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2023 Federal Budget: Selected Tax Measures

March 30, 2023

On March 28, 2023 (Budget Day), the Minister of Finance introduced Canada’s 2023 federal budget (Budget 2023). Notwithstanding some predictions that the heavy legislative agenda of the Department of Finance (Finance) in recent years would translate into a budget that was light on tax measures, Budget 2023 contains some dramatic changes to the fiscal landscape. This bulletin analyzes the most significant business tax measures addressed in Budget 2023.


Despite the pending Supreme Court of Canada decision in Deans Knight, Budget 2023 indicates Finance’s intention to forge ahead with a material overhaul of the general anti-avoidance rule (GAAR). Proposed amendments include: 1) incorporating an interpretive preamble, 2) lowering the threshold for an “avoidance transaction”, 3) mandating the consideration of “economic substance” as part of the misuse or abuse analysis, 4) extending the reassessment period, and 5) imposing a penalty of 25% of the amount of the tax benefit claimed.

In addition, in the post-COVID environment of increasing economic pressure on governments, Budget 2023 introduces draft rules to implement the tax on share buybacks that was announced in the 2022 Fall Economic Statement and proposes to eliminate the inter-corporate dividend deduction for financial institutions on shares held as mark-to-market property.

Budget 2023 also introduces an important set of tax credits designed to encourage the development of Canada’s clean economy.








General Anti-Avoidance Rule

In August 2022, Finance released a consultation paper requesting input on ways to strengthen the GAAR. The consultation paper noted that there was already a large body of case law on the GAAR, and that the GAAR had proven to be a reasonably effective tool at combatting tax avoidance. Nevertheless, in the consultation paper Finance expressed concerns about some perceived shortcomings of the current version of the GAAR (based largely on court decisions where the Canada Revenue Agency (CRA) was unsuccessful).

Budget 2023 proposes meaningful changes to the GAAR. It is interesting that the government chose to propose these changes, which were foreshadowed by the consultation paper, without waiting for the highly anticipated and yet-to-be-released Supreme Court of Canada (SCC) decision in Deans Knight, which may provide further guidance on the interpretation or application of the GAAR. That being said, these proposals are described as continuing the consultation process, following which the government intends to publish a further draft of the proposals and announce their coming-into-force date.

As background, there are three elements that must be present for GAAR to apply: a “tax benefit”, an “avoidance transaction”, and a “misuse or abuse” of a provision of the Income Tax Act (ITA), or of the entire ITA, read as a whole. Where GAAR applies, the tax consequences of an “avoidance transaction” may be determined as is reasonable in the circumstances to deny a “tax benefit” that would otherwise be realized. However, the GAAR applies only if it may reasonably be considered that the transaction would otherwise result in a “misuse” of the provisions of the ITA or an “abuse” having regard to those provisions, read as a whole.


Budget 2023 proposes to add a three-pronged preamble describing the scope of the GAAR in general terms, with the stated goal of helping to address interpretive issues and ensuring that the GAAR applies as intended.

The first prong describes the GAAR as applying to deny the tax benefit of avoidance transactions that result directly or indirectly either in a misuse of provisions of the ITA or an abuse having regard to those provisions as a whole, “while allowing taxpayers to obtain tax benefits contemplated by the relevant provisions”. This emphasis on allowing “contemplated” benefits is arguably the reverse of how the GAAR currently operates. This is because subsection 245(4) of the ITA provides that the GAAR will only apply if it results in a misuse or abuse, and courts have determined that the CRA has the burden of demonstrating that the benefit results from a misuse or abuse. Budget 2023 does not propose to amend the requirement in subsection 245(4) that the GAAR only applies if there is a misuse or abuse, and so it seems unlikely that the reference to “contemplated” benefits in the preamble could shift the burden from the CRA to the taxpayer.

The second prong describes the GAAR as striking a balance between taxpayers’ need for certainty in planning their affairs and the government’s responsibility to protect the tax base and the fairness of the tax system.

The final prong of the preamble establishes that the GAAR can apply regardless of whether a tax strategy is foreseen (presumably by Parliament). This appears to have been proposed in response to a statement by the majority of the SCC in Alta Energy that the GAAR was “enacted to catch unforeseen tax strategies”. It will be interesting to see how the CRA will meet its onus to establish that the obtaining of a foreseen tax benefit in compliance with the technical rules of the ITA is a misuse or abuse of those provisions if they were drafted in a way that permits the obtaining of such a benefit.

Avoidance Transaction

Budget 2023 proposes to reduce the threshold for finding an “avoidance transaction”.

The existing definition of “avoidance transaction” captures a transaction that (by itself or as part of a series) would result directly or indirectly in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit. Budget 2023 proposes to alter this definition by removing the “bona fide purpose” exception, and instead identifying an avoidance transaction as one where it may reasonably be considered that “one of the main purposes” for undertaking or arranging the transaction was to obtain the tax benefit. This “one of the main purposes” test is similar to the “one of the principal purposes” test under the Multilateral Instrument, which was enacted in Canada in 2019 and modifies many of Canada’s existing tax treaties. However, unlike under the Multilateral Instrument, if the purpose test is satisfied, it is still the CRA that bears the onus of demonstrating a misuse or abuse for purposes of the GAAR.

The broadening of the “avoidance transaction” definition from a primary purpose to “one of the main purposes” test significantly weakens its gatekeeping role. It is a shift from the previous understanding of subsection 245(3) as removing “from the ambit of the GAAR transactions or series of transactions that may reasonably be considered to have been undertaken or arranged primarily for a non-tax purpose” (per the SCC’s decision in Canada Trustco).

It remains to be seen how material this change is to the GAAR dispute landscape, given that the vast majority of GAAR cases are decided on the “misuse or abuse” prong of the existing test (the “avoidance transaction” determination having been met or conceded).

Misuse or Abuse Test

As previewed in the GAAR consultation paper (which was in response to the Prime Minister’s Office’s mandate letter to Finance), Budget 2023 proposes to introduce a unique economic substance interpretive rule to the “misuse or abuse” test. The proposed amendments, as currently drafted, state that if an avoidance transaction is “significantly lacking in economic substance”, that “tends to indicate” that there is a misuse or abuse.

Budget 2023 notes, however, that economic substance would not supplant the general approach under Canadian tax law, which generally places primacy on a transaction’s legal substance (i.e., this is not intended to be a general move to an “economic substance over legal form” approach). Budget 2023 also states that a lack of economic substance will not always mean that a transaction is abusive, noting that in cases where the tax results sought are consistent with the purpose of the provisions or scheme relied upon, abusive tax avoidance would not be found even in cases lacking economic substance.

The “tends to indicate” standard is a novel one for Canadian tax law. It is not entirely clear how one should weigh a potential or asserted lack of substance with the more traditional analysis of the object and spirit of the provisions or scheme at issue.
The proposed amendments list factors that tend, depending on the particular circumstances, to establish that a transaction is “significantly lacking” in economic substance. These include:

  • Where all or substantially all of the opportunity for gain or profit and risk of loss of the taxpayer and non-arm’s length taxpayers remains unchanged, including because of a circular flow of funds, offsetting financial positions, or the timing between steps in the series;

  • Where it is reasonable to conclude that, at the time the transaction was entered into, the expected value of the tax benefit exceeded the expected non-tax economic return, excluding both Canadian and foreign tax benefits; and

  • Where it is reasonable to conclude that the entire, or almost entire, purpose for undertaking the transaction was to obtain the tax benefit (it is unclear whether the “entire, or almost entire” standard is intended to mimic the “all or substantially all” language used in other places of the ITA, which the CRA has stated generally means 90% or greater).

Extended Reassessment Period

Budget 2023 proposes to give the CRA three years beyond the normal reassessment period to assess or reassess on the basis of the GAAR, unless the transaction was disclosed to the Minister as a “reportable transaction” under section 237.3 of the ITA. Provision is made for optional disclosure under section 237.3, in which case the normal reassessment period would apply (generally, four years for mutual fund trusts (MFTs) and corporations other than Canadian-controlled private corporations (CCPCs) and three years for others). This protective disclosure may, in addition to the proposed changes to mandatory disclosure rules released by Finance in August 2022, be a further incentive to taxpayers and/or their advisors to increase reporting under section 237.3.

The protective disclosure mechanism, while new to federal law, is predated by similar measures under the Quebec GAAR regime. In 2009, Quebec’s Minister of Finance released a protective disclosure mechanism for certain transactions where the Quebec GAAR may be applicable. In order to provide Quebec tax authorities with additional time to scrutinize so-called avoidance transactions, the measures extend the normal reassessment period by an additional three years unless the protective disclosure is made. The Quebec protective disclosure reporting is voluntary and restricted to circumstances involving the application of the Quebec GAAR.

Note that if the transaction at issue involves a non-arm’s length non-resident, or if the consequence of a successful application of the GAAR is the assessment of withholding tax, such matters can already be assessed or reassessed beyond the normal reassessment period.

Interestingly, the potential for an extended reassessment period for GAAR, much like the potential extended (even indefinite) periods that can arise under the proposed reportable transaction provisions (and other proposed mandatory disclosure rules), is not accompanied by any change to the time periods for which taxpayers are required by the ITA (and the associated regulations) to maintain books and records that may be relevant to the determination of tax consequences. Taxpayers may wish to consider reevaluating record retention polices to provide for extended retention periods in some cases given the prospect of reassessments being issued beyond the statutory record retention limits.


As previewed in the GAAR consultation paper, Budget 2023 proposes a penalty equal to 25% of the amount of the tax benefit that is denied because of the application of the GAAR (a proposal that, again, is predated by a similar measure under the Quebec GAAR). This is intended to enhance the deterrent effect of the GAAR, by ensuring that taxpayers are not taking a “nothing ventured, nothing gained” approach when deciding whether to undertake a transaction that risks being subject to the GAAR. This 25% penalty is not, however, proposed to apply to unutilized tax attributes (for example, an increase in paid-up capital that has not yet been returned). This exception is appropriate because a tax attribute that has not been used does not generate any tax savings. However, it seems the penalty calculation may still need further refinement, as it is unclear how to measure the amount of the tax benefit where the benefit consists of a deferral rather than avoidance of tax.

A taxpayer will not be subject to the penalty if the transaction that is held to be subject to the GAAR was disclosed under section 237.3 (whether mandatorily or under the protective disclosure mechanism). There is no statutory due diligence defence specifically established for this penalty, although there is a significant body of case law establishing a common law due diligence defence to penalties under the ITA. It will be interesting to see how courts apply this in the context of a GAAR penalty, where the transaction in question, by definition, was compliant with the technical provisions of the ITA.

Coming-Into-Force Date

Budget 2023 does not propose a specific coming-into-force date for the above proposed amendments; rather, the coming-into-force date would be announced sometime following an additional consultation period. Stakeholders are invited to provide submissions on these GAAR proposals to Finance by May 31, 2023.

Tax on Repurchases of Equity

As announced in the 2022 Fall Economic Statement, Budget 2023 introduces a tax on equity buybacks. The new tax is modelled closely on the 1% U.S. stock buyback tax that was introduced in the 2022 Inflation Reduction Act. The stated purpose of these buyback taxes is to encourage public companies to reinvest earnings rather than buying back shares. Whether these taxes will achieve this objective is questionable. Indeed, the U.S. experience suggests that stock buybacks are likely to continue unabated. Public companies buy back equity for a host of non-tax reasons.

The amount of the tax is 2% of the net value of equity repurchases in the taxation year by most Canadian public corporations, partnerships, and trusts. An entity is a “covered entity” subject to this rule if it is:

  • A corporation resident in Canada (other than a mutual fund corporation),

  • A MFT that is a real estate investment trust (REIT) or specified investment flow-through (SIFT) trust (or a trust that would be a SIFT trust if its property were located in Canada), or

  • A SIFT partnership (or a partnership that would be a SIFT partnership if its property were located in Canada),

in each case so long as equity of the entity is listed on a designated stock exchange.

In contrast to the U.S. measure, the proposed Canadian buyback tax would apply not only to normal course issuer bids where shareholders generally enjoy capital gains treatment, but also to other situations, including substantial issuer bids, where shareholders may be subject to taxation on a deemed dividend.

For purposes of calculation of the 2% tax, the net value of equity repurchases is equal to the total fair market value of equity (other than equity that meets the very narrowly defined term “substantive debt”, as described below) of the covered entity that is redeemed, acquired or cancelled in the applicable taxation year less the total fair market value of equity (other than substantive debt) of the covered entity that is issued in that year. Under a de minimis rule, a covered entity is not subject to this tax where its aggregate gross redemptions, acquisitions or cancellations for the year is less than C$1-million.

Redemptions, acquisitions, cancellations, and issuances that occur in the course of certain reorganization or acquisition transactions are excluded from this calculation.

Budget 2023 includes two related anti-avoidance rules. First, equity that is redeemed, acquired, or cancelled (or issued) by a covered entity will be included (or excluded) from the calculation of the net value of equity repurchases if it is reasonable to consider that the primary purpose of the transaction or applicable series of transactions is, generally, to cause a net decrease in the amount subject to the 2% tax.

Second, equity of a covered entity that is acquired by certain affiliated entities will be deemed to be acquired by the covered entity for purposes of this regime, subject to narrow exceptions for certain purchases by registered securities dealers and employee benefit trusts.

As noted above, while the Budget 2023 materials describe the definition of “substantive debt” as covering “debt like” preferred equity, the actual definition is drafted very narrowly. Specifically, it is defined as equity that is not convertible or exchangeable (other than for other substantive debt of the same issuer), is non-voting, carries a coupon expressed as a percentage of the subscription price and that is redeemable or retractable for a price that does not exceed the subscription price plus any unpaid distributions. Based on this definition, preferred shares that are redeemable for a slight premium over the subscription price in order to account for early repayment, would appear not to qualify.

This measure applies to transactions that occur after 2023.

Budget 2023 estimates that this measure would generate C$2.5-billion in revenue over five years beginning in 2023-24.

Dividend Received Deduction by Financial Institutions

Following last year’s imposition of new taxes targeting Canada’s large financial institutions, including the Canada Recovery Dividend, the government proposes to enact yet another significant tax increase on the sector.

In a significant change in fundamental tax policy, Budget 2023 proposes to deny the inter-corporate dividend deduction on shares of Canadian companies held by financial institutions as mark-to-market property. Shares generally will be considered to be mark-to-market property of a financial institution unless the financial institution owns shares representing 10% or more of the voting rights and fair market value of the issuer or is related to the issuer. The measure also applies to shares held by a financial institution that are issued by a corporation (other than a financial institution) and that are tracking property of the financial institution such that, for example, dividends paid by a mutual fund corporation on tracking shares held by a financial institution would be subject to this rule even if those shares would not otherwise be mark-to-market property.

In explaining this fundamental change, Budget 2023 asserts that the policy of the mark-to-market rules is to treat mark-to-market property as generating business income, and that the provision of a dividend received deduction is inconsistent with that policy. However, Budget 2023 does not specify why the deduction, which provides a measure of integration and prevents double or multiple taxation of corporate profits, is inconsistent with the earning of business income, nor is it clear why this assertion is correct. Indeed, one can infer that the government felt that the inter-corporate dividend deduction was consistent with the mark-to-market property regime when that regime was introduced in 1994.

Notably, the new measure does not limit its scope to shares that are hedged, which appears to have been the focus of previous anti-avoidance measures. Nor does it differentiate shares on the basis of accounting treatment.

This measure applies to dividends received after 2023.

Budget 2023 estimates that this measure would generate C$3.15-billion over five years beginning in 2024-25, and by C$790-million annually on an ongoing basis.

Clean Energy

Budget 2023 places significant emphasis on developing Canada’s “clean economy” by introducing new tax credits and providing additional details on previously announced tax credits. These credits include:

  • The Investment Tax Credit for Clean Hydrogen (Hydrogen Credit),

  • The Investment Tax Credit for Clean Technology (Technology Credit),

  • The Investment Tax Credit for Clean Electricity (Electricity Credit),

  • The Investment Tax Credit for Clean Technology Manufacturing (Manufacturing Credit), and

  • The Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS Credit).

Each of these credits is refundable. Businesses may claim only one of the credits if a particular property is eligible for more than one of the credits.

Hydrogen Credit

As promised in the 2022 Fall Economic Statement, Budget 2023 provides a refundable Hydrogen Credit of 15%–40% of the cost of purchasing and installing eligible equipment.

The Hydrogen Credit is only available for projects that produce all, or substantially all, hydrogen from production processes involving either electrolysis or natural gas (and in respect of the latter, only if carbon capture, utilization, and storage (CCUS) is used to abate resulting emissions). The percentage value of the credit increases as the carbon intensity (CI) of produced hydrogen decreases: 40% for a CI of less than 0.75 kilograms; 25% for a CI greater than or equal to 0.75 kilograms, but less than two kilograms; and 15% for a CI greater than, or equal to, two kilograms, but less than four kilograms.

Eligible equipment for electrolysis of water includes electrolysers, rectifiers and other ancillary electrical equipment, water treatment and conditioning equipment and equipment used for hydrogen compression and on-site storage. Eligible equipment for natural gas with emissions abated using CCUS includes auto-thermal reformers, steam methane reformers, pre-heating equipment, shift reactors, purifiers, water treatment and conditioning equipment and equipment used for hydrogen compression and on-site storage (excluding equipment described in Class 57 or Class 58, which is eligible for the CCUS Credit).

The Hydrogen Credit is subject to certain project assessment and verification procedures, as well as compliance requirements, the details for which will be provided at a later date.

This credit will apply to property that is acquired and that becomes available for use on, or after, Budget Day. Budget 2023 proposes that the Hydrogen Credit will 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. The credit will be unavailable after 2034.

Technology Credit

As promised in the 2022 Fall Economic Statement, Budget 2023 expands eligibility of the 30% refundable Technology Credit to geothermal energy systems that are eligible for CCA Class 43.1. Eligible properties include equipment used primarily for the purpose of generating electrical energy or heat energy, or both, solely from geothermal energy. This may include piping, pumps, heat exchangers, steam separators and electrical generating equipment. The expansion of the Technology Credit to include geothermal will apply in respect of property that is both acquired and available for use on, or after, Budget Day.

Budget 2023 also proposes to modify the phase-out of the Technology Credit. The Technology Credit will now be reduced to 15% beginning in 2034, instead of 2032, and unavailable thereafter.

Electricity Credit

Budget 2023 introduces a 15% refundable Electricity Credit for eligible investments in non-emitting electricity generation systems, abated natural gas electricity-fired electricity generation, stationary electricity storage systems, and equipment for the transmission of electricity between provinces and territories. 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 Electricity Credit.

Labour Requirements

Each of the Hydrogen Credit, Technology Credit and Electricity Credit will be reduced by 10%(to a minimum of zero) if certain labour requirements (relating to wages and apprenticeships) are not met. The government indicated that it may also attach labour requirements to the CCUS Credit, with details to be announced at a later date.

The labour requirements will apply to workers engaged in projects that are subsidized by the respective investment tax credit and to workers whose duties are primarily manual or physical in nature, and will not apply to workers whose duties are primarily administrative, clerical, supervisory or executive in nature. The prevailing wage requirement requires that all covered workers are compensated at a level that meets or exceeds the relevant wage, plus the substantially similar monetary of benefits and pension contributions, as specified in an eligible collective agreement. We anticipate that the calculation of a prevailing wage will cause interpretative issues. The apprenticeship requirement requires that, in a given taxation year, not less than 10% of the total labour hours performed by covered workers be performed by registered apprentices. Certain exemptions to the labour requirements exist, including in respect of the acquisition of zero-emission vehicles and acquisitions and installations of low-carbon heat equipment.
The labour requirement rules will apply to work that is performed on or after October 1, 2023.

Manufacturing Credit

Budget 2023 proposes to introduce a refundable Manufacturing Credit equal to 30% of the capital cost of eligible property associated with eligible activities.

Eligible property generally includes machinery and equipment, including certain industrial vehicles, used in manufacturing, processing, or critical mineral extraction, as well as related control systems.

Eligible activities are expected to be broad and include the processing or recycling or nuclear fuels and heavy water and the manufacturing of certain renewable energy equipment, nuclear energy equipment, nuclear fuel rods, certain electrical energy storage equipment, equipment for air-source and ground-source heat pump systems, zero-emission vehicles, batteries, fuel cells, recharging systems, hydrogen refueling systems for zero-emission vehicles, equipment used to produce hydrogen from electrolysis and the processing of certain upstream components and sub-assemblies.

The Manufacturing Credit will apply to property that is both acquired and becomes available for use on, or after, January 1, 2024. The Manufacturing Credit will be gradually phased out in 2032 and become unavailable after 2034.

CCUS Credit

The 2022 budget proposed the CCUS Credit for businesses that incur eligible expenses starting in 2022. While it was anticipated that Budget 2023 would provide significantly more detail in respect of the CCUS Credit, it proposes only certain additional details, as follows.

First, subject to certain conditions, Budget 2023 provides that dual-use equipment that produces heat and/or power or uses water, and that is used for CCUS with another process, is eligible for the CCUS Credit.

Second, British Columbia is now added to the list of eligible provinces (previously being only Alberta and Saskatchewan) for dedicated geological storage.

Third, rather than obtaining approvals from the government that the process for using and storing carbon dioxide in concrete meets the mineralization and other conditions for the process to constitute an “eligible use”, businesses will now need to have their technology validated by a qualified third party.

Fourth, Budget 2023 proposes that CCUS Credits related to eligible refurbishment costs incurred after the project is operational is to be calculated based on the average of expected eligible use ratio for each five-year period in which they are incurred during the first 20 years of the project only. Total eligible refurbishment costs over the first 20 years of the project would be limited to 10% of the total pre-operational costs that were eligible for the CCUS Credit. With certain adjustments, refurbishment credits would be recovered in generally the same manner as the credits claimed during the construction phase of the project.

Lastly, Budget 2023 includes draft legislative proposals related to knowledge sharing and climate risk disclosure.

Knowledge Sharing Requirements

The knowledge sharing requirement contemplates two reports: annual operations knowledge sharing reports and construction and completion knowledge sharing reports, which must be submitted to the Minster of Natural Resources before the prescribed due date if a CCUS project: (a) is expected to incur qualified CCUS expenditures of C$250-million or more over the life of the project; or (b) has incurred C$250-million or more of qualified CCUS expenditures before the first day of commercial operations of the CCUS project.

Based on the proposed definitions of “reporting period” and “reporting-due day”, construction and completion knowledge sharing reports are to be prepared for the period beginning the first day an expenditure is incurred for a qualified CCUS project until the first day of commercial operations, and annual operations knowledge reports must be prepared for the first five calendar years beginning in the year in which commercial operations begin.

The Department of Natural Resources will publish each of these reports on a government website after a taxpayer submits its reports.

A taxpayer that fails to provide a knowledge sharing report will be liable to a penalty of C$2-million payable the day after a particular knowledge sharing report is due.

Climate Risk Disclosure

Subject to certain exemptions if the CCUS project has incurred, or is expected to incur, expenditures of less than C$20-million, a corporation that has deducted a CCUS Credit must make available to the public a climate risk disclosure report. This report must describe the corporation’s climate-related risks and opportunities, in addition to how the corporation’s governance, strategies, policies and practices contribute to achieving Canada’s commitments under the 2015 Paris Agreement and 2050 goal of net-zero emissions. A climate risk disclosure report must be prepared for each taxation year beginning in the year in which a taxpayer claims the CCUS tax credit and ending in the taxation year before the 21st calendar year after the end of the taxation year which includes the first day of commercial operations of the qualified CCUS project. A corporation that fails to make publicly available a climate risk disclosure report will be liable to a penalty in the amount that is the lesser of: (a) 4% of the total of all CCUS credits deducted by the corporation in the relevant taxation year and (b) C$1-million.

Zero-Emission Technology Manufacturers

The 2021 budget proposed to temporarily reduce corporate income tax rates by one-half on income from eligible activities for qualifying zero-emission technology manufacturers.

Applicable for taxation years beginning after 2023, Budget 2023 proposes to expand the eligible activities to include the manufacturing of nuclear energy equipment, processing or recycling of nuclear fuels and heavy water and the manufacturing of nuclear fuel rods. Furthermore, Budget 2023 proposes to extend the availability of the reduced rates by three years, such that the planned phase-out will start in taxation years that begin in 2032 and become unavailable for taxation years that begin after 2034.

Flow-Through Shares and Critical Mineral Exploration Tax Credit – Lithium from Brines

Budget 2023 proposes to include lithium from brines as a mineral resource, allowing principal-business corporations that undertake certain exploration and development activities to issue flow-through shares and renounce expenses to their investors. Budget 2023 also proposes to expand the eligibility of the Critical Mineral Exploration Tax Credit (CMETC), which provides for an enhanced 30% non-refundable tax credit, to lithium from brines. Eligible expenses related to lithium from brines made after Budget Day would 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 Budget Day and before April 2027.


Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel tax to ordinary Part I income tax, targeted at high-income individuals (including certain trusts) who are perceived to pay little to no personal income tax. Currently, the AMT imposes a flat 15% tax on a broadened tax base known as “adjusted taxable income”, as reduced by a C$40,000 exemption amount (which generally does not apply to trusts). Adjusted taxable income is defined as taxable income as modified in certain ways, including by adding back certain preferential tax credits and deductions and including most capital gains at an 80% rate. An individual is liable to pay either the AMT or ordinary income tax, whichever is higher.

The AMT has not been substantially updated since it was introduced in 1986. Budget 2023 proposes several significant changes to the existing AMT, including increasing the AMT rate from 15% to 20.5% and increasing the AMT exemption threshold from C$40,000 to approximately C$173,000, indexed to inflation, in an attempt to ensure that the AMT does not apply to middle-class Canadians and instead only applies to what Budget 2023 describes as the wealthiest Canadians.

Budget 2023 also proposes to broaden the AMT base in several ways, including increasing the inclusion rate for capital gains and employee stock option benefits from 80% to 100%, as well as disallowing 50% of certain deductions, including interest on funds borrowed to generate leverage, non-capital loss carryforwards, and limited partnership losses of other years, and disallowing 50% of most non-refundable tax credits.

As mentioned above, the AMT currently generally applies to all individuals, including trusts, with some exceptions. Notably, it does not apply to MFTs. However, it generally applies to investment trusts that would be MFTs but for the fact that they do not have at least 150 unitholders (often known as “quasi-mutual fund trusts”), or because they are not “unit trusts” (both of which are requirements in order to qualify as an MFT). Budget 2023 indicates that the government is examining whether additional types of trusts should be exempt from the AMT (which might, for example, include quasi-mutual fund trusts, though this is not known at this time).

In some cases, the AMT can be a trap for unwary taxpayers. For instance, a trust that earns capital gains but makes all of its income (including capital gains) payable to its beneficiaries would not generally be subject to ordinary income tax, but it may be subject to AMT in certain circumstances, including, for example, if it does not properly designate the appropriate portion of its income paid to its beneficiaries as capital gains, if it deducts expenses against its capital gains, or if it applies loss carryforwards against its capital gains. The change to the capital gains inclusion rate from 80% to 100% for AMT purposes, combined with the increased AMT rate, will require increased vigilance when dealing with trusts that are not MFTs.

The proposed changes would come into force for taxation years that begin after 2023. Although Budget 2023 does not include draft legislation to implement the AMT changes, additional details are expected to be released later this year. Budget 2023 predicts that these changes will generate C$3-billion in revenue over the next five years.

Employee Ownership Trusts

Following consultations announced in the 2021 and 2022 budgets, Budget 2023 establishes a new type of trust called an “employee ownership trust” (EOT). Budget 2023 provides that an EOT is a form of employee ownership where a trust holds shares of a corporation for the benefit of the corporation’s employees. Budget 2023 proposes new rules to encourage owners to sell their shares to an EOT and to facilitate the purchase of those shares by not requiring employees to pay directly to acquire shares. The new framework is similar to measures enacted in the United Kingdom several years ago. The establishment of EOTs in Canada would be timely given that, according to Budget 2023, more than 75% of small business owners are planning to retire in the next decade.

Typically, when a taxpayer receives proceeds from a sale of capital property on a deferred basis, they are permitted to defer recognition of the capital gain until the year in which they receive the proceeds for up to a maximum five-year deferral period through a reserve mechanism in subsection 40(1) of the ITA. Budget 2023 provides an incentive for business owners to transfer their equity ownership to an EOT by extending the existing five-year capital gains reserve in subsection 40(1) to 10 years (with a minimum of 10% of the gain being required to be included in income each year) for individuals who transfer shares of a “qualifying business” to an EOT in a “qualifying business transfer”.

A “qualifying business” is a corporation controlled by a trust that:

  1. Is a CCPC and all, or substantially all, of the fair market value of its assets must be attributable to assets used principally in an active business carried on primarily in Canada by the corporation or a corporation controlled thereby;

  2.  Has no more than 40% of its directors who, together with related persons, held a significant interest in the business prior to the transfer; and

  3. Deals at arm’s-length with persons who owned more than 50% of the corporation immediately prior to the transfer.

A “qualifying business transfer” generally refers to a disposition of the shares of a corporation, for no more than fair market value, to a trust that qualifies as an EOT after the sale, or to a CCPC controlled and wholly owned by the EOT.

Additionally, Budget 2023 encourages what is effectively an employee leveraged buyout through an amendment to the shareholder loan rules. Under the existing shareholder loan rules in subsection 15(2) of the ITA, a taxpayer who receives a shareholder loan is generally required to include the amount of the loan in income unless one of the limited exceptions applies, including repayment of the loan within one year. Budget 2023 introduces a new exception to the shareholder loan rules that will allow an EOT to finance its acquisition of a qualifying business by borrowing the funds from, or otherwise becoming indebted to, the qualifying business so long as there are bona fide repayment arrangements with a repayment period not exceeding 15 years.

For a trust to be characterized as an EOT, several conditions must be met.

  • Governance. The trust must be resident in Canada (other than as a result of the subsection 94(3) deeming rule) and follow a specified governance structure. Trustees may be either individuals or licensed corporate trustees, but in any event, must be residents of Canada, and must be elected at least once every five years. Each trustee must have an equal vote. When an existing business is sold to an EOT, individuals and related persons who held a significant economic interest in the business prior to the sale cannot account for more than 40% of the trustees of the EOT, the directors of the board of a corporate trustee of the EOT or the directors of any qualifying business owned by the EOT.

  • Beneficiaries. All beneficiaries of an EOT must be employees of the qualifying businesses controlled by the EOT who own no more than a stipulated maximum equity interest. The interest of each beneficiary must be determined in the same manner, based solely on criteria involving any reasonable combination of length of service, remuneration and hours worked. The EOT may not distribute shares of a qualifying business to any beneficiary and is prohibited from acting in the interest of one beneficiary or group of beneficiaries to the prejudice of another beneficiary or group of beneficiaries.

  • Assets held by EOT. The trust must hold a controlling interest in the shares of one or more “qualifying businesses”, and all, or substantially all, of the trust’s assets must consist of those shares.

Once the EOT is established, it is taxed in the same manner as other taxable trusts, except that it is exempt from the 21-year deemed disposition rule normally applicable to trusts. Income that is distributed to beneficiaries will be taxed at the beneficiary level, with beneficiaries being eligible for the dividend tax credit where dividends are distributed and designated by the EOT. Undistributed income would be taxed at the highest personal marginal rate.

These rules would apply as of January 1, 2024, but Budget 2023 invites stakeholder feedback on the regime.

Intergenerational Business Transfers

Section 84.1 of the ITA is an anti-avoidance provision that in certain circumstances converts a capital gain realized by an individual (vendor) on a sale of shares of a Canadian target corporation into a deemed dividend. These provisions were amended in 2021 by a private member’s bill (Bill C-208) to provide an exception for intergenerational share transfers. For a discussion of these changes, please see our April 2022 Blakes Bulletin: 2022 Federal Budget: Selected Tax Measures.

Since the passage of Bill C-208 (which was drafted without the participation of Finance), Finance has expressed its displeasure with this exception to section 84.1, on the basis that it provides relief even where a genuine intergenerational transfer did not occur. For example, under this exception, a vendor can retain control of the target corporation and simply sell a portion of the target corporation’s shares to a purchaser corporation provided a child or a grandchild controls the purchaser corporation.

Budget 2023 proposes to amend the rules introduced by Bill C-208 to ensure that the exception to section 84.1 only applies to genuine intergenerational transfers of shares of a family farm or fishing corporation or shares of a qualified small business corporation (QSBC) by a vendor to a purchaser corporation controlled by an adult child (or children) of the vendor. The proposed amendments contain an extended definition of “child”, which includes grandchildren, step-children, children-in-law, nieces, nephews, grandnieces and grandnephews.

Budget 2023 introduces two options for intergenerational transfers, each of which contains particular conditions in order for the transfer to be excepted from section 84.1. The first option involves an immediate intergenerational transfer based on arm’s-length sale terms, to take place over a period of up to three years. The second option involves a gradual intergenerational transfer based on traditional estate freeze characteristics (i.e., by crystallizing the value of the vendor’s economic interest and allowing future growth to accrue to the transferee child while the vendor’s interest is gradually diminished), to take place over a period of five to 10 years. The vendor and transferee child must choose the applicable option and file a joint election in order for section 84.1 not to apply. Once the election is made, the vendor and transferee child are jointly and severally liable for any tax that may be payable under section 84.1 as a result of failing to meet the conditions.

The immediate intergenerational transfer requires the vendor to transfer both legal and factual control, including an immediate transfer of a majority of the voting and common growth shares and a transfer of the balance within 36 months. The vendor would be permitted to retain (indefinitely) non-voting preferred shares in the target corporation. Management of the business would be required to be transferred to the child within 36 months (or such greater period of time as is reasonable in the circumstances), and the transferee child must retain legal control of the target corporation for a 36-month period following the share transfer. At least one transferee child (if there are multiple) would be required to remain actively involved in the business on a regular, continuous and substantial basis for 36 months following the share transfer. Immediate intergenerational transfers would be subject to an extended reassessment period of three years after the normal reassessment period for the vendor.

The gradual intergenerational transfer only requires the transfer of legal (and not factual) control but has the same rules regarding the transfer of voting and common growth shares by the vendor. The vendor would be required to reduce the economic value of their debt and equity interests in the target corporation within 10 years of the share transfer. In the case of shares of a family farm or fishing corporation, this reduction would be to 50% or less of the fair market value of the vendor’s pre-disposition interest, or to 30% in the case of QSBC shares. Similar requirements relating to the transfer of the management of the business, retention of legal control by the transferee child and maintenance of active involvement in the business would also apply to a gradual intergenerational transfer, but with an expanded 60-month period rather than a 36-month period. Gradual intergenerational transfers would be subject to an extended reassessment period of 10 years after the normal reassessment period for the vendor. The proposed extended reassessment period could result in significant interest payable by the vendor.

A potential benefit of the proposed new regime for some vendors is that the capital gains reserve period is expanded from five to 10 years.

The proposed amendments to section 84.1 would apply to share transfers that occur on or after January 1, 2024.

The proposed amendments leave ambiguity regarding the conditions that must be met for the share transfer to be excepted from section 84.1. For example, it is unclear what is meant by the “management” of the business. Additionally, it is uncertain under what circumstances it would be reasonable for the vendor to take longer than 36 or 60 months (as applicable) to transfer the management of the business to the transferee child.

There are some additional consequences of these amendments to consider, as well. Under the Bill C-208 amendments, there is no limit to the number of share transfers of the target corporation’s shares that can occur. However, under the proposed amendments, the vendor must control the target corporation immediately before the share transfer and cease to control it immediately thereafter. It appears that for a vendor to benefit from the entirety of the proposed section 84.1 exceptions, the vendor would need to dispose of all his or her shares in one intergenerational transfer.

It should be noted that Quebec has its own set of rules regarding non-arm’s length sales of shares, which already provide an exception for intergenerational transfers in certain circumstances. Some of the factors proposed in Budget 2023 are present in the existing Quebec rules. For example, the Quebec exception also contemplates the transfer of control from the vendor to the transferee child, the limitation of the economic interest of the vendor in the target corporation, and the active participation of the transferee child in the business. However, there are significant differences between the Budget 2023 proposals and the Quebec rules, which Quebec taxpayers should be mindful of when claiming exceptions under these rules. 

Finally, as mentioned above, the proposed amendments to section 84.1 would apply to shares transfers that occur on or after January 1, 2024. Therefore, taxpayers who have taken advantage of the current rules appear to be safe from the retroactive application of the proposed amendments. Business owners may wish to consider reorganizing prior to January 1, 2024, in order to take advantage of the current rules.


On October 8, 2021, the Organisation for Economic Co-operation and Development (OECD) released a two-pillar solution to “address the tax challenges arising from the digitalization of the economy”. It was signed by 137 members of the OECD/G20 Inclusive Framework, including Canada. Pillar One proposes to grant “market jurisdictions” new taxing rights over an allocated portion of residual profits of businesses with an economic, but not physical, presence that fails to meet the level of taxable nexus generally required under the current international tax norms (i.e., permanent establishment). Pillar Two proposes to subject the profits of large multinational enterprises (MNEs) to a minimum level of tax on the income arising in each jurisdiction where they operate.

Digital Services Tax

In the absence of international agreement on Pillar One, a domestic gross-revenue-based Digital Services Tax (DST) was first proposed in the 2020 Fall Economic Statement, and was officially announced in the 2021 budget. Draft legislation (the Digital Services Tax Act) was first proposed in 2021. The proposed tax would be imposed at a rate of 3% on revenues from digital services that rely on data and content contributions from Canadian users. In particular, the DST would apply to revenues from digital services businesses including online marketplaces, social media, online advertising and the sale or licensing of user data. This tax would apply to foreign or domestic businesses with (i) consolidated annual global revenues of €750-million or more and (ii) revenue associated with Canadian users of more than C$20-million.

The new DST would apply (retroactively) to revenues earned as of January 1, 2022, but would come into force on January 1, 2024, at the earliest, and only if a Pillar One agreement under the OECD’s two-pillar approach to taxation of the digitalisation of the economy does not come into effect by the end of 2023. As noted above, Canada agreed to a statement on the two-pillar approach in October 2021. Since that statement, the Canadian government has reaffirmed its commitment to continue working with international partners to bring a multilateral agreement into effect.

Budget 2023 states that the government intends to release a revised draft of the DST legislation for public comment, noting that the DST could be imposed as of January 1, 2024 if the Pillar One framework has not yet come into force. Taxpayers to whom the DST may apply should consider now the collection and retention of data in their books and records that may be necessary if the DST becomes payable, including on revenues going back to January 1, 2022.

Budget 2023 indicates the government’s continued hope that the timely implementation of Pillar One will make the DST unnecessary.

Global Minimum Tax

As part of Pillar Two, in December 2021, the OECD released model rules, entitled “Global Anti-Base Erosion” (GloBE) rules, with the stated intention of introducing a 15% global minimum corporate tax rate for MNEs of a sufficient size. The GloBE rules generally apply to enterprises with annual revenue of €750-million or more in at least two of the four preceding fiscal years.

The mechanics of the proposed rules are quite complex. The GloBE 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). The GloBE rules also contemplate that a jurisdiction may enact a domestic minimum top-up tax on the low-taxed income of domestic entities, creditable against the top-up tax liability otherwise arising under Pillar Two. The 2022 budget announced a public consultation on the implementation of Pillar Two in Canada.

Budget 2023 repeats the announcement in the 2022 budget that Canada intends to introduce legislation to implement the “Income Inclusion Rule” and a domestic minimum top-up tax applicable to Canadian entities that are members of multinational groups that are within the scope of Pillar Two. This legislation would come into effect for fiscal years of MNEs that begin on, or after, December 31, 2023. Budget 2023 indicates that such draft legislation will be released for public consultation in the coming months. At some point after, the government also intends to release draft legislation to implement the “Undertaxed Profits Rule” with effect for fiscal years of MNEs that begin on, or after, December 31, 2024.

Budget 2023 also announces the government’s intention to share revenues from the foregoing measures (Pillars One and Two) with the provinces and territories.


GST/HST on Payment Card Network Services

The GST/HST status of payments to payment card network providers, such as Visa and Mastercard, has recently been contentious. In early 2021, the Federal Court of Appeal held that Visa Canada provides exempt financial services, and the fees payable by credit card issuers, such as Canadian banks, are not subject to GST/HST. This decision was welcomed by the financial services industry, but was widely expected to be overturned by retroactive legislation. Budget 2023 contains such legislation.

Budget 2023 proposes to amend the definition of “financial service” to specifically exclude a service (other than a prescribed service) that is supplied by a payment card network operator in respect of a payment card network (as those terms are defined in section 3 of the Payment Card Networks Act) and that is (i) a service in respect of the authorization of a transaction in respect of money, an account, a credit card voucher, a charge card voucher or a financial instrument, (ii) a clearing or settlement service in respect of money, an account, a credit card voucher, a charge card voucher or a financial instrument, or (iii) a service provided in conjunction with a service referred to in items (i) or (ii).

The amendment is prospective only (from the day after Budget Day) for services where the taxes were not previously charged, collected or remitted in respect of the supply, and where the supplier did not charge, collect and remit GST/HST in respect of any other supply made under an agreement that includes provision of the newly taxable service. In all other cases where consideration was already paid or payable, the amendment is retroactive, including on cross-border supplies (where the financial institution was required to self-assess) and the CRA is given a special one-year period from the date of royal assent to assess the taxes, notwithstanding the standard limitation period. This last provision appears intended to allow the CRA to collect back any GST/HST that it may have refunded during the interim period since the Federal Court of Appeal’s decision.

The effect of this coming-into-force rule is that the interim period between the Federal Court of Appeal’s decision and Budget Day, where payment network providers were generally following the decision and not charging taxes, likely remains non-taxable. However, in cases where the payment card network provider was a non-registered non-resident and taxes were not charged by the Canadian financial institutions, it appears the CRA can assess the taxes where the financial institution did not self-assess.

The impact of these changes will be felt not only by the financial institutions that make payments to the payment card networks directly, but also retail suppliers that accept credit cards as they may now bear higher fees if the additional tax cost, which is not fully recoverable by the card issuers, is passed along to them. In a tangentially related development, the CRA confirmed that credit card surcharges that are charged by merchants to customers (and which must be disclosed to the customer before the transaction is completed under the amended credit card network rules), are exempt from GST/HST. Any GST/HST that has been charged on credit card surcharges was an error.

Expansion of Credit Union Rules

Existing income tax and GST/HST rules provide for a specific regime applicable to credit unions.

Under subsection 150(6) of the Excise Tax Act, every credit union is deemed to have made an election with every other credit union, which converts taxable services, and any leases, licences, or similar arrangements of property, to be exempt financial services. The expanded rule for credit unions also deems sales of tangible personal property to another credit union to be an exempt financial service. Other Canadian corporations can only benefit from an election under section 150 if it is actively filed, and it is only effective within a closely related group of corporations that includes a listed financial institution.

From an income tax perspective, this regime includes certain unique features such as the treatment of dividends (and other payments in respect of shares) as interest under specific conditions (deductible by the credit union in appropriate circumstances).

However, the definition of “credit union” for GST/HST purposes, and for income tax purposes, does not reflect business realities for credit unions. Under the existing legislation, if a credit union earns more than 10% of its revenue from sources other than certain specified sources (such as interest income from lending activities), it would not meet the definition of “credit union” and the income tax and GST/HST rules governing credit unions would no longer apply to it. This could arise even though the credit union’s governing legislation permits it to earn revenue from these other sources. In Westminster Savings Credit Union v. Canada, the CRA took the position that the credit union was not a “credit union” for GST/HST and income tax purposes, which highlights the misalignment between the tax definition and the real world.

Budget 2023 proposes to remove the revenue rule from the definition of “credit union” (for both GST/HST and income tax purposes), applicable in respect of taxation years of a credit union ending after 2016. This will presumably make the intended GST/HST exemptions and the special income tax regime more clearly applicable to credit unions.

SR&ED Program

Budget 2023 reaffirms the government’s intent to review the Scientific Research and Experimental Development (SR&ED) program, including consideration of adopting a patent box regime. Finance indicates that it will continue to engage with stakeholders on the next steps in the coming months.

Previously Announced Measures

Budget 2023 confirms the government's intention to introduce the Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home, which was first announced in the 2022 budget. Tax amendments implementing the FHSA were enacted on December 15, 2022, with a coming-into-force date of April 1, 2023. Contributions to an FHSA up to C$40,000 will be tax deductible and, similar to other registered accounts such as RRSPs, RRIFs and TFSAs, income earned in an FHSA will not be subject to tax. Qualifying withdrawals from an FHSA made to purchase a first home will be non-taxable.

Budget 2023 also confirms Finance’s intention to proceed with previously announced legislative measures, as modified to take into account consultations and deliberations since their release. These measures include proposals regarding excessive interest and financing expenses limitations, hedging and short-selling by Canadian financial institutions, substantive CCPCs, mandatory disclosure rules, hybrid mismatch, the GST/HST joint venture election, and the transfer pricing consultation.

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