On April 19, 2021, the Honourable Chrystia Freeland tabled her first federal budget as Federal Minister of Finance. Previously, the federal government had predicted a deficit for 2020-21 of $381.6 billion, but this amount was revised down to $354.2 billion. Today’s budget predicts the deficit for 2021-22 will be $154.7 billion.
There were no changes made to personal or corporate tax rates generally. Some of the key tax changes announced on April 19 that take effect on varying dates, are summarized below. Please refer to the Department of Finance Canada’s budget documents for all details of the changes highlighted.
COVID-19 support and economic recovery measures
Subsidy programs extended and adjusted
A number of changes have been proposed for the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and Lockdown Support programs. These include:
- Extending the programs to September 25, 2021 (from June 6, 2021).
- Gradually phasing out the rates in the CEWS and CERS programs.
- Requiring employers to have a revenue decline of more than 10 per cent to qualify, beginning on July 4, 2021
- Continuing to make the CEWS available for eligible furloughed employees until August 28, 2021 adding a business acquisition rule to the CERS, similar to the CEWS rule.
Canada Recovery Hiring Program (CRHP) proposed
As an alternative to the CEWS and to encourage hiring, certain employers will be allowed to claim an amount under the proposed CRHP for six periods between June 6 and November 20, 2021. Key features of the program are:
- Eligible employers would include Canadian-controlled private corporations (CCPCs), individuals, non-profit organizations, registered charities and certain partnerships.
- The subsidy would apply to incremental remuneration increases at the rate of 50 per cent for the first three periods, declining for the final three periods to 40 per cent, 30 per cent and 20 per cent,
- Eligible weekly remuneration is limited to $1,129 per eligible employee.
- The CEWS revenue decline test would apply to determine qualification, along with other conditions.
Corporate and business tax changes
New immediate expensing deduction
A newly proposed rule would allow CCPCs to immediately expense certain capital expenditures, effective for property acquired on or after April 19, 2021 and put into use before January 1, 2024. The deduction is limited to $1.5 million per taxation year, and this limit must be shared by associated corporations. There is no carryforward of unused capital cost additions from one year to the next. The $1.5 million limit will be pro-rated for taxation years that straddle the Budget Date, and will be pro-rated for taxation years that are shorter than 365 days.
Certain types of property that are generally long-lived are excluded from this expensing rule. In particular, real property additions that are included under classes 1-6 will not benefit from this expensing rule.
Rate reduction for zero-emission technology manufacturers
Under this proposal, corporations will be able to apply reduced tax rates on eligible zero-emission technology manufacturing and processing income of 7.5 percent for corporations generally, and 4.5 per cent for corporations eligible for the small business deduction. The reduced rates would apply for taxation years that begin after 2021 and will be gradually phased out starting in 2029. The federal budget also confirmed that there would be no changes arising to the Income Tax Act’s dividend tax regime arising due to this Budgetary measure.
Capital Cost Allowance (CCA) for clean energy equipment
The CCA rules for Classes 43.1 and 43.2 will be broadened to include new types of expenditures, and the eligibility criteria will be adjusted.
Interest deductibility restrictions
For corporations, trusts, partnerships and branch operations, the federal budget proposes to restrict the deduction of interest expense to earnings before interest, taxes, depreciation and amortization (EBITDA) determined on a tax basis. The maximum deduction will be limited to 40 per cent of EBITDA for taxation years beginning on or after January 1, 2023 but before January 1, 2024, and to 30 per cent for later years. Exemptions apply for CCPCs/associated groups with taxable capital of less than $15 million, and for groups of corporations and trusts with an aggregate net interest expense of $250,000 or less.
Interest denied under these rules will be eligible to be carried forward for 20 taxation years, and will be eligible to be carried back for three taxation years, including a taxation year prior to the Budget Date. These rules will not have applicability to interest owing between Canadian members of a corporate group. The proposed measures also infer that Tax EBITDA may be computed on a consolidated basis. Finally, Canadian members of a group that have a ratio of net interest to Tax EBITDA below the fixed ratio would generally be able to transfer any unused capacity to other Canadian member of the group, in order to allow those Canadian members greater access to deduct interest than had it been computed on a stand-alone basis.
Hybrid Mismatch Arrangements (HMAs)
HMAs are cross-border tax avoidance structures that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries, in order to produce mismatches in income tax results. The Action 2 report of the OECD’s Base Erosion and Profit Shifting (“BEPS”) Action Plan recommended detailed rules which countries are to adopt in their domestic tax legislation, to ensure that multinational enterprises cannot derive tax benefits from the use of HMAs.
The federal budget proposes to implement rules consistent with the Action 2 recommendations, with appropriate adaptations to the Canadian income tax context. The first legislative package is expected to be released for stakeholder comment later in 2021, and those rules would apply as of July 1, 2022. The second legislative package is expected to be released for stakeholder comment after 2021, and those rules would apply no earlier than 2023.
In general terms, under the main proposed rules, payments made by Canadian residents under HMAs 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 income of a non-resident recipient. Conversely, to the extent that a payment made by a non-resident is deductible for foreign income tax purposes, no deduction in respect of the payment would be permitted against the income of a Canadian resident (i.e. no double dipping of the same deduction would be allowed for Canadian income tax purposes).
Transfer pricing consultation
The government announced plans to launch a consultation on transfer pricing with a view to protecting the integrity of Canada’s tax base while preserving Canada’s attractiveness for new investment and business activity.
Personal tax changes
Taxation of COVID-19 benefits
The federal budget proposes to allow individuals to claim COVID-19 benefit repayments as a deduction in either the year they received the benefit or the year they repaid it. Where a return has already been filed, the recipient can ask the Canada Revenue Agency (CRA) to adjust their return. This option would be available for benefit amounts repaid at any time before 2023.
In addition to the change described above for COVID-19 benefit repayments, additional proposed personal tax changes include:
- Changes to the requirements for the disability tax credit, which provides more clarity on certain aspects of the credit.
- Expanding the travel component of the Northern Residents Deductions.
- Adding postdoctoral fellowship income to earned income for purposes of Registered Retirement Savings Plans.
- Expanding the Canada Workers Benefit by increasing phase-out thresholds and phase-in rates, and by adding an exemption for secondary income earners.
GST/HST and other indirect tax changes
Application of GST to e-commerce
The federal government confirmed that proposals to apply the GST/HST to certain e-commerce transactions will go forward on July 1, 2021. Additional proposed changes were announced in the budget that respond to comments made by stakeholders.
Other significant proposed amendments include:
- A safe harbour rule to help protect e-platform operators that are acting in good faith or are provided with false or misleading information by a third party.
- An amendment clarifying that suppliers registered for the GST/HST under the simplified framework are eligible to deduct amounts for bad debts and certain provincial HST point-of-sale rebates.
- Zero-rated supplies will not be counted in determining the $30,000 threshold for registration.
- Where the affected businesses and platform operators can show that they have taken reasonable measures but are unable to meet their new obligations for operational reasons, the CRA will take a practical approach to compliance and exercise discretion in administering these measures for the first year.
Documenting input tax credits (ITCs)
Under the GST rules, information and documentation requirements apply for registrants that are eligible to claim input tax credits. The requirements increase on a graduated basis, based on a threshold of $30 or $150. The budget proposes to increase these thresholds to $100 and $500 respectively, effective April 20, 2021, and to allow billing agents to be treated as intermediaries for the purposes of these rules.
Digital services tax
The government reaffirmed its intention to implement a three per cent digital services tax for large businesses on January 1, 2022, which will apply until an acceptable multilateral approach comes into effect.
Tax on vacant residential properties
The government has announced its intention to implement an annual one per cent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused, effective January 1, 2022. The tax would require all owners, other than Canadian citizens or permanent residents of Canada, to file a declaration as to the property’s current use, with significant penalties for failure to file.
Tax on luxury goods
The budget proposes to introduce a luxury tax on certain items, effective on January 1, 2022. For vehicles and aircraft priced over $100,000, the tax would be the lesser of: (I) 10 per cent of the full value of the vehicle or the aircraft, and (ii) 20 per cent of the value above $100,000. For boats priced over $250,000, the tax would be the lesser of : (i) 10 per cent of the full value of the boat, and (ii) 20 per cent of the value above $250,000. Exemptions are available and more details will be announced.
Other indirect tax changes
The federal budget also proposes a number of other changes. These include:
- Adjusting the conditions for the GST New Housing Rebate.
- Increasing excise duties on tobacco.
- Implementing excise duties on vaping products.
- Amending the Customs Act to improve the collection of duties and taxes on imported goods.
Tax administration changes
The federal government announced several proposed initiatives related to anti avoidance. These include:
- Expanding existing mandatory disclosure rules and introducing new rules, including requirements to report notifiable transactions and uncertain tax treatments, subject to a consultation that closes on September 3, 2021
- Introducing anti-avoidance rules for plans that attempt to frustrate the CRA’s ability to collect tax debts, with effect as of April 20, 2021.
- Reviewing the general anti-avoidance rule, as the government had previously announced.
Other proposed tax administration changes
Other proposed changes to Canada’s tax administration in this federal budget include:
- Eliminating the requirement for handwritten signatures on certain forms.
- Allowing issuers of information returns, such as T4As and T5s, to issue income slips electronically without a paper form.
- Reducing the thresholds at which electronic filing for certain returns and forms is required.
- Requiring most corporations and GST registrants to file GST/HST returns electronically.
- Providing the CRA with more resources for a variety of initiatives, including combating aggressive tax planning, protecting taxpayers’ privacy and modernizing its services.
Learn more today
To learn more about how the upcoming federal budget may affect your business or family finances, reach out to our team today. We’re here to help you navigate as Canada recovers from COVID and moves into a sustainable future.