On 28 March 2023, Ms. Chrystia Freeland, the Deputy Prime Minister and Minister of Finance released Budget 2023. Canada’s economic growth was the strongest in the G7 over the last year, and today, 830,000 more Canadians are employed than before the pandemic. Inflation in Canada has fallen for eight months in a row, unemployment rate is near its record low.
International Tax Reform
Canada is committed to ending the corporate tax race to the bottom and ensuring that multinational corporations pay their fair share of tax wherever they do business. This is about putting Canadian workers and businesses on a level playing field with global competitors.
Canada continues to strongly support the two-pillar international tax reform plan agreed by 138 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).
Reallocation of Taxing Rights
Pillar One will ensure that the largest and most profitable global corporations, including large digital corporations, pay their fair share of tax in the jurisdictions where their users and customers are located. Canada and international partners have been developing the rules of this innovative new system through an OECD-led process, and countries are working towards completing multilateral negotiations so that the treaty to implement Pillar One can be signed by mid-2023.
Global Minimum Tax
Pillar Two, a global minimum tax regime, will ensure that large multinational corporations are subject to a minimum effective tax rate of 15 per cent on their profits wherever they do business.
To function effectively, Pillar Two requires coordinated implementation by countries around the world. Recent steps taken by a number of countries to implement Pillar Two in 2024, including the members of the European Union, the United Kingdom, Japan, and the Republic of Korea, mean the multilateral framework for the global minimum tax regime is now being put in place.
Budget 2023 reaffirms Canada’s intention, announced in Budget 2022, to introduce legislation implementing the Pillar Two global minimum tax. The primary charging rule of Pillar Two and a domestic minimum top-up tax would be effective for fiscal years of multinational corporations that begin on or after December 31, 2023. The secondary charging rule would be effective for fiscal years that begin on or after December 31, 2024.
Tax on Share Buybacks
The 2022 Fall Economic Statement announced the Canadian federal government’s intention to introduce a two per cent tax on share buybacks by public corporations in Canada, with details to follow in Budget 2023.
Budget 2023 announces that the proposed tax would apply as of January 1, 2024 to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada. A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million.
It is estimated that this measure would increase federal revenues by $2.5 billion over five years, starting in 2023-24.
Taxation on Dividends
Currently, the dividends that financial institutions receive on Canadian shares are not treated as business income and are effectively exempt from tax. Financial institutions rely on this treatment to lower their tax burden, which reduces tax revenues that are important to delivering benefits and services to Canadians.
Budget 2023 proposes to amend the Income Tax Act to treat dividends received on Canadian shares held by financial institutions in the ordinary course of their business as business income.
This measure would apply to dividends received after 2023, which would increase federal revenues by $3.15Â billion over five years starting in 2024-25, and by $790Â million ongoing.
Strengthening the General Anti-Avoidance Rule
The General Anti-Avoidance Rule (GAAR) was added to the Income Tax Act in 1988 to prevent abusive tax avoidance. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit that was unfairly created. The GAAR has helped to tackle abusive tax avoidance but it requires modernizing to ensure its continued effectiveness. Budget 2023 proposes to release for consultation draft legislative proposals to strengthen the GAAR.