EY Tax Alert 2024 no 63 – Federal Fall Economic Statement 2024 | EY

Other business tax measures

The government also proposed the following business income tax measures:

Scientific research and experimental development (SR&ED) program – As previously announced on 13 December 2024, various proposed enhancements to the SR&ED tax incentive program, generally coming into force for taxation years beginning on or after 16 December 2024, are included in the FES. More specifically, the FES confirmed or announced the following proposed enhancements, which follow from consultations launched by the Department of Finance earlier this year:

• Expenditure limit – Increase, from $3 million to $4.5 million, in the annual expenditure limit on which CCPCs are entitled to earn a 35% SR&ED investment tax credit (ITC).
• Phase-out thresholds – Increase, from $10 million and $50 million, to $15 million and $75 million, respectively, in the prior-year taxable capital phase-out thresholds for purposes of determining the annual expenditure limit. In addition, CCPCs will have the option to have their annual expenditure limit determined based on gross revenue instead of taxable capital, as proposed for Canadian public corporations (see below).
• Refundability – Extension of the 35% refundable SR&ED ITC to eligible Canadian public corporations, up to the increased $4.5 million annual expenditure limit. However, unlike for CCPCs, the $15 million and $75 million phase-out thresholds for determining the annual expenditure limit will be based on the corporation’s gross revenue instead of its taxable capital. In addition, also unlike for CCPCs, qualifying expenditures in excess of an eligible Canadian public corporation’s annual expenditure limit will not be eligible for a partially refundable SR&ED ITC.
• Capital expenditures – Reinstatement of the pre-2014 eligibility of capital expenditures (for property acquired after 15 December 2024 or lease costs first becoming payable after that date) to both the SR&ED income deduction and the SR&ED ITC. Qualifying CCPCs eligible to earn a 35% SR&ED ITC will be entitled to partial refundability of the credit at a rate of 40% on their capital expenditures.

The FES further indicates that the proposed changes represent the first of further reforms related to the SR&ED tax incentive program, as well as to promoting innovation, that the government intends to advance and that more details on the program and updates to qualified expenses will be announced in Budget 2025.

Patent box regime – Following from consultations launched by the Department of Finance earlier this year, the FES announced the government’s intention to implement a patent box regime to encourage the development and retention of intellectual property in Canada. Details on the regime are to be announced in Budget 2025.

Accelerated investment incentive and immediate expensing – The FES proposes to reinstate the accelerated investment incentive (AII) and immediate expensing measures (under the capital cost allowance (CCA) rules) for qualifying property acquired on or after 1 January 2025 and that becomes available for use before 2030. Under current legislation, these measures are in the process of being phased out for property (acquired after 20 November 2018) that becomes available for use after 2024, and fully phased out for property that becomes available for use after 2027.

As proposed in the FES, the AII measure will be reinstated so that eligible property acquired on or after 1 January 2025, and available for use before 2030, will qualify for an enhanced CCA deduction equal to three times the normal first-year deduction if the property is normally subject to the half-year rule, and equal to one-and-a-half times the normal first-year allowance if the property is not normally subject to the half-year rule. The enhanced allowance is phased out for property that becomes available for use after 2029 and before 2034, so that the enhanced deduction is equal to two times the normal first-year allowance for property normally subject to the half-year rule, and to one-and-a-quarter times the normal first-year allowance for property not normally subject to the half-year rule. Property that becomes available for use after 2033 will no longer be eligible for an enhanced deduction. 

Similarly, immediate expensing will be reinstated for manufacturing or processing machinery and equipment included in Class 53, clean energy generation and energy conservation equipment included in Class 43.1, and zero-emission vehicles included in Classes 54, 55 and 56, so that this equipment will be eligible for a first-year 100% deduction if acquired on or after 1 January 2025 and available for use before 2030. The first-year enhanced deduction will be phased out for property that becomes available for use after 2029 and before 2034, so that the enhanced deduction is reduced to 75% for property available for use after 2029 and before 2032, and to 55% for property available for use after 2031 and before 2034. Property available for use after 2033 will be subject to the normal CCA rate.

New electric vehicle (EV) supply chain ITC – additional design details – The FES provides additional design details on the new 10% EV supply chain ITC for the cost of eligible buildings used in key segments of the EV supply chain, which was first announced in Budget 2024. To qualify for the ITC, the taxpayer must be a taxable Canadian corporation that invests directly in eligible property. Investments by partnerships and trusts will not be eligible for the credit.

Eligible property will include buildings and any component parts included in Class 1(q) for CCA purposes that are used all or substantially all in one or more of three qualifying supply chain segments (EV assembly, EV battery production and cathode active material production). In addition, a corporation (by itself or as part of a related group) will be required to invest at least $100 million in each of the three supply chain segments. This requirement will be met if the corporation (and related group members) acquires at least $100 million in property that is eligible for the clean technology manufacturing ITC and has become available for use in all three of the specified segments, or in two out of three of the specified segments and the corporation (and related group members) holds at least a qualifying minority interest in another corporation that acquires at least $100 million in property eligible for the clean technology manufacturing ITC in the third segment.

Recapture rules similar to those that apply for the clean technology manufacturing ITC will also apply, and the credit may be repayable if the corporation ceases to meet the conditions described above. Other design elements will, where applicable, be based on the clean technology manufacturing ITC.

As previously announced, the EV supply chain ITC will apply to property that is acquired and becomes available for use on or after 1 January 2024. The credit will be reduced to 5% for 2033 and 2034 and will no longer in be in effect after 2034. The FES indicates that draft legislation for the EV supply chain ITC will soon be released (in 2025).

Clean hydrogen ITC – The FES proposes to expand the clean hydrogen ITC to include methane pyrolysis as an eligible production pathway, effective for property that is acquired and becomes available for use in an eligible project on or after 16 December 2024. As a result, projects that produce hydrogen from pyrolysis of natural gas and other eligible hydrocarbons (i.e., methane pyrolysis) will be eligible for the clean hydrogen ITC. To qualify, the pyrolysis process would not be required to capture carbon dioxide (CO₂) emissions using a carbon capture, utilization and storage (CCUS) process; however, dual-use heat and power equipment would still be required to capture CO₂ using a CCUS process.

Eligible equipment includes property that is used to produce all or substantially all hydrogen from methane pyrolysis (determined without reference to any solid carbon that is produced), such as pyrolysis reactors, heat exchangers, separation equipment and purifiers, and compression and on-site storage equipment. Dual-use electricity and heat equipment, project support equipment, ammonia production equipment and oxygen production equipment will also be eligible provided they satisfy existing requirements under the clean hydrogen ITC. Equipment downstream of the point where hydrogen and solid carbon are separated will not be eligible.

To ensure the clean hydrogen ITC is targeted towards clean hydrogen production rather than solid carbon production, the ITC support in respect of pyrolysis reactor systems will be limited to $3,000 per tonne of annual hydrogen production capacity. Various other conditions apply.

The government will also continue to review eligibility for other low-carbon hydrogen production pathways.

Clean electricity ITC for provincial and territorial Crown corporations – The clean electricity ITC is currently proposed and once enacted would apply effective 16 April 2024. The credit may only be claimed on investments in eligible property located in eligible jurisdictions. Following a consultation process, the FES sets out the two conditions a provincial or territorial government would need to satisfy in order to be designated an eligible jurisdiction for purposes of the tax credit. The first condition requires the jurisdiction to publicly commit to publishing, by the end of 2026, an energy roadmap to achieve net-zero emissions by 2050. The second condition requires the jurisdiction to publicly request that Crown corporations pass on the benefits from the tax credit (such as lower energy prices) to electricity ratepayers in the jurisdiction. The FES also sets out the application process each jurisdiction must follow to obtain designation, as well as the annual reporting requirements for the Crown corporations and related penalties for late filing or failure to file.

Clean electricity ITC and the Canada Infrastructure Bank (CIB) – The FES proposes to amend the clean electricity ITC so that the CIB is an eligible entity for purposes of the credit. As well, the credit will be amended to ensure that financing provided by the CIB does not reduce the cost of eligible property for purposes of computing the tax credit. These amendments will apply to eligible property that is acquired and becomes available for use on or after 16 December 2024.

Canada carbon rebate for small businesses – The FES proposes changes to the design of the Canada carbon rebate, effective in relation to the 2024–25 and later fuel charge years. The scope of the tax credit is being expanded to apply to cooperative corporations and to credit unions. Further, changes are being made to the computation of the tax credit, including introducing a minimum payment for eligible corporations with up to 20 employees and a phase-out of payment amounts for eligible corporations that have between 300 and 500 employees.

Tax measures for individuals and trusts

Personal income tax rates

There are no individual income tax rate or tax bracket changes in this FES. The brackets will continue to be indexed for inflation.

See Table C for the 2024 federal rates.