The 2023 Federal Fall Economic Update was presented on November 21, 2023 by the Minister of Finance, Chrystia Freeland. The 2023 Fall Economic Statement aims to provide a better economic outlook. The Liberals are projecting a higher than anticipated budget deficit of $40 billion in 2023-2024, which is expected to decrease to $38.4 billion in the following year.
The following is a summary of the federal government’s most relevant proposed tax measures in its 2023 Fall Economic Statement.Income Tax Measures
Denial of Income Tax Benefits on Certain Short-Term Rental Income
The 2023 Fall Economic Statement announces that the federal government intends to deny income tax deductions for expenses incurred to earn short-term rental income, including interest expenses, in provinces and municipalities that have prohibited short-term rentals.The 2023 Fall Economic Statement also announces that the federal government intends to deny income tax deductions when short-term rental operators are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements.
These measures would apply to deny all expenses incurred on or after January 1, 2024.
In addition, the federal government is taking action to support municipalities that are cracking down on non-compliant short-term rentals. The 2023 Fall Economic Statement proposes $50 million over three years, starting in 2024-25, to support municipal enforcement of restrictions on short-term rentals. This will support municipalities with strict regulatory regimes that are having a significant and measurable impact in returning short-term rentals back to the long-term housing market.
Clean Hydrogen Investment Tax Credit
Budget 2023 proposed to introduce the Clean Hydrogen Investment Tax Credit (ITC) and announced the credit's main design elements in respect of eligible projects, credit rates, measuring carbon intensity, eligible equipment, verification, and compliance.Budget 2023 also indicated that additional details on the following design elements of the Clean Hydrogen ITC would be announced at a later date.
The 2023 Fall Economic Statement proposes the details in respect of these design elements. The federal government will continue to review eligibility for other low-carbon hydrogen production pathways in the leadup to Budget 2024.
Clean Technology and Clean Electricity Investment Tax Credits - Equipment Using Waste Biomass
The 2022 Fall Economic Statement proposed a 30-per-cent refundable Clean Technology Investment Tax Credit. The credit would be available to eligible taxpayers investing in eligible property that is acquired and that becomes available for use on or after March 28, 2023, and before 2035, subject to a phase out in 2034 (the credit rate would be reduced to 15 per cent for property that becomes available for use in 2034). Eligible property would generally include certain systems and equipment used for electricity generation, stationary electricity storage, and low-carbon heating, as well as non-road zero-emission vehicles and related charging or refueling equipment.Budget 2023 proposed a 15-per-cent refundable Clean Electricity Investment Tax Credit. The credit would be available to taxable and non-taxable entities investing in eligible property as of the date of Budget 2024 for projects that did not begin construction before March 28, 2023. The Clean Electricity Investment Tax Credit would not be available after 2034. Eligible property would generally include certain systems and equipment used for electricity generation, stationary electricity storage, and transmission of electricity between provinces and territories. It was announced that the full design details of the Clean Electricity Investment Tax Credit would be provided at a later date.
As proposed in Budget 2023, the Clean Technology and Clean Electricity Investment Tax Credits would be subject to prevailing union wage and apprenticeship requirements.
The 2023 Fall Economic Statement proposes to expand eligibility for the Clean Technology and Clean Electricity Investment Tax Credits to support the generation of electricity, heat, or both electricity and heat, from waste biomass.
Dividend Received Deduction by Financial Institutions – Exception
The Income Tax Act permits corporations to claim a deduction in respect of dividends received on shares of other corporations resident in Canada. Budget 2023 proposed to deny the dividend received deduction in respect of dividends received by financial institutions on shares that are mark-to-market property.The 2023 Fall Economic Statement proposes an exception to this measure for dividends received on "taxable preferred shares" (as defined in the Income Tax Act). This exception, along with the rest of the measure, would apply to dividends received on or after January 1, 2024.
Concessional Loans
Under the Income Tax Act, if a taxpayer receives government assistance in the course of earning income from a business or property, the amount of that assistance may reduce the amount of a related expense or the cost or capital cost of a related property, or may be included in the taxpayer's income. The amount of assistance may also reduce the amount of an expenditure on which an associated investment tax credit is based.Historically, non-forgivable loans from public authorities were generally not considered government assistance. This position extended to concessional loans (meaning loans that do not bear interest or that bear interest at below-market rates) from public authorities. However, in a 2021 decision, the Tax Court of Canada determined that the full principal amount of a concessional loan was government assistance. This decision was affirmed by the Federal Court of Appeal in 2022.
The 2023 Fall Economic Statement proposes to amend the Income Tax Act to provide that bona fide concessional loans with reasonable repayment terms from public authorities will generally not be considered government assistance.
This amendment would come into force on November 21, 2023.
Sales and Excise Tax Measures
Removing the GST/HST From Psychotherapists' and Counselling Therapists' Services
Under the Goods and Services Tax/Harmonized Sales Tax (GST/HST), services covered under a provincial public health care plan are exempt in that province. Exemptions are also provided for most services rendered to individuals by physicians, dentists and nurses and certain other health care practitioners, such as optometrists and midwives. The list of other health care practitioners whose services are exempt is set out in the GST/HST legislation.The 2023 Fall Economic Statement proposes that psychotherapists and counselling therapists be added to the list of health care practitioners whose professional services rendered to individuals are exempt from the GST/HST.
This measure would apply on royal assent of the enacting legislation.
Joint Venture Election
The 2023 Fall Economic Statement proposes to amend the Excise Tax Act to clarify the application of the GST/HST to joint venture arrangements by allowing more businesses to file a joint venture GST/HST election, by ensuring all participants in a joint venture GST/HST election are registered for the purpose of the application of the GST/HST and by enacting deeming measures that are more precisely focused on tax accounting. These measures will come into force on the day on which the Act enacting the new rules will receive royal assent. In the meantime, the government will consult with industry stakeholders to receive comments on the proposed rules and on possible transitional measures.Underused Housing Tax Measures
In Budget 2021, the government announced that it would introduce a national, annual 1-per-cent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused. The Underused Housing Tax (UHT) took effect on January 1, 2022.In response to suggestions from Canadians about the implementation of the UHT, the government is now proposing to make several changes to the UHT to help facilitate compliance, while ensuring that the tax continues to apply as intended.
These changes include the elimination of filing requirements for certain owners, a reduction to minimum failure to file penalties, adding an exemption for certain employee accommodations and certain additional technical changes.
For further information, please contact your Crowe BGK advisor.