Federal Budget 2023: Clean as a Whistle

On my early morning flight to Ottawa on March 28, 2023, where I was going to be locked up with other tax practitioners and economists for the Federal Budget 2023 (“Budget 2023”), I thought back to my last in-person budget in spring 2019. The outlook for the world was much rosier – the economy was going strong, no one had heard of COVID-19 and my mortgage rate was under 2%. Fast forward four years and I am returning to Ottawa in person to a budget delivered by a government still reeling from ballooning COVID relief payments and administrative costs, rising inflation and interest rates, global economic uncertainty and threats from the United States over subsidies for clean energy. As highlighted in leaked information prior to budget day, Budget 2023 provides no increases to the personal or corporate tax rates, no changes to the taxation of capital gains and no changes to the principal residence exemption. What Budget 2023 offers is the tightening of belts (we had to pay for lunch at the lock-up), significant investment in clean energy, through a system of extensive tax credits, along with some interesting technical tax changes that mostly tax practitioners would appreciate.

Here are three things that everyone needs to know about Budget 2023:

1. Investment in Clean Energy

The focus on Budget 2023 is the push for Canada to become a clean electricity superpower. It notes that Canada faces challenges from the United States regarding Canada’s ability to compete in industries that will drive Canada’s clean economy. To combat this threat, Budget 2023 introduces many different and specifically focused investment tax credits, aimed at incentivizing different areas of clean energy to promote a clean economy. These include: (i) a clean electricity investment tax credit of 15% aimed at alternative sources of energy such as wind, solar, hydro and nuclear, (ii) a clean technology manufacturing credit of 30% of the costs of investments in new machinery and equipment used to manufacture and process key clean technologies and extract, process or recycle key critical minerals, (iii) a clean hydrogen investment tax credit (with different credit rates) to support clean hydrogen production, (iv) an expansion of the clean technology investment tax credit to include geothermal energy systems, and (v) enhancing the carbon capture, utilization and storage investment tax credit. All investment tax credits are designed to incentivize industry to invest in clean energy for the future.

2. Employee Ownership Trusts

As promised in Federal Budget 2022 (and in response to significant industry lobbying efforts), Budget 2023 outlines proposed rules to introduce tax changes to create employee ownership trusts (“EOT”) which would allow Canadian business owners the ability to transfer their businesses to their employees on a tax-efficient basis (both for the EOT and the sellers). The new rules create the concept and conditions of an EOT and propose changes to the tax rules to facilitate the creation of such trusts. Generally, the changes would extend the capital gains reserve to ten years (from its current five years) when a qualified business is sold to an EOT, would create an exception to the rules which impose tax on loans to shareholders and exempt EOTs from the 21-year deemed disposition rule that currently applies to certain trusts. See my update Federal Budget 2023: The Creation of Employee Ownership Trusts for a detailed account of the proposals surrounding the EOTs and the implications of these proposed rules. Such proposals are intended to apply on January 1, 2024.

3. Reform of the General Anti-Avoidance Rule

Last August, the Federal Government released a consultation paper which identified several issues with the general anti-avoidance rule (the “GAAR”) in the Income Tax Act (Canada) and set out potential ways to address them. The GAAR is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. Often, the line between legitimate tax planning and tax avoidance can be blurry, resulting in uncertainty and lengthy court decisions. The government received many submissions and feedback, representing a wide variety of viewpoints. In response to this, Budget 2023 proposes to amend the GAAR in several places, to strike a balance between the taxpayers’ need for certainty in planning their affairs and the government’s responsibility to protect the tax base. Most notably is the inclusion of a 25% penalty on the amount of the tax benefit (currently there is no significant deterrent to tax planning that results in the application of the GAAR, other than taxes that would be owed, plus penalties and interest).

If you have any questions with respect to the matters discussed above, please contact Katy Pitch by email at [email protected].

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.