With less than a year to go before the next federal election, much has been made of the politics of the Finance Minister's fall economic statement. Just as important are the statement's practical impacts on Canadian businesses and the economic dimensions of this series of announcements.
On Nov. 21, Canada's Minister of Finance provided Parliament with his fall economic statement 2018. Aside from the annual federal budget itself, the statement is the federal fiscal calendar's most important spending announcement. Not only does it contain hundreds of millions of dollars in new spending aimed at the business community, it also hints at regulatory changes that will reverberate across all sectors of the economy. Sectors affected are as diverse as the agri-food and aquaculture industries, extractive industries and banking.
We took a closer look at the statement and its implications for business clients.
Opportunities to help shape the regulatory environment
The changes outlined in the statement will have a long-term impact on the cost of doing business in Canada. Various industries, including agri-food, health and biosciences, and transportation, will be affected almost immediately. The government has also pledged a wide-ranging review of regulatory burdens in other industries. Such a review – if done meaningfully – has the potential to lower the cost of doing business in multiple sectors, rendering Canada more competitive and a more attractive destination for needed investment.
The Statement details 23 measures that will come into effect "as quickly as possible."1 These include:
- various changes to agri-food regulation, including adjustments to fertilizer rules, reducing barriers to internal trade, and changing beer compositional standards to allow for more inventive choices;
- amending regulations with respect to the commercial application of drones, and support for the adoption of truck platooning technologies; and
- reducing record retention requirements for clinical trials, and providing new regulations for wearable medical device software.
The statement also puts in place an institutional framework largely reflecting the Canadian Chamber of Commerce's wish list, laid out in the Chamber's May 2018 report.2
Reflecting that list, the statement promises to create a regulatory body styled as the External Advisory Committee on Regulatory Competitiveness. The creation of this entity, combined with promised regulatory review, could finally create the internal momentum required to begin the march back to competitiveness the government of Canada has needed for some time.
This Advisory Committee, along with the newly announced Centre for Regulatory Innovation, would provide the private industry with dedicated fora in which to advance views on effective regulation and deregulation. "Interested businesses in all federally-regulated industries should plan now to make submissions and advocate for regulatory change," says Dan Brock of the Government Relations Group at Fasken. "The Centre for Regulatory Innovation, in particular, is meant to be business-facing. Taking advantage of the opportunity to engage government on regulatory change should be on every federally-regulated business's priority list."
Introduction of new accelerated capital cost allowance incentives
In a clear response to the lowering of the corporate tax rate (and other corporate tax measures) in the United States, the statement includes new measures that will lower the corporate tax otherwise payable by some corporations in Canada. However, these measures will not lower actual corporate tax rates. Rather, the proposed changes will allow corporations to accelerate the tax depreciation of certain capital investments, thus lowering the effective corporate tax rate (at least in the earlier years).
Changes proposed in the statement will allow businesses to:
- immediately write off the cost of machinery and equipment used for the manufacturing or processing of goods;
- immediately write off the full cost of specified clean energy equipment; and
- rely upon an accelerated investment incentive, which will allow all businesses making capital investments to claim an accelerated capital cost allowance (i.e. a business will be permitted to deduct larger amounts of depreciation expenses sooner rather than later).
The accelerated investment incentive effectively triples the current first-year capital cost allowance rate for all tangible capital assets (and some intangible capital assets, including patents and other intellectual property). The statement provides that these changes will apply to qualifying assets acquired after Nov. 20, 2018. However, the changes will be gradually phased out starting in 2024, and will no longer be in effect after 2027.
The Department of Finance's view is that the above changes will encourage businesses to invest greater amounts of after-tax profits in new capital assets (the statement further provides that Canadian corporations' after-tax profits are near record highs). For example, according to the statement, the above changes will, respectively, promote: (i) the competitiveness of Canada's manufacturing and processing sector, including competitiveness vis-Ã -vis the same sector in the United States; (ii) Canada's clean technology sector and the shift to a "cleaner economy;" and (iii) businesses' ability to quickly recover the initial costs of investments in capital assets which will, in turn, encourage greater amounts of investment in capital assets. The statement further emphasizes that the above changes will lead to a reduction in Canada's marginal effective tax rate from 17 per cent to 13.8 per cent – a rate that would be the lowest among G7 countries.
"Canadian businesses that were considering making new investments, or shifting current investments, to the United States or other countries should take a closer look at the proposed accelerated CCA rules," says Kevin Yip of the Tax Law practice group at Fasken. "Although temporary, these incentives should make capital investments in Canada more attractive, especially in the manufacturing, technology, telecommunications and clean energy industries."
Regulation of financial institutions
In addition, the statement references proposed amendments to the Bank Act that were recently introduced in Bill C-86. These changes were discussed in a recent bulletin by Stephen D. A. Clark and Craig Bellefontaine of the Financial Institutions practice group at Fasken.3 Two of the main areas dealt with in Bill C-86 are:
- the amendment of certain provisions of the Bank Act in areas of corporate governance, business practices, public reporting, disclosure of information, and access to basic banking services; and
- adjustments to certain provisions of the Bank Act that deal with the investment powers provided to banks, privileged information made available to OSFI, and electronic consent.
It was hoped that amendments contained in Bill C-86 would address some of the outstanding issues created by the Supreme Court of Canada's decision in A Canadian Financial Institution v Marcotte,4 which dealt with the question of which level of government has constitutional authority over consumer protection issues involving banks. However, the amendments appear to be driven primarily by the Financial Consumer Agency of Canada's recent review focusing on the business practices related to the sale of products and services by federally regulated financial institutions.
The statement includes an announcement that the Financial Consumer Agency of Canada will be conducting a review to assess the complaints handling processes of Canada's banks, as well as the effectiveness of external complaints bodies.
In 2010, the previous Conservative government made amendments to the Bank Act that require banks to belong to an external complaints body approved by the Commissioner of the Financial Consumer Agency of Canada. In 2013, regulations were introduced that set out requirements that must be met by external complaint bodies, including standards for independence, timeliness and transparency.
According to Koker Christensen of the Financial Institutions Group at Fasken: "The question of whether a bank should be allowed to choose its own umpire has attracted attention over the years, most recently with a Canadian financial institution's September announcement that it would no longer be using the Ombudsman for Banking Services and Investments to mediate disputes with its customers. Instead, it is switching to ADR Chambers Banking Ombuds Office."
Banks and consumers alike will take an interest in the Financial Consumer Agency of Canada's review of the practice of banks using external complaints bodies. Depending on its outcome, the review could have a wide-ranging impact on how banks' relationships with consumers are regulated. In addition, the statement announced that the Financial Consumer Agency of Canada will engage with banks and seniors' groups to create a code of conduct to guide banks in their delivery of services to seniors.
Measures to encourage investment in mining, oil and gas
The statement also contains measures that will be of interest to those involved in the mining, oil and gas industries. These measures renew the exploration tax credit and allow taxpayers to claim immediate deductions with respect to certain Canadian development expenses and oil and gas expenses.
The 15 per cent Mineral Exploration Tax Credit helps junior exploration companies raise capital to finance early stage mineral exploration. From 2010 to 2016, mining companies raised, on an annual basis, an average of approximately $505 million in equity using this tax credit.
Given the continuing challenges facing junior mining companies, the government has decided to support mineral exploration efforts by extending the credit until March 31, 2024. It is hoped that this five –year extension will reduce uncertainty, facilitate planning, and help junior exploration companies raise more equity. This measure is expected to result in a net reduction in federal revenues of approximately $365 million over the 2019-20 to 2023-24 fiscal periods.
The statement also provides an additional first-year Canadian development expense deduction of 15 per cent for a taxpayer's "accelerated Canadian development expenses" for taxation years ending before 2024, and 7.5 per cent for taxation years ending after 2023. This amount will be added to taxpayers' cumulative Canadian development expenses at the end of the year, so as to determine the total amount deductible. For this purpose, an accelerated Canadian development expense is generally a Canadian development expense that is incurred after Nov. 20, 2018 and before 2028. This includes development expenses renounced under flow-through share agreements entered into after Nov. 20, 2018.
Finally, the statement provides for an additional first-year oil and gas expense deduction of five per cent for taxpayers' "accelerated Oil and Gas property expenses" for taxation years that end before 2024, and 2.5 per cent for taxation years that end after 2023. This amount can be added to a taxpayer's cumulative Canadian oil and gas property expenses at the end of the year, so as to determine the total amount deductible. For this purpose, an accelerated Oil and Gas property expense is generally a Canadian oil and gas property expense that is actually incurred after Nov. 20, 2018 and before 2028.
"Taken together, these measures are designed to counteract a general impression which has been forming in the extractive sector that this is a federal government more concerned with being seen to do the right thing environmentally than actually finding balance between the environment and the generation of growth and preservation of jobs," says Claude Jodoin of the Tax Law Group at Fasken. "It's the beginning of a business-friendly counter-balance to the impact of a price on carbon."
Matthew Welch is an associate with Fasken in Ottawa
End notes
- Fall Economic Statement 2018, p. 75.
- Canadian Chamber of Commerce, "Death by 130,000 cuts: Improving Canada's Regulatory Competitiveness" (May 2018).
- Craig Bellefontaine and Stephen D.A. Clark, "Federal Government Introduces Significant New Consumer Protection Framework for Customer of Banks - Bill C-86" (November 7, 2018).
- "A Canadian Financial Institution" v. Marcotte, 2014 SCC 55.