* The corporate income tax rate for zero-emission technology manufacturers is reduced to 7.5% for eligible income otherwise subject to the 15% general corporate income tax rate, or 4.5% for eligible income otherwise subject to the 9% small-business corporate income tax rate, applicable for taxation years beginning after 2021. Under proposed legislation, the reduced tax rates are scheduled to be gradually phased out beginning in 2032 and fully phased out for taxation years beginning after 2034. This proposal is not yet substantively enacted.
** An additional tax on banks and life insurers at a rate of 1.5% on taxable income (subject to a $100 million exemption to be shared by group members) applies for taxation years ending after 7 April 2022 (prorated for taxation years straddling this effective date). These rates are not reflected in the rates shown in the table above.
Other business tax measures
The minister also proposed the following business income tax measures:
Investment tax credit for clean hydrogen – additional design details – This credit, first announced in the 2022 FES and for which details were included in Budget 2023, includes a 15% tax credit on eligible equipment that converts clean hydrogen to ammonia and a tax credit between 15% and 40% of eligible project costs, with the rate dependent on the carbon intensity (CI) of the hydrogen produced.
Additional design details are included in the FES, as follows:
- Eligible clean ammonia production equipment – For purposes of this 15% tax credit, various specific conditions are introduced, including:
- The taxpayer that is producing the ammonia must use their own hydrogen feedstock in the ammonia production (the feedstock must come from a clean hydrogen project eligible for the clean hydrogen investment tax credit).
- The clean hydrogen project must have sufficient production capacity to satisfy the taxpayer’s ammonia production facility.
- The taxpayer demonstrates the feasibility of transporting the hydrogen from the hydrogen production facilities to the ammonia production facility (if they are not co‑located).
- Power purchase agreements – Introduction of specific conditions that allow for the use of power purchase agreements and other similar instruments to enable project owners to purchase clean electricity from the electricity grid for the purpose of calculating a project’s CI.
- Renewable natural gas – Allowing for the use of renewable natural gas for purposes of calculating a project’s CI, subject to several conditions, as some hydrogen production projects may use renewable natural gas to reduce the CI of their hydrogen production.
- Initial project CI assessment and validation – Clarifying details included (e.g., the initial project CI assessment will need to be validated by a third party).
- Compliance – Projects will be subject to a one-time verification based on a five-year compliance period. Over the course of the period, projects will compute and report annually on the effective CI of the hydrogen produced, and at the end of the period, compliance would be determined based on the weighted-average CI over the entire period. Taxpayers will be required to submit third-party verification reports, including any required documentation, of the CI of a project’s hydrogen.
- Recovery – Provision of an exception from recovery of the credit with respect to projects with a verified CI of no more than 0.25 kilograms of carbon dioxide equivalent per kilogram of hydrogen above their original validated CI, even if the verified CI exceeds the upper bound of the originally assessed CI tier (however, full recovery of the credit will be required in respect of ammonia production equipment, if the hydrogen production project supplying the hydrogen used in ammonia production has a verified CI of 4 kilograms or more of carbon dioxide equivalent per kilogram of hydrogen). The clean hydrogen credit, in general, may be subject to recovery if a project fails to achieve a CI of produced hydrogen in the same CI tier that the project was assessed at.
Expansion of investment tax credits for clean technology and clean electricity – Expansion of the 30% clean technology investment tax credit and the 15% clean electricity investment tax credit to include systems that generate electricity, heat, or both electricity and heat from waste biomass. The FES includes details on eligible property and eligible systems. For these purposes, eligible waste biomass will include only specified waste materials, as defined for purposes of capital cost allowance Classes 43.1 and 43.2. Eligible electricity and cogeneration systems will generally include those that use feedstock, all or substantially all of the energy content of which is from specified waste materials, as determined on an annual basis, and that do not exceed a heat rate threshold of 11,000 British thermal units per kilowatt-hour. Eligible heat generation systems will generally include those that use feedstock, all or substantially all of the energy content of which is from specified waste materials (other than spent pulping liquor), as determined on an annual basis. The expansion of eligibility for the clean technology investment tax credit will be effective in respect of property that is acquired and becomes available for use on or after 21 November 2023, provided it has not been used for any purpose before its acquisition. The expansion of eligibility for the clean electricity investment tax credit will be effective as of the day of the 2024 federal budget, and for projects that did not begin construction before 28 March 2023.
Rental expense deduction for non-compliant short-term rentals – Introduction of a new rule preventing short-term rental operators from claiming an income tax deduction for expenses incurred to earn short-term rental income in any province or municipality that has prohibited short-term rentals. The rule will apply to interest expenses as well as other types of rental expenses. An operator will also be unable to claim income tax deductions for a short-term rental if they had failed to comply with provincial or municipal licensing, permitting or registration requirements. These new restrictions will apply to all rental expenses incurred on or after 1 January 2024.
Canadian journalism labour tax credit – Increase in the cap on labour expenditures per eligible newsroom employee from $55,000 to $85,000, as well as a temporary increase in the tax credit rate from 25% to 35% for a period of four years. These changes will apply to qualifying labour expenditures incurred on or after 1 January 2023; the changes will be prorated where a qualifying journalism organization’s taxation year does not follow a calendar year.
Dividend received deduction by financial institutions – Introduction of an exception to the Budget 2023 proposal to deny the deduction in respect of dividends received on shares of other corporations resident in Canada by financial institutions on shares that are mark-to-market property. Specifically, the FES proposes to exclude dividends received on taxable preferred shares from the application of this measure. As a result, financial institutions may continue to claim a deduction for dividends received on taxable preferred shares. This exception, along with the original proposed measure, will apply to dividends received after 2023.
Concessional loans and government assistance – The FES proposes a relieving rule to counteract the effect of a recent court decision on the treatment of “concessional loans,” which are loans from public authorities that are either non-interest bearing or are granted at below-market interest rates. The court decision determined that the principal amount of a concessional loan constituted government assistance for purposes of the Income Tax Act (the Act). The FES proposes that, effective 21 November 2023, a bona fide concessional loan with reasonable repayment terms from a public authority will generally not be treated as government assistance.
International tax measures
The following is a summary of the international tax measures announced:
International tax reform – Confirmation of Canada’s intention to move ahead with enacting its proposed legislation to implement the OECD/G20 Pillar Two global minimum tax in Canada (i.e., the Global Minimum Tax Act), as well as its interim proposed Digital Services Tax Act, while continuing to work with its international partners to bring the new multilateral system under Pillar One into effect as soon as a critical mass of countries is willing. Forthcoming legislation will allow the government to determine the entry-into-force date of the new digital services tax, as Canada continues conversations with its international partners. For more information, see EY Tax Alert 2023 Issues No. 35, Global Minimum Tax Act released for public comment, and No. 36, Canada moving ahead with its own digital services tax: revised draft legislation released.
International shipping – Introduction of a measure to make the exemption for international shipping income in the Act generally available to Canadian resident companies. This measure will allow shipping companies with management in Canada to continue their operations in line with both the Pillar Two international shipping exclusion, which is proposed to be implemented in Canada’s Global Minimum Tax Act, and the exemption in the Act. The measure will apply to taxation years that begin on or after 31 December 2023.
Tax measures for individuals and trusts
Personal income tax rates
There are no individual income tax rate or tax bracket changes in this FES. The brackets will continue to be indexed for inflation.
See Table C for the 2023 federal rates.
Table C: Federal personal income tax rates