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2022 Federal Budget: Selected Tax Measures

April 13, 2022

On April 7, 2022 (Budget Day), the Minister of Finance introduced Canada’s 2022 Federal Budget (Budget 2022). While taxpayers may be relieved that Budget 2022 does not include an increase to the capital gains inclusion rate or restrictions on the principal residence exemption, Budget 2022 does include a number of significant changes applicable to financial institutions, private companies, and businesses more generally. An executive summary of these changes follows, with further details below.

A less than welcome element of Budget 2022 is the prevalence of proposed tax changes with retroactive effect to transactions occurring before Budget Day. These include the proposals relating to taxation of Canadian-controlled private corporations (CCPCs), the new Canada Recovery Dividend, and the proposed application of the General Anti-Avoidance Rule (GAAR) to the creation (as opposed to use) of tax attributes. While technically legal, this is a troubling approach from the perspective of consistency, predictability and fairness, which are among the principles that are meant to inform our income tax system. 
Budget 2022 also announces a staggering C$1.2-billion in additional funding over five years for the Canada Revenue Agency (CRA) to expand its audits of larger entities and non-residents engaged in aggressive tax planning, increase the investigation and prosecution of criminal tax evasion and expand the CRA’s educational outreach. This builds upon prior CRA funding increases (C$2.2-billion in additional funding since 2016), and the government expects to recover an additional C$3.4-billion in federal revenues from this latest funding increase – almost C$3 of revenue for each additional C$1 of CRA funding. Despite that historical measurements of the CRA’s collected tax revenues do not adequately track whether issued tax assessments are upheld on appeal, Budget 2022 clearly communicates the government’s continued emphasis on closing the perceived “tax gap” – especially with respect to tax planning the CRA deems to be “aggressive”.



    • Financial Institution Measures

      • Canada Recovery Dividend and Additional Tax on Banks and Life Insurers: Budget 2022 targets banks and life insurers with a one time 15% tax referred to as the Canada Recovery Dividend and an ongoing increase of 1.5% to the general corporate income tax rate as it applies to banks and life insurers.

      • Hedging and Short Selling by Canadian Financial Institutions: Budget 2022 proposes new rules applicable to deny certain tax benefits for registered securities dealers and persons in a group that includes a registered securities dealer that use hedging and short selling transactions that have the effect of eliminating the economic exposure to shares held by such registered securities dealers or group member.

      • Reporting Rules for Financial Institutions Administering RRSPs and RRIFs: Budget 2022 proposes to require financial institutions to report annually the total fair market value of property held in each registered retirements savings plan (RRSPs) and registered retirement income fund (RRIFs) that they administer.

      • Application of General Anti-Avoidance Rule to Tax Attributes: Budget 2022 proposes to expand the application of the GAAR to transactions that result in tax attributes that have not been utilized, but that could affect the future computation of income or tax. The proposals effectively overrule the Federal Court of Appeal’s (FCA) decision in Wild v Canada, 2018 FCA 114 (Wild) and could apply retroactively to transactions that occurred prior to Budget Day where such transactions are the subject of a notice of determination issued on or after Budget Day.

    • Private Company Measures

      • Substantive CCPCs: Budget 2022 proposes to introduce a new rule that will subject “substantive CCPCs” to the refundable tax on aggregate investment income that currently applies to CCPCs under existing rules in the Income Tax Act (ITA). This new rule shuts down certain tax planning that was intended to avoid this refundable tax. 

      • CCPCs Deferring Tax Using Foreign Resident Corporations: Budget 2022 includes proposed changes to the foreign accrual property income regime aimed at eliminating tax deferral achievable by earning passive investment income through a controlled foreign affiliate of a CCPC.

      • Small Business Deduction: Budget 2022 proposes to increase the amount of taxable capital employed in Canada that a CCPC may employ and still qualify for the small business deduction. The taxable capital limit increases from C$15,000,000 to C$50,000,000 and the small business limit will decrease on a straight-line basis after C$10,000,000 of taxable capital is reached.

      • Intergenerational Transfers: The Department of Finance (Finance) has once again announced its intention to amend the exception to section 84.1 passed by the House of Commons in June 2021 in a private member’s bill on the basis that the exception goes beyond permitting true intergenerational transfers and permits inappropriate surplus stripping.


    • International Tax Reform: Budget 2022 reaffirms Canada’s commitment to the Pillar One and Pillar Two approach to international tax reform. Canada continues to support the multilateral implementation of Pillar One while implementing a Digital Services Tax that will apply in the absence of timely implementation of this revolutionary new measure. Budget 2022 also confirms Canada’s intent to implement Pillar Two, a form of 15% global minimum tax, along the lines of the model rules released at the end of 2021, subject to a consultation process aimed at identifying necessary modifications to adapt these rules to the Canadian legal and tax context. Pillar Two is intended to be implemented in stages, beginning at a yet-to-be-identified time in 2023.

    • Interest Coupon Stripping: Budget 2022 proposes amendments to address the potential avoidance of Canadian withholding tax by a non-resident lender through a sale of the entitlement to interest on a debt owed to it by a related Canadian borrower to a person that is entitled to a better rate of Canadian withholding tax than the lender (referred to as a coupon stripping arrangement). These proposals aim to ensure that the amount of withholding tax applicable in respect of interest paid by the Canadian borrower is equivalent to the amount of withholding tax that would have been applicable in the absence of the coupon stripping arrangement.

    • Exchange of Tax Information on Digital Economy Platform Sellers: Budget 2022 proposes to implement, for calendar years beginning after 2023, the Organization for Economic Cooperation and Development’s (OECD) model rules for reporting by platform operators with respect to sellers in the sharing and gig economy, requiring digital platform operators to collect, report and share relevant information in respect of platform sellers that use an operator’s digital platform.


    • International Financial Reporting Standards for Insurance Contracts (IFRS 17): Budget 2022 includes guidance concerning the adoption of the new accounting standards for insurance contracts contained in IFRS 17 and the use of such standards for income tax purposes.

    • Investment Tax Credit for Carbon Capture, Utilization and Storage: Budget 2022 introduces a new refundable investment tax credit for carbon capture, utilization and storage (the CCUS). The CCUS tax credit is available for certain eligible expenses incurred after 2021 through 2040, and its rate is dependent on when the expenses are incurred and the type of activity certain equipment is used for.

    • Flow-Through Shares for Oil, Gas and Coal Activities: Budget 2022 proposes to eliminate the flow-through share regime for oil, gas and coal activities.

    • Critical Mineral Exploration Tax Credit: Budget 2022 introduces an enhanced 30% tax credit for specified minerals used in the production of batteries and permanent magnets, both of which are used in zero-emission vehicles or are necessary for the production and processing of advanced materials, clean technology or semi-conductors, applicable to expenditures renounced under flow-through share agreements entered into after Budget Day and on or before March 31, 2027.



    • There are several commodity tax items of note contained in Budget 2022. For GST/HST, Budget 2022 includes a change relating to assignments of new residential housing purchase agreements that will impact sales by developers and the value of new housing rebates. For cannabis excise duties, Budget 2022 includes some welcome relief and expansion of the rules to allow for co-manufacturing and white label arrangements that had previously been difficult to implement in compliance with the rules. Finally, Budget 2022 sets out the detailed excise framework for vape products, effective October 1, 2022.



Financial Institutions Measures

Canada Recovery Dividend and Additional Tax on Banks and Life Insurers

Budget 2022 included two taxes targeting banks and life insurers, the first being a one-time 15% tax referred to as the Canada Recovery Dividend and the second being an ongoing increase of 1.5% to the general corporate income tax rate as it applies to such taxpayers. These proposals represented slightly different versions of measures that had been contained in the Liberal Party election platform for the most recent federal election.

Budget 2022 proposes the Canada Recovery Dividend, a one-time tax levied at a rate of 15% on the taxable income earned in taxation years ending in 2021 of bank or life insurer groups.  Budget 2022 contemplates that a bank or life insurer group would include:

  • a taxpayer that is bank or life insurer; and

  • any other “financial institution”, as that term is defined for purposes of Part VI of the ITA, that is related to the bank or life insurer. 

Budget 2022 proposes that members of a related group to which the Canada Recovery Dividend may apply will be able to allocate by way of agreement an exemption on the first C$1-billion of taxable income earned in 2021. Although this tax is imposed for the 2022 taxation year, it will be payable in equal instalments over five years. 

Finance estimates that the Canada Recovery Dividend will result in C$4.05-billion of tax revenue over the five year period.

Budget 2022 also proposes increasing the corporate tax from 15% to 16.5% for the same taxpayers to whom the Canada Recovery Dividend is proposed to apply. A C$100-million taxable income exemption will be able to be allocated among group members by agreement. 

This additional tax is proposed to apply to taxation years ending after Budget Day (subject to being pro-rated for the number of days in such taxation year that are after Budget Day). Finance estimates that this additional tax will generate C$290-million in 2022-23 and C$460-million in 2023-24.

Hedging and Short Selling by Canadian Financial Institutions

The ITA generally permits dividends to be paid by one Canadian corporation to another without being taxed in the hands of the recipient. To this end, while the recipient is required at first instance to include the dividend in computing its income for tax purposes, it is then generally permitted to deduct the amount of the dividend, leaving it with no net income in connection with the dividend. This “dividend received deduction” is intended to limit the imposition of multiple levels of corporate taxation on earnings distributed from one corporation to another. Existing rules deny this deduction where the taxpayer receives the dividend as part of a “dividend rental arrangement”. Budget 2022 proposes to also deny the dividend received deduction in certain circumstances where a registered securities dealer or a group that includes a registered securities dealer has also entered into transactions that eliminate all or substantially all of the net economic exposure to the shares of the corporation that pays the dividend.

In broad terms, the proposal would apply in situations where the following conditions are met:

  • A registered securities dealer (Dealer), or a person that does not deal at arm’s length with the Dealer (this may be another member of the Dealer’s financial group), holds a share of a Canadian corporation (the Dealer or other person being the Shareholder);  

  • The Dealer has entered into a particular transaction or series of transactions which hedge the economic exposure to the share. Typically this would involve a “short sale” of the share – essentially, a transaction whereby the Dealer borrows the share and sells it, and commits to (i) repurchase the same or an identical share on the market when the borrowing period is up and transfer the share back to the lender, and (ii) if a dividend is paid on the share during the borrowing period, pay an amount to compensate the lender for such dividend (a dividend compensation payment);

  • The transaction (e.g., the short sale) or series has the effect of eliminating all or substantially all (generally 90% or more) of the Shareholder’s risk of loss and opportunity for gain or profit in respect of the share, or would do so if the transaction were entered into by the Shareholder rather than the Dealer; and

  • If the transaction or series are entered into by the Dealer rather than the Shareholder, it can reasonably be considered to have been entered into with the knowledge, or where there ought to have been the knowledge, that the effect described in the previous bullet would result.

As noted above, if a dividend is paid on the share in the above circumstances, under current rules the Shareholder would prima facie be able to claim the dividend received deduction, leaving it with no net income in respect of the dividend. Moreover, when the Dealer makes the dividend compensation payment to the lender, the securities lending rules in the ITA would permit it to claim a deduction in computing its income equal to two-thirds the amount of the dividend.

Finance is concerned that the above types of transaction entered into by certain financial institution groups may give rise to unintended tax benefits by allowing the group to benefit from the two-thirds deduction on the dividend compensation payment made in respect of the short side of the transaction, without being required to include any amount in income in respect of dividends received on the long side of the transaction. As a result, Budget 2022 proposes that, in the above situations, the Shareholder would no longer be permitted to claim the dividend received deduction. However, the Dealer will be permitted to claim a full, rather than a two-thirds, deduction for the dividend compensation payment it makes (provided the transaction entered into by the Dealer is a securities lending arrangement, as defined in the ITA).  

The proposed amendments would generally apply to dividends and related dividend compensation payments that are paid, or become payable, on or after Budget Day. However, if the relevant hedging transaction or related securities lending arrangement was in place before Budget Day, the amendment would apply to dividends and related dividend compensation payments that are paid after September 2022. Thus, affected financial institution groups would be given a limited period in which to unwind any transactions to which these proposals would otherwise apply.

Reporting Rules for Financial Institutions Administering RRSPs and RRIFs

Financial institutions that administer tax-free savings accounts (TFSAs) are required to file a detailed annual information return (Form RC 243) that includes significantly more information than is required to be reported in respect of RRSPs and RRIFs. In particular, the Form RC 243 requires a description of each property held in the TFSA and the total fair market value of such property. 

Budget 2022 proposes to require financial institutions to report annually the total fair market value, determined at the end of the calendar year, of property held in each RRSP and RRIF that they administer, although the Budget 2022 materials do not specify that any additional information from the Form RC 243 would be required for RRSPs and RRIFs. Such reporting is proposed to be required for 2023 and later taxation years.

Application of the GAAR to Tax Attributes

The FCA decision in Wild held that a series of transactions undertaken to increase the paid-up capital of certain shares to effect a tax-free distribution did not constitute a "tax benefit" for the purposes of the GAAR since the reduction in tax that would result from the future tax-free distribution had not yet been realized. Effectively, the taxpayer's planning could not be challenged under the GAAR until the surplus paid-up capital was used. The reasoning in Wild has been followed in a number of subsequent decisions.

Budget 2022 proposes to expand the GAAR and related provisions to apply to transactions that affect tax attributes relevant to the future computation of tax (or income), which attributes have not yet been used, effectively overruling Wild.

Budget 2022 states that the limitation of the GAAR to circumstances where a tax attribute has been utilized runs counter to the policy underlying the GAAR and the tax attribute determination rules. No explanation as to why or how this is the case was offered. Budget 2022 also states that such limitation reduces certainty for both taxpayers and the CRA, as it can take years from the time when attributes are created until they are used. Consequently, Budget 2022 proposes to expand the definition of “tax benefit” to include a reduction, increase or preservation of an amount that could at a subsequent time be relevant to the computation of a reduction or deferral of tax or other amount payable; or an increase in a refund of tax or other amount. Corresponding amendments would similarly expand the definition of “tax consequences”.

Subsection 152(1.11) of the ITA is also proposed to be amended to expand the scope of the notice of determination provisions to permit the Minister of National Revenue to determine any amount that could, at a subsequent time, be relevant for purposes of computing income, refundable amounts or tax or other amounts payable.

Other than potentially accelerating the timing of a GAAR challenge, these proposals may have little practical impact for most taxpayers, except in one respect. In order for a GAAR challenge to be successful, there must be an “avoidance transaction”. One branch of the avoidance transaction definition includes a series of transactions test. Under the current formulation of GAAR, it is at least possible for a taxpayer to argue that the use of a tax attribute that arose many years prior is not an avoidance transaction because that use was not part of the series of transactions under which the attribute arose. With the creation of the attribute itself clearly subject to a GAAR challenge as a result of the proposals, it will presumably now be even more challenging to argue that the creation of the attribute is not part of a relevant series.

Budget 2022 provides that the proposed amendments would apply to transactions that occur on or after Budget Day and with respect to notices of determination issued on or after Budget Day. Importantly, the proposed amendments could apply retroactively to transactions that occurred prior to Budget Day if a determination in respect of those transactions is made under (amended) subsection 152(1.11) on or after Budget Day.

Private Company Measures

Substantive CCPCs

CCPCs are subject to certain benefits under the ITA, including the low rate of tax on qualifying active business income, enhanced investment tax credits and the potential for shareholders to benefit from the lifetime capital gains exemption on capital gains realized on the sale of their shares. There are, however, tax disadvantages to being a CCPC. The largest disadvantage is, arguably, that CCPCs are subject to additional refundable taxes on most investment income, including rents, royalties, capital gains and interest. The refundable tax removes the deferral advantage from earning such income inside a CCPC, placing the shareholders in roughly the same position as if they earned this income directly. The combined federal and provincial corporate tax rate plus the refundable tax is approximately 50%. Non-CCPCs, such as public corporations and corporations controlled by non-residents, are not subject to this refundable tax, thus resulting in a tax rate of approximately one-half of what a CCPC will pay or approximately 25% depending on the province of residency.

As a result, in respect of investment income, there is a clear disadvantage to being a CCPC.  Planning has evolved to allow Canadian shareholders to control a company, but have it not be a CCPC. Such planning can involve, amongst other things, the following:

  • continuing the corporation to a foreign jurisdiction, but keeping all mind and management and residency in Canada;

  • providing non-residents an option to acquire greater than 50% of the voting shares of the corporation; or

  • inserting a non-resident corporate owner (often a disregarded flow-through entity) somewhere into the corporate structure.

In some cases, this planning has been carried out just prior to a CCPC realizing a large capital gain so as to avoid the refundable tax. This has allowed the CCPC to have the benefit of being a CCPC but ultimately avoid the refundable tax once the gain is realized. The CRA has begun to challenge some of this planning using the GAAR, but that can be expensive and time consuming and it is by no means clear that the CRA will be successful in these challenges. Finance also showed its displeasure with this planning in the February 2022 draft legislation by including this planning in its list of transactions that would be subject to the new notifiable transaction rules. (Blakes Bulletin: Department of Finance (Canada) Releases Significant Draft Tax Legislation).

In many other cases, taxpayers took advantage of the non-application of the refundable tax regime after a former CCPC lost such status upon signing of a bona fide agreement pursuant to which a non-resident or public corporation would acquire control of a corporation. This planning is often referred to as paragraph 111(4)(e) planning and can be used to step up the basis of assets of a former CCPC on a tax-efficient basis.

Budget 2022 proposes to shut down the planning described above (including paragraph 111(4)(e) planning in connection with legitimate third-party transactions) on a retroactive basis, generally effective for taxation years ending on or after Budget Day. The amendments will introduce a new definition of a “substantive CCPC”. A substantive CCPC is proposed to be a private corporation that is not a CCPC, and:

  • is ultimately controlled in fact by a Canadian resident individual or individuals; or

  • would be controlled by a Canadian resident individual if that individual were deemed to own all shares of a corporation that are owned by a Canadian resident individual.

Thus, if Canadian resident individuals directly or indirectly own sufficient shares to control such a private corporation, it will be a substantive CCPC. Further, a corporation will be a substantive CCPC if it would be a CCPC, but for the fact that a non-resident or public corporation has a right to acquire its shares.

The investment income of a substantive CCPC will be subject to the same refundable tax regime as if it were a CCPC. Thus, the deferral advantage of the planning is eliminated. However, for all other purposes, the corporation will not be a CCPC. Other anti-avoidance measures and administrative changes will also be made to support the changes.

While the substantive CCPC rule is proposed to be effective for taxation years ending on or after Budget Day, an exception will apply if a year-end arises on or after Budget Day and in 2022 because of an acquisition of control by an arm’s length purchaser where the relevant purchase and sale agreement was entered into pre-Budget Day. This would appear to preserve the ability to execute paragraph 111(4)(e) planning in respect of agreements signed prior to Budget Day.

CCPCs Deferring Tax Using Foreign Resident Corporations

Foreign accrual property income (FAPI) earned in a controlled foreign affiliate (CFA) of a Canadian taxpayer is subject to Canadian taxation in the taxation year of the Canadian taxpayer that includes the taxation year-end of the CFA, whether or not such FAPI has been distributed to the Canadian taxpayer. A CFA is generally a non-resident corporation in which the Canadian resident taxpayer either alone or together with certain other persons has a controlling interest.

The FAPI rules provide for a deduction in computing a Canadian taxpayer’s income to address foreign taxes paid on FAPI earned by its CFA. The deduction is generally equal to the amount of foreign taxes paid by the CFA multiplied by a “relevant tax factor” (RTF). For Canadian resident individuals, the RTF is 1.9. Where the taxpayer is a Canadian corporation, the RTF is 4.

Because the RTF does not distinguish between the different Canadian tax rates applicable to Canadian corporations depending on their status, the existing FAPI rules offer a potential tax deferral advantage for CCPCs that earn passive investment income through a CFA rather than in the CCPC itself. This is because, as discussed above under “Substantive CCPCs”, passive investment income earned by a CCPC is subject to tax at a rate of approximately 50% (including a refundable tax component ), meaning that an RTF of 4 provides for a deduction that offsets more Canadian tax where the income is earned in a CFA of a CCPC than would be the case if the CCPC earned the foreign passive income directly. For example, if a CFA of a CCPC pays C$25 of foreign tax on C$100 of FAPI, the CCPC would receive a deduction of C$100, resulting in no Canadian tax payable by the CCPC, whereas if the CCPC earned C$100 of  foreign passive investment income directly it would  be subject to approximately C$50 of Canadian tax, which would be only partially reduced by a foreign tax credit of C$25.

Budget 2022 proposes to eliminate this deferral advantage by making FAPI earned in a CFA of a CCPC subject to an RTF of 1.9, the same RTF as is applicable to a CFA owned by an individual. 

Separately, the inclusion of certain amounts in respect of FAPI in a CCPC’s “general rate income pool” (GRIP) makes it possible under current rules for the CCPC to distribute such amounts to its shareholders as lower-taxed eligible dividends. If the CCPC earned the investment income itself, such earnings would be distributed as higher-taxed non-eligible dividends.

To address this issue and to try and preserve integration for investment income earned in a CFA of a CCPC taking into account the proposed RTF change, Budget 2022 proposes to achieve integration by dealing with certain dividends paid by foreign affiliates through the capital dividend account of the CCPC rather than through its GRIP account. 

These proposed changes are intended to apply to taxation years that begin on or after Budget Day.

The Small Business Deduction

Under the ITA, CCPCs and corporations which are not controlled by non-residents or public corporations are subject to a lower rate of federal and provincial income tax on a portion of their qualifying active business income. Generally, the first C$500,000 (the Small Business Limit) of such income is subject to a lower tax rate. On this income, the federal tax rate is reduced from 15% to 9%. The combined federal and provincial tax rates range from 9% to 13% instead of as high as 31% on non-qualifying active business income.

Generally, the Small Business Limit must be shared by associated corporations and the Small Business Limit is reduced to the extent a CCPC has in excess of C$50,000 of investment income. The Small Business Limit is also reduced on a straight-line basis to the extent taxable capital employed in Canada of the CCPC (and associated corporations) exceeds C$10,000,000. At C$15,000,000 of taxable capital, the Small Business Limit is reduced to zero. To a certain extent, this limitation impairs the ability of medium-sized businesses to grow in Canada, because as taxable capital increases, the Small Business Limit is reduced and the effective tax rate increases.

Budget 2022 proposes to extend the range of taxable capital employed in Canada over which the Small Business Limit is reduced to zero. The range will now be from C$10,000,000 to C$50,000,000 and reduce the Small Business Limit on a straight-line basis. For example, at C$30,000,000 of taxable capital, a CCPC would have a Small Business Limit of C$250,000 compared to zero under the existing rules. This is a welcome change for small and medium businesses in Canada.

Intergenerational Transfers

The ITA includes a number of provisions aimed at preventing so-called “surplus stripping”. One of those provisions is section 84.1, which generally converts a capital gain realized by an individual (vendor) on a sale of shares of a Canadian target corporation into a deemed dividend if:

  • the vendor sells the shares to a corporate purchaser with which the vendor does not deal at arm’s length; and

  • after the sale, the target corporation and the purchaser are “connected” for purposes of section 84.1.

In the absence of section 84.1, the purchaser corporation could help facilitate “stripping” assets out of the target corporation for the benefit of the vendor by using the following steps:

  • the purchaser corporation pays a portion of the purchase price for the shares by issuing a promissory note to the vendor,

  • following the closing of the sale, the purchaser corporation causes the target corporation to pay a dividend to the purchaser corporation in an amount equal to the surplus assets of the target corporation, and

  • the purchaser corporation uses the cash or other assets from the dividends to repay the promissory note issued to the vendor. 

In such a case, the vendor may pay no tax on the proceeds received from the sale of shares (if the lifetime capital gains exemption applies) or will effectively pay tax at a lower capital gains rate than if the vendor instead directly received a dividend of the surplus assets from the target corporation prior to the sale of the shares of the target corporation to the purchaser. Instead, because of the application of section 84.1, the purchaser corporation may be deemed to pay a dividend to the vendor.

Section 84.1 has been criticized for not facilitating intergenerational transfers, because it prevents the use of target corporation assets from being used by a purchaser corporation controlled by a child of the individual vendor to pay the purchase price for the shares of the target corporation.

In June 2021, the House of Commons passed Bill C-208, a private member’s bill which provides an exception to section 84.1 of the ITA that was intended to better facilitate intergenerational transfers. More specifically, Bill C-208 provides that section 84.1 does not apply if the target corporation shares are qualified small business corporation shares (QSBC Shares) and the purchaser corporation is controlled by a child or grandchild of the vendor. In order for the exception to apply, the vendor must have an independent assessment of value of the QSBC Shares and must sign an affidavit with respect to certain elements of the transaction.

Since the passage of Bill C-208, Finance has expressed its displeasure with this exception to section 84.1 on the basis it permits inappropriate surplus stripping, where true intergenerational transfers do not occur. For example, under the exception provided for in Bill C-208, a parent vendor can retain control of the target corporation and simply sell a portion of the shares of the target corporation to a purchaser corporation provided a child or a grandchild controls the purchaser corporation.

In Budget 2022, Finance has once again indicated that it is reviewing the legislation related to Bill C-208 and will table the new legislation in the fall to fix perceived deficiencies. Finance will accept submissions on the issue until June 17, 2022. It is expected Finance will focus on rules that ensure there is a true intergenerational transfer of an operating business.
In the meantime, vendors who use the new exception are well advised to carefully document their transaction and ensure they fit squarely within the rules. Audit exposure for vendors that rely on the new exception is expected to be high.


International Tax Reform

The government reiterated in Budget 2022 its commitment to the two-pillar approach to international tax reform being developed by the OECD and the broader “Inclusive Framework” of countries. 

Pillar One is a new approach being developed to allow “market jurisdictions” where customers are located new taxing rights in respect of entities with an economic, but not physical, presence that does not rise to the required level of taxable nexus generally required under the current international tax norms (i.e., a permanent establishment). These new rules will, to a certain extent, over-rule the arm’s length principle that governs international transfer pricing and will institute a more formulaic approach to allocate taxable income to market jurisdictions. These measures will apply to multinational groups with global annual revenues above €20-billion, and the amounts allocated represent profits in excess of 10%. 

Budget 2022 confirms that Canada continues to work internationally to develop the Pillar One rules and to achieve agreement on a multi-lateral approach to implementation. Budget 2022 also confirms that Canada is moving forward with its Digital Services Tax as of 2022 (with payment obligations delayed until 2024) as an alternative to Pillar One, with the hope that timely multi-lateral implementation of Pillar One would allow Canada to repeal this measure (read more in our Blakes Bulletin: 2021 Federal Budget – Selected Tax Measures under the section, Digital Services Tax).

Pillar Two represents a set of rules aimed at ensuring that a minimum income tax rate of 15% applies to all income earned globally. The mechanics of the proposed rules are quite complex (the Inclusive Framework released model rules (the Model Rules) on December 20, 2021). The Model Rules include a primary “Income Inclusion Rule” and a secondary “Undertaxed Profits Rule”. The Income Inclusion Rule is intended to allow an ultimate parent of a group to impose a top-up tax to the extent that group income is not taxed at the minimum rate of 15%. The Undertaxed Profits Rule is a secondary rule intended to apply when no ultimate parent or substitute parent entity applies an Income Inclusion Rule. The Undertaxed Profits Rule allows jurisdictions to apply a top-up tax on group entities in each such jurisdiction, allocated on a formulaic basis, thus providing an incentive for jurisdictions to implement Pillar Two (as non-implementation will not relieve group profits from the minimum tax, but just change the jurisdictions that collect it).

Budget 2022 proposes that Pillar Two be implemented in Canada through amendments to the ITA based on the Model Rules, which are to include a domestic Canadian minimum or “top-up” tax. As with other measures recently proposed (e.g., the proposed anti-hybrid rules in Budget 2021, this regime is proposed to be implemented in two stages, with primary charging provisions relating to the Income Inclusion Rule and the top-up tax effective as of a yet-to-be determined date in 2023, with secondary charging provisions relating to Canada’s implementation of the Undertaxed Profits Rule effective in 2024 at the earliest.

Budget 2022 announces a public consultation on the implementation of Pillar Two, with input specifically sought on a number of specific design elements of this new regime. The stated intent of the consultation is to get input on how to adapt the global rules for the Canadian context, rather than feedback on the broader policy and design of the Pillar Two concepts. Written representations for the consultation are due by July 7, 2022.

Interest Coupon Stripping

Canada generally imposes a domestic withholding tax of 25% on interest paid or credited by a Canadian resident borrower to a non-arm’s length, non-resident lender (Group Lender). The rate of withholding tax on interest paid to such a resident of another country is commonly reduced to 10% or 15% where that country has a tax treaty with Canada, or to nil in the case of interest paid to a resident of the United States that is eligible for the benefits of the Canada-U.S. tax treaty (U.S. Treaty).

In some cases, “coupon stripping” arrangements have been used to eliminate or reduce the amount of Canadian withholding tax that would otherwise be paid on interest payments made by Canadian borrowers to Group Lenders. Generally, coupon stripping refers to circumstances in which the entitlement to receive a periodic interest payment on a debt obligation has been separated from the entitlement to be repaid the principal amount of the debt and sold to an arm’s length party. Interest paid to the arm’s length purchaser is then subject to a lower rate of Canadian withholding tax as compared to if the interest had been paid to the Group Lender, and the purchase price for the interest coupon is not itself subject to withholding tax.

The ITA already includes rules aimed at curtailing the ability of Group Lenders to use coupon-stripping arrangements to avoid withholding tax on interest payments by transferring the interest component to a person that deals at arm’s length with the applicable Canadian borrower. Those rules were introduced in response to the decision in Lehigh Cement Limited v The Queen, 2010 FCA 124, in which the government was unsuccessful in applying the GAAR to a coupon stripping arrangement. Budget 2022 introduces rules to further limit the use of coupon stripping arrangements to avoid Canadian withholding tax. Two examples of coupon stripping arrangements that are purportedly used are provided in the materials accompanying Budget 2022.

The first example is of a Group Lender that is not entitled to the benefits of the U.S. Treaty that transfers the entitlement to interest to a person that is entitled to the benefits of the U.S. Treaty.  As the U.S. Treaty provides for a nil rate of withholding on interest payments made by a Canadian borrower to a person entitled to the benefits of the U.S. Treaty (even if that person does not deal at arm’s length with the Canadian borrower), such arrangement would eliminate the applicable Canadian withholding tax.

The second example is of a Group Lender that transfers the entitlement to interest in respect of a loan made to a Canadian borrower to a (presumably unrelated) person resident in Canada.  Since the interest payments would be made to a resident of Canada, no Canadian withholding tax would apply.

In each of these examples, presumably the Group Lender would transfer the entitlement to interest for a purchase price that is less than the full amount of interest (thereby creating a profit for the purchaser that is intended to receive the interest free of Canadian withholding tax), but more than the amount that the Group Lender would receive after the deduction of Canadian withholding tax if the interest were paid to it.

Budget 2022 proposes an amendment to the interest withholding rules to ensure that the total withholding tax paid under an “interest coupon stripping arrangement” is the same as if the arrangement had not been undertaken and interest had instead been paid to the applicable Group Lender. In general terms, an interest coupon stripping arrangement would be considered to exist where:

  • A Canadian borrower pays or credits a particular amount as interest to a person or partnership (interest coupon holder) on a debt (other than a “specified publicly offered debt obligation” as described below) owed to a non-resident lender with whom the Canadian borrower does not deal at arm’s length for purposes of the ITA; and

  • The Canadian withholding tax that would otherwise be payable in respect of the particular amount, if the particular amount were paid or credited to the non-resident lender, is greater than the Canadian withholding tax actually payable on the amount paid or credited to the interest coupon holder.

Where an interest coupon stripping arrangement exists, the Canadian borrower will be deemed to pay an additional amount of interest to the non-resident lender such that the Canadian withholding tax on the deemed interest payment would equal the Canadian withholding tax avoided as a result of the coupon stripping arrangement. In part, the proposed rule functions as a domestic anti-treaty shopping rule, similar in some respects to the “back-to-back” rules that were first introduced in Budget 2014.

As noted above, Budget 2022 proposes an exception to the deemed interest rule for interest paid on a “specified publicly offered debt obligation”, defined to mean a debt or other obligation:

  • issued as part of an offering that is lawfully distributed to the public in accordance with a prospectus, registration statement or similar document filed with, and where required by law, accepted for filing by a public authority; and

  • where it can reasonably be considered that none of the main purposes of a transaction or event, or series of transaction and events, as a part of which the Canadian borrower pays or credits an amount of interest is to avoid or reduce the Canadian withholding tax that would otherwise be payable.

This exception presumably exists to avoid Canadian corporations being subject to additional withholding tax requirements in respect of a public issuance of indebtedness in a circumstance where a coupon stripping arrangement was not contemplated by the Canadian borrower. However, it is not clear that the exception would be available to cover debt issued pursuant to a confidential offering memorandum, even if the debt is offered to a large number of noteholders.

The rule is proposed to apply to interest that accrues on or after Budget Day. However, the rule will not apply to interest that accrues before April 7, 2023, if the interest is paid or payable in respect of a debt or other obligation incurred by a Canadian borrower before Budget Day and where the interest coupon holder deals at arm’s length with the non-resident lender and acquired the interest coupon as a consequence of an agreement or other arrangement entered into by the interest coupon holder and evidenced in writing prior to Budget Day. Notably, this additional grandfathering would not apply to a coupon stripping arrangement that involves the sale of a coupon to a U.S. purchaser who does not deal at arm’s length with the Group Lender.

Exchange of Tax Information on Digital Economy Platform Sellers

In 2020 and 2021, the OECD released model rules for reporting of data by digital platform operators with respect to sellers in the sharing and gig economy, as well as to the sale of goods and the rental of transportation means (Digital Economy Reporting Rules). The Digital Economy Reporting Rules include an international legal framework in the form of the Multilateral Competent Authority Agreement supporting the annual automatic exchange of information by the resident jurisdiction of the platform operator with the jurisdictions of residence of sellers. The Digital Economy Reporting Rules are generally aligned with the European Union Directive 2011/16/EU or “DAC 7”, which sets out the framework for the reporting obligations for European Member State digital platform operators, applicable from January 1, 2023. Other jurisdictions such as the United Kingdom and Australia have announced their intention to implement the Digital Economy Reporting rules of a similar framework.
According to Budget 2022, some platform sellers may not be aware of the tax implications resulting from their online activities, and transactions occurring digitally through online platforms may not be visible to tax administrations, in turn making it difficult for the CRA to detect non-compliance. With this backdrop, Budget 2022 proposes to implement the Digital Economy Reporting Rules in Canada. Such rules will apply to a digital platform operator (Reporting Platform) that is resident in Canada for Canadian tax purposes, or not resident in Canada or a partner jurisdiction but facilitates reportable activities by sellers resident in Canada or rental of immovable property situated in Canada.

A Reporting Platform consists of an entity that is engaged in 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. Activities that are reportable (Reportable Activities) include the sales of goods and relevant services pertaining to transportation and delivery services, data manipulation and clerical, legal and accounting tasks, rental of residential or commercial property and parking spaces and rental of means of transportation. A reportable seller (Reportable Seller) is an active user who is registered on a Reporting Platform to provide Reportable Activities.

A Reporting Platform excludes a digital platform operator who operates software that exclusively facilitates the processing of compensation in connection with the Reportable Activities (e.g., a payment processor), advertises or lists Reportable Activities (e.g., classified ads board), or transfers sellers to other digital platforms (e.g., an online aggregator). Moreover, a Reporting Platform does not include a digital platform operator that can demonstrate to the CRA that its platform does not have Reportable Sellers or its business model does not allow sellers to profit from compensation received, or facilitates the provision of Reportable Activities for which the total compensation over the previous year is less than €1-million provided that the platform operator elects to be excluded from reporting.

Reporting Platforms will need to conduct due diligence to identify Reportable Sellers and their jurisdiction of residence by December 31 of the second calendar year in which the digital platform operator becomes a Reporting Platform. A Reporting Platform will be required to report to the CRA-specified information by January 31 of the year following the calendar year for which a seller is identified as a Reportable Seller. Reportable Sellers that represent a limited compliance risk – such as 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 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 – will be excluded. To avoid duplicative reporting, a Reporting Platform will generally not have to report information about a Reportable Seller if another platform operator will be reporting the required information about that seller.

The CRA will automatically exchange with partner jurisdictions the information received from Canadian Reportable Platforms on Reportable Sellers that are resident in the partner jurisdiction and rental property that is located in the partner jurisdiction. Correspondingly, the CRA will receive information on Canadian Reportable Sellers and rental property located in Canada from partner jurisdictions. The exchanges will be carried out pursuant to the exchange of information provisions in tax treaties and similar international instruments.

The Digital Economy Reporting Rules will be effective for calendar years beginning after 2023 such that the first reporting and exchange of information is contemplated to occur in early 2025 with respect to the 2024 calendar year.

The Digital Economy Reporting Rules are far-reaching with significant implications. Digital platforms operators’ due diligence requirements will likely be onerous and business sensitive. Multinationals should not underestimate the scope of the reporting obligations, particularly the operational impact for platforms with a high volume of sellers. Intricate compliance procedures will need to be devised by affected digital platform operators. In addition, the Digital Economy Reporting Rules do not limit information exchange solely on the basis of reciprocity, but rather enables jurisdictions to provide information on another interested jurisdiction even if the latter has not itself implemented reporting rules for digital platform. Accordingly, it is quite conceivable that a foreign tax administration will obtain access to information on Canadian platform sellers even if the receiving foreign jurisdiction has not implemented the Digital Economy Reporting Rules.


International Financial Reporting Standards for Insurance Contracts (IFRS 17)

Beginning January 1, 2023, IFRS 17, representing a new accounting standard for insurance contracts, is due to come into effect and will substantially change financial reporting for Canadian insurers. Further to an announcement made in May 2021, Budget 2022 includes guidance generally supporting the use of accounting income as determined pursuant to IFRS 17 as the basis for determining an insurer’s income for tax purposes, with certain adjustments.

IFRS 17 introduced a new reserve referred to as the “contract service margin” (CSM) that in general terms is intended to represent unearned profit the insurer will recognize for accounting purposes as it provides services under the relevant insurance contracts. Finance has expressed a concern that permitting the deduction of the CSM for tax purposes would lead to an undue income tax deferral, and in the May 2021 announcement it indicated that it would not allow the CSM to be deducted for tax purposes. However, following extensive industry consultation, Budget 2022 proposes a number of relieving measures as regards deductibility of the CSM, as well as some other IFRS-related measures, as follows:

  • Life Insurance: Budget 2022 proposes that 10% of the CSM associated with life insurance contracts (other than segregated funds) be deductible for tax purposes.

    • Segregated Funds: though segregated funds are legally classified as life insurance policies, the CSM associated with segregated funds would be fully deductible.

  • Property and Casualty Insurance: As the CSM is expected to be largely insignificant for property and casualty insurance contracts (other than mortgage and title insurance contracts), Budget 2022 proposes to maintain the current treatment for these contracts.

    • Mortgage and Title Insurance: 10% of the CSM in respect of mortgage and title insurance contracts would be deductible.

  • Capital Tax: Part VI of the ITA currently provides for a capital-based tax on large financial institutions. Budget 2022 includes a number of proposals intended to prevent erosion of the Part VI capital tax base as a result of the adoption of IFRS 17.

Budget 2022 also includes a number of transitional rules including five year transition periods for changes in reserves computed under IFRS 17 and for mark-to-market gains and losses on certain fixed income instruments realized on the adoption of IFRS 9.

These measures are proposed to be effective January 1, 2023.

Investment Tax Credits for Carbon Capture, Utilization and Storage

To incentivize the development and adoption of technologies for CCUS, Budget 2022 introduces a refundable investment tax credit for eligible expenses incurred beginning on January 1, 2022, through 2040 (the CCUS Tax Credit). The CCUS Tax forms part of Canada’s plan to achieve net-zero emissions by 2050.

Generally, the CCUS Tax Credit is available in respect of the acquisition and installation of “eligible equipment” used in an “eligible CCUS project” and where the captured CO2 is used for an “eligible use”. These concepts are discussed in greater detail below. 

CCUS Tax Credit Rate

The amount of the CCUS Tax Credit generally depends on when the eligible expense is incurred and the type of activity the equipment is used for. The CCUS Tax Credit rates are as follows:

Use of Equipment

Expense Incurred after 2021 and before 2031

Expense Incurred after 2030 and before 2041

Direct air capture project



Eligible capture equipment



Eligible transportation, storage and use equipment



 As an acknowledgment to the Canadian energy sector that the development of new technology for the equipment and the implementation of projects generally require large amounts of capital, the CCUS Tax Credit can be claimed in the tax year in which the expenses are incurred even if the equipment may not yet become available for use.

As noted above, the availability of the CCUS Tax Credit requires eligible equipment, an eligible project, and eligible uses of the captured CO2. The following sections provide details in respect of each requirement.

Eligible Equipment

Eligible equipment is equipment used solely to capture, transport, store or use CO2 as part of an eligible CCUS project, and only if the equipment is put to use in Canada.

Equipment required for hydrogen production, natural gas processing, acid gas injection, or equipment that does not support CCUS is not eligible equipment.

Eligible Project

An eligible CCUS project is a new project that:

  • captures CO2 in Canada that would otherwise be released into the atmosphere or from the ambient air;

  • prepares the capture CO2 for compression;

  • compresses and transports the captured CO2; and

  • stores or uses the captured CO2. 

While CO2 must be captured in Canada, it may be stored or used outside Canada if certain requirements are met.

Taxpayers may also be involved in multiple eligible projects.

Projects are not eligible if emission reductions are necessary to comply 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 Uses

The initial list of eligible uses includes dedicated geological storage and storage in concrete.

In respect of dedicated geological storage, the CCUS Tax Credit is currently available for CCUS projects in Alberta and Saskatchewan, as only these two provinces now meet certain federal conditions established by Environment and Climate Change Canada to ensure that CO2 is permanently stored.

In respect of storage in concrete, the CCUS Tax Credit is available in all jurisdictions if the process for using and storing CO2 is approved by Environment and Climate Change Canada and at least 60% of the CO2 injected in the concrete is mineralized and locked into the concrete produced.  

Enhanced oil recovery does not constitute an eligible use.

Capital Cost Allowance Classes

CCUS equipment will be included in two new capital cost allowance (CCA) classes:

  • an 8% CCA rate on a declining-balance basis in respect of:

    • capture (i.e., equipment that solely captures CO2),

    • transportation (i.e., pipelines or dedicated vehicles for transporting CO2), or 

    • storage equipment (i.e., injection and storage equipment), and 

  • a 20% CCA rate on a declining-balance basis in respect of use equipment (i.e., equipment required for using CO2 in an eligible use).

These CCA classes 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.

Furthermore, these CCA classes are eligible for enhanced first year depreciation under the Accelerated Investment Incentive.

Intangible exploration and development expenses associated with storing CO2 are not eligible for the CCUS Tax Credit but will be addressed through two new CCA classes:

  • a 100% CCA rate on a declining-balance basis in respect of intangible exploration expenses associated with storing CO2; and

  • a 30% CCA rate on a declining-balance basis in respect of development expenses associated with storing CO2.

Compliance Considerations

There are several compliance considerations for taxpayers claiming the CCUS Tax Credit.

First, once projects begin to capture CO2, taxpayers must track the amount of captured CO2 and the proportion of eligible and ineligible uses. That is, projects will be assessed at five-year intervals (to a maximum of 20 years) to determine the amount of CO2 going to an ineligible use and if repayment of the CCUS Tax Credit is warranted.

Second, taxpayers will be required to produce a climate-related financial disclosure report that describes how their corporate governance, strategies, policies and practices will help manage climate-related risks and opportunities and contribute to achieving Canada’s goal of net-zero emissions by 2050.

Third, projects that are expecting to have eligible expenses over certain thresholds over the life of the project will be subject to the following rules:

  • ≥C$100-million of eligible expenses: taxpayers will be required to undergo an initial project tax assessment to identify expenses that are eligible for the CCUS Tax Credit and the CCUS Tax Credit rate expected to apply, based on the initial project design.  Prior to claiming CCUS Tax Credit, eligible expenses would need to be verified by Natural Resources Canada. This would occur as soon as possible after the end of the taxpayer’s tax year, and in advance of filing a tax return for the refund to be processed upon filing; and  

  • ≥C$250-million of eligible expenses: taxpayers are expected to contribute to public knowledge sharing in Canada.

Specific design features of the foregoing (i.e., recovery of CCUS Tax Credit, climate-related financial disclosure, initial project tax assessment and verification, and public knowledge sharing) will be released by Finance at a later date.  

Flow-Through Shares for Oil, Gas and Coal Activities

The flow-through share regime generally allows corporations to “flow through” certain expenditures to investors, who could then deduct such expenses in calculating their taxable income.

Budget 2022 seeks 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.

Critical Mineral Exploration Tax Credit

The ITA contains a regime that allows certain corporations to renounce “Canadian exploration expenses” (CEE) to the initial purchasers of “flow-through shares”, as those terms are defined in the ITA, who can then deduct such expenses in calculating their taxable income.

The ITA also provides the initial purchasers of flow-through shares with an additional 15% non-refundable tax credit, referred to as the Mineral Exploration Tax Credit (METC), for certain specified CEE. The tax benefits from CEE and the METC allow corporations to issue their shares at a premium to “vanilla” common shares.

Budget 2022 introduces a new 30% Critical Mineral Exploration Tax Credit (CMETC) for certain exploration expenses for the following specified minerals: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium.

Eligible expenditures renounced to an initial purchaser of flow-through shares cannot benefit from both the METC and CMETC.

In order for exploration expenses to be eligible for the CMETC, a “qualified person” would need to certify that the expenditures that will be renounced will be incurred as part of an exploration project that targets specified minerals. A qualified person is as defined under National Instrument 43-101 published by the Canadian Securities Administrator as of Budget Day.

If the qualified person cannot demonstrate that there is a reasonable expectation that the minerals targeted by the exploration program are primarily specified minerals, then the related exploration expenses would not be eligible for the CMETC (but could still qualify for the METC).  The CRA interprets the term “primarily” to mean 50% or more.

No form of certificate was included in the materials accompanying Budget 2022.

The CMETC will apply to expenditures renounced to purchaser of flow-through shares after Budget Day and on or before March 31, 2027.


New 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 tax 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. The lifetime limit on contributions would be C$40,000, subject to an annual contribution limit of C$8,000 (with no carry-forwards available). To provide flexibility, funds can be transferred between an FHSA and an RRSP, subject to the FHSA contribution limits, but not the RRSP contribution limits. Funds in an FHSA must be used within 15 years of first opening the FHSA. The existing home buyers’ plan regime, which allows individuals to withdraw up to C$35,000 from an RRSP to purchase or build a home without having to pay tax on the withdrawal (and which must be repaid to the RRSP over a period not exceeding 15 years), will still be available, but an individual will only be able to make a withdrawal under one or the other of the programs in respect of a particular qualifying home purchase. 

The materials accompanying Budget 2022 did not include draft legislation to implement the FHSA proposal, but it is expected that the rules for FHSA will be broadly similar to other registered accounts, such as RRSPs, RRIFs, and TFSAs.

Finance will work with financial institutions to have infrastructure in place to start accepting contributions at some point in 2023.

Charitable Partnerships

Under the ITA, registered charities are limited to devoting their resources to charitable activities they carry on themselves or providing gifts to qualified donees. When charities conduct activities through an intermediary organization the charity must maintain sufficient control and direction over the activity such that it can be considered its own. This places significant restrictions on a charity’s ability to deploy resources to other organizations (including related foreign charitable organizations), even if those organizations carry out the same or similar charitable activities. Budget 2022 proposes a number of changes to expand the flexibility afforded to charities in this regard, allowing charities to make qualified disbursements to organizations that are not qualified donees (a grantee), provided that the disbursements are in furtherance of the charity’s charitable purposes and provided further that certain accountability requirements are met. Measures intended to ensure compliance include (i) the charity conducting a pre-grant inquiry in respect of the proposed grant (in effect performing due diligence on the grantee), (ii) having a written agreement between the charity and the grantee that includes the terms of funding, a description of the activities to be carried out using the grant, a requirement for unused funds to be returned and a record-keeping requirement, (iii) the charity monitoring the grantee, receiving period reports and taking remedial action as required, (iv) the charity receiving, reviewing and approving a full and detailed final report from the grantee, and (v) the charity publicly disclosing on its annual information return details of any grants above C$5,000. These changes are proposed to apply upon royal assent of the enacting legislation.

Building a World-Class Intellectual Property Regime

Budget 2022 proposes a number of new spending measures aimed at building a world-class intellectual property regime in Canada, and confirms that the Strategic Intellectual Property Program Review announced in Budget 2021 is underway. The government also committed to review further ways to build innovative companies that support Canada’s competitiveness, keep intellectual property in Canada and attract talent and investment from around the world. In particular, Budget 2022 announces the government’s intent to consider and seek views on the suitability of adopting a patent box tax regime (generally, a regime that applies a lower corporate tax rate on income earned from qualifying intellectual property) and other measures to promote the growth of intellectual property and maintain it in Canada. No particulars are available yet regarding the consultation process on these potential developments.

Employee Ownership Trusts 

Budget 2021 announced a consultation regarding the idea of creating an employee ownership trust regime in Canada. Budget 2022 reports that these consultations revealed that the main barrier to the creation of employee ownership trusts in Canada is the lack of a dedicated trust vehicle under applicable tax law. Budget 2022 proposes to create employee ownership trusts as a dedicated type of trust under the ITA to support employee ownership. Budget 2022 indicates that the government will continue to engage with stakeholders to finalize the development of rules for employee ownership trusts and to assess the remaining barriers to the creation of these trusts.  No further details are available at this time regarding either the consultation process or any of the details of the proposed regime.

Clean Technology Tax Incentives

Accelerated capital cost allowance deductions are available for clean energy investments and provide for an immediate write-off of the cost of specified clean energy equipment that qualifies for Class 43.1 and 43.2 of the Income Tax Regulations. Budget 2022 proposes to expand the eligibility under Class 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating. Eligible property will 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. The expanded list of eligible property will apply in respect of property 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.


GST/HST on Assignments of Residential Real Property

Budget 2022 proposes to make taxable an assignment of a purchase agreement for newly constructed or substantially renovated condominium units and certain other single unit residential complexes for GST/HST purposes. GST/HST will only be collectable, however, to the extent that the assignment price is higher than the deposit paid by the original purchaser to the builder.  Presumably sellers that are small suppliers will not be required to register in order to collect this GST/HST, but can collect and remit the taxes as a non-registrant. Although this is unusual, it would be similar to other taxable supplies of real property by way of sale by a small supplier.

These new assignment rules will be effective for assignment agreements entered into on or after May 7, 2022. 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), these changes will be of interest to builders and developers who sell new residential housing and claim the rebates on behalf of purchasers.

Cannabis Excise Duty

Budget 2022 proposes several changes to the existing cannabis excise duty framework.

For fiscal quarters beginning on or after April 1, 2022, licensed cannabis producers will be allowed to remit excise duties on a quarterly rather than monthly basis if their total excise duties payable are under C$1,000,000 during the four immediately preceding fiscal quarters. This will relieve the onerous reporting requirements for smaller cannabis producers.

Budget 2022 also proposes relief to allow for more white-label and co-manufacturing arrangements between licensed cannabis producers. Currently the cannabis excise stamp regime is quite restrictive and common co-manufacturing arrangements have proved difficult to implement in a compliant manner. Under the new proposals, the CRA may approve certain contract-for-service arrangements between two licensed cannabis producers to permit actions that are prohibited under existing legislation. Actions that would be permitted between a pair of licensed producers if a particular arrangement receives CRA approval include:

  • Transferring stamps to each other;

  • Transferring packaged but unstamped products to each other;

  • Stamping and selling cannabis products that were packaged by the other producer; and

  • Paying excise duties on cannabis products that were stamped by the other producer.

Budget 2022 further proposes that holders of a Health Canada-issued Research Licence or Cannabis Drug Licence will be exempted entirely from the licensing requirement under the cannabis excise duty regime. 

Vaping Products Excise Duty

Budget 2022 proposes to implement the excise duty framework on vaping products that was announced in Budget 2021, effective as of October 1, 2022. Affected products include vaping products in either liquid or solid form, whether or not they contain nicotine, but do not include vaping products that are already subject to the cannabis excise duty framework or that are produced by individuals for their personal use. The proposals will further expand the existing federal excise regime for tobacco, alcohol and cannabis to include vaping products, but with additional vape-specific rules. Many of those rules appear similar to the cannabis rules, with some notable differences; for example, non-duty paid vaping products may be stored in an excise warehouse, unlike cannabis and similar to tobacco and alcohol.  

The excise duty rates are calculated based on the volume of vaping substance, with an equivalency of 1 mL of liquid to 1 gram of solids. The federal excise duty rate is proposed to be C$1 per 2 mL, or fraction thereof, for the first 10 mL of vaping substance, and C$1 per 10 mL, or fraction thereof, for volumes beyond that. The duty would be based on the volume of vaping substance in each vaping product (e.g., pod, bottle or disposable vape pen). The federal government has also invited provincial and territorial governments to join a coordinated vaping taxation framework administered by the federal government. If a province or territory chooses to participate, an additional duty rate equal to the proposed federal excise duty rate would be imposed.

Under this proposal, retailers would still be able sell unstamped vaping products until January 1, 2023, if they are in inventory as of October 1, 2022.

For further information, please contact any member of our Tax group.