2021 Federal Budget Highlights
On April 19, 2021, Finance Minister Chrystia Freeland tabled the minority Government’s 2021 Federal Budget. Read below for a highlight of tax and other proposals:
- Business Subsidy and Income Tax Measures
- Personal Income Tax Measures
- International Tax Measures
- Sales Tax and Excise Tax Measures
- Administrative and Other Matters
BUSINESS SUBSIDY AND INCOME TAX MEASURES
Canada Emergency Wage Subsidy (CEWS)
The current combined maximum base subsidy and top-up wage subsidy rate is set at 75% through the qualifying period ending on June 5, 2021. The Budget proposes to extend the CEWS to September 25, 2021, with a gradual phase out beginning July 4, 2021. The phase out will limit the subsidy to employers with a revenue decline of over 10%, along with a gradual decrease in the maximum weekly benefit per employee from $847 to $226.
Repayment by Publicly Listed Corporations
The Budget propose to require a publicly listed corporation to repay its wage subsidy amounts received for a qualifying period that begins after June 5, 2021, where its aggregate compensation for specified executives during the 2021 calendar year exceeds its aggregate compensation for specified executives during the 2019 calendar year.
Canada Recovery Hiring Program (CRHP)
The Budget proposes a new CRHP 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. An eligible employer would be able to claim either the CRHP or the CEWS for a particular qualifying period, but not both.
Canada Emergency Rent Subsidy (CERS)
The current maximum base rent subsidy is set at 65% through the qualifying period ending on June 5, 2021. The Budget proposes to extend the CERS to September 25, 2021 with a gradual phase out beginning July 4, 2021. The phase out will limit the subsidy to organizations with a revenue decline of over 10%, along with a gradual decrease in the subsidy rate from 65% to 20%.
Lockdown Support is offered through the CERS to provide additional help for those locations that must cease operations or significantly limit their activities under a public health order. The Budget proposes to extend the current 25% rate for the Lockdown Support for the qualifying periods from June 6, 2021 – September 25, 2021.
Capital Cost Allowance (CCA) – Immediate Expensing
The Budget proposes a temporary immediate expensing in respect of ‘eligible property’ acquired by a CCPC on or after Budget Day and that becomes available for use before January 1, 2024. This immediate expensing will be subject to a maximum of $1.5 million per tax year (pro-rated for short taxation years), to be share amongst associated members of a group of CCPCs. Unused limits cannot carry forward. The half-year rule would be suspended for property that falls under this measure.
Eligible property in respect of this measure includes depreciable capital property subject to the CCA rules, other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51 (long lived assets).
This measure would not reduce the availability of other enhanced deductions under existing rules (i.e., full expensing of manufacturing and processing machinery and equipment). Further, CCPCs with more than $1.5 million of annual capital cost of eligible property can choose which CCA class the immediate expensing applies. Thus, a CCPC may expense up to $1.5 million under this new proposal, plus benefit from immediate expensing of clean energy equipment under the current rules.
Property that has been used, or acquired for use, for any purpose before it was acquired by the taxpayer would be eligible for this measure only if both of the following conditions
- 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 “rollover” basis.
CCA for Clean Energy Equipment
CCA Classes 43.1 and 43.2 provide accelerated CCA rates (30% and 50%, respectively) for investments in specified clean energy generation and energy conservation equipment. Property acquired after November 20, 2018 is currently eligible for immediate expensing. The Budget proposes to expand the type property and expenditures included these classes. These new measures would apply in respect of property that is acquired and becomes available for use on or after Budget Day, where it has not been used or acquired for use for any purpose before Budget Day.
Rate Reduction for Zero-Emission Technology Manufacturers
The Budget proposes to apply temporary reduced tax rates on eligible zero-emission technology manufacturing and processing income of:
- 5% where that income would otherwise be taxed at the 15% general corporate rate; and
- 5% where that income would otherwise be taxed at the 9% small business tax rate.
For those taxpayers with income subject to both the general and small business corporate tax rates, the taxpayers would be able to choose to have their eligible income taxed at the 7.5% general rate or the 4.5% small business rate. No corresponding changes to the dividend gross-up and tax credits are proposed.
These measures would apply to taxation years that begin after 2021 and the reduced rates would start phasing out in taxation years beginning in 2029, with a full phase out for taxation years that begin after 2031.
Film or Video Production Tax Credits
The Budget proposes to extend, by 12 months, certain timelines with respect to the Canadian Film or Video Production Tax Credit (CPTC) and the Film or Video Production Services Tax Credit (PSTC).
These measures would be available for productions for which eligible expenditures were incurred by taxpayers in their taxation years ending in 2020 or 2021.
Mandatory Disclosure Rules
To obtain information on aggressive tax planning strategies, the government is consulting on certain proposals to enhance Canada’s mandatory disclosure rules. These proposals include changes to the current reportable transaction rules, new requirements to report notifiable transactions and uncertain tax treatments, and in certain circumstances, the extension of applicable reassessment periods. The proposal also includes penalties for failure to report, assessable to both the taxpayer and advisors/promoters of reportable/notifiable transactions.
The Budget contains detailed information regarding the proposals and invites stakeholders to provide comments to the Department of Finance by September 3, 2021.
PERSONAL INCOME TAX MEASURES
COVID-19 Benefit Amounts
Taxable benefits received by individuals may be required to be repaid (i.e., where the individual determines they were not eligible for the benefit). The amount repaid can only be deducted in the year the repayment takes place, which may not be the same year in which the benefit is included in income. The Budget proposes to allow individuals to claim a deduction in respect of repaid COVID-19 benefits for the year in which the benefit amount was received, rather than the year it was repaid. This option would be available for benefits repaid at any time before 2023.
The Budget also proposes to amend the Income Tax Act to ensure that benefit amounts are include in the taxable income of those individuals who reside in Canada but are considered non-resident persons for income tax purposes.
Disability Tax Credit (DTC)
The DTC is a non-refundable tax credit available to assist those with severe and prolonged impairment in physical and mental functions. Budget 2021 proposes to expand the eligibility criteria for the DTC. There are no increases to the amount of the DTC proposed.
Canada Workers Benefit (CWB)
The CWB is a non-taxable refundable tax credit that supplements the earnings of low and modest-income workers. The Budget proposes to enhance the CWB in 2021 by increasing the phase-in rate by 1% for both single individuals without dependents, as well as families and to increase the phase out thresholds from 12% to 15%. The Budget does not propose a change to the maximum credit available to be received.
Other personal income tax measures proposed by the Budget include:
- Expansion of the Norther Residents Deduction; and
- Inclusion of postdoctoral fellowship income in the definition of ‘earned income’ for RRSP contribution purposes.
INTERNATIONAL TAX MEASURES
Interest Deductibility Limits
The Budget proposes to introduce an earnings-stripping rule, applicable to Canadian corporations, trusts, partnerships and Canadian branches of non-resident taxpayers, that would 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 ‘tax EBIDTA’. The fixed ratio is proposed to be 40% in the initial transition year, and 30% for the years thereafter. Denied interest may be carried back for up to three years and forward for up to 20 years.
These rules would not be applicable to CCPCs that have taxable capital employed in Canada of less than $15 million amongst their associated group of companies; and groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.
This measure is proposed to be phased in for taxation years beginning on or after January 1, 2023 for both existing and new borrowings. Draft legislative proposals are expected to be released for comment this summer.
Hybrid Mismatch Arrangements
The Budget proposes to implement new rules aimed at restricting the ability of multinational enterprises from deriving tax benefits from the use of hybrid mismatch arrangements, which exploit tax differences in two or more countries to obtain tax benefits. The proposed rules would be implemented in two separate legislative packages. The first legislative package would be released for stakeholder comment in 2021, with the related rules to apply as of July 1, 2022. The second legislative package would be released for stakeholder comment after 2021, with the related rules to apply no earlier than 2023.
SALES TAX AND EXCISE TAX MEASURES
The 2020 Fall Economic Statement proposed a number of changes to the Goods and Services/Harmonized Sales Tax (GST/HST) related to e-commerce, along with draft legislative proposals for comments. The Budget proposes amendments to these proposals resulting from the comments received. These proposed amendments include, among other items:
- A safe harbour rule to ensure that platform operators are not held liable for failing to collect and remit tax as a result of having relied, in good faith, on information provided by third-party suppliers;
- Clarification that suppliers registered or GST/HST under the simplified framework are eligible to deduct amounts for bad debts from required tax remittances; and
- Clarification that supplies of digital products or services that are GST/HST-free 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.
Where affected businesses show that they have taken reasonable steps but have difficulty meeting these new obligations, the CRA will take a practical approach to compliance and will exercise discretion in administrating these measures during a 12-month transition period starting on July 1, 2021.
Tax on Select Luxury Goods
The Budget proposes to introduce a tax on the retail sale and import, of new luxury cars and personal aircrafts priced at over $100,000, and boats priced over $250,000, for personal use, effective as of January 1, 2022.
For vehicles and aircrafts priced over $100,000, the tax would be the lesser of 10% of the full value of the vehicle or aircraft, and 20% of the value above $100,000. For boats priced over $250,000, the amount of the tax would be the lesser of 10% of the full value of the boat or 20% of the value above $250,000.
Tax on Vacant Residential Properties
The Budget proposes to introduce a new national 1% tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused. This tax would be levied annually beginning in 2022.
Beginning in 2023, all owners of residential property in Canada, other than Canadian citizens or permanent residents of Canada, would be required to file an annual declaration for the prior calendar year with the CRA in respect of each Canadian property they own.
Other Sales Tax and Excise Tax Matters
Other sales tax and excise tax measures proposed by the Budget include:
- Adjustments to the conditions to qualify for the GST New Housing Rebate;
- An increase in the tobacco excise duty rate;
- The implementation of a tax on vaping products in 2022 through the introduction of a new excise duty framework;
- Amendments to the Customs Act to improve the collection of duties and taxes on imported goods.
ADMINISTRATIVE AND OTHER MATTERS
Avoidance of Tax Debts
The Budget proposes a number of measures to address complex transactions that are intended to circumvent the existing rules related to the avoidance of tax debt. These measures include a penalty for planners and promoters of tax debt avoidance schemes equal to the lesser of 50% of the tax attempted to be avoided, and $100,000 plus the promoter’s or planner’s compensation for the scheme.
Electronic Filing and Certification of Tax and Information Returns
The Budget proposes the following measures:
- Allow the CRA to send certain notices of assessment electronically without taxpayer authorization;
- Allow issuers of T4A and T5 information returns to provide slips electronically without also having to issue a paper copy. This measure would apply in respect of information returns sent after 2021;
- Requirement for professional preparers of income tax returns to file electronically where they prepare more than 5 corporate tax returns or personal income tax returns, or more than 5 information returns, per calendar year, for calendar years after 2021; and
- Require electronic filing of all corporate income tax returns and GST returns.
The Budget also proposes to eliminate the requirement for handwritten signatures for certain prescribed forms, including the T183 form for both personal and corporate income tax returns, and T2200 Declaration of Conditions of Employment.
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If you have any questions or would like further information relating to the 2021 Budget and its impact on you, please contact your Smythe advisor.