Tax Insights: 2023 Fall Economic Statement (FES 2023)

On November 21, 2023, Deputy Prime Minister and Minister of Finance Chrystia Freeland introduced the 2023 Fall Economic Statement (FES 2023) on behalf of the federal government. These measures aim to modify the Underused Housing Tax (UHT) to exclude specific individuals, reduce the profitability of short-term rental properties, and enhance the affordability of certain healthcare services.

FES 2023 is expected to steer clear of a recession but anticipates a significant deceleration in economic growth. The federal government declared that Canada is committing billions to the construction of new homes, boosting the workforce in the construction industry, implementing stricter measures on short-term rentals and competition within the grocery sector, and introducing eagerly awaited tax credits for green investments. Healthcare services with psychotherapists, and counselling therapists will also see a tax exemption from GST/HST.

Find some of the main highlights here:

1. Tax measures related to Housing 
   1. 1. Underused Housing Tax – The UHT first took effect on January 1, 2022.  Every person that is an “owner” of a residential property in Canada, other than an “excluded owner”, is required to file a UHT return for that property.  To relieve the compliance burden, effective for the 2023 and subsequent calendar year the following would be considered an “excluded owner” and would no longer have a UHT filing requirement:
         1. A specified Canadian corporation
         2. A trustee of a specified Canadian trust
         3. A partner of a specified Canadian partnership

   As well, there will be a reduction in the minimum penalty for failing to file by the deadline, effective for the 2022 and subsequent calendar years from:

   1. 1. 1. $5,000 to $1,000 per failure for individuals
         2. $10,000 to $2,000 per failure for corporations
   1. Rentals – The federal government will be cracking down on owners who have listed short-term rentals on AirBnb or VRBO. This includes:
      1. Denying income tax deductions on rental expenses for short-term rental income (interest expenses, property taxes, repair costs etc.) where short-term rental restrictions are in place (Toronto, Montreal, and Vancouver). This measure will deny any expenses incurred on or after January 1, 2024.
      2. Denying income tax deductions for short-term rental operators not compliant with permitting or registration requirements
2. Employee Ownership Trusts
   The 2023 budget contained measures regarding employee ownership trusts (EOT). EOT are designed to make it easier for the ownership transfer of specific businesses to a trust for the employees’ benefit. These rules aim to encourage employee ownership and offer business owners an alternative plan for succession. FES 2023 proposes to implement measures encouraging business owners to sell to an EOT. This involves a proposed exemption for the initial $10 million in capital gains from shares sold to an EOT during the years 2024 to 2026, contingent on specific conditions that will be elaborated upon later.
3. Sales Tax Measures 
   1. Expansion and refinement of GST/HST joint venture election regime – A joint venture is not considered to be a person for GST/HST purposes and is therefore not entitled to register and account for GST/HST.  Each participant would be required to register separately and account for their proportionate share of the and input tax credits.  Current rules allow for a joint venture participant that is a registrant (the operator) can make an election (a joint venture election) with another participant (the co-venturer) if the activities under their joint venture agreement are eligible activities or prescribed activities.
      To make the election available to more participants the federal government has proposed new joint venture election rules. Draft legislative proposals have been released for consultation. The government is inviting feedback on a proposed enhancement and clarification of the current GST/HST joint venture regulations until March 15, 2024. Subsequently, it plans to conclude the development of a new GST/HST joint venture framework, along with the drafting of implementing legislation.
   2. GST Rebate on New Rental Construction – 100% GST rebate on the construction of newly built rental housing to include co-op housing projects that include long-term rental accommodation.