Finance Minister Chrystia Freeland delivered the government’s 2023 Fall Economic Update on November 21, 2023. The Update anticipates a deficit of $40.0 billion for 2023-24 and forecasts deficits of $38.4 billion for 2024-25 and $38.3 billion for 2025-26. Although the Update does not include any personal or corporate tax rate changes, it provides relieving changes for the Underused Housing Tax (UHT), enhances the Canadian Journalism Labour Tax Credit, provides additional design details on previously announced clean economy credits and proposes new rules for GST/HST joint venture elections.
Although Finance notes that it will provide more specific details on some of these
announcements in the future, Finance did release draft legislation for consultation for
GST/HST joint venture elections and proposed changes to the UHT.
We are pleased to bring you highlights from the 2023 Fall Economic Statement delivered yesterday by Chrystia Freeland, Minister of Finance.
1. Cracking Down on Non-Compliant Short-Term Rentals
In a bold move, the government emphasized that “Homes should be for Canadians to live in—not a speculative financial asset class for investors.”
To achieve this, the 2023 Fall Economic Statement proposes the denial of income tax deductions for expenses related to short-term rental income in areas where such rentals are prohibited or where short-term rental operators are not compliant with rules/regulations. This includes expenses like interest and applies to non-compliant operators. These measures will be effective from January 1, 2024.
The government’s stance and approach toward real estate investors appear noteworthy, suggesting the potential for future tax policy adjustments in this area.
2. Underused Housing Tax (UHT) Updates
The government proposed several changes to the Underused Housing Tax (UHT) based on feedback from Canadians. Notable proposals include:
1. Exemption for Certain Owners: Specified Canadian corporations, partners of specified Canadian partnerships, and trustees of specified Canadian trusts are proposed to be excluded owners, relieving them of UHT reporting obligations. The expanded definitions aim to provide relief for a broader range of Canadian ownership structures from 2023 onwards. This is interesting. You may still be required to file for 2022 by the April 30, 2024 deadline (see below).
2. Reduction in Minimum Failure to File Penalties: reducing the minimum penalties for failing to file UHT returns by individuals (from $5,000 to $1,000 per property) and corporations (from $10,000 to $2,000 per property). If approved, these changes will apply from the 2022 calendar year.
3. Additional Time to File 2022 UHT Returns: Responding to the unique circumstances surrounding the inaugural UHT returns, the government has extended the filing deadline for 2022 UHT returns. Owners now have until April 30, 2024, to file, providing ample time to meet their obligations without incurring penalties and interest.
3. The New Canadian Mortgage Charter
The new Canadian Mortgage Charter introduces measures aimed at assisting Canadians facing temporary financial stress due to elevated interest rates. Canadians can expect:
1. Allowing temporary extensions of the amortization period for mortgage holders at risk;
2. Waiving fees and costs that would have otherwise been charged for relief measures;
3. Not requiring insured mortgage holders to requalify under the insured minimum qualifying rate when switching lenders at mortgage renewal;
4. Contacting homeowners four to six months in advance of their mortgage renewal to inform them of their renewal options;
5. Giving homeowners at risk the ability to make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties; and
6. Not charging interest on interest in the event that mortgage relief measures result in a temporary period of negative amortization.
4. Removing GST/HST From Psychotherapists’ and Counselling Therapists’ Services:
The government proposes to exempt psychotherapists and counselling therapists from the Goods and Services Tax/Harmonized Sales Tax (GST/HST). This exemption aims to make mental health services more accessible and is set to take effect upon royal assent.
5. Employee Ownership Trusts
Budget 2023 introduced tax rules to facilitate the creation of an employee ownership trust (EOT). These trusts own shares in a business on behalf of its employees, enabling greater worker participation in business decisions and profits. An EOT can also provide an alternative business succession option for retiring business owners. With the stated goal of encouraging more business owners to sell to an EOT, the Statement proposes to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions. This incentive would be in effect for the 2024, 2025 and 2026 tax years. The Statement indicates that further details of this new exemption will be provided in the coming months.
Next Steps
If any of these measures affect you and you would like to learn more, please feel free to reach out to your LCA advisor.