The program spending measures announced focus on transitioning from emergency response to recovery. The Government announced it will invest more than $101 billion in net new spending over the next three years, including $30 billion over the next five years to build a national child-care system.
There were a significant number of tax measures included in this Budget, as well as items for future consultations.
The following are emergency measures and tax highlights from the announcements:
Budget 2021 proposes to extend the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Rent Subsidy (CERS) and the Lockdown Support until September 2021. The subsidy rates will gradually decline over the July to September qualifying periods.
The Budget also proposes to provide the Government with the legislative authority to add additional qualifying periods until November 20, 2021, should the economic and public health situation warrant it.
The Budget proposes the wage subsidy rate structures for June 6, 2021 to September 25, 2021. The maximum subsidy rates will initially be 75 percent, with gradual phasing out starting July 4, 2021. Only employers with a decline in revenues of more than 10 percent will be eligible for the wage subsidy for qualifying periods beginning on or after July 4, 2021.
The Budget proposes to extend the current rate structure for the base rent subsidy from June 6, 2021 to September 25, 2021, with subsidy rates being gradually phased out starting July 4, 2021.
Budget 2021 also proposes to introduce a deeming rule whereby the purchaser of the assets of a seller may be deemed to meet the rent subsidy rules.
Lockdown Support for CERS
Further support is available for applicants who qualify for the base rent subsidy in locations that must cease operations or significantly limit their activities under a public health order issued under the laws of Canada, a province or territory. Budget 2021 proposes to extend the current 25-percent rate for the Lockdown Support for the qualifying periods from June 6, 2021 to September 25, 2021.
Canada Recovery Hiring Benefit
Budget 2021 introduces the new Canada Recovery Hiring Benefit (CRHB). This program provides eligible employers a subsidy of up to 50 percent on the incremental remuneration paid to employees between June 6, 2021 and November 20, 2021.
Eligible employers can claim either the CRHB or the CEWS for a particular qualifying period, but not both.
Eligible employers include individuals, non-profit organizations, registered charities, certain partnerships and Canadian-controlled private corporations (CCPCs). Employers qualify for this program if they have a drop in revenue which is to be computed the same way as it is computed for the CEWS.
The subsidy is equal to the incremental remuneration multiplied by the applicable hiring subsidy rate for that qualifying period. Incremental remuneration for a qualifying period means the difference between remuneration paid by an employer in a qualifying period and remuneration paid by an employer in a baseline period. The initial baseline period will be March 14 to April 10, 2021.
Other Emergency Business Support Measures
The Government proposes to extend the number of weeks that Canadians can apply for the Canada Recovery Benefit from 38 weeks to 50 weeks. The first four of these weeks will be paid at $500 per week, consistent with the current payment amount, and the remaining eight weeks will be paid at $300 per week. All new Canada Recovery Benefit claimants after July 17, 2021 will also receive the $300 per week benefit, available until September 25, 2021.
The Government proposes to extend the number of weeks that Canadians can apply for the Canada Recovery Caregiving Benefit from 38 weeks to 42 weeks. The payments will remain at $500 per week.
The Government proposes to provide authority for potential extensions of the Canada Recovery Benefit and its associated benefits, as well as regular Employment Insurance (EI) benefits until no later than November 20, 2021.
Corporate Tax Rates
No new corporate income tax rate changes were announced in this Budget, other than for zero-emission technology manufacturers as described below.
Budget 2021 proposes to provide immediate deductions in respect of certain “eligible property” acquired by a CCPC. This immediate deduction will be available for eligible property acquired on or after Budget Day and that becomes available for use before January 1, 2024, up to a maximum amount of $1.5 million per taxation year.
The immediate deduction will only be available for the year in which the property becomes available for use. The $1.5-million limit will be shared among associated members of a group of CCPCs. CCPCs with capital costs of eligible property in a taxation year that exceed $1.5 million will decide which capital cost allowance (CCA) classes the immediate deduction will be attributed to, and any excess capital costs will be subject to the normal CCA rules. For those CCPCs with less than $1.5 million of eligible capital costs, no carry-forward of excess capacity will be allowed.
Rate Reduction for Zero-Emission Technology Manufacturers
Budget 2021 proposes a temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers as follows:
7.5 percent, where that income would otherwise be taxed at the 15 percent general corporate tax rate; and
4.5 percent, where that income would otherwise be taxed at the 9.0 percent small business tax rate.
The reduced rates will apply to taxation years that begin after 2021. The reduced rates will be gradually phased out starting in taxation years that begin in 2029 and fully phased out for taxation years that begin after 2031.
CCA for Clean Energy Equipment
Budget 2021 proposes to modernize CCA classes for investments in specified clean energy generation and energy conservation equipment. Qualifying property will be eligible for accelerated CCA rates of 30 percent and 50 percent, depending on classification.
Interest Deductibility Limitations
Budget 2021 proposes to introduce rules that will limit the amount of net interest expense that an entity may deduct in computing its taxable income to no more than a fixed ratio of “tax EBITDA.” Generally, EBITDA is a corporation’s taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization.
The measures will be phased in, with a fixed ratio of 40 percent for taxation years beginning on or after January 1, 2023, but before January 1, 2024 (the transition year), and 30 percent for taxation years beginning on or after January 1, 2024.
This measure will apply with respect to existing as well as new borrowings.
The following rules will apply:
Tax EBITDA will exclude, among other things, dividends to the extent they qualify for the inter-corporate dividend deduction or the deduction for certain dividends received from foreign affiliates.
Interest expense and interest income will include amounts that are legally interest, and also certain payments that are economically equivalent to interest, and other financing-related expenses and income.
The measure of interest expense will exclude interest that is not deductible under existing income tax rules, including the thin capitalization rules, which will continue to apply.
Interest expense and interest income related to debts owing between Canadian members of a corporate group will generally be excluded.
The new rules will also apply to trusts, partnerships and Canadian branches of non-resident taxpayers.
Exemptions from the new rules will be available for:
CCPCs that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million; and
groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.
Interest denied under
these rules will carry forward for up to twenty years or carried back for up to
three years. Denied interest may be allowed to be carried back to taxation
years that begin prior to the effective date of this rule.
These proposed rules also include a “group ratio” rule that will allow a taxpayer, in certain circumstances, to deduct interest in excess of the fixed ratio of tax EBITDA calculated on a consolidated basis. For purposes of the group ratio rule, the parent company and all of its subsidiaries that are fully consolidated in the parent’s audited consolidated financial statements will be included in the calculation.
Draft legislative proposals are expected to be released for comment in the summer.
Mandatory Disclosure Rules
Budget 2021 launches public consultations on proposals to enhance Canada’s income tax mandatory disclosure rules. This consultation will address changes to the Income Tax Act’s (ITA’s) reportable transaction rules, a new requirement to report notifiable transactions, and a new requirement for specified corporations to report uncertain tax treatments.
Tackling Tax Avoidance and Evasion
Budget 2021 builds on the previous investments in the Canada Revenue Agency (CRA) with new measures to combat tax evasion and aggressive tax avoidance.
Reaffirming CRA Audit Power
Budget 2021 proposes to amend legislation to confirm that CRA officials have the authority to require taxpayers to respond to questions orally or in writing, including in any form specified by the relevant CRA official.
Other Corporate Tax Measures
The Budget proposes other corporate tax measures:
Fund Innovation, Science and Economic Development Canada to support the implementation of a publicly accessible corporate beneficial ownership registry by 2025.
Introduce legislation that will establish a federal minimum wage of $15 per hour, rising with inflation, unless provincial or territorial minimum wages are higher.
Personal Tax Rates
No new personal income tax rate changes have been announced in this Budget.
Tax Treatment of COVID-19 Benefit Amounts
Budget 2021 proposes to allow individuals the option to claim a deduction in respect of the repayment of a COVID-19 benefit amount in computing their income for the year in which the benefit amount was received rather than the year in which the repayment was made. This option will be available for benefit amounts repaid at any time before 2023. Previously, a benefit amount was only deductible in the year of repayment.
Further, COVID-19 benefits received by individuals who reside in Canada but are considered non-resident persons for income tax purposes will be taxable in Canada in a manner generally similar to employment and business income earned in Canada.
Taxes Applicable to Registered Investments
Budget 2021 proposes a tax on registered investments that are held by a limited number of investors.
Other Personal Tax Measures
The Budget proposes other personal tax measures:
Enhance the Canada Workers Benefit by increasing the phase-in and phase-out rates and threshold, and to introduce a “secondary earner exemption” for individuals with an eligible spouse.
Update the list of mental functions of everyday life that is used for the eligibility for the Disability Tax Credit (DTC), to recognize more activities in determining time spent on life-sustaining therapy and to reduce the minimum required frequency of therapy to qualify for the DTC. Fund consultations to reform the eligibility process for federal disability programs and benefits.
Expand access to the travel component of the Northern Residents Deduction.
Include postdoctoral fellowship income in “earned income” for RRSP purposes.
Provide one-time payment of $500 in August 2021 to OAS pensioners over the age of 75 as of June 2022 and increase regular OAS payments for pensioners 75 and over by 10 percent on an ongoing basis as of July 2022.
Application of GST / HST to E-Commerce
The legislation introduced in the 2020 Fall Economic Statement has been included with some qualifications and clarifications.
A reminder that this legislation will require non-residents and distribution platform operators to register for the GST / HST under a simplified system when they are selling to consumers in Canada. This includes sales of digital supplies and services, short-term accommodations in Canada and the supply of goods through online platforms.
Safe Harbour Rules
Where a platform operator is obligated to collect and remit GST / HST on supplies they facilitated for a third-party who is not registered for GST / HST, they are likely to rely on information provided by third parties. This may not be accurate information relative to the information requirements needed for GST / HST purposes. To avoid this situation, the Budget proposes rules that will:
impose joint and several liability on a platform operator and a third-party supplier for the collection and remittance of GST / HST, if the third-party supplier provides false information to the platform operator; and
limit the liability of a platform operator for failure to collect and remit tax, if the platform operator reasonably relied on the information provided by a third-party supplier.
GST / HST registered suppliers will be eligible to deduct amounts for:
bad debts; and
certain provincial HST point-of-sale rebates to purchasers from the GST / HST they must remit.
Simplified System – Small Supplier Threshold
The $30,000 small supplier threshold proposed under the simplified GST / HST system provides if the amount is exceeded in a 12-month period, registration is required. The Budget proposes to exclude zero rated sales as there would not be any tax to remit.
Platform Operators Information Return
Platform operators will be required to file an information return if they facilitate a supply of Canadian short-term accommodations, or a sale by a non-registered vendor of goods located in a fulfilment warehouse in Canada.
The amendment in Budget 2021 clarifies that the requirement to file an annual information return applies only to platform operators that are registered or are required to be registered for the GST / HST. This will reduce the compliance requirement for some.
Authority to Register a Person
The Minister of National Revenue will be given the authority to register a non-resident vendor and platform operator that are required to be registered under the simplified GST / HST system.
The CRA will have the authority in respect of compliance measures within the simplified GST / HST system as they have under the regular system.
The CRA has indicated they will take a practical approach in administering these measures in the twelve months following implementation.
Digital Services Tax (DST)
The Budget proposes a tax on foreign and domestic corporations that earn revenue from engagement with online users in Canada. This new DST will be effective January 1, 2022. The highlights of the DST are as follows:
It will be 3 percent of in-scope revenue in excess of the threshold
Will apply to entities that have excess of 750 million euros of revenue and $20 million of in-scope revenue from Canadian users
Will be reviewed on an annual basis, with a separate return required
The threshold criteria will be reviewed within the corporate group.
Information Requirements – Input Tax Credits
The documentation requirement thresholds have been increased from $30 - $150 to $100 - $500. This will allow more flexibility for taxpayers to support their input tax credit claims. This information requirement change also allows the purchaser to rely on the GST number of the billing agent, rather than the vendor. This measure is effective April 20, 2021.
GST New Housing Rebate
Budget 2021 proposes to remove the condition where two or more individuals need to buy a new home together which will not be both of their primary place of residence. This condition created challenges for qualification, especially in situations requiring co-signing of a loan. The GST new housing rebate will now be available where two or more individuals buy a new home together, as long as any of one of those individuals is acquiring the new home as their primary residence. This applies whether it will be an owner-built home, purchased from a builder, co-operative housing, and homes constructed on leased land.
No change is being made to the threshold or amount of the rebate. This measure will be effective April 20, 2021.
Excise Duty – Tobacco
Budget 2021 proposes to increase the tobacco excise duty rate by $4 per carton of 200 cigarettes, and corresponding increases to the excise duty rates for other tobacco products. An inventory tax of $0.02 per cigarette (with certain exemptions) applies effective April 20, 2021.
Excise Duty – Vaping Products
Budget 2021 will implement a tax on vaping products in 2022, by introducing a new excise duty framework. This will be done through a consultation process, with the framework to follow in due course. This will include applicable rates, administration, licensing and registration requirements, stamping, reporting, among other obligations and requirements.
This will apply to vaping liquids, whether or not they contain nicotine, that are produced in Canada or imported, that are intended for use in a vaping device in Canada. Cannabis-based vaping products are already captured under the Excise Tax Act and are exempt from this additional framework.
Tax on Luxury Goods
Effective January 1, 2022, big ticket items like luxury cars, boats and planes will be subject to taxation changes. Separate legislation will be introduced as this will not be considered a sales tax. New cars and personal aircraft valued at more than $100,000 and watercraft (boats) over $250,000 are the target of this tax.
The following items will be excluded from this tax:
Motorcycles and certain off-road vehicles, such as all-terrain vehicles and snowmobiles.
Racing cars (e.g., non-street legal and owned solely for on-track or off-road racing).
Motor homes (e.g., recreational vehicles, or RVs) that are designed to provide temporary living, sleeping, or eating accommodation for travel, vacation, seasonal camping, or recreational use.
Off-road, construction and farm vehicles are excluded.
Certain commercial and public sector vehicles and hearses are excluded.
Personal aircraft will include aeroplanes, helicopters and gliders, but exclude commercial and industrial-use aircraft.
Boats will include yachts, recreational motorboats, and sailboats, typically suitable for personal use. Excluded are smaller personal watercraft (water scooters), floating homes, commercial fishing vessels, ferries and cruise ships.
Importations of vehicles, personal aircraft and boats will also be subject to this tax.
Customs Tariff and Tax Measures
The proposed changes will ensure all importers value their goods using the value of the last sale for export to a purchaser in Canada to provide fairness for all importers and consistency with international rules.
Further, amendments are proposed to modernize the payment processes for commercial importers. A streamlined and harmonized billing cycle will include flexibility for honest mistakes without incurring penalties and interest.
Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners
Budget 2021 proposes to introduce a new national 1 percent tax on the value of non-resident, non-Canadian owned residential real estate considered to be vacant or underused. This tax will 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, will be required to file an annual declaration for the prior calendar year with the CRA in respect of each Canadian residential property they own. The requirement to file this declaration will apply irrespective of whether the owner is subject to tax in respect of the property for the year. The owner may also be eligible to claim in their declaration an exemption from the tax in respect of a property for the year.
In the coming months, the Government will release a backgrounder to provide stakeholders with an opportunity to comment on further parameters of the proposed tax.
Electronic Filing and Certification of Tax and Information Returns
Budget 2021 proposes the following measures to improve the CRA’s ability to operate digitally:
1. Default Method of Correspondence
Notices of Assessment: The Budget proposes to provide the CRA with the ability to send certain notices of assessment electronically without the taxpayer having to authorize the CRA to do so. This proposal will apply to individuals who file their income tax return electronically and those who employ the services of a tax preparer that files their income tax return electronically.
Correspondence with Businesses: The Budget proposes to change the default method of correspondence for businesses that use the CRA’s My Business Account portal to electronic only. Businesses could still choose to also receive paper correspondence.
2. Information Returns
The Budget proposes to allow issuers of T4A (Statement of Pension, Retirement, Annuity and Other Income) and T5 (Statement of Investment Income) information returns to provide them electronically without having to also issue a paper copy and without the taxpayer having to authorize the issuer to do so.
3. Electronic Filing Thresholds
The Budget proposes to reduce or eliminate the electronic filing thresholds for tax preparers, filers of information returns, and returns for corporations and GST/HST registrants. These measures will apply in respect of calendar years after 2021.
4. Electronic Payments
The Budget proposes to clarify that payments required to be made at a financial institution include online payments made through such an institution. It is also proposed that mandatory electronic payments be required for remittances over $10,000.
5. Handwritten Signatures
The requirement that signatures be in writing is proposed to be eliminated on certain prescribed forms under the ITA and the Tax Rebate Discounting Act.
Hybrid Mismatch Arrangements
Hybrid mismatch arrangements are cross-border tax avoidance structures that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce mismatches in tax results.
Generally, there are two forms of hybrid mismatch:
Deduction / non-inclusion mismatches: These arise where a country allows a deduction in respect of a cross-border payment, the receipt of which is not included within a reasonable period of time in ordinary income in the other country. For these purposes, “ordinary income” generally means income that is subject to income tax at the recipient’s full tax rate and 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 in respect of a single economic expense.
Budget 2021 proposes to implement rules where payments made by Canadian residents under hybrid mismatch arrangements will not be deductible for Canadian income tax purposes to the extent they give rise to a further deduction in another country or are not included in the ordinary income of a non-resident recipient. Conversely, to the extent that a payment made under such an arrangement by an entity that is not resident in Canada is deductible for foreign income tax purposes, no deduction in respect of the payment will be permitted against the income of a Canadian resident. Any amount of the payment received by a Canadian resident will also be included in income, and, if the payment is a dividend, it will not be eligible for the deduction otherwise available for certain dividends received from foreign affiliates.
In effect, these rules will neutralize a mismatch by aligning the Canadian income tax treatment with the income tax treatment in the foreign country. The proposed rules will be implemented in two separate legislative packages with stakeholder comment beginning later in 2021 on the first legislative package.
Transfer Pricing Consultation
The Government is proposing consultations on enhancements to Canada’s transfer pricing rules in the coming months.
The Budget proposes other tax measures:
Engage with stakeholders to examine the barriers that exist in creating employee ownership trusts.
Temporarily extend certain timelines for the Canadian Film or Video Production Tax Credit and the Film or Video Production Services Tax Credit.
Changes to the delivery of the Climate Action Incentive payments from a refundable credit claimed annually on personal income tax returns to quarterly payments made through the benefit system starting in 2022.
Launching public consultations with charities about increasing the disbursement quota that requires charities to spend a minimum amount on their charitable programs or gifts to qualified donees.
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