CANADA Law and Practice Contributed by: Marc-André Godard, Pierre Allard, Isabelle Gagnon and Mehrez Houacine, BCF Business Law LLP
Canadian taxable corporations have access to four refundable tax credits known as the Clean Economy ITCs, aimed at supporting the transition to net zero emissions. Those credits are: • Carbon Capture, Utilization and Storage (CCUS) ITC; • Clean Technology ITC; • Clean Hydrogen ITC; and • Clean Technology Manufacturing ITC. These ITCs apply to eligible expenditures or property that is acquired and becomes available for use before 31 December 2034 (with the exception of the CCUS ITC, which ends on 31 December 2040). Generally speaking, it is only possible to claim one of the Clean Economy ITCs for the same eligible property. Canada has implemented a temporary measure to reduce corporate income tax rates by 50% for quali - fying zero-emission technology manufacturers. Provinces may also offer targeted incentives for spe - cific industries (the production of multimedia titles to support digital transformation in print media compa - nies, etc). 2.4 Loss Relief A corporation may incur two types of losses: Capital losses occur upon the disposal of a capital property for an amount that is less than its cost. Gen - erally, a capital loss may only offset capital gains – it cannot be applied to other income unless it qualifies as an allowable business investment loss (ABIL). Capi - tal losses may be carried back three years or carried forward indefinitely. An ABIL is a capital loss incurred on the sale of shares of a small business corporation to a third party, or upon the bankruptcy, insolvency or winding-up of a small business corporation. ABILs may offset income from all sources. They can be carried back three years or carried forward for ten years, after which they are • capital losses; and • non-capital losses. Capital Losses
converted into capital losses and may be carried for - ward indefinitely. Non-Capital Losses Generally, a non-capital loss is any loss incurred from carrying on a business. Non-capital losses may offset income from all sources. They can be carried back three years or carried forward for 20 years. When a business is carried on through a limited part - nership, a limited partner’s share of the limited part - nership’s loss from a business or property may only be deducted by the limited partner if such loss does not exceed the limited partner’s “at-risk amount” (gener - ally the amount of capital contributed by the partner to the partnership) for the year. The excess loss can Generally, interest expense is considered a capital expenditure and is not deductible unless it meets specific requirements in the ITA, which include that the amount must be payable in the year under a legal obligation to pay interest, and that the amount must be reasonable. Where the above conditions are fulfilled, the ITA nev - ertheless restricts the deduction for interest paid or payable by certain corporations resident in Canada in a taxation year on debts owing to specified non- residents if the ratio of these debts to the corpora - tion’s equity exceeds 1.5:1. be carried forward indefinitely. 2.5 Deduction of Interest Furthermore, for taxation years beginning after 30 September 2023, the ITA restricts the deduction for excessive interest and financing expenses. The rules adopt an “earnings stripping” approach, which restricts a taxpayer’s deductions for interest expense and other financing costs to an amount that is propor - tional to the taxable income generated by its activities in Canada. The rules limit the amount of net interest and financing expenses that may be deducted in com - puting a taxpayer’s income to no more than a fixed ratio of earnings before interest, taxes, depreciation and amortisation (EBITDA). The ratio is 40% for taxa - tion years beginning after 30 September 2023 and before 1 January 2024, and is lowered to 30% for taxation years beginning after 31 December 2023.
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