On November 3, 2022, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, presented Canada’s Fall Economic Statement 2022. Touting a relatively strong economic position among G7 countries in the face of considerable global economic uncertainty, the federal government’s plan focuses primarily on addressing affordability issues, including support measures designed to help lower-income families and first-time home buyers, as well as continuing to foster environmentally sustainable economic growth and job creation.
Projecting a deficit of $36.4 billion for 2022–23—an improvement of more than $16 billion from the estimate in last spring’s federal budget—the government’s current fiscal plan includes several interesting tax measures and funding initiatives.
Corporate Tax Measures
Clean Technology and Hydrogen Production Investment Tax Credits
Following up on announcements made in its most recent budget, the government is proposing refundable investment tax credits for clean technology and clean hydrogen production. A refundable income tax credit will be available for 30% of the capital cost of eligible clean technology investments, including specified clean electricity generation systems, stationary electricity storage systems, low-carbon emission heating equipment, and zero-emission off-road industrial vehicles and related charging or refuelling equipment. The credit rate will be reduced to 20% for companies that do not adhere to certain labour conditions, such as paying prevailing market wages and ensuring the creation of apprenticeship training opportunities. Consultations with various stakeholders, including unions, will be undertaken to determine the exact nature of any labour conditions.
The proposed clean technology investment tax credit would be available from the date of the 2023 federal budget until the start of 2035, subject to a phase-out beginning in 2032.
While the Department of Finance’s consultation process for the clean hydrogen production investment tax credit will not start for several weeks, the economic statement provides parameters for those discussions. The proposed tax credit for clean hydrogen production would be refundable and available for eligible investments made as of the date of the 2023 budget, with a phase-out planned after 2030. The maximum tax credit rate for the lowest carbon intensity tier of hydrogen production would be at least 40%. Similar to the tax credit for clean technology, a 10% rate reduction will apply where a taxpayer fails to satisfy established labour conditions.
The economic statement references carbon intensity tiers introduced by the U.S. Inflation Reduction Act of 2022, where the level of support is based on carbon emissions per kilogram of hydrogen produced. However, the consultation process will also seek input on both the level of support needed for different production pathways and an appropriate carbon intensity-based system to be used in Canada.
Scientific Research and Experimental Development Tax Credit Update
A review of the Scientific Research and Experimental Development (SR&ED) tax credit program to evaluate its effectiveness with respect to encouraging research and development (R&D) in Canada was announced as part of the 2022 federal budget. This review will also look at how the program can be modernized and simplified, potentially leading to the revision of longstanding SR&ED eligibility criteria to “ensure adequacy of support and improve overall program efficiency.” Similarly, the government previously announced that it would be investigating a potential “patent box” regime, under which income from certain underlying intellectual property would be segregated and taxed at a favourable rate.
Interestingly, the economic statement noted that the government’s review of the SR&ED tax credit is in process, but described the program as “… a cornerstone of Canada’s innovation strategy by supporting the salaries and wages of workers conducting R&D in Canada…” This statement could be foreshadowing simplification of the SR&ED expenditure base in respect of salaries and wages; time will tell. Ryan expects further details on any potential changes to the SR&ED program to be released in the upcoming federal budget.
Tax on Share Buybacks
The government also announced its intention to levy a 2% tax on the net value of all share buybacks by public corporations in Canada, effective January 1, 2024. Further details on this proposed new tax will be released as part of the next federal budget.
Personal Income Tax Measures
Extension of Residential Property Flipping Rules
In last spring’s budget, the government proposed a measure to address residential real estate flipping by deeming profits arising from the disposition of residential property (including rental property) owned for less than 12 months to be business income. The economic statement indicates that this measure, which will take effect for residential properties sold on or after January 1, 2023, will be extended to apply to any profits from the disposition of a right to purchase residential property via an assignment sale.
In addition, to prevent a taxpayer from bypassing the deeming rule by holding the right to purchase a property prior to construction, the 12-month holding period will reset once ownership of a property has been secured. Numerous exceptions to the deeming rule will be put in place for various circumstances involving life (and death) events and the destruction or expropriation of property.
Minimum Tax Reform
The federal government previously committed to investigating the possible creation of “a new minimum tax regime to ensure that all wealthy Canadians pay their fair share of tax.” The economic statement confirms that the government intends to reform the Alternative Minimum Tax currently in place, with further details to be announced in its next budget.
Previously Announced Measures
The fall economic statement also reaffirms the government’s intention to move forward with several previously announced tax measures, many of which were included in Federal Budget 2022. While legislative proposals to implement certain changes have already been introduced, proposed amendments for various other measures remain outstanding, with announcement dates ranging as far back as 2016.
Government Funding Initiatives
For information on new and extended government funding initiatives included in this year’s fall economic statement, including insight on the new Canada Growth Fund, please navigate to our Mentor Works website at: A Review of Canada’s Federal 2022 Fall Economic Statement.
More Information
Further details on Fall Economic Statement 2022 may be found on the Government of Canada website at: https://www.budget.gc.ca/fes-eea/2022/home-accueil-en.html.
If you have any questions about how these proposed changes might impact your organization, please do not hesitate to contact the Ryan TaxDirect® line at 1.800.667.1600 or taxdirect@ryan.com.