The federal government has pledged to remedy a recently emerging impediment to claiming investment tax credits. A planned amendment to the Income Tax Act, announced in the newly released fall economic statement, responds to court decisions concerning the tax treatment of interest-free or low-interest loans from public authorities.

Since 2021, both the federal Tax Court and Court of Appeal have ruled that such loans should be considered “government assistance” and thus subtracted from allowable deductibles for the purpose of tax credits. Earlier this year, the Supreme Court of Canada refused to hear a further appeal on the matter, leaving the government to address it through legislation.

“Historically, non-forgivable loans from public authorities were generally not considered government assistance. This position extended to concessional loans (meaning loans that do not bear interest or that bear interest at below-market rates) from public authorities,” the economic statement advises.

The recent court rulings give Canada Revenue Agency leeway to apply a different interpretation to a wide range of concessional loans that federal, provincial/territorial and municipal governments offer, which are typically aligned with incentive programs to spur investments deemed to be in the social good. In the precedent-setting case, for example, the entire principal of a concessional loan was subtracted from a company’s deductible expenditures for tax credits under the federal scientific development and experimental development (SR&ED) program.

In an advisory bulletin released this summer, Steve Suarez, a business tax lawyer with Borden Ladner Gervais LLP, underscores the broad implications — particularly since many of the public entities offering concessional loans could be unaware of these tax repercussions — and potential to undermine the intentions of programs like the clean technology investment tax credit.

“It is virtually unimaginable that Parliament intended the results of the interaction of these incentive programs and the Income Tax Act to be this,” Suarez hypothesizes. “It does not appear that the tax policy around government incentives is being fully considered and effectively coordinated with the myriad of economic and social policy programs that different branches of government (including quasi-government agencies under government supervision) are administering.”

The fall economic statement confirms a proposed amendment to the Act will clarify “that bona fide concessional loans with reasonable repayment terms from public authorities will generally not be considered government assistance.” Once adopted, it will retroactive to November 21, 2023.