On April 19, 2021 (Budget Day), the Minister of Finance of Canada, the Hon. Chrystia Freeland, tabled the Federal Budget for 2021 (Budget 2021). Budget 2021 is the first budget in more than two years and provides for billions of dollars in new spending to finish the fight against COVID-19 and ensure a strong economic recovery.
Some of the key tax measures proposed by Budget 2021 include the introduction of the new Canada Recovery Hiring Program, new incentives to support clean emission activities and projects, new reporting requirements for certain aggressive transactions and new measures to fight base erosion and profit shifting (including the introduction of new interest deductibility limits and new rules targeting hybrid arrangements). Notably, Budget 2021 does not propose to increase corporate or personal tax rates, change the inclusion rate for capital gains or the rules governing the lifetime capital gains exemption or the principal residence exemption.
As the government is in a minority position in the House of Commons, there is no certainty that the proposed tax measures will be adopted as tabled.
A. Business tax proposals
Emergency Business Supports
Budget 2021 proposes to extend the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Rent Subsidy (CERS) until September 25, 2021, with a gradual decline in the subsidy rate starting on July 4, 2021, and proposes to implement the Canada Recovery Hiring Program (CRHP), a new program aimed at incentivizing new hiring or wage increases for current employees.
Regarding the CEWS and the CERS:
- the reference periods remain the same and generally refer back to the equivalent month in 2019 or January and February 2020;
- the CEWS and CERS are proposed to be extended for four more periods, ending September 25, 2021, with the possibility of extension by regulation until November 20, 2021;
- both the CEWS and CERS will be available on a declining basis, and for periods starting on or after July 4, 2021, will only be available to employers with a revenue decline of greater than 10%;
- support for furloughed employees under the CEWS will continue until August 28, 2021, and will align with benefits generally available under employment insurance;
- the current 25% rate for the Lockdown Support, which was introduced under the CERS program for locations that were forced to cease operations or significantly limit their activities under a public health order, will be extended for qualifying periods from June 6, 2021, to September 25, 2021; and
- publicly listed corporations will be subject to a claw-back under the CEWS for periods after June 5, 2021, if the aggregate compensation paid to their top executives (generally the chief executive officer, the chief financial officer and the three other most highly compensated executives) is higher in 2021 than it was in 2019.
The CRHP is proposed to provide eligible employers with a subsidy of up to 50% of the incremental remuneration paid to eligible employees between June 6, 2021, and November 20, 2021. Highlights of the CRHP include:
- An eligible employer will generally be an eligible entity as determined under the current CEWS rules; however, in the case of for-profit corporations, only Canadian-controlled private corporations (CCPCs) (or cooperatives that are eligible for the small business deduction) will be eligible for the CRHP and, in the case of partnerships, only partnerships where 50% or more of the fair market value of all of the interests in the partnership are held directly or indirectly by persons or partnerships who are eligible entities (other than corporations that are not Canadian-controlled private corporations, tax-exempt corporations or cooperatives that are not eligible for the small business deduction) will be eligible for the CRHP.
- Other eligible employers would include individuals, non-profit organizations and registered charities.
- An eligible employee will generally be an individual who is employed primarily in Canada throughout a qualifying period (or the portion of the qualifying period throughout which the individual was employed by the eligible employer).
- Incremental remuneration is the difference between an employee's current remuneration in a particular period and his or her base period remuneration (neither of which may exceed $1,129 per week per eligible employee). Base period remuneration is the employee's remuneration for a week during the period from March 14, 2021, to April 10, 2021.
- The CRHP will start out at 50% of an employee's incremental remuneration (subject to a maximum of $1,129 per week per eligible employee), gradually declining to 20% for the period from October 24, 2021, to November 20, 2021.
- The eligible employer would have to experience a sufficient revenue decline to qualify for the CEWS (i.e., greater than 0% for the period starting June 6, 2021, and greater than 10% for the periods starting on or after July 4, 2021).
- An eligible employer will be entitled to receive the greater of the CEWS or CRHP benefit that is applied for, but may not receive both.
Immediate Expensing by Canadian-Controlled Private Corporations
Under the capital cost allowance (CCA) system in the Income Tax Act (Canada) (the Tax Act), taxpayers are entitled to deduct a portion of the capital cost of depreciable property in computing their income. Depreciable property is generally divided into CCA classes and a CCA rate for each class of property is prescribed in the Income Tax Regulations where the CCA deduction is computed on a declining balance basis.
The amount of CCA that can be claimed in the first year that a depreciable property becomes available for use is generally limited to half the amount that could otherwise be deducted (generally referred to as the "half-year rule"). On November 21, 2018, the federal government announced a temporary enhanced first-year allowance, referred to as the Accelerated Investment Incentive, equal to up to three times the previously applicable first-year allowance and the ability to immediately expense investments in certain machinery and equipment used in manufacturing or processing as well as certain clean energy generation equipment.
Budget 2021 proposes to allow CCPCs to immediately expense the full cost of certain depreciable property (referred to as "eligible property") acquired on or after Budget Day and that becomes available for use before 2024, up to a maximum of $1,500,000 per taxation year (to be pro-rated for short taxation years and shared among associated CCPCs) and subject to certain restrictions. The immediate expense in respect of eligible property would be available in the taxation year that such property becomes available for use and no carry-forward will be permitted for CCPCs with less than $1,500,000 of eligible capital costs.
The category of "eligible property" that may benefit from immediate expensing is broad, and generally includes all depreciable capital property, other than certain "long-lived assets" such as buildings, pipelines and other physical infrastructure, as well as goodwill. Accordingly, this proposal will allow CCPCs to immediately expense the full costs of many tangible items acquired in the course of business, including tools, computers, vehicles, machinery and other equipment, up to the maximum of $1,500,000 per taxation year.
The costs of depreciable property that do not benefit from the immediate expense treatment under this proposal would continue to be subject to the existing CCA rules, including the accelerated investment incentives and full expensing of certain clean energy equipment previously announced in 2018.
This measure would apply for eligible property that is acquired on or after Budget Day and that becomes available for use before 2024.
Clean Technology Incentives
As part of a continued effort to encourage investment in clean technology, Budget 2021 proposes to:
- temporarily reduce corporate tax rates applicable to "eligible zero-emission technology manufacturing and processing income"; and
- expand availability of preferred CCA regime for clean energy equipment.
Reduced tax rates applicable to "eligible zero-emission technology manufacturing and processing income"
Budget 2021 proposes to temporarily reduce the federal corporate income tax rate applicable to "eligible zero-emission technology manufacturing and processing income" to 7.5% for income otherwise subject to the general federal rate of 15%, and 4.5% for income that would otherwise be subject to the federal small business rate of 9%.
These reduced rates are generally applicable only to income earned from certain zero-emission technology manufacturing and processing activities, such as the manufacturing of solar, hydro, wind and geothermal energy equipment, as well as the production of zero-emission vehicles and charging systems. Budget 2021 contains proposals as to how such eligible income is to be calculated and the government has invited feedback from stakeholders as to such calculations.
The reduced rates are proposed to be in effect for taxation years that begin after 2021 and before 2029, and would be gradually phased out between 2029 and 2031.
Expanded availability of preferred CCA regime for clean energy equipment
Certain incentives are available for clean energy equipment that is included in Class 43.1 and Class 43.2 for purposes of the CCA rules. In addition to ordinary depreciation rates of between 30% and 50%, property that is included in Class 43.1 and Class 43.2 is generally eligible for immediate expensing where it is acquired and becomes available for use before 2024. As Budget 2021 notes, certain expenses incurred in the development of a clean energy project that relies on equipment included in Class 43.1 and Class 43.2 can be treated as Canadian Renewable and Conservation Expense and deducted in full, or flowed through to shareholders under the flow-through share regime.
Budget 2021 proposes to expand the types of clean energy equipment that may be included in Class 43.1 and Class 43.2. Accordingly, certain clean and renewable energy equipment that was previously excluded, such as active solar and geothermal heating for pools, and hydrogen refueling equipment for vehicles, will generally be eligible for inclusion where it is acquired and becomes available for use on or after Budget Day.
Of note, Budget 2021 also proposes to remove certain equipment that relies on fossil fuels from Class 43.1 and Class 43.2, thereby denying the above-mentioned incentives for such equipment. Examples of such equipment include cogeneration systems and certain waste-fuelled systems that rely on fossil fuels for energy input. Such equipment will no longer qualify for Class 43.1 or Class 43.2 treatment where it becomes available for use after 2024.
Extension of the Timelines for Certain Film or Video Production Tax Credits
Budget 2021 proposes to temporarily extend certain timelines for the Canadian Film or Video Production Tax Credit (CPTC) and the Film or Video Production Services Tax Credit (PSTC) for productions for which eligible expenditures were incurred by taxpayers in their taxation years ending in 2020 or 2021.
With respect to the CPTC, Budget 2021 proposes to extend the following existing timelines by 12 months:
- The 24-month period to incur qualifying expenditures before the date that principal photography begins.
- The timeline to submit a certificate of completion to the Canadian Audio-Visual Certification Office within 24 months of the end of the taxation year in which principal photography began. The new 12-month extension would apply in addition to the existing 18-month extension already available.
- The requirement that there be a written agreement with a Canadian distributor or with a broadcaster licensed by the Canadian Radio-television and Telecommunications Commission to show the production in Canada within 24 months of its completion.
Regarding the PSTC, Budget 2021 proposes to extend by 12 months the 24-month timelines in respect of when aggregate expenditure thresholds must be met for film or video productions for the purposes of the PSTC.
For both the CPTC and the PSTC, taxpayers will be required to file a waiver with the Canada Revenue Agency (CRA) and the Canadian Audio-Visual Certification Office in order to extend the assessment limitation period in respect of the relevant years to take into account the 12-month extension.
Mandatory Disclosure Rules
Budget 2021 proposes consultations to enhance Canada’s disclosure rules for certain types of transactions, as recommended by the OECD Base Erosion and Profit Shifting (BEPS) Action 12 report.
Under the current provisions of the Tax Act, certain transactions entered into by, or on behalf of, a taxpayer are considered a "reportable transaction" if they are both an "avoidance transaction" and two out of three criteria (referred to in Budget 2021 as "generic hallmarks") apply to that transaction. Currently, an "avoidance transaction" generally means any transaction that would, directly or indirectly, result in a tax benefit unless it was undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
In general terms, the three criteria or generic hallmarks are:
- an advisor or promoter (or a person not dealing at arm’s length with the advisor or promoter) was entitled to a fee that was based on the amount of a tax benefit, contingent on obtaining a tax benefit, or attributable to the number of persons who participated in (or were provided access to advice or a tax opinion in respect of) the transaction;
- an advisor or promoter (or a person not dealing at arm’s length with the advisor or promoter) obtained "confidential protection" – i.e., anything that prohibits the disclosure to any person or to the CRA of the details of the structure or transactions that result in a tax benefit – in respect of the transaction; and
- a relevant participant in the transaction had "contractual protection" in respect of the transaction – i.e., certain types of insurance that protect against the transaction failing to achieve the desired tax benefit or that reimburse taxes, fees and other expenses in the course of a tax dispute, and any undertaking of a promoter to provide assistance of any kind during a tax dispute.
For purposes of these rules, any transaction that is part of a series of transactions that includes the avoidance transaction can also be a reportable transaction. A reportable transaction must be disclosed to the CRA by June 30 of the calendar year following the year in which the transaction first satisfied the above conditions.
Budget 2021 notes that the existing provisions of the Tax Act "result in only limited reporting by taxpayers." Therefore, to improve the effectiveness of these rules and to bring them more in line with the recommendations under the BEPS Action 12 report, Budget 2021 proposes to make the following changes to the existing reportable transaction rules in the Tax Act:
- only one of the three generic hallmarks would have to be satisfied for an avoidance transaction to become reportable;
- the definition of "avoidance transaction" for purposes of these rules would be broadened so that a transaction would be considered an avoidance transaction if it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit. Notably, the exception for transactions entered into or arranged for bona fide non-tax purposes would appear to no longer apply;
- reporting would be required within 45 days of the earlier of: (i) the day the taxpayer becomes contractually obligated to enter into the transaction (or a person who entered into the transaction for the benefit of the taxpayer becomes contractually obligated to enter into the transaction); and (ii) the day the taxpayer enters into the transaction (or a person who entered into the transaction for the benefit of the taxpayer enters into the transaction); and
- reporting would be required to be made by a promoter or advisor (as well as by persons who do not deal at arm’s length with the promoter or advisor and who are entitled to receive a fee with respect to the transaction) within the same time limits. However, an exception to the reporting requirement would apply for advisors to the extent that solicitor-client privilege applies.
Budget 2021 proposes to introduce a new, mandatory regime (modelled after those in the US, UK, EU and Australia) for reporting certain transactions of interest that have the potential for tax avoidance or tax evasion. Notifiable transactions would include transactions that the CRA has found to be abusive and transactions identified as transactions of interest. The description of a notifiable transaction would set out the fact patterns or outcomes that constitute that transaction in sufficient detail to enable taxpayers to comply with the rule. It would also include examples in appropriate circumstances.
Reporting would be required by taxpayers who enter into notifiable transactions (or a transaction or series of transactions that is substantially similar) within the same time periods described above for reportable transactions. Reporting would also be required of promoters and advisors, except if solicitor-client privilege applies.
Uncertain Tax Treatments
Budget 2021 notes, whereas US and Australian tax laws require reporting uncertain tax treatments (and the UK intends to implement its own law), there is no similar requirement under Canadian tax law. New rules are proposed in Budget 2021 that would bring Canada in line with those countries, and also with Canadian GAAP that currently requires all Canadian public companies, and those Canadian private companies that follow IFRS, to disclosure their uncertain tax positions on their consolidated financial statements.
The proposal to report uncertain tax treatments will apply to corporate taxpayers if each of the following conditions is met:
- the corporation (whether public or private, resident or non-resident) is required to file a Canadian return of income for the taxation year;
- the corporation has at least $50 million in assets at the end of the financial year that coincides with the taxation year (or the last financial year that ends before the end of the taxation year). This would be determined using the carrying value of the assets on the corporation’s balance sheet at the end of the financial year in accordance with GAAP, and for banks and insurance companies using values as are accepted by the applicable regulatory authority;
- the corporation, or a related corporation, has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies (e.g., US GAAP); and
- uncertainty in respect of the corporation’s Canadian income tax for the taxation year is reflected in those audited financial statements (i.e., the entity concluded it is not probable that the taxation authority will accept an uncertain tax treatment and thus, as described by the IFRS interpretations committee, it is probable that the entity will receive or pay amounts relating to the uncertain tax treatment).
For each reportable uncertain tax treatment, the corporation will be required to provide prescribed information, such as the quantum of taxes at issue, a concise description of the relevant facts, the tax treatment taken (including the relevant sections of the Tax Act) and whether the uncertainty relates to a permanent or temporary difference in tax. The uncertain tax treatments would be required to be reported at the same time that the reporting corporation’s Canadian income tax return is due.
These proposals do not indicate if they would apply to entities other than corporations (such as trusts and partnerships) which otherwise meet the above criteria.
Reassessment Period and Penalties
Budget 2021 proposes that if a taxpayer fails to provide one of the mandatory disclosures noted above, the normal reassessment period for the relevant taxation year will not apply, and accordingly, the year would not become statute barred. Further, Budget 2021 also proposes that significant penalties would apply to taxpayers and promoters for each failure to report.
Avoidance of Tax Debts
The Tax Act contains a tax debt anti-avoidance rule that is intended to prevent taxpayers from avoiding tax liabilities by transferring their assets to non-arm's length persons for less than fair market value consideration. In certain circumstances, the tax debt anti-avoidance rule will make the transferee jointly and severally liable with the transferor for the tax debts of the transferor, to the extent of the value of the property transferred in excess of the consideration paid. Budget 2021 indicates that some taxpayers have engaged in complex transactions to circumvent the application of the tax debt anti-avoidance rule.
Budget 2021 proposes to amend the Tax Act to prevent taxpayers from circumventing the tax debt anti-avoidance rule through the introduction of new rules focusing on three main areas of concern:
- inappropriate deferral of tax debts,
- avoidance of non-arm’s length status, and
Firstly, for the deferral of tax debts, in certain circumstances, Budget 2021 proposed to introduce an anti-avoidance rule under which the tax debt will be deemed to have arisen before the end of the taxation year in which a transfer of property occurs where it is reasonable to conclude that the (i) transferor (or a person that is non-arm’s length with the transferor) had knowledge or would have knowledge if they had made reasonable inquiries that there would be a tax amount owing by the transferor (or there would be a tax amount owing if not for additional tax planning done as part of the series of transactions that includes the transfer) that would arise after the end of the taxation year, and (ii) a purpose for the transfer of property was to avoid the payment of the future tax debt.
For the avoidance of non-arm’s length status, Budget 2021 proposes that the parties to a transfer of property will be deemed to have been non-arm’s length at that time if: (i) at any time within a series of transactions or events that includes the transfer, the parties do not deal at arm’s length and (ii) it is reasonable to conclude that one of the purposes of a transaction or event (or a series of transactions or events) was to cause the parties to the transaction to deal at arm’s length at the time of transfer.
In respect of valuations, Budget 2021 proposes to introduce a rule such that, for transfers of property that are part of a series of transactions, the overall result of the series would be considered. As such, the overall result would factor into the determination of the values of and consideration for the transferred property – and not, simply using the values at the time of the transfer.
Budget 2021 also proposes to introduce a penalty for planners and promoters of such tax debt avoidance arrangements that will be equal to the lesser of 50 per cent of the tax that is attempted to be avoided and $100,000 plus the promoter’s or planner’s compensation for the scheme.
These measures will apply to transfers of property that occur on or after Budget Day.
Expanding Audit Powers
Budget 2021 proposes to amend the Tax Act to clarify the audit and verification powers of CRA officials. Primarily, the proposed changes are aimed at requiring persons to respond to questions either orally or in writing, including in any form specified by the CRA official. Persons must continue to answer all proper questions, and to provide all reasonable assistance, for any purpose related to the administration or enforcement of the Tax Act. Irrespective of the federal government’s stance that this confirms previous powers, such amendments regarding demanding oral answers (and likely in-person meetings) are fresh CRA audit powers.
These measures would come into force upon royal assent.
B. International tax measures
Budget 2021 introduces two additional measures to further align Canada’s tax system with the objectives of the multinational BEPS project. Consistent with the BEPS Action Plan, Canada will adopt limits on interest deductibility and address "hybrid mismatch" arrangements.
Interest Deductibility Limits
Canada already imposes "thin capitalization" rules that limit the deductibility of interest when the ratio of debt owed to specified non-residents to equity exceeds 1.5:1. These rules have been strengthened considerably over the past 10 years, including with the adoption of the "back to back" loan rules. Nonetheless, Budget 2021 proposes to adopt a new earnings-stripping rule consistent with the BEPS Action 4 report, which will limit the amount of net interest expense that may be deducted to a fixed share of earnings. The budget materials state it is expected that standalone Canadian corporations and Canadian corporations that are members of a group with no non-resident members would in most cases not be affected by the earnings-stripping rule.
Under the proposed rule, the amount of net interest expense that a taxpayer may deduct in computing its taxable income is limited to no more than a fixed ratio of "tax EBITDA." The tax EBITDA, is the corporation’s taxable income before interest expense, interest income and income tax, and deductions for depreciation and amortization. Each of these terms will be defined for purposes of the Tax Act, but in general:
- Tax EBITDA will exclude dividends to the extent they qualify for the intercorporate dividend deduction under subsection 112(1) or are deductible dividends received from foreign affiliates.
- Interest expense and interest income will include payments that are economically equivalent to interest, and other financing-related expenses and income.
- Interest expense will exclude non-deductible interest, including interest that is not deductible under the thin capitalization rules (which will continue to apply).
- Interest expense and interest income related to debts between Canadian members of a corporate group will be excluded from the computation of tax EBITDA. This rule is intended to ensure that the earnings-stripping rule does not impact domestic loss consolidation transactions.
The new earnings-stripping rule will apply to corporations, trusts, partnerships and Canadian branches of non-resident taxpayers.
CCPCs that, together with associated corporations, have taxable capital employed in Canada of less than $15 million will be excluded from the earnings-stripping provisions. Also excluded will be groups of corporations and trusts whose aggregate net interest expense among Canadian members is $250,000 or less.
The proposals address these additional further issues:
- Carry Forward and Carry Back: interest denied under the earnings-stripping rule may be carried forward 20 years and back three years. In certain circumstances, the carry back will be permitted to periods prior to the introduction of the earnings stripping rule.
- Group Members: Canadian members of a group that have ratio of net interest to tax EBITDA below the fixed ratio may be able to transfer the unused capacity to other group members to permit them to deduct additional interest.
- Group Ratio Rule: Under the group ratio rule, a taxpayer may deduct interest in excess of the fixed ratio where it is demonstrated that the ratio of net third party interest to book EBITDA of its consolidated group implies that a higher deduction limit would be appropriate.
- Banks and Financial Institutions: Special rules will apply to banks and other financial institutions, to restrict their ability to transfer unused deduction capacity to group members that are not regulated banking or insurance entities.
The ratio of net interest to tax EBITDA will be set at 40% for taxation years beginning on or after January 1, 2023, but before January 1, 2024, and will be 30% for all subsequent years. Special rules will apply to determine the ratio applicable where non-deductible interest is carried back to a prior year.
This measure is proposed to apply to taxation years that begin on or after January 1, 2023, and an anti-avoidance measure has been proposed (which has not been set out) to prevent taxpayers from deferring the application of the rule, or of the 30% ratio. In addition, this measure will apply to existing borrowings, not just those incurred after January 1, 2023. Budget 2021 indicated that draft legislation will be released for comment in the summer of 2021.
Hybrid Mismatch Arrangements
Hybrid mismatch arrangements are cross-border tax structures that take advantage of differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce mismatches in tax results. The BEPS Action 2 report detailed rules for adoption in domestic legislation to deny tax benefits from the use of hybrid mismatch arrangements in a coordinated international manner. While the Department of Finance Canada concluded that there are existing Canadian income tax rules that the government can use to challenge certain hybrid arrangements, specific legislative measures would provide certainty and the benefits of a common international approach as proposed by the Action 2 report.
In general terms and consistent with the rules in the Action 2 report, Budget 2021 proposes that payments made by Canadian residents under hybrid mismatch arrangements would not be deductible for Canadian income tax purposes to the extent that they give rise to a further deduction in another country or are not included in the ordinary income of a non-resident recipient. In addition, to the extent that a payment made under such an arrangement by an entity that is not resident in Canada is deductible for foreign income tax purposes, Budget 2021 proposes that no deduction for the payment would be permitted against the income of a Canadian resident. Any amount of the payment received by a Canadian resident would also be included in income for Canadian tax purposes, and, if the payment is a dividend, it would not be eligible for the deduction otherwise available for certain dividends received from foreign affiliates.
The proposed rules to address hybrid mismatch arrangements are suggested to be implemented in two separate legislative packages. The first package, intended to be released for consultation later in 2021 would have application as of July 1, 2022, and would comprise rules to neutralize certain deduction/non-inclusion mismatches. The second legislative package would be released for stakeholder comment after 2021, with application no earlier than 2023. The second package would comprise rules consistent with the balance of Action 2 recommendations that were not addressed in the first package.
C. Personal tax measures
Budget 2021 included a number of relatively minor personal tax proposals, including the following:
Disability Tax Credit
Budget 2021 proposes to expand access to the disability tax credit (DTC) by broadening the definition of "mental functions necessary for everyday life" and expanding the inclusion of time spent on certain activities in determining the average weekly time spent receiving extensive life-sustaining therapy to better recognize certain aspects of therapy that may be excluded under the current rules.
This measure would apply to the 2021 and subsequent taxation years, in respect of DTC certificates filed with the CRA on or after the enacting legislation receives royal assent.
Canada Workers Benefit
The Canada Workers Benefit (CWB) provides a non-taxable, refundable tax credit to low- and modest-income workers based on the amount of "working income" earned by the eligible individual up to a particular threshold, at which point the benefit phases out at a specified rate in proportion to the "working income" earned above the phase-out threshold.
The phase-out threshold differs if the eligible individual also has an eligible spouse or an eligible dependant. Budget 2021 proposes to increase (i) the rate at which the benefit accrues, (ii) the phase-out threshold and (iii) phase-out rate, collectively resulting in expanded entitlement to the CWB. Corresponding changes are also proposed to the additional supplement that may be received by an eligible individual who is also eligible to receive the DTC. Budget 2021 also proposes to introduce a "secondary earner exemption" that would allow an eligible individual with an eligible spouse to exclude up to $14,000 of the secondary earner's income from the adjusted household net income for the purpose of determining whether the phase-out threshold has been met or exceeded.
This measure would apply to the 2021 and subsequent taxation years.
Northern Residents Deduction
Budget 2021 announced the intention to introduce the choice for a taxpayer to claim as a deduction, for each of the taxpayer and each "eligible family member" of the taxpayer, a new standard amount in respect of a given trip made for non-medical personal reasons, subject to the general limitations of the Northern Residents Deduction.
This measure would apply to the 2021 and subsequent taxation years.
Postdoctoral Fellowship Income
Budget 2021 announced that postdoctoral fellowship income received in the 2021 and subsequent taxation years will qualify as “earned income” for the purpose of determining an individual’s contribution limit for an RRSP, and taxpayers may request an adjustment to their RRSP contribution room for such income received in the 2011 to 2020 taxation years in writing to the CRA.
This measure would apply to postdoctoral fellowship income received in the 2021 and subsequent taxation years. This measure would also apply to postdoctoral fellowship income received in the 2011 to 2020 taxation years where the taxpayer submits a request to the CRA for an adjustment to their RRSP room for the relevant years.
Tax Treatment of COVID-19 Benefit Amounts
Budget 2021 proposes to amend the Tax Act to allow individuals the option to claim a deduction in respect of the repayment of a COVID-19 benefit amount in computing their income for the year in which the benefit amount was received rather than the year in which the repayment was made and to include COVID-19 benefit amounts in the taxable income of those individuals who reside in Canada but are considered non-resident persons for income tax purposes.
Fixing Contribution Errors in Defined Contribution Pension Plans
Budget 2021 announced that contribution errors in a defined contribution pension plan can be corrected through the filing, by the plan administrator, of a prescribed form for each affected employee rather than through a T4 amendment, for any of the preceding five years. Additional contributions made to correct an error would reduce the employee's RRSP contribution room for the taxation year following the year in which the retroactive contribution is made. Where the correction results in negative RRSP room, it will affect the employee's contributions in future years. Refunds of over-contributions will restore the employee's RRSP contribution room for the taxation year in which the refund is made.
This measure would apply to additional contributions made, and amounts of over-contributions refunded, in the 2021 and subsequent taxation years.
Taxes Applicable to Registered Investments
Budget 2021 proposes certain changes to Part X.2 tax imposed where a registered investment for a registered plan is in contravention of investment restrictions that require certain registered investments to only hold qualified investments for its type of registered plan. Specifically, Budget 2021 proposes that the Part X.2 tax be calculated on a pro-rata basis on the proportion of shares or units of the registered investment that are held by investors that are subject to the qualified investment rules, rather than the entire fair market value of the non-qualified investments held.
This measure will apply to taxes imposed under Part X.2 of the Tax Act for months subsequent to 2020. The measure will also apply to months before 2021 where the CRA has not finally determined the tax liability under Part X.2 of a taxpayer.
D. Excise Tax and GST/HST Measures
Amendments to the GST/HST E-Commerce Proposals
In the Fall Economic Statement 2020, the government proposed that:
- non-resident vendors supplying digital products or services be required to register for and collect and remit the goods and services tax/harmonized sales tax (GST/HST) on their taxable supplies to Canadian consumers;
- distribution platform operators also be required to register for and collect and remit the GST/HST on the supplies to Canadian consumers that they facilitate;
- non-resident vendors be required to register for and collect and remit GST/HST for sales of goods shipped from a fulfillment warehouse or another place in Canada (as well as distribution platform operators when sales are made by non-registered vendors through their platforms); and
- GST/HST be applied on all supplies of short-term accommodation in Canada facilitated through a digital accommodation platform (collectively the E-Commerce Proposals, which would come into force on July 1, 2021).
Budget 2021 proposes to introduce the following amendments to the E-Commerce Proposals:
- Liability and Safe Harbour Rules. Joint and several (or solidary) liability of the platform operator and the third-party supplier where the third-party supplier provides false information to the platform operator, and a safe harbour provision to limit the liability of the platform operator if it relied in good faith on the information provided by a third-party supplier.
- Eligible Deductions. Suppliers registered for the GST/HST simplified framework would be eligible to deduct amounts for bad debts and certain provincial HST point-of-sale rebates to purchasers from the tax that they are required to remit, and public libraries and similar institutions would be eligible to claim a rebate for the GST paid on audio books acquired from those suppliers.
- Threshold Amount Determination. Supplies of digital products or services that are GST/HST free would not be included in calculating the threshold amount for determining if a person is required to be registered for the GST/HST under the simplified framework.
- Compliance of Short-Term Accommodation Platform Operator. Annual information returns would only be required for platform operators that are registered (or required to be registered) for the GST/HST.
- CRA’s Authority to Register a Person. The CRA would have the authority to register a person that it believes should be registered under the simplified framework.
These new measures would come into force on July 1, 2021, with a 12 month transition period during which CRA would take a practical approach to compliance and exercise discretion in administering these measures.
Information Requirements for Input Tax Credits
Currently under the Excise Tax Act (Canada) (the ETA), businesses must obtain and retain certain prescribed information to support their input tax credit (ITC) claims depending on the amount paid for a supply. Budget 2021 proposes to increase the current ITC information thresholds to $100 (from $30) and $500 (from $150), as applicable, and to allow billing agents to be treated as intermediaries for purposes of the ITC information rules. These measures would come into force after Budget Day.
GST New Housing Rebate Conditions
Budget 2021 proposes to allow the rebate where a new home is acquired for use as the primary place of residence of any one of the purchasers (or of a related person), rather than only where all the purchasers so use the new home, generally with respect to a supply made under an agreement entered on or after Budget Day.
Tax on Select Luxury Cars, Aircraft and Boats
Budget 2021 proposes to introduce a new retail sales tax on new luxury cars and personal aircraft priced over $100,000, and boats priced over $250,000, purchased in or imported to Canada on or after January 1, 2022. The tax rate would be equal to the lesser of 10% of the full value of the luxury good or 20% of the value above the applicable threshold. The tax would be imposed at the final point of purchase (or at the time of importation if no further sale in Canada), and the GST/HST would apply to the final sale price, including of the proposed tax.
- Luxury vehicles would include all passenger vehicles, SUVs, pick-up trucks and minivans designed for fewer than 10 passengers, but would exclude motorcycles, certain off-road vehicles (such as ATVs and snowmobiles) and racing cars, motor homes (RVs), and off-road, construction, farm and certain commercial vehicles.
- All new aircraft would be subject to tax (including aeroplanes, helicopters and gliders), other than certain large commercial aircraft and aircraft used in public transportation.
- The tax would apply to new boats (such as yachts, recreational motorboats and sailboats) typically suitable for personal use, excluding watercraft (e.g., water scooters), floating homes, and commercial and cruise ships.
Excise Tax Measures
Budget 2021 contains the following proposals for excise tax:
- Rebate of Excise Tax for Goods Purchased by Provinces. Proposals effective as of 2022 to clarify that only the province would be entitled to claim the rebate, unless it jointly elects with the vendor that the vendor alone would be eligible to the rebate.
- Excise Duty on Tobacco. Proposals to increase tobacco excise duty rates as of Budget Day.
- Excise Duty on Vaping Products. Proposals to implement in 2022 a new excise duty, as well as an excise stamp mechanism and licensing, registration and reporting requirements, for vaping liquids that are produced in Canada or imported and are intended for use in a vaping device in Canada. The new duty framework would be similar to the one existing for tobacco, wine, spirits, and cannabis products, and the government invites input from industry and stakeholders on these proposals.
Customs Duty and Tax Collection on Imported Goods
Budget 2021 proposes amendments to the Customs Act (Canada) to improve the collection of duties and taxes on imported goods by (i) ensuring that all importers value their goods using the value of the last sale for export to a purchaser in Canada and (ii) supporting a broad modernization of payment processes for commercial importers.
E. Additional proposals and previously announced measures
National Vacancy Tax on Foreign-Owned Canadian Housing
Budget 2021 announced the federal government’s intention to impose a tax on persons who are not Canadian citizens or permanent residents and who own residential property in Canada that is vacant or underused.
The proposed tax would be applied at an annual rate of 1% of the value of such vacant or underused housing and would be effective as of January 1, 2022.
All foreign owners of residential property in Canada would be required to file annual declarations (beginning in 2023) regarding the use of their residential property for the prior year, regardless of whether a property is subject to tax in the year. It is proposed that the failure to file a declaration for a property could result in penalties, interest and the loss of any otherwise available exemptions from the tax, in addition to causing the limitation period for assessment to be unlimited.
No specific legislation to enact this tax has yet been released. Rather, Budget 2021 announced that the federal government intends to release a backgrounder to stakeholders with an invitation to comment on other aspects of the proposed tax in the coming months. Some of the issues on which the federal government will be seeking consultation include how residential property should be defined, how value should be determined, how the tax should be applied in situations involving multiple owners, corporations and trusts, as well as what exemptions should be permitted. In addition, Budget 2021 indicates that this consultation will also involve considering whether the tax should be applied to smaller communities and to resort and tourism areas and, if so, when and how the tax should be applied to such locales.
In the 2020 Fall Economic Statement, the federal government announced that, in the absence of a multilateral approach among OECD member countries on cross-border taxation, Canada would move ahead to implement a tax on corporations providing digital services.
Without introducing enacting legislation, Budget 2021 proposes to implement a digital services tax at a rate of 3 percent on revenue from digital services that rely on data and content contributions from Canadian users. Budget 2021 proposes that the digital services tax would apply to large businesses with gross revenue of 750 million euros or more and would come into effect as of January 1, 2022, and will apply until an acceptable multilateral approach comes into effect.
Registration and Revocation Rules Applicable to Charities
Budget 2021 includes mechanisms to revoke a charity’s registration or suspend issuing official donation receipts in relation to terrorist funding purposes or false statements made by registered charities. The measures will apply on royal assent and include:
- the introduction of a mechanism for the Minister of National Revenue to immediately revoke a charity’s registration upon being listed as a terrorist entity under the Criminal Code, removing a series of steps previously required to do so;
- the expansion of the definition of an “ineligible individual” in the context of revoking a charity’s registration, or suspending its ability to issue official donation receipts; and
- giving the Minister of National Revenue the power to suspend the ability of a registered charity to issue official donation receipts for one year or to revoke its registration where the charity makes a false statement amounting to culpable conduct for the purpose of maintaining its registration.
Electronic Filing and Certification of Tax and Information Returns
Budget 2021 also introduces a number of measures to improve the CRA’s ability to operate digitally, including the following measures to be effective after receiving royal assent of the enacting legislation:
- the CRA may send certain notice of assessments digitally without taxpayer’s authorization to do so for individuals who file, or who use tax preparers to file, their income tax returns electronically;
- the default method of correspondence for businesses that use the CRA’s My Business Account portal will change to electronic only for the Tax Act, the ETA, the Air Travellers Security Charge Act and Part 1 of the Greenhouse Gas Pollution Pricing Act;
- issuers of T4A and T5 information returns will be allowed to provide returns electronically without having to also issue a paper copy and without the taxpayer’s authorization; and
- after 2021 for the Tax Act and in respect of reporting periods that begin after 2021 for the ETA, corporations or GST/HST registrants must file returns electronically under those acts.
In addition, Budget 2021 included additional measures relating to the electronic filing of tax and information returns, remittance of tax and the certification of tax and information returns.
Previously Announced Measures
Budget 2021 also confirmed the government’s intentions for previously announced tax measures, as modified to take into account consultations and deliberations since their release, including:
- previously announced changes to the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy and the Lockdown Support;
- extending the timelines in respect of flow-through shares by 12 months;
- CCA claims for purchases of zero-emission automotive equipment and vehicles;
- the measures announced on November 30, 2020, relating to the Canadian tax treatment of employee stock options to limit the availability of the stock option deduction;
- the legislative proposals released on July 30, 2019, to implement certain income tax measures from Budget 2019;
- faster tax depreciation of certain investments via the accelerated investment incentive and immediate write-off for certain manufacturing and clean energy equipment, as announced in the 2018 Fall Economic Statement;
- enhanced tax reporting requirements for certain trusts; and
- outstanding legislative proposals relating to the GST/HST, including those relating to taxation of the digital economy outlined above.