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Budget 2023/24 Presented; Proposes Pillar 1 GMT, GAAR Review, Tax on Stock Buybacks, and Host of Refundable Tax Credits — Orbitax Tax News & Alerts

The federal Canadian budget for 2023/2024 was presented on 28 March 2022. The draft proposes several tax measures including, notably, the following:

Pillar 1 Global Minimum Tax (GMT)

It is proposed to introduce the OECD/IF Pillar 2 global minimum tax framework in Canada. This would be done through the implementation of an Income Inclusion Rule (IIR) and a Qualified Domestic Minimum Top-up Tax (QDMTT) with effect for FYs beginning on or after 31 December 2023. An Undertaxed Payments Rule (UTPR) would also be legislated but would become effective only for FYs beginning on or after 31 December 2024. A consultation paper on the implementation of the GMT framework would be released in the coming months with respect to IIR and QDMTT, and at a later date with respect to UTPR.

Pillar 1 – Reallocation of Taxing Rights

The draft states that members of the Inclusive Framework are working towards finalizing a multilateral convention towards implementing the Pillar 1 framework by mid-2023, with a projected entry into force in 2024. Failing a successful conclusion of the negotiations and the adoption of a convention, Canada would start applying its domestic digital services tax (DST) from 1 January 2024, but with retroactive effect to 1 January 2022.

GAAR Enhancement

The general anti-avoidance rule (GAAR) would be strengthened through several amendments including the following:

  • A preamble would be added to the GAAR to resolve interpretative issues and ensure the rules are applied as intended;
  • The GAAR’s “primary purpose test” tax avoidance threshold would be amended to a “one of the main purposes test”;
  • Economic substance would play a greater role in the GAAR analysis so that the lack thereof would be indicative of abusive tax avoidance;
  • The statute of limitations would be extended by 3 years with respect to arrangements falling under GAAR unless the arrangement had been disclosed to the Canada Revenue Agency (CRA);
  • GAAR penalties would be fixed at 25% of the benefit derived. The penalties could be avoided if the arrangement is disclosed to the CRA whether voluntarily or under the proposed  mandatory disclosure rules (MDR).

Denial of the Dividend Received Deduction for Financial Institutions

The deduction of dividends received by financial institutions on or after 1 January 2024 on portfolio shares in Canadian corporations that are classified as mark-to-market property would be denied.

Tax on Stock Buybacks

A tax would apply at 2% on a corporation’s repurchase of own stock (stock buybacks) on or after 1 January 2024. Exemptions would be available to buybacks of less than CAD 1 million per year, as well as to mutual fund corporations and other specified investment funds.

Refundable Tax Credits

The draft budget proposes to introduce or enhance various refundable tax credits mostly geared towards the promotion of green investments, including notably the following:

  • A refundable investment tax credit would be made available to investments in clean technology manufacturing, and critical minerals extraction and processing. The credit would be equal to 30% of the capital cost of new machinery and equipment for the manufacturing and processing of key clean technologies, or the extraction, procession or recycling of key critical minerals. The credit would be available for property acquired / put in use from 1 January 2024 and would be gradually phased out from 2032 until fully phased out from 2034;
  • The refundable investment tax credit for carbon capture, utilization and storage (CCUS) would be enhanced by notably adding specified dual use equipment to the list of eligible equipment, and adding British Columbia to the list of eligible jurisdictions for geological storage;
  • A refundable 15% clean electricity tax credit would be introduced for investments in non-emitting electricity generation projects, abated natural gas-fired electricity generation projects, stationary electricity storing systems, and electricity transmission equipment. The credit would be available from budget day 2024 for projects launched on or after 28 March 2023, and would be phased out by 2034;
  • A refundable clean hydrogen investment tax credit would be introduced in respect of expenditure for the acquisition and installation of eligible equipment for projects which produce hydrogen from electrolysis or from natural gas, subject to several technical specifications. The credit would be available at the rate of 40%, 25% or 15% based on the assessed carbon intensity of the hydrogen produced and several other technical specifications. It is proposed to be gradually phased out and ultimately fully phased out for equipment put to use after 2034.

Alternative Minimum Tax (AMT) for High-Earning Individuals

The AMT due by high-earning individuals would be increased by hiking the rate to 20.5% (from 15% currently) and broadening the AMT base through the abolition of several exclusions. Hence, the AMT tax base inclusion rate would be increased to 100% for capital gains and benefits associated with employee stock options, whilst certain deductions from the AMT tax base would be limited to 50%. The AMT exemption thresholds would be increased to CAD 173,000 and indexed annually for inflation.