Unpacking the Fall Economic Statement

After unprecedented events in Ottawa, the government released its Fall Economic Statement (FES), focusing on investments to support the growth of Canadian businesses.

The FES proposes more legislation when there are already several previously announced and tabled measures yet to be passed into law. While the FES reaffirms a commitment to these measures ⁠–⁠ such as the increase in the capital gains inclusion rate, the increase in the lifetime capital gains exemption, the Aug. 12, 2024 release and several technical amendments ⁠–⁠ it is still unclear when these will become law.

This continues to create uncertainty for taxpayers, who are depending on the new Finance Minister and a minority government to move significant policies through the House of Commons to provide clarity on 2024 tax filing requirements. Adding to this, an election must occur no later than October 2025. If a new party forms government before these proposals are passed, it is not known what will be kept and what will be cut.

Pre‑FES announcements

On Dec. 13, 2024, the government made pre‑FES announcements, teasing two major tax reforms.

Scientific Research & Experimental Development (SR&ED) incentives

The proposed enhancements include:

• An increase from $3 million to $4.5 million for the annual expenditure limit, allowing Canadian‑controlled private corporations (CCPCs) to access additional investments tax credits (ITCs) at the 35 per cent rate.
• An increase to the prior year taxable capital phase‑out thresholds for the enhanced credit (35 per cent ). Previously, the phase‑out began at $10 million and was fully phased out at $50 million of taxable capital. The new limits are $15 million and $75 million, respectively.
• An extension of the enhanced refundable credit to some Canadian public corporations, and
• Restoration of eligibility for capital expenditures as a deduction against income and for the ITC components of the SR&ED program.

From our experts…

"We see these changes as a step in the right direction and have been a long time coming. Program stakeholders have been advocating for many of these changes for years. With Canada lagging in terms of R&D investment compared to our international peers, these updates will help ensure the program effectively incentivizes R&D investment to strengthen economic growth in Canada.”

Rob D’Amico
Director, SR&ED and Government Incentives

Private sector and pension fund investment initiatives

The proposals outline significant changes and programs, including:

• Removing rule limiting investment in Canadian entities by pension funds; specifically, removing the 30 per cent ownership cap, allowing pension funds to make larger investments in Canadian entities.
• An additional $1 billion in funding to launch a fourth round of the Venture Capital Catalyst Initiative.
• Concessional financing up to $1 billion invested to support mid‑cap companies (up to 25 per cent of net‑new private investment in these entities). Investments will be managed by qualified fund managers with a record of supporting these companies.
• Developing a program to secure Canada’s artificial intelligence (AI) industry, including loans and equity investments up to $45 billion for AI data centre projects where Canadian pension funds are significant investors
• Incentivizing development on airport lands, including potential changes to airport authority ground lease alongside pension funds.
• Exploring lowering the thresholds limiting private sector ownership in municipal‑owned utility corporations, allowing Canadian pension funds to acquire a higher ownership share.

Key FES measures

Personal income tax

Canadian Disability Benefit (CDB)

Under current rules, the CDB will provide $2,400 annually to certain individuals eligible for the Disability Tax Credit. The payments received will be included in income and have an offsetting deduction, resulting in them being effectively nontaxable. The proposed change would make the payment exempt to ensure it does not inadvertently affect any other income‑tested benefits. Since these payments have not been made, all changes will be made prospectively for the 2025 taxation year.

Canada Carbon Rebate ⁠–⁠ Rural supplement

The FES proposes to expand eligibility for the rural supplement to individuals who reside in a census rural area (less than 1,000 individuals) or a small population centre (less than 30,000 individuals) within a Census Metropolitan Area (CMA). For example, while Kemptville is part of the CMA of Ottawa‑Gatineau, individuals may now be eligible for the additional 20 per cent supplement. This would apply for the 2024 taxation year, meaning the first payments would occur in April 2025.

Northern Zone expansion

The FES proposes to reclassify the islands of Haida Gwaii from the Intermediate Zone to the Northern Zone, allowing residents to claim up to the maximum value of the Northern Residents Deduction. This would be effective for the 2025 taxation year.

Eligible Small Business Corporation (ESBC) shares

The FES proposes to amend three main components of the eligibility criteria for ESBC shares. First, common and preferred shares will now be eligible. Second, the period to acquire replacement shares would be expanded to include the year of disposition of the ESBC shares and the entire calendar year following the year of disposition. Third, the limitation related to total carrying value of the asset of the ESBC and corporations related to it has been increased to $100 million. This would be effective for qualifying dispositions on or after Jan. 1, 2025.

Reporting by non‑profit organizations (NPOs)

Annual return changes

The FES proposes to add an additional requirement for NPOs with total gross revenues exceeding $50,000 to file an annual NPO information return. This is in addition to the three existing tests. This would take effect for the 2026 taxation year.

New filing requirement for small NPOs

The FES proposes to introduce a short form return for NPOs not otherwise subject to a filing requirement for an annual NPO information return. These requirements allow for the collection of basic information about the organization, without the administrative burden of a full annual return. This would come into effect for the 2026 taxation year.

Business income tax

SR&ED tax incentive program

The FES includes additional details to supplement the teaser release. The two main proposals not previously communicated are:

Gross revenue phase‑out structure

The FES proposes to extend the enhanced 35 per cent refundable tax credit to certain Canadian public corporations through an alternative structure. This would use average gross revenue of the consolidated group (over the preceding three years) as the basis of the credit phase‑out, not taxable capital. The phase‑out would begin at $15 million and fully phase‑out at $75 million.

CCPCs ability to opt into gross revenue phase‑out structure

CCPCs will have the opportunity to opt into the gross revenue phase‑out structure, and not have the normal taxable capital tests apply.

From our experts…

"This is an interesting development and will certainly help businesses who raise significant capital in the private or public markets as part of their growth and scale up strategy. This will be very applicable in the technology industry, where managing taxable capital in the pre‑ and low‑revenue phase can be especially difficult.”

Sean Grant‑Young
National Director of Tax

Extension of the Accelerated Investment Incentive and immediate expensing

Accelerated Investment Incentive

The FES proposes to reinstate the Accelerated Investment Incentive for qualifying property acquired on or after Jan. 1, 2025, and is available for use before 2030. These measures would be phased out starting in 2030 and fully eliminated for property available for use after 2033.

Table 3
Current and Proposed Enhanced First‑Year Allowance Under the Accelerated Investment Incentive
(property subject to the half‑year rule)

(Source: 2024 Fall Economic Statement ⁠–⁠ pg. 266)

Immediate expensing measures

The FES proposes to fully reinstate immediate expensing measures for qualifying property acquired on or after Jan. 1, 2025, and made available for use before 2030. These measures would be phased out starting in 2030 and fully eliminated for property available for use after 2033. The half‑year rule would continue to effectively be suspended for property eligible for these measures.

Table 4
Current and Proposed Immediate Expensing for Manufacturing or Processing Machinery and Equipment, Clean Energy Generation and Energy Conservation Equipment and Zero‑Emission Vehicles

(Source: 2024 Fall Economic Statement ⁠–⁠ pg. 266)

Canada Carbon Rebate for small businesses

The FES proposes to change certain elements of the design of the tax credit for the 2024/25 and later charge years (this corresponds to the 2024 calendar year for testing number of employees).

Eligible businesses

Currently, only CCPCs are eligible. It is proposed to extend the tax credit to cooperative corporations and credit unions for the 2024/25 fuel charge year.

Minimum payment

An eligible corporation with one to 20 employees across Canada would receive payments corresponding to it having 20 employees. Where an eligible corporation has less than 20 employees, and those employees are located in multiple provinces, including provinces where the fuel charge is not in place, the employees in each province would be increased proportionally for the purposes of calculating the credit.

Phase‑out

Eligible corporations would have their payments reduced on a straight‑line basis when the number of employees across Canada reaches 300. Payment is phased out completely when the number reaches 500.

Investment Tax Credits (ITC)

Clean Electricity ITC for provincial and territorial Crown corporations

The FES builds on the Aug. 12, 2024 release to provide clarity on conditions required for some nontaxable entities to qualify for up to a 15 per cent refundable ITC. Project eligibility hinges on whether the province has met certain conditions, including proposed net‑zero targets and passing along resulting savings to ratepayers.

Clean Electricity ITC and Canada Infrastructure Bank

The FES proposes to include the Canada Infrastructure Bank (CIB) as an eligible entity under the Clean Electricity ITC, and introduce the exception that any financing provided by the CIB would not reduce the cost of eligible property when computing the ITC.

EV Supply Chain ITC

The FES builds on Budget 2024’s announcement of a 10 per cent refundable ITC with details of eligibility, including minimum investment levels ($100 million) in each of the three segments of the supply chain (including those made by related parties and qualifying minority interests).

Clean Hydrogen ITC ⁠–⁠ Methane pyrolysis

The FES proposes expansion of the Clean Hydrogen ITC to include pyrolysis of natural gas and other eligible hydrocarbons as an eligible hydrogen production pathway. This should apply in respect of property acquired and made ready for use in an eligible project on or after the day of the FES. Details regarding eligible projects, equipment and limitations on cost are highly technical and outlined in the FES documents.

Next steps

Contact your Baker Tilly advisor to learn more about how we can help you navigate the complexities of the Canadian tax system.