On September 20, 2021, Canadians re-elected a federal Liberal minority government. Now that we know the results of Canada’s federal election, let’s look at the Liberal Party of Canada’s election promises that could affect taxpayers. The Liberals’ election platform does not propose any sweeping general corporate or personal income tax or GST/HST rate changes. Instead, key tax initiatives in the platform would:
- extend existing COVID-19 emergency business supports to May 31, 2022 for certain organizations in the tourism industry, and the Canada Recovery Hiring Program to March 31, 2022
- increase the federal corporate income tax rate by 3 percentage points for banks and insurance companies that earn more than $1 billion per year, and introduce a temporary Canada Recovery Dividend that would be paid by certain banks and insurance companies
- reform the Scientific Research and Experimental Development (SR&ED) program and introduce new investment tax credits to support the development of clean technology
- create a federal minimum tax of 15% for high-income individuals
- introduce taxes, credits and a tax-free Registered Home Savings Plan to encourage home ownership by Canadians
Given that it will be a minority government, the Liberals will require the support of another federal party to enact their proposals. As a result, it is unclear whether all of their proposals will be implemented, and to what extent compromises or modifications must be made to the proposals and other policies to gain the support of another party in the House of Commons.
Business tax measures
Emergency business supports and hiring program
The Liberal party platform intends to extend:
- the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) programs from October 24, 2021 to May 31, 2022, but only for Canada’s tourism industry
- the Canada Recovery Hiring Program from November 20, 2021 to March 31, 2022
The ongoing COVID-19 pandemic continues to affect the Canadian economy and its recovery. It is possible that the Liberal government may expand this extension of the CEWS and CERS programs to other industries, in addition to the tourism industry.
Banks and insurance companies
The Liberals plan to increase the corporate income tax rate by 3 percentage points (to 18%) on taxable earnings exceeding $1 billion annually for banks and insurance companies, starting 2022.
In addition, the Liberals would introduce a temporary Canada Recovery Dividend, to be paid by large and profitable banks and insurance companies, beginning in 2022.
It is expected that the additional 3% corporate income tax would apply to only certain banks and insurance companies.
Little detail has been provided on the Canada Recovery Dividend. The Liberals indicated that this dividend fund would aid in Canada's economic recovery and specifically tied it to their proposals that aim to facilitate affordable home ownership for Canadians.
Innovation and clean technologies
The Liberals’ election platform contains various proposals to incentivize innovation and green technologies. These tax‑related measures would:
- improve the SR&ED program by reducing administrative “red tape,” better aligning eligible expenses with current innovation and making the program more generous for certain companies
- develop additional investment tax credits for a range of renewable energy and battery storage solutions to accelerate the deployment of clean energy
- double the mineral exploration tax credit for materials on the Canadian list of critical minerals (which are used for the manufacturing of clean technologies)
- develop an investment tax credit of up to 30% for a range of clean technologies
- eliminate flow-through shares for oil, gas and coal projects
The funds expended under the SR&ED program have decreased considerably in the past 10 years, so it will be interesting to see how the Liberal government intends to improve the program’s effectiveness in stimulating Canadian innovation and making it administratively more accessible. The new investment tax credit proposals signal a move away from traditional fossil-fuel based industries and encourage manufacturing of clean, low-carbon and net-zero technologies (e.g. batteries).
Personal tax measures
Minimum tax rate
The Liberals have promised to create a federal minimum tax that would require individuals with taxable income in excess of the top income tax bracket threshold ($216,511 in 2021; $222,661 in 2022 per the Parliamentary Budget Officer estimates) to pay at least 15% federal income tax. The minimum tax would replace the net federal tax when it is lower than the minimum tax. Any foreign income taxes paid would reduce the minimum tax payable, based on the proportion of foreign income to net income.
Canada already has an “alternative minimum tax” regime for individuals that can limit benefits from certain so-called “tax preferences” (i.e. tax shelter deductions, dividend tax credits, capital gain exemptions, and others) by adjusting the calculation of taxable income for these items and then applying a 15% federal tax rate. This new proposed minimum tax would appear to take a different approach, by limiting the benefit of all tax credits (which currently apply to reduce the tax calculated on taxable income) so that federal tax is at least 15% of taxable income.
Under Canada’s marginal tax rates for 2021, an individual with taxable income equal to $216,511 would incur total federal tax, before credits, at an effective federal rate of approximately 23.16% (the effective rate would increase for higher taxable incomes, as the top marginal rate of 33% would apply to additional income). The maximum amount of most federal credits is relatively modest, other than for medical expenses, charitable donations and taxable dividends, which depend only on the amount of such outlays or income (although annual donation claims are capped at 75% of net income). Accordingly, it would seem that this proposed minimum tax would most likely affect taxpayers with some combination of large donations, medical costs or dividend receipts relative to their taxable income for the year. This is puzzling, as the Liberal platform explains that the intent of this proposed change is to remove the ability of individuals to “artificially pay no tax through excessive use of deductions or credits.”
The Liberals have proposed several measures to facilitate home ownership and affordable housing for Canadians. They propose to:
- introduce a tax-free Registered Home Savings Plan (RHSP), effective July 2022, which would help individuals under 40 to save for their first home; contributions up to $40,000 to the RHSP would be permitted, and contributions would count towards an individual’s Registered Retirement Savings Plan (RRSP) contribution limit and be deducted from the individual’s income (transfers from existing RRSPs would also be permitted). Similar to a Tax-Free Savings Account, earnings in the RHSP and withdrawals would be tax-free if used to purchase a first home, with no requirement to repay a withdrawal. At least 50% of the funds withdrawn must have been invested in the RHSP for at least four years and no funds would be allowed to be withdrawn within a year of being contributed
- double the first-time home buyers' tax credit (from $5,000 to $10,000)
- introduce a multi-generational home renovation tax credit, which would allow families to claim a 15% tax credit on up to $50,000 in renovation and construction costs incurred to add a secondary unit to their home for an immediate or extended family member, providing up to $7,500 in savings
- establish an “anti-flipping” tax on residential properties, starting in the 2022 tax year, which would disallow the principal residence exemption for individuals that sell their principal residence within 12 months of its purchase or transfer of title. The gain on sale would be treated as a capital gain for income tax purposes, deductions will be permitted for cost of refurbishments and exemptions will be available for changes in life circumstances (e.g. pregnancy, death, new job, divorce or disability)
- extend the proposed federal underused housing tax (to be effective January 1, 2022; see our Tax Insights “Department of Finance launches consultation on the proposed underused housing tax”) to include foreign-owned vacant land within large urban areas
Under Canada’s existing tax law, a gain from a “quick flip” of a residential property can already be subject to full taxation as regular income, when the purchase was motivated by the prospect of a resale at a profit. Accordingly, the “anti-flipping” tax proposal would appear to apply only when a homeowner seeks to take advantage of a “fortuitous” resale opportunity that is not prompted by an eligible change in circumstances, and therefore would be expected to have a fairly limited impact. However, combined with additional reporting requirements previously introduced for the principal residence exemption, a bright-line test would likely enhance Canada Revenue Agency (CRA) enforcement efforts.
Disability benefits, caregivers and seniors
The Liberals plan to:
- undertake a comprehensive review of access to the disability tax credit, Canada Pension Plan-disability and other federal benefits and programs to ensure they are available to individuals experiencing mental health challenges
- reintroduce the Canada Disability Benefit, a direct monthly payment for low-income individuals with disabilities aged 18 to 64
To support caregivers and seniors, the Liberals propose, effective January 2022, to:
- make the Canada caregiver credit refundable and increase the benefit to $1,250 per year
- double the home accessibility tax credit to $20,000 (increasing the benefit by up to $1,500 per year)
The proposed changes to the caregiver and home accessibility tax credits aim to encourage seniors to remain living longer in their homes (or those of their family members). Although eligibility for the Canada caregiver credit would not change, the Liberals propose that it would no longer be income tested, and, therefore, would be available to a broader taxpayer base.
Other personal tax measures
The Liberals’ election platform also contains plans to:
- increase the refundable eligible educator school supply tax credit rate to 25% (from 15%), effective January 1, 2022, expand the eligibility criteria to include technological devices and ensure teaching supplies are eligible (whether used at home or at school)
- extend the “simplified” home office expense deduction to the 2021 and 2022 taxation years and increase the available deduction to $500 (from $400 in 2020)
- introduce a labour mobility tax credit that will allow workers in the building and construction trades to deduct up to $4,000 of eligible travel and temporary relocation expenses, providing a benefit of up to $600 per year
- introduce a non-refundable career extension tax credit, effective January 1, 2022, for individuals 65 and over who earn a minimum of $5,000 of employment income in a taxation year, providing an annual benefit of up to $1,650
- introduce a 15% tax credit to cover up to $500 of home appliance repair costs performed by technicians
- expand the medical expense tax credit to include costs that have been reimbursed to a surrogate mother for in vitro fertilization expenses
Tax compliance and the General Anti-Avoidance Rule (GAAR)
The Liberals intend to significantly increase the resources provided to the CRA to combat aggressive tax planning and tax avoidance through additional tax compliance and enforcement actions. Additional funding of $2.5 billion over four years is expected to produce almost $14.5 billion of additional tax revenue over the same period.
The Liberal party platform states that it will “modernize the general anti-avoidance rule regime in order to focus on economic substance and restrict the ability of federally regulated entities ... to use tiered structures as a form of corporate tax planning that flows Canadian-derived profit through entities in low-tax jurisdictions in order to reduce taxes back in Canada.”
Vaping and tobacco products
The Liberals also propose to:
- introduce a national tax on vaping products
- require tobacco manufacturers to pay for the cost of federal public health investments in tobacco control
Other COVID-19 business supports
To facilitate economic recovery, the Liberals plan to:
- implement the Canada Digital Adoption Program, which will provide:
- grants of up to $2,400 to small businesses for new technology expenses
- training and work opportunities for young people to help small and medium-sized businesses adopt new technology
- zero-interest loans to small and medium-sized businesses to finance larger technology adoption projects
- improve the Canada Small Business Financing Program by:
- increasing the maximum loan amount from $350,000 to $500,000
- extending loan coverage from 10 to 15 years for equipment and leasehold improvements
- expanding borrower eligibility to include non-profit and charitable social enterprises
- expanding loan class eligibility to include lending against intellectual property and start-up assets and expenses
- introducing a new line of credit
Employment Insurance (EI)
The Liberals also propose changes to the EI program, which include:
- introducing a new EI benefit for self-employed individuals (for up to 26 weeks), effective January 2023
- requiring operators of digital platforms to pay EI and Canada Pension Plan contributions for Canadian employees
- providing a simpler, more responsive and modern EI system that covers all workers, including those in seasonal employment
- establishing an EI Career Insurance Benefit, which would be available to individuals who have worked continuously for the same employer for five or more years and are laid off when the business closes. The benefit would begin after regular EI ends, providing an additional 20% of insured earrings in the first year following layoff and an extra 10% in the second year
- providing adoptive parents an additional 15 weeks of leave to make it the same as maternity/parental leave
2021 Federal budget measures
When the Canadian parliament was dissolved on August 15, 2021 due to the federal election call, many proposed measures from the minority Liberal government’s 2021 federal budget had not yet been implemented. The Liberals intend to move forward with most or all of these initiatives, which include:
- providing immediate expensing of up to $1.5 million per taxation year of capital property acquisitions by Canadian-controlled private corporations
- enhancing Canada’s mandatory reportable transaction disclosure rules
- implementing a 3% digital services tax, effective January 1, 2022
- reducing corporate tax rates on eligible zero-emission technology manufacturing and processing income
- limiting the deductibility of interest by corporations, trusts and partnerships to a percentage of tax-basis EBITDA
- eliminating the tax benefits arising from hybrid mismatch arrangements
- implementing the tax on the unproductive use of Canadian housing by foreign non-resident owners
For more information on these proposed measures, see our Tax Insights “2021 Federal budget: From pandemic to recovery”.
Individuals and corporations should pay attention to how these tax proposals (and any changes to the proposals) could impact them. The timing of when the proposals will become effective is also uncertain (even though the Liberal party platform does suggest a target date for some of them). In any event, it is unlikely that any will be effective before 2022. Further, it is also unclear whether, or to what extent, the Liberals will be able to obtain the support of another federal party to allow legislation implementing election platform measures (and 2021 budget measures) to be passed in the House of Commons.