Updated: June 21, 2024
The measures in Bill C-59, Fall Economic Statement Implementation Act, 2023 are now law. This includes tax measures such as the expanded general anti-avoidance rule (GAAR), changes to the intergenerational business transfer rules, and several green initiatives. Bill C-59 also contains several measures introduced in Budget 2023 and the 2023 Fall Economic Statement (FES 2023). This bill was enacted on June 20, 2024.
Understanding how these measures could apply to you or your business may be complex. If you need help navigating these new or changing rules, reach out to your Grant Thornton advisor.
What are the key measures in Bill C-59?
Expanded GAAR
Bill C-59 includes the expanded GAAR, along with the introduction of a new 25% penalty where the GAAR applies.
Most notably, the GAAR expansions include:
- If a taxpayer undertakes a transaction and it can reasonably be considered that “one of the main purposes” of the transaction is to obtain a tax benefit (directly or indirectly), it would be considered an avoidance transaction. Previously, a transaction wasn’t considered an avoidance transaction if it was undertaken “primarily” for bona fide purposes, even if it resulted directly or indirectly in a tax benefit.
- A transaction or series of transactions that’s “significantly lacking in economic substance” would tend to indicate a “misuse or abuse” of the provisions of the Income Tax Act or other prescribed legislation. Previously, there was no economic substance test in the legislation.
As a result, taxpayers will need to carefully consider whether the GAAR may apply before undertaking any transaction involving a tax benefit.
The expanded GAAR rule is effective retroactively to transactions occurring on or after January 1, 2024, except for the new preamble and the new GAAR penalty which are effective, as of June 20, 2024.
EIFEL rules
The bill includes the excessive interest and financing expenses limitation (EIFEL) rules, effective for tax years starting on or after October 1, 2023. EIFEL may significantly reduce the tax-deductible amount of interest and financing expenses (IFE) of certain corporations and trusts, including when they are partners of a partnership with IFE, where the rules apply. These rules require taxpayers to file a prescribed form with their tax return to support the deductible amount of IFE for the tax year.
Intergenerational business transfer rules
The bill includes the additional tests required to qualify for the intergenerational business transfer rules introduced in Budget 2023. Notable changes from the previous draft legislation include removing the requirement for the parent to control the operating company (Opco) pre-sale and for the child to control it post-sale (however the child must still control the Purchaser corporation that acquires the Opco shares). Furthermore, parents who executed Bill C-208 plans before 2024 to transfer a portion of their shares in Opco may be able to benefit from the new rules to transfer the remaining ownership of the same business after 2023, if certain conditions are met.
Substantive CCPC rules
Bill C-59 also includes the substantive Canadian-controlled private corporation (CCPC) rules, which would apply retroactively to tax years ending on or after April 7, 2022.
A substantive CCPC is a private corporation that is not a CCPC but:
- is controlled, directly or indirectly in any manner whatever, by one or more Canadian resident individuals, or
- would be controlled by a particular individual if that individual owns all the shares owned by Canadian resident individuals.
Investment income earned by a substantive CCPC would be subject to an additional tax on investment income (a portion of which is refundable upon paying a taxable dividend), same as a CCPC. However, substantive CCPCs wouldn’t qualify for the small business deduction or other tax benefits available to CCPCs.
Employee ownership trusts
Bill C-59 includes the employee ownership trust rules, which are retroactively effective January 1, 2024. An employee ownership trust is a Canadian resident trust used to facilitate the purchase of a qualifying businesses for the benefit of its employees, where certain conditions are met.
Note that an additional measure to temporarily exempt up to $10 million capital gains realized on the sale of a qualifying business to an employee ownership trust for 2024 to 2026 taxation years was enacted as part of Bill C-69 on June 20, 2024.
Digital services tax
This bill includes the new Digital Services Tax Act.
Canada’s digital service tax (DST) would apply an annual 3% tax rate on the “taxable Canadian digital services revenue” of domestic and foreign enterprises, comprising certain types of Canadian-source digital service revenues from online marketplaces, advertising and social media services, and the sale and licensing of user data.
The DST only apply to large entities and groups that earn revenues from all sources equal to at least the “global revenue threshold” amount of €750 million, as well as Canadian digital services revenue that exceeds an “in-scope revenue threshold” amount of $20 million. However, for registration requirement purposes, the in-scope revenue threshold is only $10 million. This means some entities will need to register even if they aren’t subject to the tax.
The effective date of Canada’s DST isn’t specified yet as Canada continues to monitor the status of global negotiations regarding the implementation of the Pillar One rules of the OECD’s Two-Pillar initiative. However, the DST would be payable in respect of revenues earned as of January 1, 2022.
Green technology investment tax credits
This bill also includes the Clean Technology Investment Tax Credit (Clean Technology ITC) and the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS ITC).
The Clean Technology ITC provides a refundable tax credit of up to 30% of the cost of the eligible clean technology property acquired after March 28, 2023, and is available for use. This credit will be reduced to 15% in 2034, after which this incentive will no longer be available.
The CCUS ITC provides a refundable tax credit of up to 60% for qualified carbon capture expenditures used to capture carbon directly from ambient air, 50% for other qualified carbon capture expenditures, and 37.5% for qualified carbon transportation, storage or use expenditures. This credit is available for expenditures incurred from 2022 to the end of 2030. These credit rates are reduced by half for expenditures incurred from 2031 and the end of 2040, and fully phased out after 2040.
In addition, the bill also introduces labour requirements that the taxpayer must meet to claim the maximum rates for these ITCs. These ITC rates will be reduced by 10% for the taxpayers who don’t meet the labour requirements or fail to file an election in a prescribed form.
Other business measures
Other notable business measures in Bill C-59 include:
- Tax on repurchase of equity (stock buybacks): Charging certain public corporations a 2% tax on the excess between equity buybacks and issuances for the tax year, where the share repurchases are over $1 million in a given tax year (prorated for short tax years). These rules would apply to transactions occurring after 2023.
- Dividend received deduction by financial institutions: Eliminating the deduction available to financial institutions on dividends received on mark-to-market property for dividends received after 2023.
- Hybrid mismatch arrangements: Preventing “double non-taxation" in certain cross-border transactions, including deeming non-deductible interest under the hybrid mismatch rules to be a dividend for withholding tax purposes, retroactive to payments made on or after July 1, 2022.
Sales tax measures
Bill C-59 contains sales tax measures, such as:
- Expanded GST rebate on new rental construction: Providing 100% GST rebate on eligible new co-op housing construction projects that provide long-term rental accommodation, effective September 14, 2023.
- GST/HST exemption on certain health care services: Removing the GST/HST on psychotherapy and counselling therapy services, effective on June 20, 2024.
Takeaway
Bill C-59 includes a variety of measures which may impact you or your business. If you need help navigating these tax measures or have any questions, our experienced advisors are here to help you—reach out to us here.
Disclaimer
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Doane Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.
