extent such earnings had been subject to a notional tax rate of 52.63 per cent. This addition to the capital dividend account would represent after-tax income that was subject to tax at the highest combined personal income tax rate and therefore, to achieve integration, should not be subject to additional Canadian income tax upon its distribution to the corporation’s Canadian resident individual shareholders.
In addition, other dividend income from foreign affiliates for which a foreign tax credit is effectively provided through the relevant tax factor mechanism (dividends paid out of hybrid surplus and taxable surplus other than FAPI) would be treated in the same manner. All such dividends, to the extent not deductible in computing taxable income, will continue to be subject to the refundable tax system. The treatment of dividends paid out of exempt surplus and pre-acquisition surplus would be unaffected.
More specifically, Budget 2022 proposes to:
- remove from the general rate income pool of a CCPC an amount equal to the deductions claimed in respect of repatriations of a foreign affiliate’s hybrid surplus (representing certain capital gains) and taxable surplus (generally representing FAPI and active business income earned in a country with which Canada does not have a tax treaty or tax information exchange agreement), and in respect of the payment of withholding tax to a foreign government on inter-corporate dividends received from a foreign affiliate prescribed to be paid out of taxable surplus; and
- include in the capital dividend account of a CCPC (and a substantive CCPC) upon repatriation:
- the amount of an inter-corporate dividend deduction claimed with respect to a dividend paid out of hybrid surplus less the amount of withholding tax paid with respect to the dividend (representing the non-taxable half of hybrid surplus plus the after-tax portion of the taxable half of hybrid surplus that was subject to sufficient foreign tax, as determined based on the new relevant tax factor less any withholding tax paid in respect of the dividend prescribed to have been paid out of hybrid surplus);
- the amount of an inter-corporate dividend deduction claimed with respect to a dividend paid out of taxable surplus (representing the after-tax amount of the foreign accrual tax-sheltered FAPI (i.e., the amount of foreign accrual tax-sheltered FAPI less foreign accrual tax) repatriated to Canada as well as other non-FAPI amounts included in taxable surplus that were subject to sufficient foreign tax, as determined based on the new relevant tax factor); and
- the amount of a withholding tax deduction claimed less the withholding tax paid in respect of repatriations of taxable surplus (representing the after-tax amount of withholding tax sheltered amounts, i.e., the amount of the deduction for withholding tax paid on dividends prescribed to have been paid out of taxable surplus less the withholding tax paid).
These measures would apply to taxation years that begin on or after Budget Day.
International Tax Measures
International Tax Reform
Canada is one of 137 members of the Organisation for Economic Co-operation and Development (OECD)/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) that have joined a two-pillar plan for international tax reform agreed to on October 8, 2021. The historic “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy” (the October Statement) agreed to that day has since been endorsed by G20 Finance Ministers and Leaders.
Pillar One is intended to reallocate a portion of taxing rights over the profits of the largest and most profitable multinational enterprises (MNEs) to market countries (i.e., where their users and customers are located). Pillar Two is intended to ensure that the profits of large MNEs are subject to an effective tax rate of at least 15 per cent, regardless of where they are earned.
Pillar One – Reallocation of Taxing Rights
Under longstanding rules reflected in bilateral tax treaties, a country is generally entitled to tax only those business profits of a foreign MNE that are associated with a subsidiary or “permanent establishment” in the country. This concept, and the associated rules for attributing profits to the local taxable presence using the arm’s length principle, were designed for traditional bricks-and-mortar businesses. Their application has become increasingly strained with the digitalization of the economy.
The result is that market countries have limited ability to tax the profits of certain large MNEs that carry out important value-generating activities in the country through remote means or rely on the exploitation of intangible property held outside the country.
Pillar One is intended to update the framework for profit allocation underlying current income tax treaties. It aims to ensure that the largest and most profitable MNEs pay a fair share of tax in the countries where their users and customers are located.
Specifically, the October Statement provides that a new allocation framework will apply to MNEs with global revenues above €20 billion and a profit margin (i.e., profit before tax as a share of revenue) above 10 per cent. Extractives and regulated financial services will be excluded. For in-scope MNEs, 25 per cent of residual profit, defined as profit in excess of 10 per cent of revenue, will be allocated to market countries using a revenue-based allocation key. Taxable profit will be determined by reference to financial accounting income, with a small number of adjustments.
Under this new framework, double taxation of the profit reallocated to market countries (referred to as Amount A) will be avoided through relief provided by the countries where residual profit is taxed under traditional rules. Mandatory and binding dispute prevention and resolution mechanisms will ensure that Amount A is taxed in a coordinated manner by participating countries.
The government is actively working with its international partners to develop the model rules and the multilateral convention needed to establish the new multilateral tax framework for Amount A and bring it into effect. The government is encouraged by the progress being made and will continue to press forward and be prepared to introduce implementing legislation after the terms are multilaterally agreed.
To ensure that Canadians' interests are protected, as a back-up plan the government released draft legislative proposals for a Digital Services Tax (DST) in December 2021. A period for public input on the proposals closed in February and the government is reviewing the feedback received. Consistent with the October Statement, the DST could be imposed as of January 1, 2024, but only if the multilateral convention implementing the Amount A tax framework has not come into force. (In that event, the DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022.) It remains the government’s hope and underlying assumption that the timely implementation of the new international tax framework will make this unnecessary.
Pillar Two – Global Minimum Tax
Pillar Two is a framework for a minimum tax applicable to MNEs with annual revenues of €750 million or more. It is designed to ensure these MNEs are subject to a minimum effective tax rate (ETR) of 15 per cent on their profits in every jurisdiction in which they operate.
Pillar Two builds on the OECD/G20 Base Erosion and Profit Shifting project, and helps to further reduce the incentive for MNEs to shift profits into low-tax jurisdictions. At the same time, it seeks to end the “race to the bottom” in international corporate taxation by setting a floor on tax competition, while leaving appropriate flexibility for governments to design their income tax systems to support business investment and innovation.
Pillar Two is generally intended to be implemented through changes to each country’s domestic tax laws. To facilitate coordinated implementation and ensure consistency, the Inclusive Framework approved detailed model rules (the Model Rules), published on December 20, 2021, as well as a commentary (the Commentary) providing guidance on their interpretation and operation, published on March 14, 2022. The October Statement provides that Inclusive Framework countries implementing Pillar Two are required to do so in a way that is consistent with the outcomes provided for under the Model Rules and Commentary.
Basic Elements of the Pillar Two Rules
Under Pillar Two, an MNE is generally required to calculate the ETR on its profits in each jurisdiction in which it operates. If the ETR for a particular jurisdiction is below 15 per cent, the MNE is subject to a “top-up tax” that brings the ETR on its profits in the jurisdiction up to the 15–per-cent minimum rate.
There is an exclusion (the Substance-based Income Exclusion) from the application of the top-up tax for an amount of income equal to a fixed percentage of the carrying value of an MNE’s tangible assets and of its expenditures on labour in a jurisdiction. This is intended as a measure of the MNE’s substantive economic activities in the jurisdiction.
Pillar Two is comprised of two core charging rules for the top-up tax: the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).
The IIR is the primary rule. In general terms, if the country where the ultimate parent entity of an MNE is located has implemented the IIR, it has the primary right to impose a top-up tax on the ultimate parent entity with respect to income from the MNE’s operations in any jurisdiction where it is taxed at an ETR below 15 per cent. The top-up tax brings the ETR of this low-taxed income up to 15 per cent. If the ultimate parent jurisdiction has not implemented the IIR, the right to impose the top-up tax under the IIR shifts to the jurisdiction of the highest-tier intermediate parent entity within the MNE’s structure that has adopted the IIR.
The UTPR is a “backstop” rule that generally applies where neither the ultimate parent jurisdiction nor any intermediate parent jurisdiction of an MNE has implemented the IIR. In that case, other jurisdictions in which the MNE operates that have implemented the UTPR would impose the top-up tax on the group entities located in their jurisdiction, with the top-up tax being allocated among those jurisdictions on a formulary basis. The UTPR provides a strong incentive for countries to adopt Pillar Two, as it ensures that MNEs whose parent entities are located in non-implementing jurisdictions are nonetheless subject to top-up tax in respect of their low-taxed income.
Pillar Two also contains a treaty-based rule called the subject-to-tax rule. Where applicable, this rule allows a country to impose a higher rate of withholding tax than the negotiated tax treaty rate on certain payments (including interest, royalties and a defined set of other payments) made between related entities, if the payment is subject to tax in the payee country at a nominal tax rate below nine per cent. The subject-to-tax rule is to be implemented in a country’s bilateral tax treaty at the request of a developing country, and a developing country may make this request only if the partner country has a nominal tax rate below nine per cent that applies to any of the types of payments covered by the rule. Based on discussions to date, the subject-to-tax rule is not expected to impact Canada, and thus is not further discussed here.
The Model Rules also explicitly contemplate that a jurisdiction may enact a domestic minimum top-up tax that would apply a top-up tax on low-taxed income of its domestic entities. If such a tax is designed to achieve the intended outcomes under Pillar Two, it is treated as a “qualified” domestic minimum top-up tax and is creditable dollar-for-dollar against the top-up tax liability otherwise arising under Pillar Two. In effect, this allows a jurisdiction to collect the top-up tax applicable to any low-taxed income of its domestic entities, rather than allowing the top-up tax to accrue to the treasuries of other countries under the IIR or UTPR.
Further details concerning the Model Rules are set out in the Consultation section below.
Implementation Timeline and Framework
The Pillar Two project has now entered the implementation phase. The October Statement provides that countries should implement Pillar Two effective in 2023, with the UTPR coming into effect in 2024.
In accordance with the Detailed Implementation Plan accompanying the October Statement, work is ongoing at the OECD to develop an Implementation Framework for public release by the end of 2022. The Implementation Framework is intended to address issues around administration of Pillar Two, including filing obligations, multilateral review processes and safe harbours that would be designed to reduce administration and compliance costs by relieving MNEs of the obligation to compute their jurisdictional ETRs in certain circumstances.
Recent International Developments
Countries have begun to take steps towards the implementation of Pillar Two.
Members of the European Union are currently debating a draft Directive that, if adopted, would require member states to implement Pillar Two in their national laws effective in 2023.
The U.K. launched a public consultation on January 11, 2022 regarding the implementation of Pillar Two and a proposed domestic minimum tax. The anticipated effective date for the IIR in the U.K. is April 1, 2023, with the UTPR and domestic minimum tax to be introduced no earlier than April 1, 2024.
The U.S. has a minimum tax called the Global Intangible Low-Taxed Income (GILTI) regime, which is similar to Pillar Two but less stringent in certain key respects. The Build Back Better Act, passed by the House of Representatives in November 2021, includes proposed amendments that would bring GILTI into closer alignment with Pillar Two, effective in 2023, principally by raising the GILTI minimum rate to roughly 15 per cent (from the current rate of 10.5-13.125 per cent) and applying the regime on a jurisdictional, rather than global, basis. However, these amendments have not yet been enacted. The October Statement indicated that the Inclusive Framework will consider the conditions under which the GILTI regime will “co-exist” with Pillar Two “to ensure a level playing field”. These conditions remain to be settled.
Implementation in Canada
In light of these international developments, and in accordance with the timeline and parameters set out in the October Statement, Budget 2022 proposes to implement Pillar Two, along with a domestic minimum top-up tax that would apply to Canadian entities of MNEs that are within the scope of Pillar Two.
The government anticipates that draft implementing legislation would be publicly released for consultation and the IIR and domestic minimum top-up tax would come into effect in 2023 as of a date to be fixed. The UTPR would come into effect no earlier than 2024.
Consultation on Pillar Two
To allow the government to implement Pillar Two in accordance with the intended timeline, Budget 2022 is launching a public consultation on the implementation in Canada of the Model Rules and a domestic minimum top-up tax.
The Model Rules are the product of extensive international negotiation and have been agreed to by Inclusive Framework members. A country’s failure to adhere in its domestic implementing legislation to the common approach set out in the Model Rules runs the risk of the implementing country’s IIR not being a “qualified” IIR under the Model Rules, leaving MNEs based in that country open to the application of other countries’ UTPRs.
In light of the above considerations, the principal purpose of this consultation is to ensure that the draft legislation takes account of any necessary adaptations of the Model Rules to the Canadian legal and income tax context, rather than to seek views on the major design aspects of the Model Rules or broader policy considerations.
The government welcomes comments on all aspects of the implementation of these rules in the Canadian income tax system. To help guide respondents, set out below are questions on specific aspects of the Model Rules identified as being of particular interest. Following a series of general questions, specific questions are organized according to the corresponding chapters of the Model Rules and are preceded by a brief summary of the chapter. Where appropriate, the questions include a reference to the relevant article in the Model Rules. Certain defined terms in the Model Rules are capitalized below.
The full text of the Model Rules is available on the OECD website.
- Are there any specific ways in which the Canadian legislation should vary from, or expand on, particular provisions of the Model Rules, bearing in mind the importance of ensuring consistency and coordination with other countries’ rules, and the limited flexibility permitted by the common approach reflected in the Model Rules?
- Do respondents have any comments regarding specific interactions of the Model Rules with existing Canadian laws, including specific provisions of the Income Tax Act?
- Do respondents have suggestions as to existing Income Tax Act provisions that should or should not be made applicable for the purposes of the Canadian legislation on Pillar Two, including any of the administrative and enforcement provisions in Part XV and the interpretive provisions in Part XVII of the Income Tax Act?
- Do respondents have any suggestions regarding the design of the domestic minimum top-up tax in Canada?
- Are there any issues or uncertainties with how a domestic minimum top-up tax is treated under the Model Rules?
Scope (Chapter 1)
Chapter 1 of the Model Rules determines the groups and entities that are within the scope of Pillar Two.
Generally, an MNE Group with annual revenues of at least €750 million (computed according to the rules under this chapter) is within the scope of Pillar Two. An MNE Group is defined essentially as a group of entities whose financial results are fully consolidated in the Ultimate Parent Entity’s consolidated financial statements, and that operates in more than one jurisdiction.
The members of an MNE Group that are within the scope of Pillar Two are known as Constituent Entities, and can be corporations or arrangements, such as partnerships, trusts or permanent establishments. However, the following types of entities (referred to as Excluded Entities) are excluded from the application of the rules: a Governmental Entity; an International Organization; a Non-profit Organization; a Pension Fund; an Ultimate Parent Entity that is an Investment Fund or a Real Estate Investment Vehicle; and certain holding entities owned by Excluded Entities.
- Do respondents have any comments on the Excluded Entity provisions in the Model Rules?
Charging Provisions (Chapter 2)
Chapter 2 sets out the operation of the IIR and the UTPR. Generally, the IIR imposes Top-up Tax (as calculated in Chapter 5) on the Ultimate Parent Entity or, if the ultimate parent jurisdiction has not implemented the IIR, on an Intermediate Parent Entity. However, if a Parent Entity’s ownership stake in another Parent Entity (referred to as a Partially-Owned Parent Entity) is less than 80 per cent, the IIR is applied at the level of the Partially-Owned Parent Entity.
Chapter 2 also includes rules for allocating Top-up Tax to be imposed under the UTPR between UTPR jurisdictions on a formulary basis, based on the relative number of employees and relative net book value of tangible assets located in a given UTPR jurisdiction.
- Do respondents have views as to the appropriate design of the UTPR in Canadian legislation, including in particular the design of the charging mechanism for Top-up Tax under the UTPR (e.g., as a separate levy, or as a denial of deductions under Part I of the Income Tax Act)?
Computation of GloBE Income or Loss (Chapter 3)
Chapter 3 comprises the rules for computing the GloBE Income or Loss of each Constituent Entity of an MNE Group (which is used in the calculations in Chapter 5). Generally, this is the net income or loss of the Constituent Entity determined in preparing the consolidated financial statements of the Ultimate Parent Entity, adjusted in accordance with Articles 3.2 to 3.5 of the Model Rules.
This chapter also sets out the rules for computing the exclusion for certain international shipping income, which is generally not subject to Top-up Tax under Pillar Two.
In addition, this chapter includes rules for allocating income or loss between a head office and a permanent establishment, as well as rules for allocating income or loss from a Flow-through Entity such as a partnership.
- Do respondents have comments, or suggestions for clarifications that could be made in the Canadian legislation, regarding the adjustments required to accounting profits under Articles 3.2 to 3.5 (including the various elections available under those provisions), while respecting the intended outcomes in the Model Rules?
Computation of Adjusted Covered Taxes (Chapter 4)
Chapter 4 provides rules to determine Covered Taxes, meaning taxes that are taken into consideration in determining an MNE Group’s jurisdictional ETR in Chapter 5. Covered Taxes are generally defined as income or profits taxes, taxes in lieu of income taxes, certain taxes on corporate distributions and taxes on equity.
The computation of Covered Taxes of a Constituent Entity begins with certain amounts accrued in current tax expense in its financial statements, which are then subject to a number of adjustments. These include adjustments to address loss carryovers and timing differences in the recognition of income and expense between financial and tax accounting, based on deferred tax accounting principles (subject to certain exceptions and modifications).
Chapter 4 also reallocates certain Covered Taxes from one jurisdiction to another, where the Covered Tax is in respect of income recognized in the other jurisdiction. Covered taxes paid by a head office in respect of a permanent establishment’s profits, or under a controlled foreign company tax regime in respect of the income of a controlled foreign company, are reallocated to the jurisdiction of the permanent establishment or controlled foreign company, respectively, subject to a limitation based on the 15-per-cent minimum rate in the case of passive income of a controlled foreign company.
- Do respondents have comments, or suggestions for clarifications in the Canadian legislation, regarding the computation of Adjusted Covered Taxes under Article 4.1, and the allocation of Covered Taxes between Constituent Entities under Article 4.3?
- Do respondents have views on how rules to address temporary differences in Article 4.4 work, including whether there are any uncertainties as to their operations that could be further clarified in the Canadian legislation?
- Do respondents have any suggestions as to clarifications required in relation to post-filing adjustments under Article 4.6 of the Model Rules?
Computation of Effective Tax Rate and Top-up Tax (Chapter 5)
Chapter 5 provides rules to compute an MNE Group’s ETR in each jurisdiction in which it operates. It also sets out rules to compute the amount of any Top-up Tax with respect to the low-taxed entities in a jurisdiction in which the ETR falls below 15 per cent.
The computation of Top-up Tax takes into account the Substance-based Income Exclusion, which is also computed under the rules in this chapter. For 2023, the Substance-based Income Exclusion will exclude from the application of Top-up Tax an amount of income equal to 8 per cent of the carrying value of Eligible Tangible Assets and 10 per cent of payroll expenditures; these percentages will decline annually over the course of a 10-year transition period to end at 5 per cent for both tangible assets and payroll as of 2032.
In addition, Chapter 5 provides for a de minimis exclusion from Top-up Tax where the MNE Group’s average revenue and income in a jurisdiction are less than €10 million and €1 million, respectively, for the year and the two preceding years.
- Do respondents have any comments on the computation of the Substance-based Income Exclusion under Article 5.3?
Corporate Restructurings and Holding Structures (Chapter 6)
Chapter 6 provides rules governing the treatment of certain corporate restructurings, as well as special rules for joint ventures and Multi-Parented MNE Groups.
- Do respondents have any comments with respect to the rules on corporate restructurings in Articles 6.1 to 6.3?
- Do respondents have any comments, or suggestions for clarifications in the Canadian legislation, as to the treatment of joint ventures under the rules?
Tax Neutrality and Distribution Regimes (Chapter 7)
Chapter 7 provides special rules applicable to certain tax neutrality and distribution taxation regimes. It also provides special rules for computing the ETR of Investment Funds and other Investment Entities, which generally is calculated separately from the ETR of the jurisdiction where the entity is located.
- Do respondents have any comments, or suggestions for clarifications in the Canadian legislation, on how the rules apply in relation to Investment Funds and other Investment Entities, including the provisions in Articles 7.4 (computation of ETR for Investment Entities), 7.5 (tax transparency election) and 7.6 (Taxable Distribution Method election)?
Administration (Chapter 8)
Chapter 8 provides reporting requirements, including the obligation to file a standardized information return within 15 months of the end of the MNE Group’s reporting period and the ability for the MNE Group to appoint a Designated Filing Entity to fulfill this obligation on behalf of the group.
Chapter 8 also contemplates the development of one or more “safe harbours” to mitigate compliance and reporting obligations in respect of an MNE Group’s operations in particular jurisdictions where certain criteria are met. The criteria to qualify for the safe harbour and other details are to be further developed under the Implementation Framework.
- Do respondents have comments on the reporting requirements?
- Do respondents have views on an appropriate payment deadline for Pillar Two liabilities under the Canadian legislation, and any views regarding instalment payments in relation to such liabilities?
- What are respondents’ views on how to design a potential safe harbour that would allow for a simplified ETR calculation based on information reported in country-by-country reports?
- Do respondents have views as to the appropriate design of the administrative power in Article 8.2.2 to override the safe harbour election?
Transition Rules (Chapter 9)
Chapter 9 provides transitional rules that ensure MNE Groups get appropriate recognition for losses incurred prior to Pillar Two coming into effect, as well as other deferred tax assets and liabilities.
This chapter also provides for a five-year deferral in the application of the UTPR in relation to MNE Groups in the initial stage of international expansion, and the transitional rates for the Substance-based Income Exclusion described in Chapter 5.
- Are there any issues or uncertainties regarding the operation of the transitional rules that could be clarified in the Canadian legislation?
- Do respondents have views as to whether Canada should adopt the optional transitional rule in Article 9.3.5., in relation to MNE Groups in the initial phase of their international activity?
Definitions (Chapter 10)
Chapter 10 sets out definitions for various terms used in the Model Rules.
- Do respondents have any comments regarding clarifications to any of these definitions that could be included in the Canadian legislation?
How to Participate in the Consultation
Interested parties are invited to send written representations by July 7, 2022 to the Department of Finance Canada, Tax Policy Branch.
Exchange of Tax Information on Digital Economy Platform Sellers
Technological developments related to the digital economy are making it possible for a wider share of the population to carry on business through online platforms. The digital economy includes the sharing and gig economies, and online sellers of goods. The sharing economy is an economic model involving peer-to-peer based activity of acquiring, providing, or sharing access to goods and services that is often facilitated by an online platform. The gig economy is based on flexible, temporary or freelance jobs, often involving connecting with clients or customers through online platforms. Online sellers of goods often make use of digital platforms, rather than maintaining their own websites.
In Canada, the onus is generally on taxpayers earning business income, including those carrying on business through online platforms (i.e., platform sellers), to report to the Canada Revenue Agency (CRA) the income they have earned. However, not all platform sellers are aware of the tax implications of their online activities. In addition, transactions occurring digitally through online platforms may not be visible to tax administrations, making it difficult for the CRA to identify non-compliance.
To address these concerns, which are shared by other jurisdictions, the Organisation for Economic Co-operation and Development (OECD) has developed model rules for reporting by digital platform operators with respect to platform sellers. The model rules require online platforms to collect and report relevant information to tax administrations in order to ensure that revenues earned by taxpayers through those platforms can be properly taxed. The OECD’s framework for the model rules is designed to minimize administrative burden by providing for the sharing of information between tax administrations. An online platform would generally need to report the information to only one jurisdiction, and that jurisdiction would then share the information with partner jurisdictions based on the residence of each platform seller earning revenue through the platform (and, in the case of a rental property, the jurisdiction where the rental property is located).
Other jurisdictions have announced their intention to implement the model rules or a similar framework, including the European Union, the United Kingdom and Australia.
Budget 2022 proposes to implement the model rules in Canada. The measure would require reporting platform operators that provide support to reportable sellers for relevant activities to determine the jurisdiction of residence of their reportable sellers and report certain information on them.
Reporting platform operators would be entities that are engaged in the following activities:
- contracting directly or indirectly with sellers to make the software that runs a platform available for the sellers to be connected to other users; or
- collecting compensation for the relevant activities facilitated through the platform.
Software that exclusively facilitates the processing of compensation in relation to relevant activities, the mere listing or advertising of relevant activities or the transfer of users to another platform would not be subject to the rules, provided in each case that there is no further intervention in the provision of relevant activities. For example, this would generally exclude pure payment processors, classified ads boards, and online aggregators.
The measure would generally apply to platform operators that are resident for tax purposes in Canada. The measure would also apply to platform operators that are not resident in Canada or a partner jurisdiction and that facilitate relevant activities by sellers resident in Canada or with respect to rental of immovable property located in Canada. A partner jurisdiction would be a jurisdiction that has implemented similar reporting requirements on platform operators and that has agreed to exchange information with the CRA on reportable platform sellers.
The measure would not apply to platform operators that demonstrate to the CRA that their business model does not allow sellers to profit from compensation received or that the platform does not have any reportable sellers. The measure would also exclude platform operators that facilitate the provision of relevant activities for which the total compensation over the previous year is less than €1 million, and that elect to be excluded from reporting.
Relevant activities would be relevant services and sales of goods. Relevant services would be:
- personal services (i.e., services involving time- or task-based work performed by one or more individuals at the request of a user, unless such work is purely ancillary to an overall transaction or it is provided by a seller pursuant to an employment relationship with the platform operator or a related entity of the platform operator), for example, transportation and delivery services, manual labour, tutoring, data manipulation and clerical, legal or accounting tasks;
- rental of immovable property (residential or commercial property, as well as parking spaces); and
- rental of means of transportation.
A reportable seller would be an active user who is registered on a platform to provide relevant services or sell goods. Sellers that represent a limited compliance risk would not be reportable sellers. These are:
- governmental entities;
- entities the stock of which is regularly traded on an established securities market;
- large providers of hotel accommodation that provide accommodation at a high frequency (i.e., more than 2,000 per year in respect of a property listing on an online platform); and
- with respect to the sales of goods, sellers who make less than 30 sales a year for a total of not more than €2,000.
Reporting platform operators would need to complete due diligence procedures to identify reportable sellers and their jurisdiction of residence. For platform operators that become reporting platform operators for the first time, the due diligence procedures would be required to be completed by December 31 of the second calendar year in which the platform operator is subject to the reporting rules. A reporting platform operator could continue to rely on the due diligence procedures from a previous year as long as it has verified the seller’s address within the last 36 months and it does not have reason to know that its information on the seller has become unreliable or incorrect.
Reporting platform operators would be required to report to the CRA specified information on reportable sellers by January 31 of the year following the calendar year for which a seller is identified as a reportable seller. Reporting platform operators would also be required to provide the information relating to each reportable seller to that seller by the same date.
To avoid duplicative reporting, a reporting platform operator would generally not have to report information about a seller if another platform operator will be reporting the required information about that seller. The reporting platform operator would need to obtain adequate assurances from the other platform operator that it will report the required information.
The CRA would automatically exchange with partner jurisdictions the information received from Canadian platform operators on sellers resident in the partner jurisdiction and rental property located in the partner jurisdiction. Likewise, the CRA would receive information on Canadian sellers and rental property located in Canada from partner jurisdictions. The exchanges would take place under the exchange of information provisions in tax treaties and similar international instruments, which provide important safeguards to protect taxpayer confidentiality and ensure that the exchanged information is not used inappropriately.
This measure would apply to calendar years beginning after 2023. This would allow the first reporting and exchange of information to take place in early 2025 with respect to the 2024 calendar year.
Interest Coupon Stripping
Part XIII of the Income Tax Act generally imposes a 25-per-cent withholding tax on interest paid or credited by a Canadian resident to a non-arm’s length non-resident. The 25-per-cent withholding tax rate is generally reduced for interest paid to a resident in a country with which Canada has a tax treaty. These Canadian tax treaties typically reduce this withholding tax rate to either 10 per cent or 15 per cent. Exceptionally, for interest paid to U.S. residents, the Canada-U.S. tax treaty generally reduces the withholding tax rate to nil.
Some taxpayers have sought to avoid Part XIII interest withholding tax on non-arm’s length debt using so-called interest coupon stripping arrangements. These arrangements generally involve a non-resident lender selling its right to receive future interest payments (interest coupons) in respect of a loan made to a non-arm’s length Canadian-resident borrower to a party that is not subject to withholding tax. The non-resident lender generally retains its right to the principal amount under the loan.
While an amendment was made in 2011 to address a particular interest coupon stripping arrangement that was the subject of a court decision, it did not deal with two other variations of the arrangement.
The first variation generally involves a non-resident lender, not resident in the U.S., selling the interest coupons in respect of a loan made to a non-arm’s length Canadian-resident borrower to another person who is resident in the U.S. This U.S.-resident interest coupon holder could be either arm’s length or non-arm’s length with the Canadian-resident borrower. To the extent that the interest paid by the Canadian-resident borrower to the U.S. interest coupon holder under this arrangement is eligible for benefits under the Canada-U.S. tax treaty, the withholding tax rate to which it is subject would be reduced from 25 per cent to nil. This variation could also involve a lender resident in a non-treaty country - or in a treaty country where the treaty provides for a relatively high rate of withholding tax on interest - selling interest coupons to a purchaser in any country with a lower treaty rate.
The second variation involves a non-resident lender, not resident in the U.S., selling the interest coupons in respect of a loan made to a non-arm’s length Canadian-resident borrower to a person resident in Canada. Under this variation, interest paid by the Canadian-resident borrower to the Canadian-resident interest coupon holder is not subject to withholding tax since it is not paid to a non-resident. In these circumstances, taxpayers take the position that certain potentially applicable provisions in the Income Tax Act do not apply to deem an interest payment to be made by the Canadian-resident interest coupon holder to the non-resident lender.
Depending on the particular facts, these two variations of interest coupon stripping arrangements could be challenged by the Government based on existing rules in the Income Tax Act. However, to avoid the uncertainty and costs associated with such challenges, the Government is proposing a specific legislative measure to ensure that the appropriate tax consequences apply to these arrangements.
Budget 2022 proposes an amendment to the interest withholding tax rules to ensure that the total interest withholding tax paid under an interest coupon stripping arrangement is the same as if the arrangement had not been undertaken and instead the interest had been paid to the non-resident lender.
In general terms, an interest coupon stripping arrangement would be considered to exist where the following conditions are met:
- a Canadian-resident borrower pays or credits a particular amount to a person or partnership (interest coupon holder) as interest on a debt (other than a publicly offered debt obligation) owed to a non-resident person with whom the Canadian-resident borrower is not dealing at arm’s length (non-resident lender); and
- the tax that would be payable under Part XIII in respect of the particular amount, if the particular amount were paid or credited to the non-resident lender, is greater than the tax payable under Part XIII on the particular amount paid or credited to the interest coupon holder.
Where an interest coupon stripping arrangement exists, the Canadian-resident borrower would be deemed, for the purposes of the interest withholding tax rules, to pay an amount of interest to the non-resident lender such that the Part XIII tax on the deemed interest payment equals the Part XIII tax otherwise avoided as a result of the interest coupon stripping arrangement.
This measure would apply to interest paid or payable by a Canadian-resident borrower to an interest coupon holder to the extent that such interest accrued on or after Budget Day, unless the interest payment meets the following conditions:
- it is in respect of a debt or other obligation incurred by the Canadian-resident borrower before Budget Day; and
- it is made to an interest coupon holder that deals at arm’s length with the non-resident lender and that acquired the interest coupon as a consequence of an agreement or other arrangement entered into by the interest coupon holder, and evidenced in writing, before Budget Day.
For cases falling within the above exception, the measure would apply to interest paid or payable by a Canadian-resident borrower to an interest coupon holder to the extent that such interest accrued on or after the day that is one year after Budget Day.
Sales and Excise Tax Measures
GST/HST Health Care Rebate
Under the Goods and Services Tax/Harmonized Sales Tax (GST/HST), hospitals can claim an 83-per-cent rebate and charities and non-profit organizations can claim a 50-per-cent rebate of the GST and the federal component of the HST that they pay on inputs used in their exempt supplies. In recognition of restructuring in the delivery of health care services, the 83-per-cent hospital rebate was expanded in 2005 to cover eligible charities and non-profit organizations that provide health care services similar to those traditionally performed in hospitals.
One of the conditions to be eligible for the expanded hospital rebate is that a charity or non-profit organization must deliver the health care service with the active involvement of, or on the recommendation of, a physician, or in a geographically remote community, with the active involvement of a nurse practitioner.
Budget 2022 proposes to amend the GST/HST eligibility rules for the expanded hospital rebate to recognize the increasing role of nurse practitioners in delivering health care services, including in non-remote areas. It is proposed that to be eligible for the expanded hospital rebate, a charity or non-profit organization must deliver the health care service with the active involvement of, or on the recommendation of, either a physician or a nurse practitioner, irrespective of their geographical location. In other words, the expanded hospital rebate would no longer distinguish between health care services rendered by physicians and nurse practitioners.
This measure would generally apply to rebate claim periods ending after Budget Day in respect of tax paid or payable after that date.
GST/HST on Assignment Sales by Individuals
An assignment sale in respect of residential housing is a transaction in which a purchaser (an “assignor”) under an agreement of purchase and sale with a builder of a new home sells their rights and obligations under the agreement to another person (an “assignee”).
Under the current Goods and Services Tax/Harmonized Sales Tax (GST/HST) rules, an assignment sale in respect of newly constructed or substantially renovated residential housing may be either taxable or exempt. An assignment sale made by an individual would generally be taxable if the individual had originally entered into the agreement of purchase and sale with the builder for the primary purpose of selling their interest in the agreement. If, on the other hand, the individual had originally entered into the agreement for another primary purpose, such as to occupy the home as a place of residence, the assignment sale would generally be exempt.
Budget 2022 proposes to amend the Excise Tax Act to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. As a result, the GST/HST would apply to the total amount paid for a new home by its first occupant and there would be greater certainty regarding the GST/HST treatment of assignment sales.
Typically, the consideration for an assignment sale includes an amount attributable to a deposit that had previously been paid to the builder by the assignor. Since the deposit would already be subject to GST/HST when applied by the builder to the purchase price on closing, Budget 2022 proposes that the amount attributable to the deposit be excluded from the consideration for a taxable assignment sale.
As is currently the case, the assignor in respect of a taxable assignment sale would generally continue to be responsible for collecting the GST/HST and remitting the tax to the Canada Revenue Agency (CRA). Where an assignor is non-resident, the assignee would continue to be required to self-assess and pay the GST/HST directly to the CRA.
The amount of a new housing rebate under the GST/HST legislation is determined based on the total consideration payable for a taxable supply of a home, as well as the total consideration payable for any other taxable supply of an interest in the home (e.g., the consideration for a taxable assignment sale). Accordingly, these changes may affect the amount of a GST New Housing Rebate or of a new housing rebate in respect of the provincial component of the HST that may be available in respect of a new home.
This measure would apply in respect of any assignment agreement entered into on or after the day that is one month after Budget Day.
Taxation of Vaping Products
The Government consulted Canadians in Budget 2021 on a proposal for a new excise duty on vaping products. Key refinements to the proposed taxation framework, informed by the public consultation that took place following Budget 2021, are below.
The taxation base would be comprised of vaping products that include either liquid or solid vaping substances (whether or not they contain nicotine), with an equivalency of 1 ml of liquid = 1 gram of solids. Vaping products that are already subject to the cannabis excise duty framework, as well as those produced by individuals for their personal use, would be excluded.
A federal excise duty rate of $1 per 2 ml, or fraction thereof, is proposed for the first 10 ml of vaping substance, and $1 per 10 ml, or fraction thereof, for volumes beyond that. The excise duty would be based on the volume of vaping substance in each vaping product (e.g., a pod, a bottle, or a disposable vape pen).
If a province or territory were to choose to participate in a coordinated vaping taxation regime administered by the federal government as discussed below, an additional duty rate would be imposed in respect of dutiable vaping products intended for sale in that participating jurisdiction.
- The additional duty rate in respect of that participating province or territory would be equal to the proposed federal excise duty rate, so that the proposed combined rate would be $2 per 2 ml, or fraction thereof, for the first 10 ml of vaping substance, and $2 per 10 ml, or fraction thereof, for volumes beyond that.
Illustrative Duty Rates
Sale in a non-participating province or territory
If a retail package contains four separate pods of 1.0 ml of vaping liquid, each pod would be considered a separate vaping product for the purpose of the duty. The federal duty would be calculated based on the volume of liquid in each separate pod (i.e., $1.00 per 2 ml, or fraction thereof, per pod, for a total of $4.00 for the retail package), and not on the total volume of liquid in the retail package.
For a 30 ml bottle of vaping liquid, the federal excise duty would be $7.00: $5.00 for the first 10 ml, and an additional $2.00 for the remaining 20 ml.
Sale in a participating province or territory
For a retail package containing four separate pods of 1.0 ml of vaping liquid, the combined federal and provincial/territorial duty would be $2.00 per pod, for a total of $8.00 for the retail package.
For a 30 ml bottle, the combined federal and provincial/territorial excise duty would be $14.00: $10.00 for the first 10 ml, and an additional $4.00 for the remaining 20 ml.
Budget 2022 proposes to allow duty-free importations by travellers returning to Canada of unstamped vaping products for personal use, as outlined below.
For an absence of less than 48 hours:
- No duty-free importation of vaping products for personal use.
For an absence of 48 hours or more:
- Duty-free importation for personal use of up to twelve vaping products (e.g., pods, bottles, or disposable vape pens) of less than 10 ml each (for a total of 120 ml); or, any combination of vaping products of 10 ml or more, so long as the total volume imported is below 120 ml.
Federal-provincial-territorial Taxation Coordination
The government will work collaboratively with provinces and territories that may be interested in a federally coordinated approach to taxing these products, which could be achieved through the implementation, under federal legislation and administration, of taxation on a common product base.
- An agreement between the federal government and a province or territory could be signed and come into effect after the proposed federal excise duty framework for vaping products is in place.
Licensees would be required to apply an excise stamp with a specific colour and other unique markings indicating the provincial or territorial market in which the vaping product is intended to be sold.
Coming-into-force and Transition Period
The proposed federal excise duty framework for vaping products would come into force on October 1, 2022.
It is also proposed that retailers may continue to sell until January 1, 2023 unstamped products that are in inventory as of October 1, 2022
Cannabis Taxation Framework and General Administration under the Excise Act, 2001
As the legal cannabis industry in Canada grows and evolves, there are opportunities to streamline, strengthen, and adapt the cannabis excise duty framework specifically, and other excise duty regimes under the Excise Act, 2001 accordingly.
Excise Duty Quarterly Remittances
Cannabis producers licensed under the excise duty regime must remit excise duties on a monthly basis, not later than the last day of the month following the month in which a product is delivered to a buyer. However, not all buyers – which are primarily provincial Crown entities – pay for those products on a monthly basis; in some cases, buyer payment terms extend well beyond one month, which may lead to cash-flow issues for smaller licensed producers.
Budget 2022 proposes to allow licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis, starting from the quarter that began on April 1, 2022. This option would only be available in respect of a fiscal quarter, beginning on or after April 1, 2022, of a licensee that was required to remit less than a total of $1M in excise duties during the four fiscal quarters immediately preceding that fiscal quarter.
Contracts-for-Service – Cannabis Framework
Under the cannabis excise duty framework, packaged but unstamped cannabis products may not be transferred between licensed cannabis producers. Transferring excise duty stamps from one licensed producer to another is also prohibited. These restrictions, while intended to ensure the security and integrity of the supply chain, have also led to inventory management issues and inefficiencies in the supply chain for the cannabis industry.
Budget 2022 proposes to allow the Canada Revenue Agency to approve certain contract-for-service arrangements between two licensed cannabis producers. These approved arrangements would permit, as the case may be, two licensed producers to:
- transfer stamps, and packaged but unstamped products, between them;
- stamp and enter cannabis products into the retail market that have been packaged by the other producer; and,
- pay the excise duty on cannabis products that were stamped by the other producer.
This proposal would come into force upon royal assent to the enabling legislation.
Penalties – Cannabis Framework
Penalties are imposed on licensees when they lose excise stamps. The penalties are higher where the lost stamps are in respect of jurisdictions that opted for the inclusion of an additional cannabis duty adjustment clause in their Coordinated Cannabis Taxation Agreement (CCTA).
Additional Cannabis Duty Adjustments
This adjustment is meant to reflect in whole or in part differences between the general sales tax rate applied to cannabis in the particular jurisdiction, and the highest prevailing general provincial sales tax rate (or rate of the provincial component of the HST) in Canada – which is currently 10 per cent.
- Some jurisdictions do not have a sales tax adjustment clause in their CCTA, such as Quebec and Nova Scotia.
- Some jurisdictions with a prevailing general provincial sales tax rate of less than 10 per cent opted for the adjustment: Ontario (a 3.9 per cent adjustment), Alberta (16.8 per cent), Saskatchewan (6.45 per cent), and Nunavut (19.3 per cent).
- Some jurisdictions with a prevailing general provincial sales tax rate already at 10 per cent asked that the adjustment clause be included in their CCTA, although at a current rate of 0 per cent. These were New Brunswick, Prince Edward Island, and Newfoundland and Labrador.
In practice, licensees remitting excise duties in respect of sales to provinces with an adjustment must remit an additional duty amount in respect of those sales, calculated on the value of the product sold.
However, the higher penalties in these cases are the same whether a province has an adjustment of 0 per cent (i.e., stamps for New Brunswick, Prince Edward Island, and Newfoundland and Labrador) or an actual adjustment that is greater than 0 per cent (i.e., Ontario, Alberta, Saskatchewan, and Nunavut). This lost stamp penalty therefore does not properly reflect the difference in the value of excise duties owed.
Budget 2022 proposes to amend the penalty provision for lost stamps so that the higher penalty for losing stamps for a province or territory with an additional cannabis duty adjustment only applies if the adjustment rate is greater than 0 per cent.
In addition, there are currently no penalty provisions for situations where unlicensed parties illegally possess or purchase cannabis products, or where licensed parties illegally distribute such products.
Budget 2022 proposes that existing cannabis penalty provisions would also apply to situations where unlicensed parties illegally possess or purchase cannabis products, and where licensed parties illegally distribute cannabis products.
These proposals would come into force upon royal assent to the enabling legislation.
Licences – Cannabis Framework
Entities that hold a Health Canada-issued Research Licence or Cannabis Drug Licence are required to also hold a cannabis excise duty licence, issued by the Canada Revenue Agency (CRA). These licensees must post financial security, and most of them file excise duty returns that only contain information on the movement of insignificant quantities of inventory. In general, holders of a Research Licence or Cannabis Drug Licence use relatively small amounts of cannabis, and pose little risk of cannabis product diversion (i.e., illegal sale or use).
Budget 2022 proposes to exempt holders of a Health Canada-issue Research Licence or Cannabis Drug Licence from the requirement to be licensed under the excise duty regime.
Excise duty licences issued by the CRA for cannabis producers are only valid for up to two years, while Health Canada-issued licences, which are a necessary prerequisite for receiving a CRA-issued excise licence, may be granted for up to five years at a time.
Budget 2022 proposes to allow the CRA to issue licences that would be valid for up to the lesser of five years or the longest period for which the relevant Health Canada licence or licences are valid.
These proposals would come into force upon royal assent to the enabling legislation.
General Administration – Excise Act, 2001
The Excise Act, 2001 currently imposes excise duties on spirits, wine, tobacco, and cannabis products. The following proposals would apply in respect of all these excisable goods under the Act.
The CRA may cancel an excise licensee’s licence with 90 days’ notice. However, the grounds for suspension are not as broad as those for cancellation.
Budget 2022 proposes to add all cancellation criteria for an excise licence, other than a proactive request by a licensee to cancel its licence, to the criteria that may be used to suspend an excise licence.
Under the Regulations Respecting Excise Licences and Registrations, tobacco, spirits, wine and cannabis excise licensees and applicants to such licences are required to comply with federal and provincial legislation and regulations respecting the taxation and control of alcohol and tobacco products. Cannabis products are not currently part of this group of products.
Budget 2022 proposes to require all excise licensees and excise applicants to comply with federal and provincial legislation and regulations regarding the taxation and control of cannabis products.
In practice, the CRA no longer has the ability to accept cash, or transferable bonds issued by the Government of Canada, as financial security. There are cash and bond equivalents the CRA accepts instead.
Budget 2022 proposes to remove cash and transferable bonds issued by the Government of Canada, and add bank drafts and Canada Post money orders, to the types of financial security that could be accepted by the CRA.
As a result of the ongoing pandemic, the CRA has conducted virtual audits and reviews of excise licensees. Remote due diligence activities are often a more efficient and cost-effective option.
Budget 2022 proposes to confirm the ability of the CRA to carry out virtual audits and reviews of all licensees, where the Agency deems it appropriate.
These proposals would come into force upon royal assent to the enabling legislation.
WTO Settlement on the 100-per-cent Canadian Wine Exemption
Under the Excise Act, 2001, wine is subject to excise duties. For a typical 750mL bottle of wine, as of April 1, 2022, the excise duty is $0.688 per litre or about 52 cents per bottle. The duty is imposed at the time of packaging or, in the case of bulk wine, when the wine is taken for use (e.g., consumed). Wine that is produced in Canada and composed wholly of agricultural or plant product grown in Canada (i.e., 100-per-cent Canadian wine) is exempt from excise duties.
In 2018, the 100-per-cent Canadian wine excise duty exemption was challenged at the World Trade Organization (WTO). Canada reached a settlement on this dispute in July 2020, in which it agreed to repeal the excise duty exemption by June 30, 2022.
To give effect to the settlement, Budget 2022 proposes to repeal the 100-per-cent Canadian wine excise duty exemption.
The proposed measure would come into force on June 30, 2022.
Under the Excise Act, 2001, wine and spirits containing no more than 0.5 per cent alcohol by volume (ABV) are not subject to federal excise duty. Meanwhile, under the Excise Act, beer containing no more than 0.5 per cent ABV is subject to duty.
Budget 2022 proposes to eliminate excise duty for beer containing no more than 0.5 per cent ABV, bringing the tax treatment of such beer into line with the treatment of wine and spirits with the same alcohol content.
The proposed measure would come into force on July 1, 2022.
Other Tax Measure
Amendments to the Nisga’a Final Agreement Act to Advance Tax Measures in the Nisga’a Nation Taxation Agreement
The Nisga’a Final Agreement (2000) was negotiated between the Nisga'a Nation, British Columbia and Canada, and became one of the first modern treaties in Canada. Accompanying the Nisga’a treaty, the Nisga’a Nation Taxation Agreement was the first instance of a tax treatment agreement being concluded with a self-governing Indigenous government. At the time it was enacted, the Nisga’a Final Agreement Act, which is the federal settlement legislation giving effect to the Nisga’a treaty, provided force-of-law to specific provisions of the Nisga’a Nation Taxation Agreement, rather than the entire agreement.
For all other modern treaties negotiated following the Nisga’a treaty, comparable federal settlement legislation provided force-of-law to the entire tax treatment agreement, to accommodate the inclusion of additional tax treatment measures in the future.
Budget 2022, therefore, proposes to amend the Nisga’a Final Agreement Act to provide force-of-law to all provisions of the Nisga’a Nation Taxation Agreement, including a forthcoming amendment with respect to an income tax exemption for amounts received by citizens of the Nisga’a Nation from a registered pension plan to the extent that the employment income on which the pension amounts are based was itself exempt from tax. The proposed amendment to the Nisga’a Final Agreement Act would also enable any future potential tax-related amendments to the Nisga’a Nation Taxation Agreement to have effect.
Previously Announced Measures
Budget 2022 confirms the government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:
- Legislative proposals relating to the Select Luxury Items Tax Act released on March 11, 2022.
- Legislative proposals released on February 4, 2022 in respect of the following measures:
- electronic filing and certification of tax and information returns;
- immediate expensing;
- the Disability Tax Credit;
- a technical fix related to the GST Credit top-up;
- the rate reduction for zero-emission technology manufacturers;
- film or video production tax credits;
- postdoctoral fellowship income;
- fixing contribution errors in registered pension plans;
- a technical fix related to the revocation tax applicable to charities;
- capital cost allowance for clean energy equipment;
- enhanced reporting requirements for certain trusts;
- allocation to redeemers methodology for mutual fund trusts;
- mandatory disclosure rules;
- avoidance of tax debts;
- taxes applicable to registered investments;
- audit authorities;
- interest deductibility limits; and
- crypto asset mining.
- Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
- Legislative proposals released on December 3, 2021 with respect to Climate Action Incentive payments.
- The income tax measure announced in Budget 2021 with respect to Hybrid Mismatch Arrangements.
- The transfer pricing consultation announced in Budget 2021.
- The anti-avoidance rules consultation announced on November 30, 2020 in the Fall Economic Statement.
- The income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year, from eight years to nine years.
- Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election.
Budget 2022 also reaffirms the government's commitment to move forward as required with technical amendments to improve the certainty and integrity of the tax system.
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