On March 28, 2023, the federal government introduced Budget 2023: A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future (the Budget). The Budget proposed amendments to the Income Tax Act and the Canada Labour Code that may impact both Canadian employers and workers.

I. Improved eligibility for leave related to death or disappearance of child

Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023, proposes to amend the Canada Labour Code, to increase the leave for federally regulated employees related to the death or disappearance of a child from 104 weeks to 156 weeks. In addition, Bill C-47 removes the condition that would deprive an employee from utilizing this leave if the child was 14 years of age or older at the time of the crime and it is probable, considering the circumstances, that the child was a party to the crime.

II. Federally regulated gig workers

In the Budget, the government proposed to amend the Canada Labour Code by enhancing job protections for federally regulated gig workers. The central component to the government’s plan is to improve protections against employee misclassification. To this point, the government has completed one consultation on this issue but has not yet taken any legislative action.

III. Prohibiting the use of replacement workers

While the government has not yet taken any legislative steps, the Budget states that the government intends to table amendments to the Canada Labour Code before the end of 2023 to prohibit the use of replacement workers during a strike or lockout.

As many of the proposed initiatives still require government action, employers should continue to monitor the government’s legislative agenda as we move closer to the end of the calendar year.  

IV. Labour requirements for investment tax credits

A main focus of the Budget was investing in a clean economy. To this end, the Budget introduced several investment tax credits for clean energy. Further details in respect of the investment tax credits can be found in the Special Report prepared by Wolters Kluwer and Dentons’ Tax group here.

The government also announced its intention to attach wage and apprenticeship requirements (the Labour Requirements) to certain credits, namely, the Clean Technology Tax Credit, the Clean Hydrogen Investment Tax Credit, and the Clean Electricity Investment Tax Credit.

Generally, where a business fails to meet the Labour Requirements, the applicable tax credit rate will be reduced. Specifically:

• The 30% rate under the Clean Technology Investment Tax Credit will be reduced to 20%;
• The applicable rate under the Clean Hydrogen Investment Tax Credit will be reduced by 10%; and
• The 15% rate under the Clean Electricity Investment Tax Credit will be reduced to 5%.

During the phase-out periods for the Clean Technology and Clean Hydrogen investment Tax Credits, if a business does not meet the Labour Requirements, the applicable rate would be reduced by another 10%.

Prevailing wage requirement

The prevailing wage requirement provides that all workers whose duties correspond to those performed by a journey person in a Red Seal trade (Covered Workers) must be compensated at a level that meets or exceeds the relevant “prevailing wage.” The prevailing wage is based on an eligible collective bargaining agreement in the province in which the worker is employed.

Outside Quebec, an eligible collective agreement is:

• The most recent multi-employer collective bargaining agreement between a trade union and a group of employers who are accredited to bargain together and be bound by the same agreement that may reasonably be considered the industry standard for a given trade, in a region, province or territory; or
• A project labour agreement that covers the work associated with the investments eligible for the investment tax credits and is based on the industry standard multi-employer collective bargaining agreements for the region, province or territory in which the investment takes place.

In Quebec, eligible collective agreements are those negotiated in accordance with provincial law.

The prevailing wage requirement can be satisfied through a combination of wages, pension contributions, and benefits.

Apprenticeship requirement

The apprenticeship requirement is that at least 10% of the total labour hours performed by Covered Workers engaged in subsidized project elements must be performed by registered apprentices. However, at no point can there be more apprentices working than are allowed under applicable labour laws or a collective agreement.

Application

The Labour Requirements apply in respect of workers performing project elements that are subsidized by the respective investment tax credit. The Labour Requirements apply to workers performing physical labour and not to those whose duties are primarily administrative, clerical, supervisory, or executive.

The Labour Requirements will apply to work that is performed on or after October 1, 2023. The government is currently soliciting feedback from stakeholders as it prepares the draft legislative proposals.

The government also announced its intention to apply the Labour Requirements to the Investment Tax Credit for Carbon Capture, Utilization, and Storage. However, details will be announced at a later date.

Corrections and Penalties

If a business fails to satisfy the Labour Requirements, it may be able to pay corrective remuneration to workers and penalties to the Receiver General to be deemed to have satisfied the Labour Requirements. Further details about corrections and penalties are to be announced at a later date.

V. New rules for Employee Ownership Trusts

Employee Ownership Trusts (EOTs) are a form of employee ownership whereby a trust holds shares of a corporation for the benefit of the corporation’s employees. EOTs can allow employees to participate in decision-making and business profits, can be used to facilitate the purchase of a business by its employees, and can give owners an alternative succession planning option.

The new rules facilitate the use of EOTs to acquire and hold shares of a business by:

• Extending the capital gains reserve from five to ten years for sales of shares of a qualifying business to an EOT;
• Allowing EOTs to fund the purchase of a qualifying business using funds borrowed from the business itself and extending the repayment period for that loan from one to 15 years; and
• Exempting EOTs from the 21-year deemed disposition rules.

Requirements

The Budget provides that an eligible EOT is a trust that:

• Is a Canadian resident trust (excluding deemed Canadian resident trusts); and
• has only two purposes which are to (1) hold shares of a “qualifying business” for the benefit of its employees; and (2) make distributions from the EOT to “qualifying employees” pursuant to a distribution formula that takes into account the employee’s length of service, remuneration and hours worked. Distributions cannot be in the form of an allocation of shares of a qualifying business.

Additionally, an EOT must have a controlling interest in the shares of at least one “qualifying business” and all or substantially all of its assets must be shares of qualifying businesses.

A qualifying business is a corporation that:

• Is a Canadian-controlled private corporation and all or substantially all of the fair market value of its assets are used in an active business carried on primarily in Canada (other than through a partnership);
• Not more than 40% of its directors are individuals that, immediately prior to the trust acquiring control of the corporation, owned, directly or indirectly, 50% or more of the fair market value of the shares of the capital stock or indebtedness or the corporation; and
• Deals at arm’s length and is not affiliated with any person or partnership that owned 50% or more of the fair market value of the shares of the capital stock or indebtedness of the corporation immediately prior to the time the trust acquiring control of the corporation.

The trustees of an EOT must be Canadian residents and the beneficiaries must be “qualifying employees,” which includes all individuals employed by the qualified business and excludes employees who have significant economic interests in the business or have not completed a reasonable probationary period.

Application

The new rules for EOTs are to take effect for the 2024 tax year.

For more information about this topic, please reach out to the authors, Andy Pushalik and Caroline Harrell.