Purpose statements included in some recent ITA amendments

New clean economy credits introduce purpose statements to the Income Tax Act

May 13, 2024
Business tax

Executive summary

Purpose statements can assist the practitioners and the court in interpreting legislative provisions. Though they have appeared in international instruments Canada is a party to, recently proposed legislation for clean economy tax credits introduces the first purpose statements into the Income Tax Act (ITA).

This content was first published by the Canadian Tax Foundation in (2024) 14:2 Canadian Tax Focus / Focus sur la fiscalité canadienne. Republished with permission.

In a major departure from the previous drafting style for the ITA, a statement of legislative purpose has been included in each of the four new clean economy tax credits announced between 2021 and 2023 for which legislation has been introduced. Legislative preambles and purpose statements were discussed in the government’s 2022 consultation paper on GAAR (Modernizing and Strengthening the General Anti-Avoidance Rule, at 17-18). The consultation paper also suggested that purpose statements could be introduced to existing sections when these sections are substantially amended or as part of a specific project to introduce purpose statements where appropriate. Nevertheless, the government’s commitment to this new drafting style is still in question, since purpose statements have not yet been included in two new legislative initiatives: the hybrid mismatch arrangements regime and the excessive interest and financing expenses limitation (EIFEL) regime. However, this may be explained by the fact that the initial draft legislation for those packages was released before the consultation paper and the initial draft legislation for the clean economy credits.

A GAAR analysis identifies a provision’s object, spirit, and purpose. This is ascertained from the provision’s text, the relationship between provisions alleged to have been abused, the scheme in which the provision operates, its legislative history, and extrinsic evidence (Deans Knight Income Corp. v. Canada, 2023 SCC 16). A purpose statement should simplify this analysis and provide greater certainty to taxpayers and practitioners, especially for provisions that have not yet been considered by a court. The purpose statements may be used in traditional statutory interpretation as well, where the particular interpretive question at hand involves a consideration of purpose.

At least one court has agreed with the interpretive value of purpose statements: a judicial review decision (Oceanex Inc. v. Canada (Transport), 2018 FC 250) concerning the Canada Transportation Act discussed in obiter how purpose statements could be used as an interpretive aid and to limit discretion. The consultation paper notes that Australia’s tax legislation has long included purpose statements; however, the historical practice around the world seems to have been to avoid such statements because of the disparate and competing goals of tax law.

Finance has acknowledged that it faces a balancing act in determining to what level—section, subsection, paragraph, etc.—purpose statements will apply. Purpose statements applicable to sections may be too general to provide substantive interpretive value. Conversely, there may be diminishing returns and additional complexity and confusion in adding purpose statements applicable to lower hierarchical levels. The government will also need to ensure that more specific purpose statements do not unintentionally restrict the application of provisions.

Purpose statements appear in Canadian tax law outside the ITA. For example, article 6 of the multilateral instrument states that the purpose of covered tax agreements is to eliminate double taxation without creating opportunities for tax evasion or avoidance. Also, many Canadian tax treaties may be considered to include purpose statements, in that they frequently begin with a statement of the parties’ intentions. However, in Canada v. Alta Energy Luxembourg SARL (2021 SCC 49), the SCC found the relevant treaty’s statement of intentions to be a broader policy objective of the treaty and thus not usable in determining the object, spirit, and purpose of a specific treaty provision for the purposes of the GAAR abuse analysis.

Although purpose statements have not previously appeared in the ITA itself, they have sometimes appeared in the explanatory notes and are common in budget documents. For decades, this has been a way for Finance to influence a provision’s interpretation without going as far as incorporating the purpose statement into the legislation. The courts have looked at such materials as part of understanding the mischief that a particular amendment sought to correct.

The clean technology, clean hydrogen, and clean technology manufacturing credits are each introduced via a new ITA section, with the purpose statement included as a subsection near or at the end of the section to which it applies (see proposed subsections 127.45(19), 127.48(31), and 127.49(19)). For example, proposed subsection 127.45(19) reads: “The purpose of this section is to encourage the investment of capital in the adoption and operation of clean technology property in Canada.” The associated explanatory notes generally identify the purpose statement as an interpretive provision.

The carbon capture, use, and storage credit follows a similar structure, but also introduces new part XII.7. Its proposed purpose statement in subsection 127.44(15) applies to both the section and the part.

The clean economy tax credits offer a good starting place for introducing these statements because the purpose for each of these sections is self-evident, and the provisions are sufficiently self-contained that the interpretation of other sections is unlikely to be affected. They may also provide a political benefit for the government, because purpose statements reinforce its broader goal of tackling climate change.

RSM contributors

  • Cassandra Knapman

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