Fall Economic Statement 2024
The Federal Department of Finance tabled the 2024 Fall Economic Statement (the “FES”) on December 16, 2024. The release of the FES was overshadowed by Chrystia Freeland resigning her position as Deputy Prime Minister and Minister of Finance earlier in the day.
Of particular significance, the FES proposes to relax the requirements for the tax deferral in respect of dispositions of eligible small business corporation shares (“ESBC shares”), enhance tax incentives for scientific research and experimental development (“SR&ED”), provide notable updates to the design and delivery of the Canadian clean economy tax credits, and extend the Accelerated Investment Incentive and immediate expensing measures. All of these proposals, which may be of interest to Canadian businesses and foreign investors, are discussed in further detail in this article.
Unless otherwise stated, statutory references are to the Income Tax Act (Canada) (the “ITA”).
Capital Gains Rollover on Investments
The replacement property rules in the ITA do not permit a deferral of tax payable on the sale of shares, even when the sale proceeds are reinvested into shares of another corporation. However, an exception exists for qualifying dispositions of eligible small business corporation shares ("ESBC Shares") under subsection 44.1(2) of the ITA, allowing for a potential deferral of tax payable on a disposition of ESBC Shares provided that the sale proceeds are reinvested in ESBC Shares issued by another corporation (the "ESBC Rollover").
Under the current rules, shares of a corporation will be ESBC Shares if, generally: (i) they are common shares; (ii) at the time of issuance, the issuer corporation was a Canadian-controlled private corporation ("CCPC"); (iii) the common shares were acquired directly from the treasury of the issuer corporation; (iv) at issuance, the issuer corporation derived all or substantially all of the fair market value of its assets from assets used principally in an active business carried on primarily in Canada by the corporation or a related ESBC, or from shares and debts of related ESBCs, or a combination of these; and (v) immediately before and after the shares were issued, the carrying value of the assets of the issuer corporation and related corporations did not exceed $50,000,000.
Very generally, to qualify for the ESBC Rollover, the following conditions, among others, must be met: (i) the person disposing of the shares is an individual (other than a trust); (ii) the shares disposed of are ESBC Shares (the “Old ESBC Shares”); (iii) throughout the period that the individual owned the shares, the shares were common shares of a taxable Canadian corporation that derived all or substantially all of the fair market value of its assets from assets used principally in an active business carried on by the corporation or a related corporation, or from shares or debts of a related corporation that meets this asset test, or a combination of these; (iv) the shares were owned by the disposing individual for at least 185 days before the disposition, (v) within 120 days after the year-end in which the ESBC Shares were sold by the individual, the individual acquires new ESBC Shares (the "Replacement ESBC Shares"); and (vi) the individual designates in his or her tax returns for the relevant taxation year that the Replacement ESBC Shares are a replacement for the Old ESBC Shares.
If these conditions are satisfied, the individual’s capital gain from the disposition of the Old ESBC Shares is reduced by an amount proportional to the individual’s proceeds of disposition of the Old ESBC Shares that is reinvested in Replacement ESBC Shares.
The 2024 FES includes proposed amendments to the ITA aimed at easing the restrictions related to the ESBC Rollover. The proposed changes are as follows:
- The definition of "replacement share" in subsection 44.1(1) of the ITA will be modified to permit the acquisition of Replacement ESBC Shares within one calendar year after the end of the taxation year in which the Old ESBC Shares were disposed of, rather than within 120 days following the end of the taxation year in which the ESBC Shares were sold.
- The definition of ESBC Shares in subsection 44.1(1) of the ITA will be modified to encompass both common shares and preferred shares of the issuer corporation.
- The definition of ESBC Shares in subsection 44.1(1) of the ITA will also be modified to increase the maximum carrying value of the assets of the issuer corporation before and after the issuance of shares to the individual from $50,000,000 to $100,000,000.
While not expressly stated in the FES, it is anticipated that the condition in paragraph (b) of the definition of "qualifying disposition" in subsection 44.1(1) of the ITA will be amended to refer to both common and preferred shares, in order to align with the broadened definition of ESBC Shares. Without such an amendment, the amendment to the ESBC Shares definition to include common shares would be frustrated.
The ESBC Rollover has historically seen limited use due to its stringent qualification criteria. For instance, individuals who did not subscribe for their shares directly from the issuer corporation's treasury, but instead acquired the shares from another person, are ineligible. Furthermore, if an issuer corporation's business has substantial international operations, such that less than substantially all of its assets at the issuance time were derived from assets used principally in an active business carried on primarily in Canada, its shares would not qualify as ESBC Shares. This situation may arise if a significant portion of the issuer corporation's asset value is derived from shares of foreign affiliates. Additionally, dispositions made by holding corporations rather than directly by individuals, or the acquisition of replacement shares from a non-CCPC issuer corporation, would fail to satisfy the eligibility requirements.
While the proposed amendments are not intended to address the aforementioned issues that prevent reliance on the ESBC Rollover, they will broaden eligibility for individual taxpayers at the margins. The total projected cost of this measure – $5,000,000 over five years – reflects this marginal impact.
If enacted, the amendments would be applicable to dispositions occurring on or after January 1, 2025.
Updates to the Clean Electricity Investment Tax Credit
Clean Electricity Investment Tax Credit for Provincial and Territorial Crown Corporations
Announced in the 2023 federal budget (“Budget 2023”), the clean electricity investment tax credit (“CE ITC”) is a 15% refundable investment tax credit applicable to investments in “clean electricity property” (as defined in subsection 127.491(1)). The stated purpose of the CE ITC is “to encourage the investment of capital in the deployment of clean electricity property in Canada.”
Budget 2023 included the following statement regarding the requirements that would need to be satisfied to access the credit:
In order to access the tax credit in each province and territory, other requirements will include a commitment by a competent authority that the federal funding will be used to lower electricity bills, and a commitment to achieve a net zero electricity sector by 2035.
This statement introduced significant uncertainty as it was not, at that time, apparent that these conditions would only apply to provincial and territorial Crown corporations or what specifically would be required to satisfy the conditions.
The 2024 federal budget (“Budget 2024”) announced design and implementation particulars of the CE ITC. Budget 2024 made it clear that the conditions requiring a commitment to net zero and passing savings on to ratepayers would only apply to provincial and territorial Crown corporations and stated that the Department of Finance would consult with provinces and territories regarding the eligibility criteria. On August 12, 2024, the Department of Finance released draft legislation to implement the CE ITC but nothing further on these conditions. The FES details the proposed conditions that must be satisfied by provincial and territorial governments in order for the jurisdiction to be designated for purposes of Crown corporations claiming the CE ITC and reporting requirements for provincial and territorial Crown corporations claiming the CE ITC.
For additional details on this measure see our article Clean Economy Tax Credits: As Updated by the 2024 Fall Economic Statement.
Expanded Eligibility of the CE ITC for the Canada Infrastructure Bank
The FES proposes to expand eligibility for the CE ITC by including the Canada Infrastructure Bank as an eligible entity for purposes of the CE ITC.
Under the tax proposals released by the Minister of Finance on August 12, 2024, for purposes of the CE ITC, the capital cost of a clean electricity property to a qualifying entity is reduced by the amount of any government assistance or non-government assistance received by the qualifying entity in, or before, the taxation year in which the property is acquired. The FES proposes to introduce an exception so that financing provided by the Canada Infrastructure Bank would not reduce the capital cost of a clean electricity property to a qualifying entity for purposes of the CE ITC.
The FES proposes that the measures with respect to the Canada Infrastructure Bank and the CE ITC would apply to clean electricity property that is acquired and becomes available for use on or after December 16, 2024.
For additional details on this measure see our article Clean Economy Tax Credits: As Updated by the 2024 Fall Economic Statement.
Additional Particulars for the EV ITC
To support investments in Canada’s electric vehicle industry, Budget 2024 announced the EV ITC as a 10% investment tax credit in respect of the cost of buildings used in the three qualifying segments of the Canadian electric vehicle supply chain: (1) electric vehicle assembly; (2) electric vehicle battery production; and (3) cathode active material production. The FES includes additional design and implementation details for the EV ITC and indicates that other design elements would generally be based on those of the Clean Technology Manufacturing Investment Tax Credit (“CTM ITC”) under section 127.49.
Eligible Property
Property eligible for the EV ITC would include buildings and structures, including their component parts, described in paragraph (q) of capital cost allowance Class 1 in Schedule II to the Income Tax Regulations. Eligible property must be used in one of the three qualifying segments which the Fall Economic Statement defines as follows:
- electric vehicle assembly which comprises the final assembly of a fully electric vehicle or a plug-in hybrid vehicle with a battery capacity of at least 7kWh;
- electric vehicle battery production which comprises the manufacturing of battery cells or battery modules used in the powertrain of a fully electric vehicle or plug-in hybrid vehicle; and
- cathode active material production which includes the production of cathode active material used as an input to manufacture battery cells used in the powertrain of a fully electric or plug-in hybrid vehicle other than preliminary processing activities such as activities that could generally allow property to qualify for the CTM ITC.
Investment Requirement
As initially described in Budget 2024, to be eligible for the EV ITC, a corporation must have invested in, and claimed the CTM ITC in respect of, each of the three qualifying segments. The Fall Economic Statement provides that, in order to satisfy this requirement, a corporation or a related group of which the corporation is a part, must:
- acquire property eligible for the CTM ITC at a cost of at least $100 million and that has become available for use in each of the three segments; or
- acquire property eligible for the CTM ITC at a cost of at least $100 million and that has become available for use in two of the three segments and hold shares of an unrelated corporation, representing at least 10 per cent of the voting rights and 10 per cent of the value of the shares of that corporation, that acquires property eligible for the CTM ITC at a cost of at least $100 million in the other qualifying segment.
Recapture
EV ITC is proposed to be subject to repayment obligations similar to the existing recapture rules for the CTM ITC.
Application and Phase-Out
The EV ITC would be available in respect of property that is acquired and becomes available for use on or after January 1, 2024. The FES confirms that the EV ITC would be phased out with a reduced rate of 5% for property that becomes available for use in 2033 or 2034, and no credit available for property that becomes available for use after 2034.
For additional details on this measure see our article Clean Economy Tax Credits: As Updated by the 2024 Fall Economic Statement.
Expanded Eligibility of CH ITC for Methane Pyrolysis Projects
The CH ITC is currently available in respect of hydrogen produced from electrolysis of water or from the reforming or partial oxidation of natural gas or other eligible hydrocarbons (where emissions are abated using a carbon capture, utilization and storage process). The FES proposes to expand the eligibility for the CH ITC to include projects that produce hydrogen from the pyrolysis of natural gas and other eligible hydrocarbons. The existing legislation regarding the CH ITC would generally apply in respect of such projects subject to certain modifications.
The FES indicates that the Government will continue to review eligibility for other low-carbon hydrogen production pathways.
For additional details on this measure see our article Clean Economy Tax Credits: As Updated by the 2024 Fall Economic Statement.
Scientific Research and Experimental Development Tax Incentive Program
The FES announces significant reforms to Canada’s Scientific Research and Experimental Development (SR&ED) program. These changes go beyond the commitments made in Budget 2024 and aim to encourage Canadian businesses to invest more in innovation. The reforms are designed to address a decade-long decline in R&D expenditures in Canada, which lags behind international peers, and to bolster the country’s competitive position in the global innovation landscape.
Existing Program
The federal SR&ED tax incentive program has been a cornerstone of Canada’s economic development strategies since 1987. It is the largest single tax incentive program, providing support to more than 20,000 businesses annually.
The program is based on the concept of qualified SR&ED expenditures, which generally include labor costs, contract payments to third-party companies performing qualified work in Canada, the cost of materials consumed or transformed during the SR&ED process, as well as third-party payments to research institutions, universities, or labs conducting SR&ED. The program offers two primary incentives for eligible taxpayers.
First, the program allows claimants to deduct SR&ED expenditures in the year incurred or to add the amount of an expense to a pool for future use. Second, the program offers claimants the following investment tax credits (“ITCs”):
- For non-Canadian-controlled private corporations, a 15% non-refundable tax credit on qualified expenditures;
- For individuals, sole proprietorships, certain trusts and partners of a partnership, a 15% credit on qualified expenditure, of which 40% is refundable;
- For Canadian-controlled private corporations (“CCPCs”) that are “qualifying corporations” (“smaller CCPCs”), a 35% fully refundable credit on the first $3 million of qualified expenditures (the expenditure limit) and a 15% credit on the excess qualified expenditures, of which 40% is refundable; and
- For CCPCs that are not qualifying corporations, a 35% fully refundable credit up to the expenditure limit, and a 15% credit on the excess qualified expenditures, none of which is refundable.
The expenditure limit decreases when claimant’s taxable capital employed in Canada for the previous year reaches $10 million and becomes nil starting at $50 million.
In addition to adhering to legislative requirements, claimants must submit extensive reporting detailing the nature and purpose of SR&ED activities to access program benefits.
Proposed Changes to the Program
The current SR&ED program represents about $4 billion in annual tax incentives. The proposed changes would increase this by almost $1.9 billion over the next six years, by incorporating the following updates to the program:
- Return of Eligible Capital Expenditures: Starting next fiscal year, capital expenditures will once again qualify for deductions and ITCs, reversing changes made in 2014. These rules will apply to capital property acquired after December 16, 2024, and to lease payments becoming payable after the same date.
- Increased 35% Rate Cap: The expenditure limit for the enhanced 35% rate will rise from $3 million to $4.5 million.
- Higher Phase-Out Thresholds: The taxable capital employed in Canada thresholds for enhanced credit eligibility will increase from $10 million - $50 million to $15 million - $75 million.
- Extended Enhanced Credits: Canadian public corporations will now qualify for the 35% enhanced refundable credit.
The proposed updates to the SR&ED program follow extensive public consultations led by the Department of Finance. These consultations explored new eligibility conditions, adjustments to the tax credit rate structure, and the potential adoption of a “patent box” regime to incentivize the creation, commercialization, and retention of intellectual property (“IP”) in Canada. The government announced its intention to implement a patent box regime in its 2025 Budget, which could encourage companies to develop, commercialize, and retain IP in Canada by taxing income earned from qualifying IP at a lower rate than standard corporate income.
The government indicated that the proposed changes would be the first of further reforms to the program, with coming updates on program administration and qualified expenses to be announced in its 2025 Budget.
The SR&ED program has long been a cornerstone of Canada’s efforts to foster innovation. However, businesses advancing beyond early-stage R&D or with sustained, long-term R&D needs have often struggled to fully leverage its benefits. The expansion of SR&ED to include scale-up activities and to move into the public company space will create a more supportive environment for Canadian business. The federal government’s proposed reforms aim to strengthen incentives for businesses to invest in R&D, ultimately driving economic growth.
However, businesses navigating these changes may face complexities and opportunities that require careful planning. While startups and scaleups await the simplification of the SR&ED application process, our team (including MT>Ventures) is ready to assist your business in navigating the SR&ED program and exploring other government funding opportunities to support your innovation journey.
Extension of the Accelerated Investment Incentive
The FES proposes to invest in economic fundamentals and create a business-friendly economic environment. Towards this goal, the FES proposes to invest an estimated $17.4 billion to provide for a five-year reinstatement of the Accelerated Investment Incentive.
Currently, the Accelerated Investment Incentive begins phasing out in 2024 and will be completely eliminated by 2027. Under the proposed extension of the Accelerated Investment Incentive the phase-out period would begin in 2030 and end in 2033.
The Accelerated Investment Incentive provides an enhanced capital cost allowance deduction in the first year for qualifying depreciable capital property. Under the FES proposals, the Accelerated Investment Incentive would be extended to qualifying property acquired on or after January 1, 2025 and that becomes available for use before 2030. An enhanced rate of two or three times the normal rate would be available for property subject to the half-year rule, and an enhanced rate of one-and-a half to one-and-a-quarter would be available for property not normally subject to the half-year rule.
Immediate Expensing Measures
With the goal of ensuring that Canada remains a competitive place to do business, the FES proposes to re-instate the immediate expensing measures, which are currently set to be reduced to 75% in 2025 and completely eliminated by 2028. These immediate expensing measures provide for an enhanced first-year capital cost allowance deduction of 100% for specified manufacturing or processing machinery and equipment, clean energy generation and energy conservation equipment, and zero-emission vehicles. As proposed, eligible property will qualify for this immediate expensing measure if it is acquired on or after January 1, 2025 and is available for use before 2030. The reinstated full 100% first-year deduction will be phased out starting in 2030 and fully eliminated for property that becomes available for use after 2033.
The FES does not propose any changes with respect to the half-year rule for immediate expensing measures, and thus the rule would remain effectively suspended for property eligible for immediate expensing.
Other Proposals
Corporation Share Ownership Rules for Canadian Pension Funds
Budget 2024 announced that the federal government would explore ways to provide greater domestic investment opportunities to Canadian pension funds. The FES announces that the federal government intends to remove the 30 per cent rule in respect of investments in Canadian entities by pension funds that are subject to the Pension Benefits Standards Act, 1985 (Canada) and that it will consult with the provinces regarding the treatment of provincially-regulated plans. The 30 per cent rule limits the percentage of a corporation’s director voting shares that may be owned by a pension fund. The FES also announces that consideration is being given to lowering the 90 per cent share ownership condition that applies to municipally-owned utility corporations in order to allow Canadian pension funds to acquire a higher ownership interest in such entities.
Canada Carbon Rebate for Individuals
The Canada Carbon Rebate provides a partial rebate on fuel charges for individuals that live in provinces where the fuel charge applies. Rural Canadians receive an additional 20% top-up to the Canada Carbon Rebate in recognition of the fact that living in rural areas and small communities requires increased energy consumption. The FES proposes to expand eligibility for the rural top-up to include Canadians living in census rural areas and small population centres that are within a Census Metropolitan Area.
Reporting by Non-profits
Currently, non-profit organizations (“NPOs”) are required to file an annual information return if: (i) the total of all of the NPO’s passive income in the fiscal period exceeds $10,000; (ii) the NPO’s total assets at the end of the previous fiscal period exceeds $200,000; or (iii) the NPO was required to file an information return for a preceding fiscal period.
The FES proposes changes to the reporting requirements for NPOs to improve transparency in the non-profit sector, by:
- Requiring all NPOs with total gross revenues over $50,000 to file the annual NPO information return; and
- Requiring NPOs that do not file the annual NPO information return to file a new short-form return.
If enacted, the new reporting requirements for NPOs would apply as of the 2026 taxation year.
Previously Announced Measures
No further details were provided in relation to various previously-announced measures, including:
- proposed amendments to the capital gains inclusion rate and the capital gains deduction;
- proposals pertaining to non-compliance with information requests announced in Budget 2024 and in the draft legislation released in August 2024;
- the Crypto-Asset Reporting Framework and the Common Reporting Standard announced in Budget 2024;
- legislative and regulatory proposals announced in the 2023 Fall Economic Statement with respect to the GST/HST joint venture election rules;
- changes discussed in the transfer pricing consultation paper released on June 6, 2023;
- the August 9, 2022 technical amendments in respect of subsection 85.1(4); or
- amendments to implement the Hybrid Mismatch Arrangements rules announced in Budget 2021.
However, for some of the above, the FES did confirm that the Government of Canada intends to proceed with these measures.
If you are affected by any of these measures, or would like further information, please contact a member of our tax group.