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2021 Federal Budget analysis

In brief 

On April 19, 2021, the Deputy Prime Minister and Minister of Finance, Chrystia Freeland, presented the government’s budget. The budget:

  • extends existing COVID-19 emergency business supports to September 25, 2021 and introduces the Canada Recovery Hiring Program 

  • provides immediate expensing of up to $1.5 million per taxation year of capital property acquisitions to Canadian-controlled private corporations (CCPCs)

  • enhances Canada’s mandatory reportable transaction disclosure rules, subject to public consultation

  • provides further details of a proposed digital services tax, to be effective January 1, 2022

  • reduces corporate tax rates on eligible zero-emission technology manufacturing and processing income

  • limits the deductibility of interest by corporations, trusts and partnerships to a percentage of tax-basis EBITDA 

  • enhances the Canada Workers Benefit

  • amends and clarifies proposals on the application of Goods and services tax/Harmonized sales tax (GST/HST) to e-commerce

  • proposes a new tax on the unproductive use of Canadian housing by foreign non-resident owners    

This Tax Insights discusses these and other tax initiatives proposed in the budget.

In detail 

Business tax measures

Emergency Business Supports 

The budget proposes to extend the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Rent Subsidy (CERS) and the Lockdown Support programs from June 5, 2021 to September 25, 2021. The subsidy rates will gradually decline over the July-to-September period.

The budget also proposes to provide the government with the legislative authority to add additional qualifying periods for the wage subsidy, the rent subsidy and the Lockdown Support until November 20, 2021, should the economic and public health situation warrant it.

Canada Emergency Wage Subsidy 

The maximum combined wage subsidy and top-up subsidy for active employees is currently set at 75% through the qualifying period ending on June 5, 2021. The maximum subsidy rate of 75% will be extended to period 17 (June 6 to July 3, 2021) and then gradually decrease to:

  • 60% for period 18 (July 4 to July 31, 2021)

  • 40% for period 19 (August 1 to August 28, 2021)

  • 20% for period 20 (August 29 to September 25, 2021)

In addition, only employers with a decline in revenues of more than 10% will be eligible for the wage subsidy as of July 4, 2021. 

The budget also proposes to require a publicly listed corporation to repay wage subsidy amounts received for a qualifying period that begins after June 5, 2021, in the event that its aggregate compensation for specified executives during the 2021 calendar year exceeds its aggregate compensation for specified executives during the 2019 calendar year. The amount of the wage subsidy required to be repaid would be equal to the lesser of:

  • the total of all wage subsidy amounts received in respect of active employees for qualifying periods that begin after June 5, 2021, and

  • the amount by which the corporation's aggregate specified executives' compensation for 2021 exceeds its aggregate specified executives' compensation for 2019

This requirement to repay would be applied at the group level and would apply to wage subsidy amounts paid to any entity in the group.

Additional details on the CEWS for June 6, 2021 to September 25, 2021 are available in our Tax Insights "COVID-19 emergency business supports extended to September 2021 and new Canada Recovery Hiring Program provides more support."

Canada Emergency Rent Subsidy and Lockdown Support 

The maximum base rent subsidy rate is currently set at 65% through the qualifying period ending on June 5, 2021. The maximum subsidy rate of 65% will be extended to period 17 (June 6 to July 3, 2021) and then gradually decrease to:

  • 60% for period 18 (July 4 to July 31, 2021)

  • 40% for period 19 (August 1 to August 28, 2021)

  • 20% for period 20 (August 29 to September 25, 2021)

The Lockdown Support program rate of 25% will be extended from June 4, 2021 to September 25, 2021.  

In addition, only organizations with a decline in revenues of more than 10% will be eligible for the base rent subsidy and the Lockdown Support as of July 4, 2021. 

Additional details on the CERS and the Lockdown Support program for June 6, 2021 to September 25, 2021 are available in our Tax Insights "COVID-19 emergency business supports extended to September 2021 and new Canada Recovery Hiring Program provides more support."

Canada Recovery Hiring Program

The budget introduces the Canada Recovery Hiring Program to provide eligible employers with a subsidy of up to 50% on the incremental remuneration paid to eligible employees between June 6, 2021 and November 20, 2021, as compared to its baseline remuneration paid during the period from March 14 to April 10, 2021. An eligible employer will be permitted to claim either the hiring subsidy or the CEWS for a particular qualifying period, but not both.

Employers eligible for the CEWS will generally be eligible for the hiring subsidy. However, a for-profit corporation will be eligible for the hiring subsidy only if it is a CCPC. Other eligible employers would include individuals, non‑profit organizations, registered charities and certain partnerships. In both the qualifying period and the baseline period, eligible remuneration for each eligible employee will be subject to a maximum of $1,129 per week.

Provided that an eligible employer's decline in revenues exceeds the revenue-decline threshold for a qualifying period, its subsidy in that qualifying period will be equal to its incremental remuneration multiplied by the applicable hiring subsidy rate for that qualifying period. The hiring subsidy rate will be:

  • 50% for periods 17 to 19 (June 6 to August 28, 2021)

  • 40% for period 20 (August 29 to September 25, 2021)

  • 30% for period 21 (September 26 to October 23, 2021)

  • 20% for period 22 (October 24 to November 20, 2021)

Additional details on the Canada Recovery Hiring Program are available in our Tax Insights "COVID-19 emergency business supports extended to September 2021 and new Canada Recovery Hiring Program provides more support."

Immediate Expensing

The budget proposes to provide immediate expensing of up to $1.5 million per taxation year in respect of eligible property acquired by a CCPC. Eligible property under this proposal consists of capital property that is subject to the capital cost allowance (CCA) rules, other than property included in classes 1 to 6, 14.1, 17, 47, 49, and 51.

This measure applies for eligible property acquired by a CCPC after April 18, 2021 that became available for use before 2024. The immediate expensing is only available in the taxation year in which the property becomes available for use. The $1.5 million limit per taxation year is shared among associated CCPCs and is prorated for short taxation years.

CCPCs with eligible property acquisitions exceeding $1.5 million in a taxation year can decide on which CCA class the immediate expensing is assigned to and any excess capital cost is subject to normal CCA rules.

Property that has been used or acquired for use before it was acquired by the taxpayer is only eligible for immediate expensing if neither the taxpayer nor a non-arm’s length person previously owned the property and the property has not been transferred to the taxpayer on a tax-deferred basis. Immediate expensing is not to apply to certain properties that are currently subject to certain other CCA restrictions and limitations.

Mandatory Disclosure Rules

The government is consulting on proposals to enhance Canada’s mandatory disclosure rules to address:

  • changes to the Income Tax Act's (ITA’s) existing reportable transaction rules

  • a new requirement to report “notifiable transactions”

  • a new requirement for specified corporations to report uncertain tax treatments, and

  • related rules providing for, in certain circumstances, the extension of the applicable reassessment period and the introduction of penalties   

To the extent the proposed measure applies to taxation years, the amendments made as a result of this consultation will apply to taxation years that begin after 2021. To the extent the proposed measure applies to transactions, the amendments will apply to transactions entered into on or after January 1, 2022. Comments and feedback on the proposals should be directed to the Department of Finance by September 3, 2021.   

Reportable Transactions

Current rules in the ITA require the reporting of a transaction if it is considered an “avoidance transaction” as that term is defined for the purposes of the general anti-avoidance rule and it meets at least two of three defined hallmarks. The reporting is required to be made on or before June 30th of the calendar year following the calendar year in which it first becomes a reportable transaction.  

To improve the effectiveness of these rules and to bring them in line with international best practices, it is proposed that only one of the three hallmarks be present for a transaction to be reportable. It is also proposed that the definition of “avoidance transaction” for these purposes be amended so that a transaction 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.  

It is proposed that a taxpayer would be required to report the transaction to the Canada Revenue Agency (CRA) within 45 days of the earlier of the day that a taxpayer, or another person who entered into the transaction for the benefit of the taxpayer, (i) becomes contractually obligated to enter into the transaction, or (ii) enters into the transaction.   

Reporting  of such schemes by a promoter or adviser, with the same time limits, will also be required. An exception may be available for advisers, to the extent that solicitor-client privilege applies. 

Penalties for failure to report are proposed for both taxpayers and promoters or advisers.    

Notifiable Transactions

To provide the CRA with further pertinent information related to tax avoidance transactions (including series of transactions) and other transactions on a timely basis, a category of specific transactions known as “notifiable transactions” is proposed. The Minister of National Revenue, with the concurrence of the Minister of Finance, will have the authority to designate a transaction as a notifiable transaction. 

Notifiable transactions will include both transactions that the CRA has found to be abusive and transactions identified as transactions of interest. The description of a notifiable transaction will set out fact patterns or outcomes in sufficient detail to enable taxpayers to comply with the disclosure rule. The consultation will include sample descriptions.  

A taxpayer, or a person who enters into a transaction for the benefit of a taxpayer, entering into a notifiable transaction, or a transaction or series of transactions that is substantially similar to a notifiable transaction, will be required to report the transaction or series to the CRA within 45 days of the earlier of the day the taxpayer or person (i) becomes contractually obligated to enter into the transaction, or (ii) enters into the transaction.   

Reporting of such schemes by a promoter or adviser, with the same time limits, will also be required. An exception may be available for advisers, to the extent that solicitor-client privilege applies. 

This disclosure will not change the tax treatment of the transaction but is intended to provide information to the CRA.  

This proposal is in response to a recent decision of the Tax Court of Canada (Paletta v. the Queen).  

Penalties for failure to report are proposed for both taxpayers and promoters or advisers.

Uncertain Tax Treatments

Currently, there is no requirement to disclose uncertain tax treatments. It is proposed that specified corporate taxpayers be required to report particular uncertain tax treatments to the CRA where the following conditions are met:

  • the corporation files a Canadian income tax return

  • the corporation has at least $50 million in assets at the end of the year

  • 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

  • there is an uncertain tax position related to the corporation’s Canadian income tax reflected in the audited financial statements  

The corporation will be required to provide the quantum of taxes at issue, a concise description of the relevant facts, the tax treatment taken (including the relevant sections of the ITA) and whether the uncertainty relates to a permanent or temporary difference in tax. It is proposed that the disclosures be reported at the same date as the Canadian’s corporate tax return is due.  

Penalties of $2,000 per week up to a maximum of $100,000 are proposed for a failure to timely report each particular uncertain tax treatment.  

Reassessment Period

To support the new mandatory disclosure rules, it is proposed that the normal reassessment period will not commence in respect of a transaction until the taxpayer has complied with the applicable reporting requirement. If a taxpayer does not comply in respect of a transaction, a reassessment in respect of the transaction will not become statute-barred. 

Digital Services Tax

As previously announced in the November 2020 Fall Economic Statement, the budget proposes to implement a Digital Services Tax (DST) effective January 1, 2022. The DST is a 3% non-income tax introduced as a temporary tax until an acceptable multilateral approach is agreed and implemented by the members of the Organisation for Economic Cooperation and Development (OECD) and the G20 countries. The DST targets large global businesses earning revenue from certain digital services reliant on the engagement, data and content contributions of Canadian users. The revenue subject to DST is grouped into four categories: revenues earned from online marketplaces, social media, online advertising, and user data (“in-scope revenue”).  

The DST will apply in a particular calendar year to an entity that meets, or is a member of a business group that meets the following thresholds:

  • global revenue from all sources of €750 million or more in the previous calendar year (the same threshold used for country-by country reporting under an OECD standard), and 

  • in-scope revenue associated with Canadian users of more than $20 million in the particular calendar year

In-scope revenue in excess of $20 million earned from or associated with Canadian users will be subject to DST. It is proposed to permit one entity in a group to file a DST return on a calendar year basis and pay the DST liability on behalf of the group. To facilitate enforcement, each entity in a group will be jointly and severally liable for DST payable by any of the group members. The DST will be deductible in computing taxable income for Canadian income tax purposes based on general principles, but it will not be eligible for a credit against Canadian income tax payable.  

The government plans to engage with provinces and territories to discuss the implications of the DST and has requested feedback by June 18, 2021 from stakeholders on the proposed approach to implementing the DST. The draft legislation for a new statute implementing the DST will be released for public comment during the summer.

Rate Reduction for Zero-Emission Technology Manufacturers

The budget proposes to reduce corporate income tax rates on eligible income from eligible zero-emission technology manufacturing and processing activities for taxation years beginning after 2021. The following table summarizes the proposed rate changes and timeline for phasing out the rate reductions:

Taxation year begins in:

2021

2022 to 2028

2029

2030

2031

2032 or later

Reduced Tax Rate on Income Eligible for the Small Business Deduction

9%

4.5%

5.625%

6.75%

7.875%

9%

Reduced Tax Rate on Other Eligible Income

15%

7.5%

9.375%

11.25%

13.125%

15%

The budget proposes that a taxpayer’s eligible income generally be equal to its adjusted business income multiplied by the proportion of its total labour and capital costs that are used in eligible activities. The method used to calculate adjusted business income and eligible labour and capital costs is substantially based on those used in calculated manufacturing and processing profits under current tax rules.

A taxpayer can only qualify for the reduced tax rates on its eligible income if at least 10% of its gross revenue from all active businesses carried on in Canada is derived from eligible activities.

For taxpayers with income subject to both the general and the small business corporate tax rates, taxpayers can choose to have their eligible income taxed at either the reduced rate for small businesses or the general reduced rate, but the combined amount of income taxed at the reduced rates cannot exceed the business limit. No accompanying changes to the dividend tax credit rates or the allocation of corporate income for the purpose of dividend distributions are proposed.

Capital Cost Allowance for Clean Energy Equipment

The budget proposes to expand classes 43.1 and 43.2 of the CCA regime to include these properties:

  • pumped hydroelectric storage equipment

  • electricity generation equipment that uses physical barriers or dam-like structures to harness the kinetic energy of flowing water or wave or tidal energy

  • active solar heating systems, ground source heat pump systems and geothermal energy systems that are used to heat water for a swimming pool

  • equipment used to produce solid and liquid fuels (e.g. wood pellets and renewable diesel) from specified waste material or carbon dioxide

  • a broader range of equipment used for the production of hydrogen by electrolysis of water

  • equipment used to dispense hydrogen for use in hydrogen-powered automotive equipment and vehicles

The expansion of classes 43.1 and 43.2 applies in respect of property that is acquired and that becomes available for use after April 18, 2021, where it has not been used or acquired for any purpose before.

The budget also proposes to remove or restrict the eligibility of the following properties from classes 43.1 and 43.2:

  • fossil-fuelled cogeneration systems

  • fossil-fuelled enhanced combined cycle systems

  • specified waste-fuelled electrical generation systems with an electrical capacity greater than 3 megawatts

  • specified waste-fuelled heat production equipment for which more than one quarter of the total fuel energy input is from fossil fuels

  • producer gas generating equipment for which more than one quarter of the total fuel energy input is from fossil fuels

The removal or restriction of these properties from eligibility for classes 43.1 and 43.2 applies in respect of property that becomes available for use after 2024.

Film or Video Production Tax Credits

The budget 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 the CPTC, the budget proposes to extend by 12 months the following timelines:

  • 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 Audiovisual Certification Office within 24 months of the end of the tax year in which principal photography began (this new 12-month extension would apply in addition to the existing 18-month extension that is 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

For the PSTC, the budget 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 both the CPTC and the PSTC, taxpayers will be required to file a waiver with the CRA and the Canadian Audiovisual Certification Office to extend the assessment limitation period in respect of the relevant years to take into account this 12-month extension.

These measures will be available in respect of productions for which eligible expenditures were incurred by taxpayers in their taxation years ending in 2020 or 2021.

Avoidance of Tax Debts

The budget proposes to introduce an anti-avoidance rule for transfers of property where, for the purposes of the existing rules dealing with tax debt avoidance, a tax debt would be deemed to have arisen before the end of the taxation year in which the transfer of property occurs if it is reasonable to conclude that:

  • the transferor (or a non-arm’s length person) had knowledge (or would have if they had made reasonable inquiry) that there would be a tax amount owing by the transferor (or that there would be if not for additional tax planning done as part of the series) that would arise after the end of the year, and

  • one of the purposes for the transfer of property was to avoid the payment of the future tax debt. 

The budget also proposes rules that would, in certain cases where a “purpose” test is met, deem a transferor and transferee to be dealing on a non-arm’s length basis at the time of the transfer, and that would clarify the determination of the value of the property transferred and the consideration given. Penalties for planners and promoters would also be introduced.

These proposals will apply in respect of transfers of property made after April 18, 2021.  

Audit Authorities

The budget proposes amendments that confirm the authority of CRA officials to require persons to answer questions in any form specified by the CRA official, and to provide reasonable assistance for any purposes related to the administration or enforcement of a statute.  

This measure will come into force on Royal Assent and will apply to the ITA, the Excise Tax Act, the Air Travellers Security Act and Part 1 of the Greenhouse Gas Pollution Pricing Act.   

Corporate Beneficial Ownership Registry

The budget proposes to provide $2.1 million over two years to Innovation, Science and Economic Development Canada to assist with the implementation of a publicly accessible corporate beneficial ownership registry by 2025. This registry will be used by law enforcement, tax and other authorities to access accurate and up-to-date data on the individuals who own and control corporations and to catch those who attempt to launder money, evade taxes or commit other financial crimes. 

International tax measures

Base Erosion and Profit Shifting (BEPS)

The government reiterated its commitment to safeguarding Canada’s tax system and combatting BEPS. The budget builds on the government’s prior efforts to address BEPS by introducing two new measures:

  • interest limitation rules consistent with the recommendations in the Action 4 report of the BEPS Action Plan

  • rules to address hybrid mismatch arrangements consistent with the recommendations in the Action 2 report of the BEPS Action Plan

Interest Deductibility Limits

The budget proposes to introduce a new rule, which will limit the amount of net interest expense that a corporation may deduct in computing its taxable income to no more than a fixed ratio of its ‘tax EBITDA’ (this is the corporation’s taxable income before taking into account interest expense, interest income, income tax, and deductions for depreciation and amortization, where each of these items is as determined for tax purposes). The new rule will also apply to trusts, partnerships and Canadian branches of non-resident taxpayers. 

The fixed ratio for the interest limitation will apply to existing as well as new borrowings and will be phased in as follows:

  • fixed ratio of 40% for taxation years beginning on or after January 1, 2023 but before January 1, 2024 (the transition year)

  • fixed ratio of 30% for taxation years beginning on or after January 1, 2024

A “group ratio” rule will allow a taxpayer to deduct interest in excess of the fixed ratio, where the taxpayer can demonstrate that the ratio of net third party interest to book EBITDA of its consolidated group is higher than the fixed ratio; in this case, the interest limitation would be based on the higher group ratio.

Detailed legislative proposals are expected to be released for comment in the summer; however, the budget provided the following details with respect to the computation of tax EBITDA:

  • tax EBITDA will exclude, among other things, dividends to the extent they qualify for the inter-corporate dividend deduction or the deduction for certain dividends received from foreign affiliates

  • interest expense and interest income will include not only amounts that are legally interest, but also certain payments that are economically equivalent to interest, and other financing-related expenses and income

  • interest expense will exclude interest that is not deductible under existing income tax rules, including the thin capitalization rules (which would continue to apply)

  • interest expense and interest income related to debts owing between Canadian members of a corporate group will generally be excluded

Interest denied under the new interest limitation can be carried-forward for up to twenty years or back for up to three years (including carry-back to years before the introduction of the new rule, with some restrictions).

In addition, a taxpayer (other than a bank or life insurance company) that is part of a group and that has excess capacity to deduct interest under the new rule can generally transfer this unused capacity to other Canadian group members.

Exemptions from the new rule will be provided for:

  • CCPCs that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million, and

  • groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.

Hybrid Mismatch Arrangements

Hybrid mismatch arrangements are cross-border transactions that are characterized differently under the tax laws of different countries. For example, certain financial instruments may be treated as debt in one country and equity in another country. Hybrid mismatches can also involve certain entities that are treated as separate taxpayers in one country, but are treated as fiscally transparent in another country.

The Action 2 report of the BEPS Action Plan recommended that countries adopt detailed rules to eliminate the tax benefits arising from hybrid mismatch arrangements. The budget proposes to implement rules that are consistent with the recommendations of this Action 2 report (with modifications for the Canadian income tax context).

The budget does not include detailed rules, but does describe the proposed rules in general terms:

  • a payment by a Canadian resident under a hybrid mismatch arrangement will not be deductible in Canada, to the extent that it produces a deduction in another country, or is not included in the ordinary income of a non-resident recipient

  • a payment by a non-resident under a hybrid mismatch arrangement cannot generate a deduction for a Canadian resident, to the extent the payment is deductible in another country

  • a payment made by a non-resident to a Canadian resident under a hybrid mismatch arrangement will be included in ordinary income of the Canadian recipient, to the extent the payment is deductible in another country (if the payment is a dividend from a foreign affiliate, no offsetting deduction will be available under the normal rules for foreign affiliate dividends)

Other measures outlined in the Action 2 report will also be adopted, to the extent they are relevant and appropriate in the Canadian tax context. This could include measures addressing the following:

  • Imported mismatches - this generally refers to arrangements in which a payment is deductible by an entity in one country and included in the ordinary income of an entity in a second country, but that income inclusion is offset by a deduction under a hybrid mismatch arrangement with an entity in a third country

  • Branch mismatches - these are mismatches resulting from differences in the tax laws of different countries involving the allocation of income or expenditures to a branch

  • Reverse hybrids - these are entities that are treated as fiscally transparent in the country where they are formed, but are treated as separate taxpayers in an investor’s country; the Action 2 report included rules for payments to reverse hybrids

The proposed rules will apply only to arrangements between related parties, and to certain arrangements between unrelated parties that are structured to produce a hybrid mismatch. Ordering rules will coordinate the application of the proposed rules with the hybrid rules of other countries.

The proposed rules will be implemented in two packages of proposed legislation, which will each be released for stakeholder comment:

  • The first package will be released later in 2021, and will deal with "deduction/non-inclusion" mismatches resulting from financial instruments (generally speaking, arrangements in which a payment under a financial instrument is deductible by the payer and is not included in the ordinary income of the recipient). These rules will apply as of July 1, 2022.

  • The second package will be released after 2021, and will deal with hybrid mismatch arrangements that are not addressed by the first package. These rules will apply no earlier than 2023.

Transfer pricing

The government is concerned that perceived shortcomings in the current transfer pricing rules can encourage the inappropriate shifting of corporate income out of Canada. To address this concern, the budget announces the government’s intention to consult on Canada’s transfer pricing rules with a view to protecting the integrity of the tax system while preserving Canada’s attractiveness as a destination for new investment and business activity. The government’s concerns appear to be based on the Federal Court of Appeal’s decision in Her Majesty The Queen v Cameco Corporation, which interpreted the transfer pricing recharacterization rule, but the consultation is not limited to matters relevant to that decision. For a discussion of the Tax Court of Canada decision in that case, see the our Tax Insights “Cameco decision addresses transfer pricing recharacterization rules in Canada”.

Personal tax measures

Canada Workers Benefit

Effective for 2021 and later years, the budget enhances the Canada Workers Benefit (CWB), by increasing: 

  • the phase-in rate for both families and single individuals without dependants to 27% (from 26%) for working income in excess of $3,000

  • the phase-out thresholds for single individuals without dependants to $22,944 (from $13,194) and to $32,244 (from $24,815) for individuals also eligible for the disability tax credit

  • the phase-out thresholds for families to $26,177 (from $17,522) and to $42,297 (from $37,548) for families also eligible for the disability tax credit

  • the phase-out rate to 15% (from 12%) of adjusted net income in excess of the phase-out threshold (7.5% per individual in a couple if each is also eligible for the disability tax credit)

The budget also introduces a “secondary earner exemption” to the CWB, for individuals with an eligible spouse, which allows the lower income earner to exclude up to $14,000 of working income in calculation of the CWB phase-out, also starting in 2021. 

Disability Tax Credit

Effective the 2021 taxation year, in respect of disability tax credit (DTC) certificates filed on or after Royal Assent, changes to the DTC eligibility criteria:

  • expand the list of mental functions necessary for everyday life

  • clarify the activities to be included in calculating the time spent on therapy

  • reduces the requirement that therapy be administered at least three times each week, to two times each week (no change to the minimum 14 hours of weekly therapy requirement) 

Postdoctoral Fellowship Income

Postdoctoral fellowship income will be considered to be “earned income” for purposes of determining an individual's contribution limit for a registered retirement savings plan (RRSP), effective for such income received in the 2021 and subsequent taxation years. This measure will also apply in respect of postdoctoral fellowship income received in the 2011 to 2020 taxation years, if the taxpayer submits a written request to the CRA for an adjustment to their RRSP room for the relevant years. 

Tax Treatment of COVID-19 Benefit Amounts

The budget gives individuals the option to claim a deduction for the repayment of a COVID-19 benefit amount in computing their income for the year in which the benefit amount was received (by requesting an adjustment to the return for the earlier year), rather than the year it was repaid. This option would be available for amounts repaid at any time before 2023, for:

  • Canada Emergency Response Benefits/Employment Insurance Emergency Response Benefits

  • Canada Emergency Student Benefits

  • Canada Recovery Benefits

  • Canada Recovery Sickness Benefits

  • Canada Recovery Caregiving Benefits

COVID-19 benefit amounts will also be included in the taxable income of individual benefit recipients who reside in Canada, but are considered non-resident persons for income tax purposes. 

Defined Contribution Pension Plans

The budget permits plan administrators of defined contribution pension plans to correct:

  • an under-contribution error made in any of the preceding five years, via additional contributions to an employee’s account, subject to a dollar limit 

  • an over-contribution error made in any of the five years prior to the year in which the excess amount is refunded to the contributing employee or employer,

in respect of additional contributions made, and amounts of over-contributions refunded, in the 2021 and subsequent taxation years.

The plan administrator would be required to file a prescribed form in respect of each affected employee, instead of amending T4 slips for prior years. The employee’s RRSP contribution room will be altered accordingly. 

Taxes Applicable to Registered Investments

Trusts or corporations that satisfy certain requirements can apply to the CRA to be considered a registered investment, so that it will be a qualified investment for RRSPs, registered retirement income funds or deferred profit sharing plans. 

Generally, registered investments are required to be widely held. Those that are not are limited to holding investments that would be qualified investments for the plans for which they are registered. Where a registered investment holds property that is not a qualified investment, it is liable to pay tax under Part X.2 of the ITA. In some cases, where the trust units or shares of a corporation that are registered investments are held by registered and non-registered plans, this tax can be disproportionate, because the tax applies without consideration to the proportion of investors that are themselves subject to the same rules.    

The budget proposes to amend the taxes imposed under Part X.2 of the ITA to prorate the amount of tax based on the proportion of shares/units of the registered investments that are held by investors that are subject to the qualified investment rules.  

This measure would apply to taxes imposed under Part X.2 of the ITA in respect of months after 2020, or for taxpayers whose liability in respect of months before 2021 has not been determined by the CRA as of April 19, 2021.  

Charities

The budget, effective on Royal Assent of the enacting legislation: 

  • allows the Minister of National Revenue (the Minister) to immediately revoke the registration of a charity or other qualified donee, upon its listing as a terrorist entity under the Criminal Code

  • expands the definition of “ineligible individual” to include an individual who has certain connections to a listed terrorist entity, for purposes of the Minister determining a charity’s ongoing registration status and authority to issue official donation receipts

  • allows the Minister to suspend the authority of a registered charity to issue official donation receipts for one year, or revoke its registration, where a false statement amounting to culpable conduct was made for the purpose of maintaining its registration

The budget also proposes to launch public consultations with charities over the coming months on potentially increasing the disbursement quota and updating the tools at the CRA’s disposal, beginning in 2022. This could potentially increase support for the charitable sector and those that rely on its services by between $1 billion and $2 billion annually.

Electronic Delivery of CRA Correspondence and Information Returns

Upon Royal Assent of the enacting legislation, the budget enables the CRA to send certain notices of assessment electronically without the taxpayer having to authorize the CRA to do so, for individuals who file their income tax returns electronically.  

Issuers of T4A (Statement of Pension, Retirement, Annuity and Other Income) and T5 (Statement of Investment Income) information returns sent after 2021, will be permitted to provide them only electronically to a taxpayer, without their express authorization.

Sales tax measures

Application of the GST/HST to E-commerce

On November 30, 2020, the federal government proposed new GST/HST compliance regimes that will impact the following non-resident businesses, effective July 1, 2021:

  • a simplified GST/HST regime for certain foreign-based businesses and digital marketplace platform operators (that are not required to register under the current GST/HST rules) that supply or facilitate the supply by foreign-based suppliers of digital products and services to consumers in Canada 

  • a simplified GST/HST regime for certain foreign-based accommodation platform operators that facilitate the supply of short-term accommodation by non-registered residential property owners, 

  • registration requirements under the general GST/HST regime for non‑resident vendors that sell directly to consumers in Canada on their own account and online marketplace platforms that facilitate the sale of these goods by non‑registered vendors to consumers in Canada, where the transactions involve the sale of goods that are located at fulfillment warehouses in Canada and sold to purchasers in Canada

The budget proposes amendments and clarifications to the draft legislation. It proposes to:

  • impose joint and several, or solidary, liability on a platform operator and a third-party supplier for collecting and remitting tax, if the third-party supplier provides false information to the platform operator

  • limit the liability of a platform operator for failure to collect and remit tax, if the platform operator reasonably relied on the information provided by a third-party supplier

  • clarify that suppliers registered for the GST/HST under the simplified framework are eligible to deduct (i) amounts for bad debts, and (ii) certain provincial HST point-of-sale rebates provided to purchasers (e.g. in respect of audio books) from the tax that they are required to remit, and that public libraries and similar institutions are eligible to claim a rebate for the GST paid on audio books acquired from those suppliers

  • clarify that supplies of digital products or services that are GST/HST-free (i.e. zero rated) are not included in the calculation of the $30,000 threshold amount for determining if a person is required to be registered for the GST/HST under the simplified framework

  • clarify that the requirement to file an annual information return applies only to platform operators that are registered or are required to be registered for the GST/HST

  • provide the Minister of National Revenue with the authority to register a person that the Minister believes should be registered under the simplified framework as already exists in respect of the existing GST/HST framework

The CRA will work closely with businesses and platform operators that show they have taken reasonable measures, but are unable to meet their new obligations for operational reasons. In doing so, the CRA will take a practical approach to compliance and exercise discretion in administering these measures during a 12-month transition period, starting from the July 1, 2021 coming into force date. 

For more information regarding the measures announced in the Fall Economic Statement, see our Tax InsightsNew GST/HST regime for non-resident vendors of digital products will be effective July 1, 2021.”

Tax on Select Luxury Goods

The budget proposes to introduce a tax on sales, for personal use, of luxury cars and personal aircraft with a retail sales price over $100,000, and boats, for personal use, over $250,000. The tax would be calculated at the lesser of:

  • 20% of the value above the threshold (i.e. $100,000 for cars and personal aircraft, $250,000 for boats), or

  • 10% of the full value of the luxury car, boat, or personal aircraft 

The tax will apply to the value of the luxury car, boat or personal aircraft above the threshold amount. There will be certain exemptions from the tax. This measure will come into force on January 1, 2022.

Input Tax Credit Information Requirements

Under the current input tax credit (ITC) information rules, businesses must obtain and retain certain information to support their ITC claims with progressively more information required when the amount paid or payable in respect of a supply equals or exceeds thresholds of $30 or $150. In addition, the supplier or intermediary must provide its business name and where the threshold amount exceeds $30, its GST/HST registration number. However, under the current rules, an intermediary does not include a billing agent such that a billing agent cannot provide its GST/HST registration number and/or business name as part of the required ITC information. Rather, the recipient of the supply must obtain the business name and registration number of the underlying vendor.

The budget proposes to increase the current ITC information thresholds to $100 (from $30) and $500 (from $150). In addition, the budget proposes to allow billing agents to be treated as intermediaries for purposes of the ITC information rules.

These measures will come into force on April 20, 2021.

GST New Housing Rebate Conditions

The GST New Housing Rebate entitles homebuyers to recover 36% of the GST (or the federal component of the HST) paid on the purchase of a new home priced up to $350,000. The maximum rebate is $6,300. The GST New Housing Rebate is phased out for new homes priced between $350,000 and $450,000. The budget proposes to make the GST New Housing Rebate available as long as the new home is acquired for use as the primary place of residence of any one of the purchasers or a relation of any one of the purchasers. Currently, when two or more individuals buy a new home together, each of them must acquire the home for use as their primary place of residence or the primary place of residence of a relation to be eligible for the rebate. The proposed changes will also apply to owner-built homes, co-op housing shares and homes constructed on leased land as well as to new housing rebates in respect of the provincial component of the HST.

This measure will apply to a supply made under an agreement of purchase and sale entered into after April 19, 2021. In the case of a rebate for owner built homes, the measure will apply when construction or substantial renovation of the residential complex is substantially completed after April 19, 2021.

Tax Avoidance and Evasion

The budget proposes an additional $304.1 million over five years, starting in 2021–22, to allow the CRA to fund new initiatives and extend existing programs, including:  

  • increasing GST/HST audits of large businesses where risk assessment models have found the greatest risk of non-compliance  

  • modernizing the CRA’s risk assessment process to prevent unwarranted and fraudulent GST/HST refund and rebate claims at the outset, and improve the ability to issue refunds for compliant businesses as quickly as possible  

  • enhancing capacity to identify tax evasion involving trusts and provide better service to executors and trustees 

Rebate of Excise Tax for Goods Purchased by Provinces

Under the Excise Tax Act, provinces are provided relief from the federal excise tax embedded in the price of motive fuels, air conditioners in automobiles, and fuel inefficient vehicles (i.e. the green levy), which they purchase or import for the province’s own use. In particular, when these goods are sold to a province, for the province’s own use, either the province or the vendor is entitled to a rebate equal to the amount of the embedded tax (the provincial-use rebate). The provincial-use rebate applies only in a province that does not have a reciprocal taxation agreement with the federal government under which, in general terms, the province and the federal government mutually agree to pay each other’s taxes.

To clarify which party is eligible to claim the provincial-use rebate, the budget proposes to create a joint election mechanism to specify that the vendor alone will be eligible to apply for the rebate if it makes a joint election with the province to be the eligible party. If no joint election is made, then only the province will be eligible to apply for the rebate.

This measure will apply to these goods purchased or imported by a province after December 31, 2021.

Excise Duty on Vaping Products

The budget introduces a taxation framework that will impose excise duties on vaping products in 2022. The proposed framework will impose a single flat rate duty on every 10 millilitres (ml) of vaping liquid or fraction thereof, within an immediate container (i.e. the container holding the liquid itself). 

The government invites input from industry and stakeholders on these proposals. 

Excise Duty on Tobacco

The budget proposes to increase the tobacco excise duty by $4 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates for other tobacco products. This measure will take effect on April 20, 2021.

Other measures

Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners

Beginning in 2023, the budget proposes to introduce a new national 1% tax on the value of non-resident, non-Canadian owned residential real estate property considered to be vacant or underused. The tax applies to owners other than Canadian citizens or permanent residents. Taxable owners will be required to file with the CRA an annual declaration for the prior calendar year for each Canadian residential property they own. A failure to file will result in penalties, interest and an unlimited assessment period. By filing the annual declaration, the owner may be eligible to claim an exemption from the tax for property that is leased to qualified tenants for a minimum period in a calendar year. When an exemption is not available, the owner will be required to calculate the amount of tax owing and report and remit it to the CRA by the filing due date.

In the coming months, the government will  provide an opportunity for stakeholders to comment on the proposed tax. The government will also seek consultation on whether, how and when the proposed tax will apply in smaller, resort and tourism communities. 

Modernized Immigration System and Borders Experience

With a significant volume of immigration applications in process with the government and a goal to invest in immigration as part of the country’s economic recovery, the Canadian government has committed to invest $428.9 million over five years to modernize Canada’s immigration platform, and to specifically develop and deliver a digital platform that would replace the legacy Global Case Management System. This is intended to enable improved application processing and support for applicants, beginning in 2023.

The budget also proposes to provide $656.1 million over five years to the Canada Border Services Agency to modernize the borders’ customs and immigration tools and processes. This will be used to transform the travellers’ experience through touchless and automated interactions and to support the preclearance pilots in the United States where inspections would be done before travel to Canada.

Temporary Foreign Worker Program

Building on several actions taken in 2020 to support temporary foreign workers during the pandemic, the budget allocates funds to help employers offset the costs of the isolation requirements when entering Canada. Funds will also be allocated to increase inspections of employers and ensure temporary foreign workers have appropriate working conditions.

Other Measures

The budget proposes to allocate:

  • $230 million over five years for the CRA to improve its ability to collect outstanding tax debts

  • $330.6 million over five years to various investments in new technologies, tools and IT infrastructure that match the growing sophistication of cyber threats and to improve the way benefits and services are delivered to Canadians

  • $88 million over four years starting in 2022-2023 in renewing and expanding the capacity of the Canadian Digital Service and further improving how the government delivers digital services to Canadians

The government also announced that it will take the next steps to strengthen and modernize Canada’s general anti-avoidance rule, as previously announced in the 2020 Fall Economic Statement. 

Previously announced measures

The budget confirms that the government will proceed with various previously announced measures, as modified to take into account consultations and deliberations since their announcement or release, including the following:

  • legislative proposals: 

    • in respect of the CEWS, CERS and the Lockdown Support

    • relating to temporary pandemic-related adjustments to the automobile standby charge

    • extending timelines in respect of flow-through shares by 12 months

    • relating to CCA claims for purchases of zero-emission automotive equipment and vehicles

    • to clarify support for Canadian journalism

    • to facilitate the conversion of Health and Welfare Trusts to Employee Life and Health Trusts

    • to implement 2019 budget measures on transfer pricing, character conversion transactions, foreign affiliate dumping and cross-border share lending arrangements (among others)  

  • the anti-avoidance rules consultation, and income tax measures relating to employee stock options, registered disability savings plans and patronage dividends paid in shares, announced in the November 30, 2020 Fall Economic Statement 

  • GST/HST relief on face masks and face shields

  • increase of the Basic Personal Amount to $15,000 by 2023

  • modifications to previously-enacted measures relating to the Accelerated Investment Incentive; expensing the cost of machinery and equipment used in the manufacturing and processing of goods and the cost of specified clean energy equipment; and expensing the cost of zero-emission vehicles

  • enhanced reporting requirements for certain trusts to provide additional information on an annual basis

 

Contact us

Dean Landry

Dean Landry

National Tax Leader, PwC Canada

Tel: +1 416 815 5090

Shawn Reain

Shawn Reain

Partner, Canadian Markets Leader, Tax, PwC Canada

Tel: +1 403 509 6373