2021 Federal Budget Tax Highlights
On April 19, 2021, the Honourable Chrystia Freeland tabled her first budget as federal Minister of Finance. With a projected deficit of $354.2 billion for 2020-21 and $154.7 billion for 2021-22, this spending budget aims to provide more relief to finish the fight against Covid-19 and to create more jobs and prosperity for Canadians in the days and decades to come.
There were no changes to the capital gains inclusion rate as may have been speculated. Nor was there an introduction of tax on the sale of a principal residence. We have summarized the key tax changes announced yesterday that may impact you and your business.
Covid-19 Support and Economic Recovery Measures
Subsidy programs extended – A number of changes have been proposed for the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and Lockdown Support programs. They include:
- Extending the programs for 3 months covering up to September 25, 2021
- Gradually phasing out the rates in the CEWS and CERS programs
- Requiring employers to have a revenue decline of 10% or more, beginning July 4, 2021
- Extending the 25% rate for the Lockdown Support on CERS up to September 25, 2021
Canada Recovery Hiring Program (CRHP) proposed – As an alternative to the CEWS and to encourage hiring, certain employers will be allowed to claim an amount under the proposed CRHP for six periods from June 6 to November 20, 2021. Key features of this program are:
- Eligible for Canadian-controlled private corporations (CCPCs), individuals, non-profit organizations, registered charities and certain partnerships
- A subsidy of up to 50% on the incremental remuneration for the first three periods, declining for the final three periods to 40%, 30% and 20%, respectively
- Eligible weekly remuneration is limited to $1,129 per eligible employee
- Eligible employer is permitted to claim either CEWS or CRHP, but not both
Immediate expensing of certain capital expenditures – A newly proposed rule would allow CCPCs to immediately expense certain capital expenditures, effective for property acquired after April 19, 2021 and put into use before 2024. The maximum deduction is $1.5 million per year which must be shared by associated corporations.
Other Corporate and Business Tax Measures
Rate reduction for zero-emission technology manufacturers – For taxation years that begin after 2021, corporation tax rates on eligible zero-emission technology manufacturing and processing income will be reduced by 7.5%, or 4.5% for corporations eligible for the small business deduction.
Capital cost allowance (CCA) for clean energy equipment – The CCA rules for Class 43.1 and 43.2 will be broadened to include new types of expenditures with the adjustment to the eligibility criteria.
Interest deductibility restrictions – For corporations, trusts, partnerships and branches, the budget proposes to restrict the deduction of interest expenses to earnings before interest, taxes, depreciation and amortization (EBITDA). The maximum interest deduction will be limited to 40% of EBITDA for taxation years beginning on or after January 1, 2023 but before January 1, 2024, and to 30% for later years. Exemption are available for CCPCs and associated groups with taxable capital of less than $15 million and for groups of corporations and trusts with an aggregate net interest expense of $250,000 or less.
Personal Tax Measures
Taxation of Covid-19 benefits – The budget proposes to allow individuals to claim Covid-19 benefit repayments as a deduction in either the year they received the benefit or the year they repaid it.
Disability tax credit – The budget proposes to change the eligibility criteria to provide more clarity on certain aspects of the credit.
Postdoctoral fellowship income – For income received in 2021 and subsequent taxation years, postdoctoral fellowship income is considered “earned income” which increases the Registered Retirement Savings Plan (RRSP) contribution limit.
Canada Workers Benefit (CWB) – The budget proposes to expand the CWB by increasing phase-out thresholds and phase-in rates, and by adding an exemption for secondary income earners.
GST/HST and Other Indirect Tax Measures
Application of GST/HST to e-commerce – Following on their November 30, 2020 proposal on new GST/HST registration rules for non-residents who sell services, digital products, or tangible goods delivered in Canada, the budget includes further proposed changes in response to comments made by the stakeholders. Key proposed amendments will come into force on July 1, 2021 which include:
- A safe harbour rule to relieve platform operators from the liability if they are acting in good faith or are provided with false or misleading information by a third party
- An amendment clarifying that suppliers registered for the GST/HST under the simplified framework are eligible to deduct amounts for bad debts and certain provision HST point-of-sale rebates
- Zero-rated supplies will not be counted in determining the $30,000 threshold for registration
- CRA’s commitment to take a practical approach to compliance and to exercise discretion in administering these measures for the first year where the affected businesses and platform operators can show that they have reasonable measures but are unable to meet their new obligations for operational reasons
Digital services tax – The government reaffirmed its intention to implement a 3% digital services tax for large businesses on January 1, 2022, which will apply until an acceptable multilateral approach comes into effect.
Tax on vacant residential properties – Effective January 1, 2022, a non-resident will be levied an annual 1% tax on the value of residential real estate if it is vacant or underused. The tax would require all owners, other than Canadian citizens or permanent residents of Canada, to file a declaration as to the property’s current use, with significant penalties for failure to file.
Tax on luxury goods – Effective January 1, 2022, the budget proposes to introduce a luxury tax on vehicles and aircraft priced over $100,000 and boats priced over $250,000 threshold. The luxury tax is equal to the lesser of 10% of the full value of the vehicle, aircraft or boats or 20% of the value above its respective threshold amounts.
GST new housing rebate conditions – The budget proposes to remove the condition that where two or more individuals buy a new home together, each of them must be acquiring the home for use as their or a related person’s primary place of residence. Instead, the GST new housing rebate will be available as long as the new home is used as primary place of residence for any one of the purchasers or their relatives.
Other indirect tax changes – These include:
- Increasing excise duties on tobacco
- Implementing excise duties on vaping products
Tax Administration Changes
Anti-avoidance rules – The federal government announced several proposed initiatives related to anti-avoidance which include:
- Expanding existing mandatory disclosure rules and introducing requirements to report notifiable transactions and uncertain tax treatments, currently under a consultation
- Introducing anti-avoidance rules for plans that attempt to frustrate the Canada Revenue Agency’s ability to collect tax debts
- Reviewing the general anti-avoidance rule, as the government has previously announced
- Introducing new rules to address cross-border hybrid mismatch arrangements, with effect in stages starting July 1, 2022
Other proposed tax administration changes – Other administrative changes include elimination of using handwritten signatures or using paper forms and moving towards electronic communications on certain forms and information income slips.
W&P is Here to Help
Our team at Williams & Partners is available to provide further information and assistance to businesses and individuals with concerns regarding this budget and any of the subsidies offered due to COVID-19. If you have any questions, please do not hesitate to contact our office.
Yours very truly,
Williams & Partners