Join Fund Library now and get free access to personalized features to help you manage your investments.
Last year, the Canada Revenue Agency (CRA) came out swinging with not one but two releases in the first four months of 2022, first with the February 4 release and then the Federal Budget on April 7. Although both releases contained extensive sets of rules, the CRA only released the actual legislation in early August, so many tax practitioners had quite a bit of end-of-summer reading to understand how the newly released rules were going to be applied. The 2022 Fall Economic Statement was released on November 3, and although it was not as comprehensive as the releases earlier in the year, there were a few items worth noting, as well as some changes that have come into effect this month.
Canada announced that it was going to follow the U.S. and apply a tax to public companies on share buybacks. A share buyback occurs when a company buys its own stock back from existing shareholders so as to return value to such shareholders (as opposed to paying dividends). The government’s motives in taxing the corporations is to try to get companies to invest back into their business and their workers.
The 2022 Fall Economic Statement announced a corporate-level tax of 2% to apply on the net value of all types of share buybacks by public corporations in Canada. No details were released. Rather, they will be announced as part of Budget 2023, with the tax coming into force as of January 1, 2024. The government release estimated that this new tax would increase federal revenues by $2.1 billion over five years.
The government also announced its commitment to ensure that multinational corporations pay their fair share of tax wherever they do business (including in other jurisdictions). The tax reform is to focus on: (1) the reallocation of taxing rights, with the largest and most profitable global corporations having to pay tax in jurisdictions where their users and customers are located; and (2) a global minimum tax regime to ensure that multinational corporations are subject to a minimum effective tax rate of 15% on profits in every jurisdiction in which they operate. This tax reform will require cooperation and consultation with the OECD and Canada’s various international partners.
Budget 2022 released back in April proposed a new deeming rule to ensure that profits from flipping residential real estate are always subject to full taxation (and not as capital gains or sheltering it under the principal residence exemption). Specifically, profits arising from sales of residential property (including a rental property) that was owned for less than 12 months would be deemed to be business income, unless the disposition occurred as a result of death, an addition to your family (i.e., birth, care of an elderly parent), separation, personal safety, disability or illness, change of employment to work at a new location (or due to an involuntary termination of employment), insolvency, or involuntary sale (i.e., expropriation or due to a natural or man-made disaster).
The Fall Statement proposes to extend this new deeming rule to profits arising from the sale of the rights to purchase a residential property via an assignment sale. Profits arising from an assignment sale would be deemed to be business income (and taxed at full rates) if the rights to purchase a property were assigned after having been owned for less than 12 months. Moreover, the 12-month holding period (originally announced in April 2022) will reset once a taxpayer secures ownership of the property (i.e., closes on the property). The government wants to ensure that the Residential Property Flipping Rule announced in April cannot be bypassed when selling a constructed property simply because a taxpayer held the rights to purchase the property before it was constructed.
Note: The same exemptions listed above with respect to the 12-month ownership of the property will also be available for this new extended deeming rule, for an assignment of an agreement of purchase and sale.
And as a reminder, these new rules will apply as of January 1, 2023.
To provide CWB beneficiaries with more timely support throughout the year, the 2022 Fall Economic Statement proposes to automatically provide individuals who received the CWB refundable tax credit (to supplement the earnings of low and modest income workers) for the previous taxation year an entitlement for the current taxation year through quarterly advance payments.
To qualify, their income tax return for the previous year must be received and assessed by the CRA prior to November 1 of the current year. Advance payments would be issued automatically starting in July 2023 for the 2023 taxation year, and the current option to apply for an advance payment under the existing provision would no longer be available after January 1, 2023.
In an effort to encourage the adoption of clean technologies by businesses, the government introduced a new refundable Clean Technology Investment Tax Credit equal to 30% of the capital cost of eligible equipment. Some examples of eligible equipment are equipment to generate electricity from solar, wind and water energy, stationary electricity-storage equipment that does not use fossil fuels, equipment to generate heat or electricity from concentrated solar energy or mall modular nuclear reactors, and non-road zero-emission vehicles, such as hydrogen or electric heavy-duty equipment used in mining or construction).
The Clean Technology Investment Tax Credit rate for eligible investments would require that all labour conditions be fulfilled in order to obtain the 30% rate (otherwise the credit will be reduced to 20%).
One interesting thing to note is that in a release that accompanied the Fall Statement, Finance announced that it will delay the implementation of certain updates to the mandatory disclosure rules imposed on taxpayers and advisors, which were announced earlier this year, in order to fully assess the feedback received on the draft legislation released.
Under the proposed update, avoidance transactions that have tax avoidance as their primary purposes would need to be reported by taxpayers and advisors. In this recent announcement, the government said it will delay the coming-into-force date of the reporting requirements for reportable transactions and notifiable transactions until the date on which a bill implementing these changes receives royal assent. The legislation’s coming-into-force date would still be the beginning of the 2023 tax year, but penalties would only apply after the bill receives royal assent.
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-author of Tax and Family Business Succession Planning, 3rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. A version of this article first appeared in The TaxLetter, © 2022 by MPL Communications Ltd. Used with permission.
Disclaimer
Content copyright © 2023 by Samantha Prasad. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
