The new investment tax credits (ITCs) are:
- ITC for clean hydrogen
- ITC for clean technology manufacturing
- ITC for clean electricity
Published: March 28, 2023
Updated: March 28, 2023
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.
Genuine intergenerational share transfers and Bill C-208
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:
- an immediate transfer of both voting and economic control with a full transition of all voting shares within 36 months of the initial transaction; or
- an immediate transfer of voting control with a full transition of all voting shares within 36 months, along with transfer of certain economic control criteria within 10 years of the initial transaction.
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.
Employee Ownership Trusts
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:
- Extend the five-year capital gains reserve to a 10-year reserve for “qualifying business transfers” to an EOT, thereby allowing for an extension of the period that an individual may defer recognition of a capital gain realized on the disposition of shares in a qualifying business transfer by an additional five years. A minimum of 10% of the gain would be required to be brought into income each year.
- Introduce an exception that will allow an EOT to repay amounts borrowed from a qualifying business from one year of the qualifying business' year-end to 15 years, where the amounts were loaned from a qualifying business to an EOT to purchase shares in a qualifying business transfer.
- Exempt EOTs from the requirement to dispose of its capital property after 21 years (i.e., 'the 21-year rule') that generally applies to certain trusts. Where the EOT ceases to meet the conditions to be considered an EOT, the 21-year rule will be reinstated until the trust next meets the conditions required to be an EOT.
These amendments will apply as of Jan. 1, 2024.
Clean energy incentives
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.
New investment tax credits
Investment tax credit for clean hydrogen
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.
Investment tax credit for clean technology manufacturing
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.
- Eligible property would include machinery and equipment—including certain industrial vehicles used in manufacturing, processing, or critical mineral extraction—as well as related control systems.
- Eligible activities are those related to certain clean technology manufacturing and processing businesses or activities. This would also include the extraction of and certain processing activities related to six critical minerals essential for clean technology supply chains: lithium, cobalt, nickel, graphite, copper, and rare earth elements.
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.
Investment tax credit for clean electricity
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.
If a particular property is eligible for more than one of these tax credits, businesses would be able to claim only one of the clean hydrogen tax credit; the ITC for carbon capture, utilization, and storage (CCUS); the ITC for clean technologies; the ITC for clean electricity; or the ITC for clean technology manufacturing. However, multiple tax credits could be available if the same project includes different types of eligible property.
Expansion of previously announced measures
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.
Budget 2022 proposed a refundable ITC for carbon capture, utilization, and storage (the CCUS Tax Credit) that would be available to businesses that incur eligible expenses starting on January 1, 2022. A consultation on initial draft legislative proposals and additional design features occurred in 2022 and, as a result, Budget 2023 proposes additional design details in respect of the CCUS Tax Credit. These measures would apply to eligible expenses incurred after 2021 and before 2041.
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:
- Apply to Canadian-resident public corporations (excluding mutual fund corporations), real estate investment trusts, specified investment flow-through (SIFT) trusts, and SIFT partnerships, to the extent they are listed on a designated stock exchange.
- Be calculated on the net value of an entity's repurchase of equity (i.e., fair market value of the equity repurchased, less the fair market value of equity issued from treasury), applied on an annual basis, and have certain exceptions.
- Not apply if an entity repurchased less than $1 million of equity in a taxation year (prorated for short taxation years) as determined on a gross basis.
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:
- Financial institutions – The budget proposes to deny a deduction from income in respect of dividends received by financial institutions on shares that are “mark-to-market property” held in the ordinary course of their business. Generally, shares will be mark-to-market property when a financial institution has less than 10% of the votes or value of the corporation that issued the shares. This measure will apply to dividends received after 2023.
- Credit unions – The budget proposes to amend the ITA by eliminating the revenue test from the definition of “credit union” and amending the definition to accommodate how credit unions currently operate to avoid unforeseen income tax and GST/HST consequences. This amendment would apply to a credit union's taxation years after 2016.
The information in this publication is current as of March 28, 2023
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