Tax Insights: 2021 Federal fall economic statement – Tax highlights

Issue 2021-32

In brief

On December 14, 2021, the Deputy Prime Minister and federal Minister of Finance, Chrystia Freeland, presented the 2021 federal Economic and Fiscal Update (economic statement). The economic statement does not change corporate or personal income tax rates, but does:

• introduce a 25% refundable tax credit for small businesses that incur expenses for air quality improvements in qualifying locations between September 1, 2021 and December 31, 2022

• provide a refundable tax credit for eligible farming businesses in federal carbon pricing backstop jurisdictions 

• extend the simplified rules for deducting home office expenses to the 2021 and 2022 taxation years, and increase the maximum annual deductible amount

• confirm the government’s intention to enact a digital services tax

• provide further details on the proposed underused housing tax, which is to be effective for the 2022 calendar year

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

In detail

Business tax measures 

Small businesses air quality improvement tax credit 

The economic statement proposes to introduce a temporary refundable small businesses air quality improvement tax credit of 25% on qualifying expenditures incurred between September 1, 2021 and December 31, 2022, to improve indoor air quality at qualifying locations (up to a maximum of $10,000 of qualifying expenditures per qualifying location and a maximum of $50,000 across all locations [to be shared among affiliated businesses]). 

Qualifying expenditures include expenses directly attributable to the purchase, installation, upgrade or conversion of mechanical heating, ventilation and air conditioning systems, as well as the purchase of devices designed to filter air using high efficiency particulate air filters, the primary purpose of which is to increase outdoor air intake or to improve air cleaning or filtration. 

The credit can be claimed by unincorporated sole proprietors and Canadian-controlled private corporations (CCPCs) with taxable capital employed in Canada on an associated basis of less than $15 million in the immediately preceding taxation year. The credit can also be claimed, in respect of qualified expenses incurred by a partnership, by members of the partnership that are qualifying corporations or individuals (other than trusts), based on their proportionate interest in the partnership.

Tax incentive for carbon capture, utilization and storage

The 2021 federal budget proposed an investment tax credit for capital invested in carbon capture, utilization and storage projects, with the goal of substantially reducing emissions. The government recently engaged in a consultation with stakeholders and interested parties and will outline the final design of the proposed investment tax credit in its 2022 federal budget. 

Returning the proceeds from the price on pollution directly to farmers

The economic statement proposes to introduce a refundable tax credit to return federal fuel charge proceeds directly to eligible farming businesses in federal carbon pricing backstop jurisdictions (i.e. Alberta, Manitoba, Ontario and Saskatchewan), beginning the 2021-22 fuel charge year. This credit will be available to corporations, individuals and trusts that are actively engaged in either the management or day-to-day activities of earning income from farming and incur total farming expenses of $25,000 or more, all or a portion of which are attributable to backstop jurisdictions. 

The Minister of Finance has specified the payment rates, for the:

• 2021 calendar year (2021-22 fuel charges), to be $1.47 

• 2022 calendar year (2022-23 fuel charges), to be $1.73,

per $1,000 of eligible farming expenses incurred in that calendar year that are attributable to one or more backstop jurisdictions. Businesses can claim these refundable tax credits in their tax returns that include the 2021 and 2022 calendar years.

COVID-19 business support programs

The economic statement provides a reminder that the government intends to implement the COVID-19 business support measures that were announced on October 21, 2021 (see our Tax Insights “Targeted COVID-19 business supports introduced and Canada Recovery Hiring Program extended to May 2022.” These measures include: 

• extending the Canada Recovery Hiring Program

• continuing wage and rent subsidy supports for:

  • specific types of organizations, through the Tourism and Hospitality Recovery Program and the Hardest-Hit Business Recovery Program

  • organizations that face new local COVID-19-related lockdowns due to public health restrictions

Personal tax measures

Home office expenses

The economic statement proposes to extend the “simplified” home office expense deduction (i.e. a flat rate deduction per day worked at home, up to a maximum amount) to the 2021 and 2022 taxation years. This method is available for employees who were required to work from home due to the COVID-19 pandemic. The economic statement also proposes to increase the maximum annual deduction from $400 in 2020, to $500 for 2021 and 2022. 

Eligible educator school supply tax credit

Effective January 1, 2021, the economic statement proposes to enhance the eligible educator school supply tax credit by:

• increasing the tax credit rate to 25% (from 15%), on up to $1,000 of eligible expenses

• expanding the list of eligible teaching supplies to include certain electronic devices

• removing the requirement that eligible teaching supplies be used in a school or child care facility

Employers must continue to certify that the supplies were purchased for the purpose of teaching or facilitating students’ learning and individuals making claims are required to retain their receipts. 

COVID-19 personal support programs

The economic statement provides a reminder that the government intends to implement the COVID-19 personal support measures that were announced on October 21, 2021. These measures include: 

• extending the Canada Recovery Caregiving Benefit (CRCB) and Canada Recovery Sickness Benefit (CRSB) until May 7, 2022 and increasing the maximum duration of these benefits by two weeks (to 44 weeks for CRCB and 6 weeks for CRSB)

• establishing the Canada Worker Lockdown Benefit, which would provide $300 per week to eligible workers unable to work due to a local lockdown any time between October 24, 2021 and May 7, 2022

Sales tax measures

Luxury tax 

The economic statement states that draft legislation on the luxury tax that was proposed in the 2021 federal budget will be released in early 2022, including details on the coming-into-force provisions. The 2021 federal budget had proposed, effective January 1, 2022, to introduce a tax on sales, for personal use, of:

• luxury cars and personal aircraft with a retail sales price over $100,000

• boats with a retail sales price over $250,000

to be calculated at the lesser of:

• 20% of the value above the sales price threshold, or

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

Other measures

Digital services tax (DST) 

The economic statement confirmed the government’s intention to enact a Canadian DST, which will only be imposed if a multilateral convention (implemented by members of the Organisation for Economic Co-operation and Development [OECD] and the G-20) has not come into force by December 31, 2023. Draft legislation to implement the DST was released and interested parties are asked to provide comments by February 22, 2022. 

The multilateral convention would provide new taxing rights that reallocate some portion of the profits of large multinational enterprises (MNEs) to countries where the MNE’s customers are located. For more information on this proposed new taxing right and Canada’s proposed DST, see our Tax Insights “The new international tax framework and Canada’s digital services tax.”  If this multilateral convention does not come into force by December 31, 2023, Canada will start imposing the DST on January 1, 2024, in respect of in-scope revenues earned since January 1, 2022.

Underused housing tax (UHT) 

The economic statement provides further details on the proposed new annual 1% federal UHT that will apply on the value of non-resident, non-Canadian owned Canadian residential property considered to be vacant or underused. The UHT is proposed to be effective January 1, 2022. Under the UHT, certain residential property owners in Canada will be required to file an annual declaration (due April 30 of the following year) for each Canadian residential property they own, even if they can claim an exemption from the UHT. The economic statement proposes several additional exemptions to the UHT for:

• an owner’s interest in a residential property that is, for the year, the primary place of residence of:

  • the owner

  • the owner’s spouse or common-law partner, or

  • a child of the owner (or owner’s spouse or common-law partner), if the child is in Canada for purposes of authorized study

• vacation/recreational properties if the property:

  • is located in an area of Canada other than one within a census metropolitan area or agglomeration with 30,000 or more residents, and

  • is used personally by the owner (or their spouse or common-law partner) for at least four weeks in the calendar year, 

Many owners of Canadian residential properties could be subject to mandatory annual reporting obligations and properties that have direct or indirect foreign ownership may potentially be subject to this new tax. For more information on the proposed UHT, see our Tax Insights “Department of Finance launches consultation on the proposed underused housing tax.”.

Previously proposed tax measures

Information reporting requirements for trusts

The economic statement does not mention the new tax return information reporting requirements for trusts that were proposed in the 2018 federal budget and are intended to apply for taxation years that end after December 30, 2021. For more information on these proposed changes, see our Tax Insights “Navigating the proposed trust reporting rules: Trustees need to be prepared.” 

2021 federal budget tax measures

The economic statement provides no update on the following tax measures, which were proposed in the 2021 federal budget:

• immediate expensing of up to $1.5 million of eligible property acquired by a CCPC

• mandatory disclosure rules

• rate reduction for zero-emission technology manufacturers

• interest deductibility limits

• hybrid mismatch arrangements

• consultations regarding Canada’s transfer pricing rules

For more details on these proposed measures, see our Tax Insights “2021 Federal budget: From pandemic to recovery.”