The new investment tax credits (ITCs) are:
- ITC for clean hydrogen
- ITC for clean technology manufacturing
- ITC for clean electricity
The 2023 Federal Budget announced a number of key tax measures for businesses in Canada, including changes to Bill C-208, new clean energy investment tax credits, and details on a previously announced 2% tax on repurchase of equity.
In 2021, a change was made to the Income Tax Act (ITA) to allow certain intergenerational transfers of closely held small businesses, including farming and fishing businesses, to be made in a tax-efficient manner when shares were transferred to the children or grandchildren of the owners. These changes were initially introduced in Bill C-208 and are generally referred to as the Bill C-208 changes.
However, the initial legislation was the result of a rushed process, and taxpayers and their advisors were left with many questions about the application of the rules. One particular concern was that the enacted legislation allowed a transfer of a family corporation in a way that took advantage of the new rules but did not restrict the ownership of that business adequately after such a transfer and did not ensure that a genuine intergenerational transfer had occurred.
Following a consultation process announced in Budget 2022, the government has brought forward changes to correct some of the concerns with the content of Bill C-208. The following is a summary of the significant changes proposed in Budget 2023 that would come into effect for transfers that occur on or after January 1, 2024.
To ensure a bona fide transfer of the business occurs, new conditions regarding the control of the business are proposed and one of two tests must be met. There must be either:
The proposed rules also expand the qualifying recipients of the business to include grandchildren, stepchildren, children-in-law, nieces, nephews, grandnieces, and grandnephews. However, the new rules also provide for a joint election between the transferor and the transferee, making the transferee jointly and severely liable for any taxes resulting from the transfer that do not meet the future conditions.
Finally, the new rules also propose to provide a 10-year capital gains reserve for all share transfers that meet the 10-year conditions. For more information on Bill C-208, see our Tax Alert, Bill C-208 - Tax changes for intergenerational transfers now law.
An Employee Ownership Trust (EOT) is a trust that holds shares of a corporation for the benefit of the corporation's employees. An EOT can be used to facilitate a purchase of a corporation by its employees, as an additional option for business owners when planning for succession. To facilitate the use of EOTs, this budget proposes to amend the Income Tax Act (ITA) to:
These amendments will apply as of Jan. 1, 2024.
As promised, and consistent with the Budget 2023 environmental focus, the government introduced three new refundable investment tax credits related to clean energy and expands on previously announced measures.
The new investment tax credits (ITCs) are:
The credit rates for the Clean Hydrogen ITC vary from 15% to 40% depending on the carbon intensity of the hydrogen that is produced. This is a refundable credit that could be claimed when eligible equipment is acquired and becomes available for use on or after March 28, 2023.
The clean hydrogen credit would be phased out starting in 2034, with property that becomes available for use in 2034 subject to a credit rate that is reduced by one-half. Property that becomes available for use after 2034 is not eligible for the credit.
A new 30% refundable ITC is proposed for clean technology manufacturing and processing as well as critical mineral extraction and processing, in respect of the capital cost of eligible property associated with eligible activities.
The ITC for clean technology manufacturing would not be available for property used in the production of battery cells or modules if such production benefits from direct support through a special contribution agreement with the Government of Canada.
This ITC would apply to property that is acquired and becomes available for use on or after January 1, 2024. It would be gradually phased out starting with property that becomes available for use in 2032 and would no longer be in effect for property that becomes available for use after 2034.
Budget 2023 proposes to introduce a 15% refundable tax credit for eligible investments in clean energy technologies that generate electricity.
Taxable and non-taxable entities such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and pension funds would be eligible for the Clean Electricity ITC.
This ITC would be available as of the day of Budget 2024 for projects that did not begin construction before the day of Budget 2023. The Clean Electricity ITC would not be available after 2034.
In addition, the following rules will apply with respect to these new ITCs:
The 2022 Fall Economic Statement announced the government's intention to attach prevailing wage and apprenticeship requirements (together referred to as “labour requirements”) to the proposed Clean Technology and Clean Hydrogen ITCs. The government also proposes to have these requirements apply to the proposed Clean Electricity ITC.
In order to qualify for the maximum credit under both of these programs, the labour requirements would need to be met for work that is performed on or after October 1, 2023.
The refundable Clean Technology ITC is expanded in respect of geothermal energy and the zero-emission technology manufacturers reduced tax rate is proposed to be expanded to certain nuclear manufacturing and processing activities.
In addition, further enhancements have been proposed to the ITC for carbon capture, utilization, and storage that was announced in the 2022 Federal Budget.
An incentive to create a new category of flow-through shares and a critical mineral exploration tax credit was also announced with respect to activities related to lithium from brines.
The 2022 Fall Economic Statement proposed a 30% refundable Clean Technology ITC. This credit would be available for eligible property that is acquired and that becomes available for use on or after March 28, 2023. Budget 2023 proposes to expand eligibility of this ITC to include geothermal energy systems.
Eligible property would include equipment used primarily for the purpose of generating electrical energy or heat energy, or both electrical and heat energy, solely from geothermal energy. Equipment used for geothermal energy projects that will co-produce oil, gas, or other fossil fuels would not be eligible for the credit.
The expansion of the Clean Technology ITC would apply in respect of property that is acquired and becomes available for use on or after March 28, 2023, where it has not been used for any purpose before its acquisition. The credit rate would be reduced to 15% in 2034 and would be unavailable after 2034.
Budget 2023 proposes that income from certain nuclear manufacturing and processing activities would qualify for the reduced tax rates for zero-emission technology manufacturers for taxation years beginning after 2023.
In addition, the reduced tax rates for zero-emission technology manufacturers are scheduled to be gradually phased out starting in taxation years that begin in 2029 and fully phased out for taxation years that begin after 2031. Budget 2023 proposes to extend the availability of these reduced rates by three years, such that the planned phase-out would start in taxation years that begin in 2032 and would be fully phased out for taxation years that begin after 2034.
The 2022 Federal Budget introduced the Critical Mineral Exploration Tax Credit (CMETC) to certain flow-through share agreements entered into after April 7, 2022, and on or before March 31, 2027. The specified minerals eligible for the CMETC as announced in 2022 are copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals, and uranium.
Budget 2023 proposes to include lithium from brines as a mineral resource and to expand the eligibility of the CMETC to lithium from brines. This will apply to eligible expenses related to lithium from brines made after March 28, 2023 and will allow them to qualify as Canadian exploration expenses and Canadian development expenses. The expansion of the eligibility for the CMETC to lithium from brines would apply to flow-through share agreements entered into after March 28, 2023, and before April 2027.
In the 2022 Fall Economic Statement, the government announced its intention to levy a new 2% tax on the net value of share buybacks by public corporations starting in 2024. This initiative is meant to encourage corporations to invest funds currently being used for buybacks in business assets and workers.
The budget provides the details of the proposed levy. The tax will:
This tax will apply in respect of repurchases and issuances of equity occurring on or after January 1, 2024.
This budget proposes several other business tax measures, including:
The information in this publication is current as of March 28, 2023
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
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