Submission to the Department of Finance on Budget 2024 Measures

The Canadian Chamber of Commerce is the country’s largest business association with a network of over 400 chambers of commerce and boards of trade representing nearly 200,000 businesses of all sizes, in all sectors and regions of our country.

We appreciate the opportunity to continue to provide feedback on the government’s key priorities outlined in Budget 2024, however, it is important to note that this consultation comes as some of the measures, such as the increase to the capital gains inclusion rate, are already in effect – limiting the ability to provide feedback which would seek to mitigate impact on Canadians and businesses.

Budget 2024 is being implemented as Canada’s global competitiveness continues to slip, and Canadians are right to be concerned about our future. Our GDP grew by only 1.1 per cent last year, with GDP per capita declining by 1.7 per cent – the worst in the G7. Labour productivity has now fallen in 12 of the last 15 quarters. The level of Canada’s labour productivity is now back to where it was in 2018, which means we’ve had little to no growth over a span of six years. Without productivity gains, Canadians continue to work harder but become poorer and will be unable to reach their goals

The way to fix these problems must be through enabling private-sector businesses to do what they do best: grow the economy. When businesses grow, so too does our country’s tax revenue – all without the need for detrimental tax increases which hold Canadians and businesses back from their potential.

At a time when we are already urgently struggling to reignite our nation’s lagging productivity, increasing taxes on capital gains and throttling Canadian potential will have profound, long-lasting and potentially irreversible repercussions on every generation.

Unfortunately, while Budget 2024 had some positive items, it lacked a strategy for economic growth. Our country must stop relying on tax-and-spend policies that undermine innovation and growth to the detriment of both today’s Canadians and future generations.

Our submission includes measures to refine Budget 2024 to help ensure it remains focused on harnessing Canadian potential now and in the future. This consultation provides a critically important opportunity to revise Budget 2024 based on feedback from Canadians, including the business community.

The Canadian Chamber of Commerce remains eager to partner with government to support policies which address the economic challenges Canada is experiencing. Given the headwinds we face, collaboration between policymakers and the business community is more critical than ever before.

Recommendations

1. Rescind the increase to the capital gains inclusion rate.

We reiterate our call to the government to heed the advice of many of Canada’s most respected leaders and commit to rescinding the ill-advised inclusion rate increase, maintaining the 50% inclusion rate in place before Budget 2024.

The assertion that the increase of the inclusion rate to 67% will only affect a small percentage of the wealthiest Canadians is misleading. When referring to the number of Canadians affected by this tax increase, the government has chosen to highlight a statistic which is reflective of a single tax year of individual Canadians, when in fact, this tax increase will hurt Canadians and businesses, for generations. When communicating to Canadians and before levying such taxes, the government has a responsibility to provide Canadians with statistics that are representative of the true impact on Canadians and businesses over the long run, not simply a single tax year.

The reality is that effects of this tax hike will be borne by all Canadians, directly or indirectly. Whether through diminishing the creation of new companies and jobs, reducing the availability of medical practitioners, eroding hard-earned pension returns, altering the delicate risk-reward balance of countless investments, complicating the succession plans of multi-generational farming operations, or threatening the retirement of millions of Canadians who underpinned their plans on the proceeds of selling a family cottage or a small business grown over a lifetime, the effects will ripple from coast-to-coast-to-coast.

Canada needs a simple, fair and principled tax system that works in the best interests of Canadians. It is not too late to reverse the damaging impact of the increase to the capital gains inclusion rate and look forward to a tax system which supports economic growth and a more prosperous future for all. Therefore, we reiterate our call to the government to heed the advice of many of Canada’s most respected leaders and commit to scrapping the ill-advised inclusion rate increase and commit to a comprehensive review of Canada’s tax system.

2. Maintain supports to businesses which will drive economic growth such as the Canadian Entrepreneurs’ Incentive and the increased Lifetime Capital Gains Exemption. Further, extend these supports equally across sectors, and ensure the impact of these supports is not nullified by corresponding tax increases.

Businesses are increasingly concerned about the impact of taxes and regulation. As noted in the Bank of Canada’s Business Outlook Survey for Q2 of 2024, tax and regulation concerns have surged, with firms pointing to red tape and regulations as critical factors slowing their plans for growth.

The second-quarter business outlook survey showed that 42 per cent of respondents listed “taxes and regulations” as a primary concern, compared with 27 per cent in the first quarter and 17 per cent a year earlier.

That’s an unusually large and rapid shift in opinion. The only issues that ranked as larger concerns were “uncertainty” and “cost pressures,” but both of those were little changed from recent quarters.

While the 2024 budget includes positive measures to assist small businesses, like increasing the Lifetime Capital Gains Exemption to $1.25M and recently announced enhancements to the Canadian Entrepreneurs’ Incentive, these measures do not mitigate the harm of the increase to the capital gains inclusion rate which remains deeply concerning to Canada’s business community writ large. These supports are important to getting Canada back on the right economic track.

3. Halt the imposition of a damaging, unilateral digital services tax, by zeroing out the tax via regulations, or at the very least, ensure that regulations do not include inflammatory retroactivity to 2022.

The Canadian Chamber has been warning for months of the damaging impact of Canada’s digital services tax on Canadians and our trading relationships.

The recent announcement by the US Trade Representative that the United States has requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA) regarding Canada’s recently enacted digital service tax (DST) confirms our longstanding concern that the digital services tax is damaging our most lucrative trading partnership at a critical time as we look ahead to a review of CUSMA.

This only stands to hurt Canadians as they struggle to afford the goods and services they need. At a time when Canadians are facing an affordability crisis, this new tax is making life more expensive. The example of France’s equally punitive DST demonstrates that costs will inevitably trickle down to consumers, causing an estimated 2-3 percent price increase in services consumed. We are already seeing the impact of this new and harmful tax on Canadians. The DST is forcing Canadians to pay more for online services they rely on such as grocery delivery, takeout after a long work week, a staycation close to home, loyalty points programs and more. These harms will only be amplified if the United States proceeds with retaliatory tariffs on Canadian goods.

We reiterate that to protect Canadians, the government needs to continue negotiating with the United States and halt the imposition of a unilateral DST. The government should reverse its unilateral decision that is out of step with our allies, and instead, work with our trading partners on an international solution that would better serve Canadians, or at the very least, ensure that regulations do not include inflammatory retroactivity to 2022.

4. Ensure the predictability, timeliness and forward-applicability of tax decisions.

Canadians and businesses deserve the ability to plan their financial futures in a predictable, timely and forward-looking manner. Lately, the government has enacted a number of tax changes such as bare trust reporting rules, an increase to the capital gains inclusion rate, and the digital services tax (just to name a few) which violate these commonly held tax principles. As a result, Canadians and businesses have been forced to hurriedly plan in the dark, without access to the full implementation and legislative details of proposed tax changes, and in many cases have had to revise financial plans that they have made because of retroactive tax changes – in some cases owing years of back taxes for a tax that didn’t previously exist! This is unfair and Canadians and businesses are right to be frustrated. When Canada has an uncompetitive, and perhaps even worse, unpredictable tax regime, compliance suffers and investment, be it personal or business, goes elsewhere – taking jobs, economic growth and opportunity with it.

5. Include intangible property and mine development investments in the Clean Technology Manufacturing Tax Credit and Extend the timeline for phasing-out beyond 2034.

Unlocking and maintaining the economic potential of Canada’s critical mineral resources will require governments to consider the international mining and investment landscape to ensure that federal incentives are targeted to make this country a preferred and predictable destination for mining investment.

The Clean Technology Manufacturing Investment Tax Credit (ITC) in Budget 2024 offers a starting point for improving Canada’s international competitiveness. At present, however, this ITC is too narrowly defined and largely limited to investments in physical property. To serve as a meaningful incentive for critical mineral development – and to begin to level the playing field with the U.S. and European Union – this credit would need to be expanded to capture investments in intangible property and development costs. While every mining project differs in its technical and financial requirements – intangible property and development costs usually account for 75-85 per cent of total capital requirements for mine development.

In contrast to brownfield and greenfield projects abroad, mature Canadian mining operations demand more capital due to deeper and technically challenging mines. These operations face substantial upfront investments, particularly in intangible assets like building tunnels, installing ventilation, and developing infrastructure for new deposits. This cost is notably higher compared to jurisdictions with surface deposits or open-pit mining.

Moreover, for established mining operations aiming to boost production it is not the tangible property (i.e., vehicles, equipment) that presents the largest financial barrier to increasing tonnage of critical minerals, but rather the intangible property, including the building of new tunnels, installation of ventilation, electricity systems, and all other adjacent infrastructure to access new ore bodies.

If the ITC is designed in a way that only covers the cost of machinery and other tangible property, Canada will miss a fundamental piece of the supply chain. Without this missing piece to incentivize domestic tonnage properly, Canada’s battery and automotive industries will likely seek to import foreign ore feed. Expanding the scope of the ITC to include these adjacent activities would enable industry to deliver additional supply to meet the demands of customers and enable more capital investments that align and support the government’s strategic investments into the EV supply chain.

Finally, developing new nickel, copper, or cobalt deposits to meet increased demand requires significant capital investment and a prolonged timeframe. In Canada it takes upwards of 12 to 15 years from the discovery of a viable deposit until commercial production is achieved. Accordingly, the Clean Technology Manufacturing Investment Tax Credit’s lifetime should extend beyond 2034 to ensure that it will be applicable to mines which will require at least 12 years to be permitted, designed, engineered, constructed, and opened. Given the uncertainty around the permitting environment in Canada – which will no doubt be amplified in the upcoming years, this tax credit will be increasingly necessary to secure large investments within the Canadian mining sector.

6. Defer implementation of both the Undertaxed Profits Rule and the Income Inclusion Rule until 2025. At a minimum, Canada should defer the application of the Income Inclusion Rule until 2025 on the operations of Canadian companies in jurisdictions that have committed to implement the GMT for 2025.

Canada’s internationally successful businesses have serious concerns about the negative impacts of Canada moving out of step on GMT with other major trading partners. GMT was agreed upon with the understanding that all countries would implement the tax at the same time. Countries moving simultaneously is necessary to ensure a fair and level playing field for businesses and not creating burdens on companies based on where they are headquartered.

Unfortunately, GMT is not being implemented by all countries at the same time and Canadian company operations in many global markets may pay significantly higher taxes than their non-Canadian competitors for 2024 and perhaps beyond. Canada is moving ahead of other countries, including the US, China and India which means the Canadian government is putting Canadian companies at a significant disadvantage and giving the advantage to our competitors. Canada should help Canadian companies succeed internationally and not take actions that tilt the playing field against Canadians.

The UTPR is the lever countries are supposed to use to ensure that their companies are not disadvantaged by the failure of other countries to implement the GMT. In theory, the UTPR would allow Canada and other countries to level the playing field by taxing foreign companies on their profits not subject to the GMT, however, there remains concern about the effectiveness of the UTPR and countries’ willingness to utilize it given trade concerns. Without application of the UTPR, certain companies may see an advantage over Canadian headquartered companies.

Canada should defer implementation of both the Undertaxed Profits Rule and the Income Inclusion Rule until 2025. These two rules operate together and help ensure that Canadian companies have a level playing field by allowing Canada to tax foreign companies if their governments fail to do so. At a minimum, Canada should defer the application of the Income Inclusion Rule until 2025 on the operations of Canadian companies in jurisdictions that have committed to implement the GMT for 2025.

Canada should also carefully monitor how and when other countries implement the GMT and take steps to ensure that Canada does not tilt the playing field against our own companies and negatively impact Canadian headquartered companies’ ability to succeed in overseas markets.

7. Do not proceed with the proposed expansion of the Unnamed Persons Requirement (“UPR”) Authority beyond verification of compliance for domestic tax purposes.

Currently, the Canadian government has the authority to require parties to provide information related to unnamed third parties to verify compliance with the Income Tax Act. This power can be used to obtain information on a class of unnamed persons, but it is currently only authorized to verify compliance for domestic tax purposes.

The Income Tax Act proposals under consideration would broaden the UPR authority to international agreements and tax treaties. This could open the door to foreign countries who have a tax treaty with Canada—including China and Russia—using Canada and its unnamed persons authority to obtain a vast array of information about individuals and entities. This could easily be exploited and compromise national and industrial security.

The Canadian government could seek information from companies within its jurisdiction that serve individuals and entities around the world. Those companies could be compelled to provide information on those third parties to the Canadian government, and the information could then be sent on to the requesting foreign country.

Canada should not be a conduit for foreign countries to obtain information about individuals and entities. Under the UPR authority, foreign countries could request information on an entire class of third parties with no limits on the number of potential targets or requirement for particularized information about the targets.

The government also proposes a new penalty of 10% of the aggregate amount of tax payable by the taxpayer if the CRA obtains a compliance order. This penalty is simply unreasonable and is designed to discourage challenges to overly broad requests. Notably, there is no penalty if the CRA loses its request for a compliance order, so while there is no disincentive to the CRA issuing an unreasonable request, a taxpayer is incentivized to comply with such a request to avoid penalties and the administrative and compliance costs associated with defending against an unreasonable request. This proposal places businesses in an impossible situation: compromise their customers’ privacy and security or be penalized.

8. Expand the scope of the elimination of GST for co-operative housing built for the long-term rental market to encompass projects currently under construction that are no longer viable due to interest rate increases, a shortage of skilled labour, and lack of supply for materials.

The elimination of GST for co-operative housing built for the long-term rental market is an important step toward increasing housing production in Canada; however, the ongoing housing crisis demands more immediate and comprehensive solutions. It is critical to expand these measures to encompass projects currently under construction that are no longer viable due to interest rate increases, a shortage of skilled labour, and lack of supply for materials. By broadening the scope, this benefit could enter the market immediately and would provide necessary reprieve to active projects facing untenable costs to complete.

9. Expand the exemptions from the Excessive Interest and Financing Expenses Limitation rules for purpose-built rental housing providers and regulated utility providers serving Canadians include all existing properties.

This policy change represents a step in the right direction as it demonstrates a clear effort to incentivize new construction. It is important that the exemption apply across the board to existing properties, as a lack of relief on costs/complexity for the broader PBR market would limit the overall impact of the policy, thereby missing an opportunity to foster a more equitable and supportive environment for all stakeholders.

10. Increase the horizon of the new 10 per cent Accelerated Capital Cost Allowance, for projects beginning construction on or after April 16, 2024, and before January 1, 2031, and completed by January 1, 2036, to instead ensure it is a long-term or permanent incentive.

A new 10 per cent Accelerated Capital Cost Allowance is an important policy announcement with a promising potential to significantly boost housing development. This immediate tax relief is particularly beneficial as it lowers the financial risk and reduces the upfront financial burden on developers, making it more feasible for them to undertake new housing projects. Ultimately, it aspires to accelerate the homebuilding activity, helping to address housing shortages and contribute to more affordable housing options. However, given that the measure is only temporary, it may lead to limited results in view of long timelines for housing approval, thus, failing to provide sustained growth in housing development. A longer-term or permanent incentive complemented with other policies that minimize regulatory complexity could create more stable, ongoing investment in housing.

11. Extend the Accelerated Investment Incentive, postponing the 2024 phase-out period to extend to 2027.

The introduction of a new capital cost allowance specifically tailored to innovation and productivity-enhancing assets in Budget 2024 is a positive step to address the needs of the manufacturing sector. With rapid technological advancements, Canadian manufacturers must continually upgrade their equipment and processes to stay ahead. That said, the Government needs to take an extra step, extending the current Accelerated Investment Incentive. This is crucial for maintaining the competitiveness of Canadian manufacturers in a global market.

The Organization for Economic Co-operation and Development (OECD) highlights that countries with favorable tax treatment for capital investments see higher levels of investment and economic growth, with accelerated depreciation policies contributing to increased business investment by 5-10% on average.

As other countries continue to provide incentives to their manufacturing sectors, Canada needs to ensure that its manufacturers have the financial tools to invest in the latest technologies and processes. This extension would enable Canadian companies to compete on a level playing field, attracting more investment and sustaining economic growth.

By incentivizing investment in new machinery, equipment, and technology, the measure would directly contribute to economic growth. As manufacturers invest in productivity-enhancing assets, they become more competitive, leading to business expansion, increased production, and the creation of high-quality jobs. This, in turn, strengthens the overall economy and supports the livelihoods of Canadians and their livelihoods.

In the face of global supply chain disruptions and the need for sustainable practices, extending the Accelerated Investment Incentive would also empower manufacturers to build more resilient and sustainable operations. By encouraging continuous investment in innovation, Canada can build a more robust industrial base capable of adapting to future challenges and seizing new opportunities in emerging markets and help set the stage for sustained economic growth and innovation.

14. Balanced allocation of the $2.4 billion AI investment: As Canada reviews its AI.

As Canada reviews its AI investment focus, boosting AI adoption in critical sectors – and among SMEs – must be a top priority. By better leveraging the transformational potential of AI, we can successfully increase the efficiency of our businesses and help Canada compete and prosper on the world stage, while ensuring that Canada’s AI legislation rather supports than hinders the investment to bear fruits of innovation.

Contact

Jessica Brandon-Jepp
Senior Director, Fiscal and Financial Services Policy
Canadian Chamber of Commerce
1700 – 275 Slater Street
Ottawa ON K1P 5H9
jbrandon-jepp@chamber.ca