In Federal Budget 2021 (Budget 2021) the Minister of Finance celebrates a projected federal deficit of $354 billion for 2020/2021, being significantly lower than the government's earlier forecast of the deficit. Only in a COVID-19 world would such an enormous deficit be considered a success.
The government stated that Budget 2021 is about finishing the fight against COVID-19 and creating prosperity for Canadians in the decades to come. In line with this objective, some of the most significant fiscal measures in Budget 2021 include extending the Canada Emergency Wage Subsidy (CEWS) and expanding the Canada Workers Benefit (CWB). These are expensive measures. The CEWS will apply to the 2021/2022 fiscal year at a cost that is forecast to be over $10.1 billion. The CWB will involve ongoing assistance which is forecast to cost an additional total amount in excess of $8.9 billion over the five-year period ending in 2026.
Prior to the release of Budget 2021, there had been some pressure on the government to implement tax increases on corporations and the wealthy. Rumours had been circulating that the government might use Budget 2021 as an opportunity to introduce a new tax on the sale of principal residences, which have historically been tax free, or to increase the effective rate of tax on capital gains by increasing the inclusion rate. When it comes to rumours of possible tax changes, increasing the tax rate on capital gains has been a perennial favourite. No such changes were proposed in Budget 2021.
Moreover, certain tax changes which had been announced in the Fall Economic Statement on November 30, 2020 (Fall Economic Statement), namely implementing limits on the stock-option deduction for high-income individuals, did not make their way into Budget 2021.
Nevertheless, a variety of specific tax measures are included in Budget 2021. In addition to a number of technical changes, the broader focus of the tax proposals was on preventing aggressive tax planning in the ongoing effort to ensure the tax system is fair, while also imposing some new taxes on luxury goods and vacant or underused housing owned by non-Canadians. This newsletter covers the proposed changes which will be of most interest to business.
A few of the new tax measures are anticipated to bring in significant revenue. For example, the international measures limiting interest deductibility and taxing hybrid arrangements are forecast to bring in nearly $6.1 billion in the next five fiscal years, and the new excise duty on tobacco is forecast to bring in over $2.1 billion over the same five-year period. Together these two items constitute a significant portion of all new tax revenue projected to arise from the Budget 2021 measures. Although the new digital services tax proposed by Budget 2021 is forecast to bring in $3.4 billion of new revenue, it is fully offset by $3.4 billion of costs provisioned in the Budget's fiscal framework.
Overall, tax revenues are projected to be $12 billion per year higher over the next five fiscal years ending in 2026. This is attributed largely to the economy returning to more active levels as the pandemic comes to an end, as opposed to increasing tax rates. The result is that the federal budget deficit is projected to shrink to 1.1% of GDP by the 2025-2026 fiscal year.
Budget 2021 is long on narrative, but short on detailed legislative tax amendments. Since it is in these legislative amendments where the rubber hits the road, we all need to stay tuned for more details on the tax proposals in Budget 2021 to fully understand the implications to corporate and individual taxpayers.
As the Minister of Finance says, "Opportunity is coming. Growth is coming. Jobs are coming." But, luckily for corporations and individuals rebuilding their finances after the pandemic, increases in income tax rates or capital gains taxes are not coming, at least not from Budget 2021.
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Table of content
- Emergency Business Supports
- Changes to the Capital Cost Allowance Regime
- Reduced Corporate Income Tax Rate for Zero-Emission Technology Manufacturers
- Tax Relief for Registered Investments
- Hybrid Mismatch Arrangements
- Interest Deductibility Limits
- Consultation Announced on Canadian Digital Services Tax
- Excise Duties
- Luxury Tax
- Improving Duty and Tax Collection on Imported Goods
- Electronic Filing and Certification of Tax and Information Returns
- Mandatory Disclosure Rules
- Enhanced Tax and Collections Enforcement
- Tax on Unproductive Use of Canadian Housing by Foreign Non-Resident Owners
- Increasing Old Age Security for Canadians 75 and Over
- Tax Treatment of COVID-19 Benefit Amounts
- Previously Announced Measures
Learn more about Gowling WLG's Tax Group
1. Emergency Business Supports
Budget 2021 continues to provide measures to support businesses impacted by COVID-19.
Canada Emergency Wage Subsidy
Budget 2021 proposes to extend the CEWS to September 2021 and provide the Government of Canada with legislative authority to continue the CEWS until November 2021 should the circumstances so warrant. Our prior bulletins on the CEWS can be accessed here and here. Budget 2021 also proposes that, commencing July 4, 2021, the rates of the CEWS would be gradually phased out.
Previously, the CEWS contained no limitations on the use of the subsidy, nor any restrictions on actions by a corporation that received the subsidy. This was reasonable, as the CEWS was essentially a reimbursement of salaries and wages previously paid by the CEWS applicant to employees. However, the absence of restrictions was in contrast to the COVID-19 assistance in other countries that contained restrictions on corporate actions, such as the payments of dividends to shareholders or the repurchase of outstanding shares, despite the differences in the design of such countries' programs. Perhaps in response to some negative press coverage, Budget 2021 introduces a requirement for a CEWS applicant that is a corporation, the shares of which are traded on a stock exchange or other public market, to repay the CEWS amounts received, for periods commencing after June 5, 2021, in the event that compensation paid to certain executives of the corporation exceeds certain thresholds. More specifically, the repayment obligation applies where aggregate compensation for specified executives during the 2021 calendar year exceeds the aggregate compensation for such executives during the 2019 calendar year. Specified executives are those individuals whose compensation is required to be disclosed under Canadian securities laws (or similar requirement in other jurisdictions). The amount of the CEWS repayment would be the lesser of (i) the total CEWS received after June 5, 2021 in respect of active employees and (ii) the amount by which the corporation's 2021 compensation for such executives exceeds the compensation for such executives for 2019.
Canada Emergency Rent Subsidy (CERS)
Budget 2021 proposes a CERS rate structure for periods ending on September 25, 2021, with the subsidy gradually phased out as of July 4, 2021. Further, only businesses having a revenue reduction of at least 10% would be eligible for the base rent subsidy beyond July 4, 2021.
Canada Recovery Hiring Program (CRHP)
As an incentive to employers to hire as the economy recovers, Budget 2021 proposes a new benefit to provide eligible employers with a subsidy, declining from 50% to 20%, on the incremental remuneration paid to eligible employees during the approximately monthly periods between June 6, 2021 and November 20, 2021. An eligible employer could claim the CERS or the CEWS in respect of a qualifying period, but not both.
An eligible employer would generally include the same types of persons as for the CEWS, but a corporation would have to be a Canadian-controlled private corporation (CCPC) to qualify. Individuals, non-profits, registered charities and certain partnerships can also qualify. Non-Canadian controlled corporations, as well as public institutions (as defined for the CEWS), would be ineligible. Further, an eligible employer must have experienced a revenue reduction sufficient to qualify for the CEWS. Eligible employees of the CRHP applicant would have to be employed primarily in Canada throughout the relevant period; employees on leave with pay would not be eligible. Eligible remuneration would generally mirror the CEWS concept and be capped at $1,129 per week. Incremental remuneration, which is the focus of this benefit, is intended to be the difference between the eligible employer's total eligible remuneration paid to eligible employees during the periods from June 6, 2021 to November, 20, 2021, as compared to the eligible employer's total eligible remuneration paid to eligible employees during the period from March 14 to April 10, 2021. As such, the CRHP is geared more towards ramping up employment over the next few months, as compared to the CEWS which was geared towards maintaining employment in the earlier stages of the pandemic.
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2. Changes to the Capital Cost Allowance Regime
Expansion of "Eligible Property" for Immediate Expensing
Normally, taxpayers are entitled to deduct a portion of the capital cost of a depreciable property as capital cost allowance (CCA) in computing their income for each taxation year. CCA deductions are claimed by class of property and are calculated on a declining-balance basis. In the 2018 Fall Economic Statement, the Government of Canada announced several measures relating to CCA for eligible property. A temporary enhanced first-year allowance, the Accelerated Investment Incentive, was introduced which suspended the existing CCA half-year rule and increased the prescribed CCA rate for a class to up to one-and-a-half times the net addition to the class for the year on eligible property. Second, full expensing was introduced for classes 43.1 and 43.2 (specified clean energy equipment) and class 53 (machinery and equipment), which allowed businesses to immediately write off the full cost of such eligible property.
Budget 2021 proposes to expand the type of property that is eligible for this immediate expensing treatment. All capital property that is subject to the CCA rules, other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49, and 51 (generally long-lived assets) would be "eligible property". However, only CCPCs will be able to take advantage of this measure as the immediate expensing is available in respect of such eligible property acquired by a CCPC on or after Budget Day and that becomes available for use before January 1, 2024. Property that was used, or acquired for use, for any purpose before it was acquired by the CCPC will not be eligible for this expanded immediate expensing measure if it was previously owned by the CCPC or a non-arm's length person, or the property had been transferred to the CCPC on a tax-deferred basis.
CCPCs will be able to expense up to a maximum amount of $1.5 million per taxation year under this new measure. CCPCs with capital costs of eligible property in a taxation year that exceed $1.5 million can allocate the amount to any eligible CCA class as desired; any excess capital cost would be subject to the normal CCA rules. This $1.5 million expense would be in addition to any other CCA claims under existing provisions of the ITA, as long as the total CCA deduction does not exceed the capital cost of the property.
Changes to Clean Energy CCA Classes
Under the existing CCA provisions in the Income Tax Act (Canada) (ITA), classes 43.1 and 43.2 provide accelerated CCA rates for investments in specified clean energy generation and energy conservation equipment. The applicable CCA rates are 30% and 50% respectively. Budget 2021 highlights the Government of Canada's continued push away from fossil fuels with its proposed changes to classes 43.1 and 43.2.
In particular, Budget 2021 proposes to expand classes 43.1 and 43.2 to include:
- 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; and
- equipment used to dispense hydrogen for use in hydrogen-powered automotive equipment and vehicles.
Fossil-fuelled systems, such as cogeneration or enhanced combined cycle systems, and waste-fuelled electrical generation systems which derive more than one quarter of their total fuel energy input from fossil fuels and have an electrical output capacity of more than three megawatts are proposed to be excluded from classes 43.1 and 43.2. Specified waste-fuelled heat production and producer gas generating equipment which derive more than one quarter of their total fuel energy input from fossil fuels are also proposed to be excluded.
The expansions to classes 43.1 and 43.2 would apply in respect of property acquired and that becomes available for use on or after Budget Day. The exclusions would apply in respect of property that becomes available for use after 2024.
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3. Reduced Corporate Income Tax Rate for Zero-Emission Technology Manufacturers
Budget 2021 proposes to temporarily reduce the general corporate and small business income tax rates on qualifying income of zero-emission technology manufacturers by 50% (i.e., to 7.5% and 4.5% respectively). The lower rates will apply to the proportion of a taxpayer's "adjusted business income" from a variety of zero-emission technology manufacturing or processing activities, including equipment relating to solar, wind, and geothermal energy, water energy conservation, storage of electrical energy, and batteries and fuel cells for zero-emission vehicles.
Since the rate reduction is intended to be temporary, Budget 2021 does not propose to change the dividend tax credit rates and gross-up factors applicable to taxpayers who are eligible for the reduced corporate income tax rate. Income subject to the general reduced rate (7.5%) would continue to give rise to eligible dividends.
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4. Tax Relief for Registered Investments
A trust or corporation can apply to the Canada Revenue Agency (CRA) to be a registered investment in respect of one or more of registered retirement savings plans, registered retirement income funds or deferred profit sharing plans (Deferred Plans). Where a trust or corporation that is a registered investment is not widely held such that it fails to meet certain prescribed conditions, it is restricted to holding only investments that are themselves qualified investments for the type of Deferred Plan in respect of which it is registered.
If a registered investment that is subject to these investment restrictions holds property that is a non-qualified investment, it is subject to a special tax under Part X.2 of the ITA equal to 1% of the property's fair market value (FMV) at the time it was acquired, for each month that it holds the non-qualified investment property. The Department of Finance acknowledged that this tax is disproportionate where not all of the interests in the registered investment are held by Deferred Plans.
Budget 2021 proposes that the Part X.2 tax applicable to a registered investment apply only to the extent that interests in the registered investment are held by Deferred Plans. For example, if a trust is a registered investment for a Deferred Plan, but only 30% of its units are held by Deferred Plans while 80% are held by taxable persons, the monthly tax under Part X.2 would be reduced to 30% of 1% of the FMV of non-qualified investments. This measure would apply to taxes imposed under Part X.2 for months after 2020, and months before 2021 to the extent that a registered investment's tax liability for those months has not been finally determined by the CRA before Budget Day.
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5. Hybrid Mismatch Arrangements
Hybrid mismatch arrangements refer to cross-border arrangements which rely on differences in the income tax treatment of an entity or an instrument under the laws of two or more countries to produce a tax outcome with an overall lower tax burden for the parties involved in the arrangement.
Action 2 of the Organisation for Economic Co-operation and Development's (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan) recommended that countries adopt domestic legislation to ensure that multinational entities cannot benefit from such arrangements. Hybrid mismatch arrangements addressed by Action 2 include the following:
- Deduction/non-inclusion mismatches: these arise where a country allows a deduction in respect of a cross-border payment but the receipt of such payment is not included in ordinary income within a reasonable period of time in the other country. Ordinary income generally means income that is subject to income tax at the recipient's full tax rate and that does not benefit from any exemption, exclusion, deduction, credit or comparable tax relief.
- Double deduction mismatches: these arise where a tax deduction is available in two or more countries with respect to a single economic expense.
- Imported mismatches: these arise where a payment is deductible by an entity in one country and included in the ordinary income of a recipient in a second country, but that ordinary income is offset by a deduction under the hybrid mismatch arrangement between the second entity and a further entity resident in a third country.
- Branch mismatches: these arise where the residence country of a taxpayer takes a different view from that of the country where the taxpayer's branch is located as to the allocation of income and expenditures between the two countries.
Budget 2021 proposes to implement rules that are consistent with the OECD Action 2 recommendations to "neutralize" any mismatches by aligning Canadian and foreign income tax treatment. Generally, the proposed rules will provide the following:
- Deny a Canadian income tax deduction where otherwise deductible payments made by a Canadian resident under a hybrid mismatch arrangement result in a further deduction in another country or to the extent that they are not included in the ordinary income of a recipient who is a non-resident of Canada.
- To the extent that a payment made by a non-resident of Canada under a hybrid mismatch arrangement is deductible for foreign income tax purposes, no deduction in respect of the payment be permitted to reduce the income of any Canadian resident. In addition, any amount of the payment received by a Canadian resident would be included in income, and, if the payment is a dividend, it would not be eligible for the deduction otherwise available for certain dividends received from foreign affiliates.
Budget 2021 further provides that additional rules implementing Action 2 recommendations would be introduced to the extent relevant and appropriate in the Canadian context (e.g., to address imported mismatches, branch mismatches or other similar arrangements).
To maintain consistency with the Action 2 recommendations, it is expected that the proposed rules would be mechanical in nature and would not rely on any purpose test and would generally apply in respect of payments between related parties but also to payments between unrelated parties in certain circumstances that are designed to produce a mismatch. The proposed rules would also follow any ordering rules recommended by the OECD to ensure that they are coordinated with similar rules in other countries.
Budget 2021 indicates that the hybrid mismatch arrangement rules are proposed to be implemented in two separate legislative packages. The first legislative package would be released for stakeholder comment later in 2021 and the rules in that package would apply as of July 1, 2022. The second legislative package would be released for stakeholder comment after 2021 and the rules in that package would apply no earlier than 2023 and would include rules consistent with the OECD recommendations in Action 2 that were not addressed in the first legislative package.
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6. Interest Deductibility Limits
Budget 2021 proposes to introduce an earnings-stripping rule that limits the amount of interest that certain businesses can deduct in computing their taxable income. Similar rules have already been adopted by other members of the G7 and the European Union member states following the recommendations of the OECD in its Action 4 of the BEPS Action Plan.
The purpose of this rule is to protect the Canadian tax base from erosion due to excessive debt and interest expense for situations not already covered by other measures such as the thin capitalization rules. Excessive debt or interest expense can occur in many situations, such as where Canadian businesses bear a disproportionate burden of a multinational group's third-party borrowings.
The earnings-stripping rule proposed by Budget 2021 would limit the amount of net interest expense that a corporation may deduct to no more than a fixed ratio of "tax EBITDA", which is that corporation's taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization. The measure of interest expense would exclude interest that is not deductible under the thin capitalization rules or other existing income tax rules. Interest expense and interest income related to debts owing between Canadian members of a corporate group would generally also be excluded.
The new rule would be phased in, with a fixed ratio of 40% for taxation years beginning on or after January 1, 2023 but before January 1, 2024 (the transition year), and 30% for taxation years beginning on or after January 1, 2024.
Interest denied under the proposed rules could be carried forward for up to 20 years or back for up to three years. Denied interest could be carried back to taxation years that begin prior to the effective date of the rule, to the extent the taxpayer would have had the capacity to deduct these denied expenses had the proposed rule been in effect for those years. Other relieving measures would allow Canadian members of a group to transfer unused capacity to deduct interest to other Canadian members of the group who would otherwise be limited by the proposed rule. A "group ratio" rule would also be introduced to allow a taxpayer to deduct interest in excess of the fixed ratio where it can demonstrate that a higher deduction limit would be appropriate in light of the consolidated group's ratio of net third party interest to book EBITDA.
Trusts, partnerships and Canadian branches of non-resident taxpayers would also be subject to the new earnings-stripping rule. Exemptions would be available for CCPCs that 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.
The Department of Finance expects to release draft legislation this summer and estimates that this new rule will increase tax revenues by $5.3 billion over five years, starting in 2021-2022.
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7. Consultation Announced on Canadian Digital Services Tax
Canada has joined the ranks of a number of jurisdictions, including France, the United Kingdom, Spain, Austria, Poland and India as well as the European Commission to propose its own version of a digital services tax (DST). A DST is a gross revenue tax or transaction tax that is targeted at revenues derived by large digital businesses such as revenues from online advertising services, receipts from digital intermediary activities such as online marketplaces, and sales of user-collected data. DSTs are widely perceived as stop-gap measures aimed at encouraging international consensus on Pillar 1 of the OECD/G-20's Inclusive Framework on Base Erosion and Profit Shifting. Should a multilateral agreement be reached on Pillar 1, which may happen in late 2021, Canada and the other jurisdictions would be required to repeal their own DSTs in order to join the OECD initiative.
The DST will apply at a rate of 3% to in-scope revenues from certain digital services reliant on the engagement, data and content contributions of Canadian users. The DST will apply to large foreign and domestic businesses that exceed the gross revenues threshold of €750 million. Special revenue sourcing and user location rules would apply.
In-scope revenues would include:
- Online marketplaces: Services provided through an online marketplace that helps match sellers of goods and services with potential buyers, whether or not the platform facilitates completion of the sale. Included would be optional (e.g., "premium") services that enhance the basic intermediation function or affect its commercial terms. This category would generally not include:
- revenue in respect of the storage or shipping of tangible goods sold through the marketplace, to the extent the revenue reflects a reasonable rate of compensation for those services;
- the sale of goods and services (including the sale, licensing or streaming of digital content such as audio, video, games, software, e-books, newspapers and magazines) by a seller on its own account; and
- trading in financial instruments and commodities.
- Social media: Services provided through an online interface to facilitate interaction between users or between users and user-generated content. This category would not generally include an interface of which the sole purpose is to provide communications services (such as telephone service through Voice over Internet Protocol).
- Online advertising: Services aimed at the placing of online advertisements that are targeted based on data gathered from users of an online interface. This would include online interfaces such as online marketplaces, social media platforms, internet search engines, digital content streaming services, and online communications services. Advertisements would include preferential search listings. The scope would encompass both revenue earned by an interface operator from the display of advertising on the interface as well as revenue earned from systems for facilitating online advertising placement by third parties (including demand-side platforms, supply-side platforms, ad exchanges and advertising performance monitoring services).
- User data: The sale or licensing of data gathered from users of an online interface, including anonymized and aggregated data.
The revenue is specified to not include the applicable value-added tax or sales tax amounts collected. In its Technical Briefing, the Department of Finance advised that there is discussion as to whether the sales of goods by platforms on their own account and related-party transactions should be included within in-scope revenues.
Group Revenue Thresholds
The DST will apply to all types of businesses (corporations, trusts, partnerships) who alone, or as part of a corporate group, meet the following thresholds in a calendar year:
- global revenue from all sources of €750 million or more (the threshold for country-by-country reporting under an OECD standard) in the previous calendar year; and
- in-scope revenue associated with Canadian users of more than $20 million in the particular calendar year.
It is anticipated that groups will generally be defined in the same manner as for country-by-country reporting.
In-scope revenue associated with users in Canada (as opposed to users in another jurisdiction) will be determined using one of two methods. First, tracing will be required for revenues that can be traced on the basis of transactional information. Second, where tracing is not possible, a formulaic approach will be used according to the nature of the revenue. Detailed sourcing rules are proposed for online market places, social media, online advertising, and user data.
The location of a user of an interface would be generally based on the ordinary (i.e., usual) location of the individual user and ordinary place of business of a business user based on relevant identifiers such as billing address, IP address, or telephone area code. Special real-time location rules will apply to targeted advertising using a real-time location.
Treatment for Income Tax Purposes
The DST is a non-income tax and therefore the payor would not be eligible for a credit against Canadian income tax payable, but may be able to claim a business expense under general principles.
Businesses subject to the DST will be required to file an annual return following the end of the reporting period, which is proposed to be the calendar year.
It is contemplated that:
- one annual payment would be required after the end of the reporting period;
- a group would be able to designate an entity to file the DST return and pay the DST liability on behalf of the group; and
- to facilitate enforcement, each entity in a group would be jointly and severally liable for DST payable by any other group member.
The DST would apply as of January 1, 2022, until an acceptable multilateral approach comes into effect. The Department of Finance invites comments on the proposed DST rules and indicated in its Technical Briefing that draft legislation can expected this summer with a second consultation process to follow thereafter.
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Amended Rules for GST/HST on E-commerce
In its Fall Economic Statement, the Government of Canada announced supplemental measures to address certain non-collection of GST/HST on e-commerce sales. Budget 2021 confirms these measures, including that: non-resident vendors will be required to register to collect and remit GST/HST on their supplies of digital products and digital and traditional services to consumers and certain other persons in Canada under a simplified registration regime; distribution platform operators will be required to register for the GST/HST and to collect and remit tax on the supplies they facilitate when made to Canadian consumers; distribution platforms and other non-residents also will be required to register and collect tax on goods shipped from a fulfillment warehouse or another place in Canada, when sold by a non-registered vendor either directly or through the distribution platform; and there are to be measures to require and simplify GST/HST registration and remittance on short-term accommodation in Canada facilitated through a digital platform. These measures are discussed in further detail in the on the Fall Economic Statement. Budget 2021 confirms these measures will come into force on July 1, 2021.
Budget 2021 announces that where 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 during a 12-month transition period, starting from the July 1, 2021 coming into force date.
In response to comments received from stakeholders, Budget 2021 also proposes certain amendments to these proposed measures:
- Budget 2021 proposes an amendment to authorize the Minister of National Revenue to register a person that the Minister believes should be registered under the simplified framework.
- A non-resident vendor or distribution platform operator with sales of digital products and services to consumers in Canada that exceed, or are expected to exceed, $30,000 over a 12-month period is required to register to collect GST/HST under the simplified framework. Budget 2021 proposes an amendment whereby zero-rated supplies of such digital products and services are not included in the calculation of the threshold amount.
- Platform operators will be required to collect and remit GST/HST on the supplies they facilitate for third parties that are not registered under the existing GST/HST framework. The proposed amendment provides that a platform operator will not be liable for failing to collect and remit tax, when the failure results from having relied in good faith on information provided by a third-party supplier. The platform operator will be relieved from liability to the extent that it did not collect and remit the GST/HST, and the third-party supplier will be liable for tax amounts not collected.
- Budget 2021 proposes an amendment to clarify that suppliers that are registered for the GST/HST under the simplified framework are eligible to deduct amounts from the tax that they are required to remit for bad debts, as well as for certain provincial HST point-of-sale rebates.
Platform operators that facilitate a supply of short-term accommodation in Canada or a sale by a non-registered vendor of goods that are located in a fulfillment warehouse in Canada, are required to file an annual information return. Budget 2021 proposes an amendment to clarify that the requirement to file the annual information return only apply to platform operators that are registered or are required to be registered for the GST/HST.
Input Tax Credit Information Thresholds and Billing Agents as Intermediaries
A business that registers to collect GST/HST can often claim input tax credits for the GST/HST it pays on business inputs. To claim an input tax credit, the business must obtain an invoice, receipt or other form of supporting document from the supplier. The supporting documentation must include certain prescribed information, with more information required where the amount paid or payable is greater. Budget 2021 proposes to replace the existing thresholds of $30 and $150, with $100 and $500, respectively.
The prescribed input tax credit information includes the name of the supplier or an intermediary, and for supplies over $100, also the supplier's or intermediary's GST/HST registration number. A billing agent is an agent that collects the consideration and GST/HST on behalf of a supplier, but does not otherwise cause or facilitate the supply of the property or service. Budget 2021 proposes to expand the scope of intermediaries to include billing agents, so that the billing agent can satisfy the prescribed information requirements by providing its name and, when required, its registration number, rather than those of the supplier for which it is acting as agent.
These measures would come into force the day after Budget Day.
New Housing Rebates
The federal and provincial new housing rebates are available for homebuyers on the purchase of certain new homes. The rebates have been the subject of a great deal of litigation before the Tax Court of Canada, as rebate claimants have frequently fallen afoul of one of the many qualifying conditions. One of these problematic conditions is a requirement that the purchaser purchase the new home for use as their primary place of residence, or that of a relation to the purchaser (an individual related by blood, marriage, common-law partnership or adoption, or a former spouse or former common-law partner).
When two or more individuals that are not relations buy a new home, each individual must meet the primary place of residence condition. Budget 2021 proposes to amend the Excise Tax Act (Canada) to permit individuals that are purchasing a new home together to qualify for the rebates if the 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. This measure will come into effect for agreements of purchase and sale entered into after Budget Day.
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9. Excise Duties
New Excise Duty Regime on Vaping
The Government of Canada proposes to introduce a new excise duty framework to tax the vaping liquids used in vaping products. The new framework will be introduced into the Excise Act, 2001, which currently imposes the excise duties on tobacco, spirits and wine, and most recently also cannabis. The new duty will apply to vaping liquids regardless of whether they contain nicotine, while cannabis-based vaping products will continue to be subject to the existing framework for cannabis excise duties. The excise duty will be imposed at the time of packaging or import, and payable by the excise duty licensee that packages the vaping product for final retail sale.
As with the other excise-dutiable products, there will be a licensing regime with applicants having to meet certain criteria, both initially and on periodic renewal. In addition, all vaping products will have to bear an excise stamp, similar to those found on cigarette and cannabis packaging, as evidence of the duty having been paid.
The Government of Canada proposes to work collaboratively with any province or territory interested in a coordinated approach to taxing these products. A similarly coordinated federal and provincial approach was taken with cannabis, and one would expect all (or substantially all) the provinces and territories to participate in respect of vaping liquids. As with other excise-dutiable products, the penalties and offence provisions should be significant. It is proposed that this regime will come into effect in 2022.
New Excise Duty Rates on Tobacco
Budget 2021 proposes to increase the tobacco excise duty rate by $4.00 per carton of 200 cigarettes, with corresponding increase to the excise duty rates for other tobacco products. This measure will come into effect for tobacco sales on the day after Budget Day.
Relief from Excise Duty on Fuel for Some Provinces
The provinces of Alberta, Manitoba and Saskatchewan, and the Northwest Territories and Yukon, are entitled to a rebate for federal excise taxes charged on fuels, automobile air conditioners and certain fuel inefficient vehicles (i.e., the 'green levy'), when these are acquired for the province's or territory's own use. Budget 2021 proposes a new joint election between the vendor of an excise taxable good and the purchasing province or territory to specify when the vendor alone would be the eligible party to the rebate, and in the absence of the joint election, only the province or territory would be the eligible party to the rebate. This measure is to apply on or after January 1, 2022.
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10. Luxury Tax
Budget 2021 proposes to introduce legislation imposing a "luxury tax" on the sales of certain personal use property, namely vehicles and aircraft (including aeroplanes, hangers, and gliders) having a retail sales price in excess of $100,000 and boats (including yachts, recreational motor boats, and sailboats) having a retail sales price in excess of $250,000.
The tax will be calculated as the lesser of 20% of the value over the stated threshold ($100,000 for cars and aircraft and $250,000 for boats) or 10% of the full value of the personal use property. Interestingly, HST will apply on the full purchase price inclusive of the luxury tax.
The luxury tax will apply at the point of sale in Canada, upon importation, or at the final point of sale within Canada following importation, as appropriate, and will come into effect starting January 1, 2022. Exported goods are not subject to the tax. The seller or lessor will be responsible for remitting the tax, in full, at the time of sale, even in the case of a leased or financed purchase.
All new personal use vehicles, aircraft, and boats will be subject to the tax, with a number of notable exceptions:
With respect to vehicles, exceptions exist for off-road vehicles, snowmobiles, racing cars that owned solely for racing, and recreational vehicles (RVs). Farm and construction vehicles and hearses, as well as certain commercial and public sector vehicles are also excluded from the base.
In the case of aircraft, exceptions exist for commercial aircraft having a maximum carrying capacity of at least 39 persons, as well as for certain smaller aircraft having a commercial or public sector application.
New boats subject to the tax include all new boats suitable for personal use, but exclude smaller craft such as water scooters. Also excluded are floating homes, commercial fishing vessels, ferries and cruise ships.
Proposed legislation will be introduced following a consultation period.
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11. Improving Duty and Tax Collection on Imported Goods
Budget 2021 proposes amendments to the Customs Act to unify the basis by which an importer determines the value for duty of imported goods and by digitizing the payment process.
Budget 2021 proposes to amend the Customs Act in respect of the method by which an importer determines the value for duty of goods imported into Canada. Presently a Canadian company that purchases and imports goods from a foreign supplier may determine the value for duty on imported goods on an intercompany or foreign sales price, even if the importer has an agreement to sell the goods to another party in Canada at the time of import. Budget 2021 proposes amendments to impose a requirement to value imported goods using the value of the last sale for export to a purchaser in Canada. While the draft legislation is yet to be released, if the amendments require such value for duty to be based on the domestic sales transaction according to a modified "last sale" principle, it would be a dramatic departure from current rules that could vastly increase duty liability for importers.
Additionally, Budget 2021 announces proposed changes that aim to modernize and digitize the duty and tax payment process for commercial importers. The changes coincide with the roll out of the key functionalities of the Canada Border Services Agency's Assessment and Revenue Management initiative, which began on a limited basis in May 2021, and the next phase of which is anticipated for May 2022. This initiative will require all importers (or their agents to whom they delegate responsibility) to account for and pay duties by way of a single electronic portal that, among other functionalities, utilizes a centralized accounting document called the Commercial Accounting Declaration, which can be updated and revised to implement corrections to trade data (e.g., valuations, tariff classification, origin), all without having to file a separate adjustment document. The proposed changes will simplify the administrative process for commercial importers, and allow them to make good-faith corrections without incurring penalties or interest.
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12. Electronic Filing and Certification of Tax and Information Returns
Budget 2021 proposes to amend ITA provisions governing filing and notices of assessment, including:
- Providing the CRA with the authority to send certain notices of assessment electronically without taxpayer authorization to do so. This would apply to individuals who e-file their returns or employ a tax preparer to e-file for them. Paper filers will continue to receive their notices of assessment in hard copy.
- Businesses that use the CRA My Business Account portal for correspondence will have the default correspondence option changed to electronic format. However, businesses would have the option of choosing to receive hard copies of their correspondence.
- For information returns sent after 2021, issuers of T4As and T5s will be permitted to provide them electronically to the taxpayer without having to issue a paper copy and without having to obtain authorization from the taxpayer to issue them electronically.
- Where a professional tax preparer files more than five corporate or five individual returns (now including trusts), the preparer will be required to file electronically. Previously more than 10 income tax returns were required to trigger this requirement and trust returns were excepted. This requirement will be in effect for calendar years after 2021.
- The threshold for mandatory electronic filing of income tax information returns for a calendar year is also reduced to five (from 50) in respect of a particular type of information return. This will be in effect for calendar years after 2021.
- Electronic filing thresholds for returns of corporations under the ITA and of GST/HST registrants under the ETA are to be eliminated such that most corporations and GST/HST registrants will need to file electronically.
- Certain prescribed forms will no longer need a "wet" signature, including:
- T183 - Information Return for Electronic Filing of an Individual's Income tax and Benefit Return;
- T2200 - Declaration of Conditions of Employment
Remittances required to be made at a financial institution will include online payments made through such an institution. Electronic payments would be required for remittances under the ITA in excess of $10,000. The threshold for mandatory remittances through a financial institution for GST/HST purposes would be lowered from $50,000 to $10,000 (along with remittances under the Excise Act, 2001, the Air Travellers Security Charge Act and Part 1 of the Greenhouse Gas Pollution Pricing Act).
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13. Mandatory Disclosure Rules
Budget 2021 cites a lack of timely information concerning so-called aggressive tax planning as a major challenge for tax administrations. The government's lack of success in its legislative and litigation agendas undertaken to peel back the tax planning curtain likely informed the disclosure rule proposals in Budget 2021.
Canada's reportable transactions regime was introduced in Budget 2010, and set out a requirement to report certain transactions where two out of three generic "hallmarks" were present. The definition of a reportable transaction relied on the general anti-avoidance rule concept of an avoidance transaction. Details about compliance have been scarce and the CRA has refused to fulfill requests under the Access to Information Act for data. Anecdotally, the existing reportable transactions regime appears to have failed and Budget 2021 concedes that these rules resulted in limited filings, hence the impetus to amend.
Proposed changes are:
(1) only one rather than two of the three generic hallmarks need to be present for a transaction to be a reportable transaction;
(2) the definition of "avoidance transaction" for the purposes of the regime would be materially broadened to include a scenario in which it may be reasonably concluded that one of the main purposes of entering into the transaction was to obtain a tax benefit;
(3) the timing for filing a report would be dramatically shortened, from June 30 of the year following the year of the transaction to within 45 days of the earlier of two triggering events; and
(4) reporting would be required by promoters or advisors, in addition to taxpayers and persons entering into transactions to benefit taxpayers (subject to solicitor-client privilege).
While the reportable transactions regime targets generic hallmarks of so-called "aggressive tax planning", Budget 2021's notifiable transactions regime would target specific areas of concern (e.g., loss trading). The proposed rules would be analogous to the US "listed transactions" and "transactions of interest". The proposed Canadian regime would allow the Ministers of Revenue and Finance to designate notifiable transactions, which would be those that have been found to be abusive, and transactions "of interest". Descriptions would be provided of factual scenarios and outcomes, including specific, detailed examples as appropriate to assist taxpayers with identifying notifiable transactions.
Budget 2021 proposes that a notifiable transaction (or one that is substantially similar to a notifiable transaction) be reported to the CRA in prescribed form within 45 days. The reporting requirement would apply to taxpayers who enter into notifiable transactions, other persons who enter into such a transaction to obtain a benefit for a taxpayer, and promoters/advisors and persons operating not at arm's length with promoters/advisors who are entitled to transaction fees. Again, an exception would apply where advice was subject to solicitor-client privilege.
Reporting Uncertain Tax Positions
An uncertain tax position (UTP) is a tax filing position the sustainability of which is open to enough doubt that a reserve is required to be recorded on financial statements prepared in accordance with IFRS (required for public corporations and optional for private corporations). Budget 2021 proposes that UTPs be reported to the CRA in certain circumstances, namely, where the corporation:
(1) is required to file a Canadian return of income;
(2) has at least $50M in assets at the end of the year (based on carrying value on the corporation's balance sheet or that would have been reflected on the balance sheet had one been prepared in accordance with GAAP; for banks and insurers, the relevant amount would be as disclosed for regulatory purposes);
(3) has audited financial statements prepared in accordance with IFRS or another form of country-specific GAAP relevant for domestic public companies (including related corporations); and
(4) reflects some uncertainty in its audited financial statements in respect of its filing position (i.e., it is more likely than not that the domestic tax authority would not entirely accept the filing position).
The reporting requirement would extend to corporations that are controlled by Canadian public corporations that meet the reporting thresholds.
The reporting of prescribed information (being the quantum of tax, relevant facts, tax treatment including specific ITA provisions, and whether the UTP concerned temporary or permanent differences) would be required contemporaneously with the corporation's T2 filings. While the proposed regime does not overturn the result in BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61, the utility of UTPs to formulate audit strategy was squarely framed in that case and that loss was likely frustrating for the CRA.
Extended Reassessment Period and Penalties
Budget 2021's rationale for requiring potentially abusive transactions to be proactively reported to the CRA, and on shortened timelines, is fairly obvious. A taxation year in which a well-planned and executed transaction was implemented will become statute-barred in three or four years unless an exceptional extended limitation period is engaged. Budget 2021 proposes to further enhance the CRA's audit powers by providing for the suspension of the normal reassessment period where a taxpayer failed to adhere to its mandatory disclosure requirements under the above regimes.
Finally, Budget 2021 proposes a penalty regime where a taxpayer that fails to meet reporting requirements for reportable or notifiable transactions would be subject to a $500 per week penalty, capped at the greater of $25,000 and 25% of the tax benefit achieved. For corporations with assets of $50 million or more, the penalties quadruple. Promoters/advisors and people operating not at arm's length with promoters/advisors and who are entitled to fees in respect of transactions may have penalties imposed equal to: 100% of their fees in connection with the tax benefit; $10,000; and $1,000 per day for each day the failure persists to a maximum of $100,000. Corporations that fail to report UTPs would be subject to a penalty of $2,000 per week to a maximum of $100,000.
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14. Enhanced Tax and Collections Enforcement
Budget 2021 builds on previous federal budgets to "combat tax evasion and aggressive tax avoidance," by committing an additional $304.1 million over five years, to enable the CRA to fund new initiatives and extend existing programs, including:
- Increasing GST/HST large business audits with high risk of non-compliance;
- Preventing unwarranted and fraudulent GST/HST refund and rebate claims and quickly issuing refunds for proper claims; and
- Enhancing capacity to identify tax evasion involving trusts and provide better service to executors and trustees.
These initiatives are expected to recover revenues of $810 million over five years.
Budget 2021 also proposes to provide an additional $230 million over five years for the CRA to improve its ability to collect outstanding taxes, which is anticipated to lead to the collection of an additional $5 billion in outstanding taxes over five years. One new mechanism to help the CRA's collection efforts seeks to stop abusive tax debt avoidance schemes designed to circumvent the application of an existing tax debt avoidance rule. The current rule makes a non-arm's length recipient of property liable for taxes owing by the transferor of the property who owes tax, up to the FMV of the transferred property, minus the FMV of any consideration given in return (both valuations determined at the time of transfer). In certain circumstances, the rule is now enhanced, for transfers of property that occur on or after Budget Day, to prevent planning to technically avoid the rule by:
- Arranging for a tax debt to crystallize after the end of the taxation year in which the property transfer occurs, by deeming the tax debt to have arisen in the taxation year in which the property was transferred;
- Arranging for the transferor to be dealing at arm's length with the transferee at the time of the property transfer, by deeming them to not having been dealing with each other at arm's length; or
- Stripping out net asset value of the transferor using a series of transactions that does not breach the point-in-time valuation test for the property transferred and consideration given therefor, by determining these values based on the overall result of the series of transactions, rather than simply using the values at the time of transfer.
Planners and promoters of these tax debt avoidance schemes will also face penalties equal to the lesser of:
- 50% of the tax that is attempted to be avoided; and
- $100,000 plus the planner's or promoter's compensation for the scheme.
Budget 2021 also enhances the CRA's audit powers by providing its auditors with the authority to require taxpayers to answer all proper questions and provide all reasonable assistance relating to the administration or enforcement of the ITA, including requiring persons to attend at the place of business and respond to questions in any form specified, whether in writing or orally.
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15. Tax on Unproductive Use of Canadian Housing by Foreign Non-Resident Owners
Following on the heels of a number of Canadian provinces and municipalities, Budget 2021 introduces, at a federal level, a "vacancy tax" aimed at foreign buyers of Canadian residential real estate.
Stating unambiguously the viewpoint that "homes are to live in", Budget 2021 proposes to take aim at the unproductive use of domestic housing by levying an annual 1% tax on the value of "non-resident, non-Canadian" owned real estate that is determined to be "vacant or underused" as of January 2022. Exemptions may be available where the property is leased to one or more "qualified tenants", an undefined term, for a minimum of one year.
The proposal also introduces an information filing requirement for all owners of Canadian residential property, other than Canadian citizens and Canadian permanent residents, beginning with 2023. This information return or declaration will require the owner to list each Canadian residential property that they own, whether vacant and unproductive or otherwise, and to provide additional information such as the property value, their ownership interest in the property, and whether the owner is eligible for an exemption. A failure to file the declaration could result in a loss of any exemption for future years and the application of penalties and/or interest, in addition to exposing the taxpayer to an unlimited assessment period.
The government intends to release a consultation paper in the coming months. While the stated goal of this tax is clear, there are a number of issues to be addressed. Some, but not all, of those issues have been noted in Budget 2021 and grappled with by local governments at the provincial and municipal level, for example:
- Defining "non-resident, non-Canadian" ownership in the context of partnerships, corporations, and trusts;
- Addressing issues of joint or co-ownership of property;
- Defining key terminology such as "residential property", "vacant or underused", and "qualified tenant";
- Determining the value of the residential property;
- Carving out exemptions, whether by geographical area or by owner (for example, for "satellite families"); and,
- The mechanisms of enforcement and compliance.
It therefore remains to be seen how integrated or punitive this federal "vacancy tax" will be when applied to jurisdictions that may already be subject to more than one such tax. For example, in some jurisdictions such as Vancouver, British Columbia, the existence of two similar regimes has already led to inconsistent results, where one property may be occupied for the purposes of one regime yet vacant for another.
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16. Increasing Old Age Security for Canadians 75 and Over
Leading up to the 2019 federal election, the current government's platform included a pledge to increase the Old Age Security (OAS) pension. That increase, which was originally expected to take effect in July 2020, was addressed in Budget 2021.
Budget 2021 proposes to introduce legislation to increase regular OAS payments for pensioners 75 and over by 10% as of July 2022, resulting in an additional benefit in the first year of $766, with that increase indexed for inflation. This continuing increase is coupled with a one time payment of $500 in August 2021 to OAS pensioners who will be 75 or over as of June 2022. The one time payment of $500 will be excluded from the definition of income for the purposes of determining eligibility for the Guaranteed Income Supplement.
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17. Tax Treatment of COVID-19 Benefit Amounts
Deductions for Repayments of COVID-19 Benefits
Budget 2021 includes a proposal to avoid a mismatch of the income inclusion and deduction in respect of the repayment of certain COVID-19 benefit amounts for individual taxpayers. Specifically, individual taxpayers who repay certain COVID-19 benefit amounts at any time before 2023 will be permitted to deduct the amount repaid in the year they received such benefit (including by way of filing a request to adjust a previously filed return). In the absence of the new rules, repayment of the amount would only be deductible in the year of repayment. The rules apply to the following COVID-19 benefits (as well as certain provincial programs providing similar benefits):
- Canada Emergency Response Benefits
- Employment Insurance Emergency Response Benefits
- Canada Emergency Student Benefits
- Canada Recovery Benefits
- Canada Recovery Sickness Benefits
- Canada Recovery Caregiving Benefits.
Canadian COVID-19 Benefits fully taxable to Non-Residents
Budget 2021 also proposes to include the above listed COVID-19 benefits in the income of non-residents of Canada who reside in Canada but are considered non-residents of Canada for income tax purposes. The benefits will be treated similar to employment income earned in Canada by such non-residents.
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18. Previously Announced Measures
In addition to stating the Government of Canada's general intention to pursue technical amendments to tax legislation as they are required, Budget 2021 specifically signalled the Government of Canada's intention to implement a number of previously announced proposals (as modified to reflect post-release consultations). The list of specific prior proposals referenced in Budget 2021 is lengthy and includes proposals announced between 2016-2021. They included the following that may be of interest to the business community:
- Legislative proposals released on February 24, 2021 and March 3, 2021, in respect of the CEWS, the CERS and the Lockdown Support.
- Legislative proposals released on December 21, 2020, relating to temporary adjustments to the automobile standby charge to take into account COVID-19.
- Legislative proposals released on December 16, 2020, relating to the extension of flow-through share expenditure timelines.
- Legislative proposals released on December 15, 2020, relating to CCA claims for purchases of zero-emission automotive equipment and vehicles.
- Certain income tax measures relating to registered disability savings plans, employee stock options, and patronage dividends, as well as certain GST/HST measures relating to face masks and face shields, announced in the Fall Economic Statement. See our article on the Fall Economic Statement.
- Legislative proposals announced on November 27, 2020 to facilitate the conversion of Health and Welfare Trusts to Employee Life and Health Trusts.
- Regulatory proposals announced on July 2, 2020 providing relief for Deferred Salary Leave Plans and Registered Pension Plans during COVID-19.
- Legislative proposals and tax measures released on July 30, 2019, relating to multi-unit residential properties, registered plans, multi-employer pension plans for older members, pensionable service under an individual pension plan, mutual funds, character conversion transactions, electronic delivery of requirements for information, transfer pricing, foreign affiliate dumping, cross-border share lending arrangements, the Accelerated Investment Incentive, clean energy manufacturing equipment, and zero-emission vehicles.
- Legislative proposals released on May 17, 2019 relating to GST/HST, including changes to the holding corporation rules to include holding partnerships and trusts.
- Regulatory proposals released on July 27, 2018 relating to GST/HST.
- The income tax measures announced in Budget 2018 to implement enhanced reporting requirements for certain trusts.
- Measures confirmed in Budget 2016 relating to the GST/HST joint venture election.
Although the Department of Finance indicated that legislative proposals to implement the foregoing measures would reflect consultations and deliberations which have occurred since their original releases, Budget 2021 does not provide a timeline for the introduction of such proposals.
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This analysis was prepared by the following members of the Gowling WLG Tax Group:
The Gowling WLG Tax Group delivers expert and innovative advice to our clients. Our team of tax professionals have leading practices in income tax, international tax planning, transfer pricing, Indigenous tax, executive compensation, indirect tax and customs, and tax dispute resolution.
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