As we move into 2023, there are a few key tax changes that startups need to be aware of. In this article, we will outline the most important changes and provide tips on preparing for them. One of the biggest changes this year is the introduction of carbon taxes in several provinces. This new measure is intended to help reduce greenhouse gas emissions and fight climate change. There are also several other climate-related tax changes that businesses should be aware of, including enhanced capital cost allowance for electric vehicles and a new Scientific Research and Experimental Development (SRED) credit for clean technology projects.
1. Carbon Tax Increased
Every Canadian province has had a carbon tax since 2019. The carbon tax is paid on the purchase or use of fuel sources such as gasoline, natural gas, propane, and coal. The carbon tax also encourages businesses to invest in cleaner technologies and reduce their overall emissions. The carbon tax rate started at $20/ton in 2019, but on April 1, 2022, it was increased to $50/ton.
It’s important to note the carbon tax is revenue neutral, meaning the government does not profit from the tax. The revenue generated is used to fund climate change initiatives and offset other taxes, such as income tax. Businesses can pass on the cost of the carbon tax to their customers through higher prices. However, many businesses choose to absorb the cost themselves in order to remain competitive.
If your business is located in a province with a carbon tax, you need to ensure that you are prepared for the increase. This includes calculating the impact of the tax on your business operations and making any necessary changes to your budget. You should also consider whether there are any opportunities for your business to reduce its emissions and take advantage of the Carbon Capture and Storage (CCS) credit or Enhanced Capital Cost Allowance (ECCA) for electric vehicles.
2. Exploring SRED Tax Credits To Secure Non-Dilutive Funding
The SRED tax credit is an important source of non-dilutive funding for startups. Non-dilutive funding is money that does not need to be repaid and does not result in equity dilution. This makes it an attractive option for startups that are looking to finance their R&D without giving up equity in their company.
For every $1 spend on research and development, a company can receive a tax credit of up to 35%. The SRED tax credit is refundable, which means that it can be used to offset taxes owed or received as a cash payment from the government. The amount of the tax credit is based on the size of the company and the type of research being conducted. For some companies, research and development to improve operations and develop new products and services that minimize the impact of climate change may benefit from SRED.
To claim the SRED tax credit, companies need to submit a technical report outlining their R&D project. This report must be approved by an independent third party. The SRED tax credit is available for both small and large businesses, but there are different eligibility requirements for each category. Startups should consult with a qualified accountant or lawyer to determine if they are eligible for the SRED tax credit.
3. Enhanced Capital Cost Allowance for Electric Vehicles
Electric vehicles are becoming increasingly popular due to their environmental benefits and lower operating costs. The Canadian government has introduced a new capital cost allowance (CCA) for electric vehicles (EVs) to encourage businesses to switch to electric vehicles. This allows businesses to write off a larger portion of the purchase price of an electric vehicle in the year it is acquired.
It currently allows 100% CCA to be taken on EV vehicles at a max cost of $55,000. In order to be eligible for the first-year CCA rate of 100 pecent provided by Classes 54 and 55, an EV must have four wheels, a maximum speed on land of at least 70 km/h, and be acquired after March 18, 2019. The vehicle must also be used mainly in Canada to transport people or property on public roads for business purposes.
If you are thinking about purchasing an electric vehicle for your business, it’s important to consider the enhanced CCA rate. This can have a significant impact on the overall cost of ownership and make EVs more affordable for businesses.
4. Climate Change Tax Credit for Clean Startups
In order to incentivize businesses to switch over to clean technologies, the Canadian government is set to introduce refundable tax credits worth up to 30% of investment costs. These credits will be available for a wide range of clean technologies, including electric vehicles, solar panels, and wind turbines. The tax credit will be available for both small and large businesses.
The government is still working on finalizing the details of this tax credit, which is expected to be introduced by the end of 2023. If you are thinking about investing in clean technology for your business, it’s important to keep this tax credit in mind. It could have a significant impact on the overall cost of your investment and make it more affordable to switch to clean technologies.
Keep an eye out for more information on this tax credit as it becomes available. In the meantime, start planning your transition to clean technology so that you can take advantage of this tax credit as soon as it is introduced.
The Bottom Line
There are several tax changes that startups need to be aware of in 2023. These include climate-related changes, such as the new EV CCA, and changes to how losses are treated for tax purposes. If your business plans to undertake any new initiatives in the coming year, make sure you are familiar with the relevant tax changes. This will help you maximize your tax benefits and minimize your tax liability.
A pending investment for the Tax Credit for Carbon Capture, Utilization, and Storage was included in the 2021 budget and is a strong indication that climate change and related tax incentives will continue to be a priority for the Canadian government.
For more detailed information and advice, schedule a Free Consultation. We would be happy to help you navigate these changes and ensure that you are taking advantage of all the available tax breaks.