Federal Fall Economic Statement 2023

The federal government just announced their Fall Economic Statement for 2023. Let’s look at the tax highlights.

Underused Housing Tax (UHT) amendments

The Underused Housing Tax (UHT) is an annual 1% tax on the ownership of vacant or underused housing in Canada that took effect on January 1, 2022. Every owner of a residential property other than an “excluded owner” (called “affected owners”) would be required to file an annual declaration with the Canada Revenue Agency (CRA) for each residential property they own. The annual declaration form is the UHT-2900. In order to file a declaration with the CRA, certain owners may need to pre-register with the CRA in advance of filing their declaration.

We wrote a detailed blog article previously on this measure.

Amendments being proposed are the following:

Eliminating filing requirements for certain affected owners

The federal government is proposing to alleviate the filing requirement for the following affected owners:

• Specified Canadian Corporations: any corporation that is incorporated under the laws of Canada or a province and of which a foreign entity does not own more 10% of common and voting shares [UHTA 1 “specified Canadian corporations” & UHTA 6(7)(b)]
• Partner of Specified Canadian Partnership: Every member of the partnership is an excluded owner, specified Canadian Corporation, prescribed person [UHTA 6(7)(a)(i)]
• Trustee of Specified Canadian Trust: Every beneficiary of the trust is an excluded owner, specified Canadian Corporation, prescribed person [UHTA 6(7)(a)(ii)].

Under current legislation, these owners would be exempt from paying the UHT. However, they are required to file the UHT-2900 annual return to claim their exemption.

The government is proposing to expand the definition of “excluded owners” to include the three types of owners mentioned above. As excluded owners, they would not be required to file the UHT-2900.

This change would come into effect as of the 2023 tax year.

Decreasing late-filing penalties

The floor for late-filing penalties for the UHT was set at $5,000 for individuals and $10,000 for all other entities (corporations, trusts, partnerships). The government is proposing to reduce these penalties to $1,000 for individuals and $2,000 for all other entities.

Technical changes

Certain technical definitions related to the UHT will also be amended:

·        to provide that unitized ('condominiumized') apartment buildings are not "residential property" for UHT purposes, effective in respect of 2022 and subsequent calendar years; and,

·        to ensure that an individual or a spousal unit can claim the UHT "vacation property" exemption for only one residential property for a calendar year, effective in respect of 2024 and subsequent calendar years.

Extension to the filing deadline

The original deadline for filing the 2022 UHT annual declaration was April 30^, 2023. The federal government has extended this deadline twice, and now the filing deadline will be April 30^, 2024. This date is also the deadline for the 2023 UHT annual declaration.

Removal of GST/HST for Psychotherapists’ and Counselling Therapists’ Services

The federal government proposes to add psychotherapists’ and counselling therapists’ services to the exempted medical practitioners’ services for the purposes of the GST/HST.

Removal of GST for construction of new Co-op rental housing

In order to encourage construction of new Co-op rental housing, such as apartment buildings, student housing, and seniors’ residences, the federal government will remove the GST for these purpose-built rental housing projects.

The removal of the GST does not include substantial renovations of existing residential complexes. This last rule is to avoid “renovictions”.

Ontario, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador will harmonize with the federal government for their respective sales taxes.

The removal of the GST would apply only to projects that begin construction between September 14, 2023, and the end of 2030, and that complete construction before 2036.

Disallowing income tax deductions for short-term rentals

To encourage more supply of long-term rental properties in the housing market, the federal government proposes to disallow income tax deductions (i.e., deducting expenses such as mortgage interest, property insurance, condo fees, property taxes, and capital cost allowance) that can be claimed against rental income.

This measure would apply to property owners in provinces and municipalities that have prohibited short-term rentals such as Airbnb. It will also prohibit property owners who are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements.

These measures would apply to deny all expenses incurred on or after January 1, 2024.

Concessional Loans

Based on a recent decision in the CAE Inc. v. The Queen case [2021 CCI 57], the federal government proposes to amend the Income Tax Act to provide that bona fide concessional loans with reasonable repayment terms from public authorities will generally not be considered government assistance.

It was the CRA’s administrative practice that a loan that is interest-free or that the rate of interest on the loan is less than the existing commercial rate of interest will not normally cause a loan to be considered as assistance for the purpose of paragraph 12(1)(x).

The CAE Inc. v. The Queen case ruled against the CRA’s administrative practice. In this case, CAE had received a below market rate loan from Industry Canada pay for scientific research and experimental development (SR&ED) expenditures and claim the Investment Tax Credit on the SR&ED claim. The Tax Court and Appeals court both ruled that the loan was indeed government assistance because the loan rate was significantly lower than the market rate, and that the conditions of the loan lacked commercial covenants.

Employee Ownership Trusts (EOT)

Announced in the 2023 budget, Employee Ownership Trusts (EOT) are a new form of personal trust that will facilitate transfers of businesses from owners to the employees.

For more details on EOTs, please consult this previous blog article.

The federal government is proposing to exempt the first $10 million in capital gains realized on the sale of a business to an Employee Ownership Trust from taxation, subject to certain conditions. This exemption would be temporary, applicable to the for the 2024, 2025, and 2026 tax years.

Canadian journalism labour tax credit

The Canadian journalism labour tax credit is a refundable tax credit of 25% on total qualifying labour expenditure incurred for a period in the tax year beginning on or after January 1, 2019, in respect of each eligible newsroom employee of a qualifying journalism organization (QJO), less any amount received from the Aid to Publishers component of the Canada Periodical Fund in the year.

Effective for labour costs incurred on or after January 1, 2023, the federal government proposes to increase the yearly limit on labour costs that can be claimed per eligible employee from $55,000 to $85,000, and temporarily increase the tax credit rate from 25 per cent to 35 per cent for a period of four years.

Investment Tax Credit (ITC) for Clean Energy

The federal government provided updates to the Investment Tax Credit (ITC) for clean energy initiatives announced in the 2023 budget.

The federal government proposes:

·        The 30-per-cent Clean Technology investment tax credit to include systems that produce electricity, heat, or both electricity and heat from waste biomass. This expansion of the Clean Technology Investment Tax Credit would be available to businesses investing in eligible property that is acquired and becomes available for use on or after the date of the 2023 Fall Economic Statement.

The 15-per-cent Clean Electricity investment tax credit to include systems that produce electricity or both electricity and heat from waste biomass, which would be available as of the date of Budget 2024 for projects that did not begi