The Minister of Finance (Canada), the Honourable Chrystia Freeland, presented the Government of Canada’s (the “Federal Government”) 2021 Federal Budget (“Budget 2021”) on April 19, 2021 (“Budget Day”). Budget 2021 contains significant proposals to amend the Income Tax Act (Canada) (the “ITA”), the Excise Tax Act (the “ETA”) and the Excise Act, 2001 (the “EA”) while also providing updates on previously announced tax measures and policies.
Significant Budget 2021 proposals and updates include:
- extending the Canada Emergency Wage Subsidy (the “CEWS”) and Canada Emergency Rent Subsidy (“CERS”) until September 25, 2021 and introducing a CEWS repayment requirement for public companies based on executive compensation;
- introduction of a new tax on the unproductive use of Canadian housing by foreign non-resident owners;
- consultations on Canada’s transfer pricing and mandatory disclosure rules;
- anti-avoidance rules intended to address transactions that circumvent section 160 of the ITA and comparable provisions in other federal legislation;
- implementing certain recommendations of the Base Erosion and Profit Shifting (“BEPS”) Action Plan with respect to interest deductibility and hybrid mismatch arrangements; and
- a number of GST/HST, Excise and other related tax measures, including amendments to the e-commerce GST/HST measures announced in November 2020, the introduction of a Digital Services Tax and the introduction of a Luxury Tax.
Selected proposals and tax measures are detailed below:
- Proposals to Improve Compliance with the Canadian Tax System
- Business Income Tax Measures
- Tax on Unproductive Use of Canadian Housing by Foreign Non-Resident Owners
- International Tax Measures
- Personal Income Tax Measures
- Sales and Excise Tax Measures
- Customs Tariff and Tax Measures
- Other Previously Announced Tax Measures
Investments in the Canada Revenue Agency
Budget 2021 noted that the Federal Government made significant investments since 2015 to strengthen the CRA’s ability to crack down on complex tax schemes and increase collaboration with international partners.
Budget 2021 proposes to invest $304 million over five years, starting in 2021–2022, for new initiatives and to extend existing programs, including:
- increasing GST/HST audits of large businesses where risk assessment models have found the greatest risk of non-compliance;
- modernizing the CRA’s risk assessment process to prevent unwarranted and fraudulent GST/HST refund and rebate claims, and improve the ability to issue refunds for compliant businesses; and
- enhancing the CRA’s capacity to identify tax evasion involving trusts and provide better service to executors and trustees with timely resolution to taxpayers’ objections.
Budget 2021 estimates that these measures will recover $810 million in revenues over five years.
The Federal Government proposes to invest an additional $230 million over five years, starting in 2021–2022, for the CRA to improve its ability to collect outstanding taxes. It is anticipated that this proposal will lead to the collection of an additional $5 billion in outstanding taxes over five years.
Budget 2021 proposes to provide $330 million over five years, starting in 2021–2022, to the CRA to invest in new technologies and tools to protect against cyber threats and to ensure the CRA’s workforce has the specialized skills to safeguard Canadian data. Budget 2021 also proposes to provide $41.7 million over three years, starting in 2021–2022, to the CRA to reduce processing time for T1 adjustments by making online self-service more user-friendly and improving automated processing of T1 adjustments.
The OECD BEPS Project
Budget 2021 confirms the Federal Government’s commitment and continued participation in the Organisation for Economic Co-operation and Development (“OECD”) project with respect to BEPS. The project is intended to address concerns related to tax planning by multinational enterprises (“MNEs”), which rely on bilateral tax treaties and their interaction with domestic tax rules to minimize taxes for the overall enterprise.
Budget 2021 highlights that the tax measures identified as minimum standards under the BEPS Action Plan have already been implemented. These minimum standards address:
- the exchange of information on confidential tax rulings;
- the adoption of treaty rules to address treaty shopping and other forms of abuse of Canada's tax treaties;
- the exchange of country-by-country reports on the global distribution of income, taxes and business activities of MNEs; and
- dispute resolution mechanisms in tax treaties.
Canada has implemented other BEPS recommendations by accepting the new transfer pricing guidance developed under the BEPS project, changes to the foreign affiliate regime, and ratifying the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
Budget 2021 proposes to implement the best practices recommended by the BEPS Action Plan on interest deductibility (i.e. the proposed earnings stripping rule) and hybrid mismatch arrangements and will propose consultations on changes to Canada's transfer pricing and mandatory disclosure rules as discussed below.
Transfer Pricing Consultation
In response to the Cameco case, the Federal Government announced its intention to consult on Canada’s transfer pricing rules. The Department of Finance will release a consultation paper to provide stakeholders with an opportunity to comment on possible measures to improve Canada’s transfer pricing rules.
Beneficial Ownership Transparency
Budget 2021 proposes to provide $2.1 million over two years to support the implementation of a publicly accessible corporate beneficial ownership registry by 2025.
Budget 2021 proposes a new national 1% tax on the value of non-resident, non-Canadian owned residential real estate considered to be vacant or underused. This tax would be levied annually beginning in 2022. 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 residential property they own. Failure to file a declaration could result in the loss of any tax exemptions that may apply. Penalties and interest would also be applicable and the assessment period would be unlimited.
The Federal Government will release a backgrounder to provide stakeholders with an opportunity to comment on further parameters of the proposed tax.
Emergency Business Supports – CEWS and CERS
Budget 2021 proposes to extend the CEWS and CERS to September 25, 2021. Legislative authority will be introduced to allow the Federal Government to add qualifying periods until November 20, 2021 should the economic and public health situation warrant further extensions of these subsidies.
Budget 2021 proposes to require public companies to repay CEWS amounts for a qualifying period that begins after June 5, 2021 in the event that its aggregate compensation for specified executives during the 2021 calendar year exceeds its aggregate compensation for specified executives during the 2019 calendar year.
For the purposes of this proposal, a public company’s specified executives will be its Named Executive Officers whose compensation is required to be disclosed under Canadian securities laws in its annual information circular or similar executives in the case of a company listed in another jurisdiction. Budget 2021 indicates that these executives generally include the chief executive officer, chief financial officer and three other most highly compensated executives.
The amount of CEWS required to be repaid would be equal to the lessor of: (i) the total of all CEWS received in respect of active employees for qualifying periods that begin after June 5, 2021; and (ii) the amount by which the corporation’s aggregate specified executives’ compensation for 2021 exceeds its aggregate specified executives’ compensation for 2019. This requirement would apply to any CEWS amounts paid to any entity in the same group.
The CEWS support for active employees will be gradually phased out from a maximum subsidy rate of 75% (for the qualifying period ending July 3rd, 2021) to 20% (for the qualifying period ending September 25th, 2021) based on the relevant revenue decline.
The CEWS support for furloughed employees will continue to be available and remain aligned with benefits available under the Employment Insurance (“EI”) program for the relevant period until August 28, 2021. Employers will also continue to be entitled to claim under the CEWS their portion of contributions to the Canada Pension Plan, EI, the Quebec Pension Plan and the Quebec Parental Insurance Plan in respect of furloughed employees.
Budget 2021 proposes to gradually phase out the CERS subsidy rate from a maximum subsidy rate of 65% (for the qualifying period ending July 3rd, 2021) to 20% (for the qualifying period ending September 25th, 2021) based on the relevant revenue decline.
Budget 2021 proposes to extend the lockdown support to September 25th, 2021. The lockdown support is additional assistance for locations that must cease operations or significantly limit their activities under a public health order. The lockdown support rate will remain at 25%.
Canada Recovery Hiring Program
Budget 2021 proposes to introduce the Canada Recovery Hiring Program (“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 permitted to claim either the CRHP or the CEWS for a particular qualifying period, but not both.
Employers eligible for the CEWS would generally be eligible for the hiring subsidy. However, a for-profit corporation would be eligible only if it is a Canadian-controlled private corporation. Eligible employers would be required to have a payroll account open with the CRA on March 15, 2020.
An eligible employee must be employed primarily in Canada by an eligible employer throughout a qualifying period. The hiring subsidy would not be available for furloughed employees.
Eligible remuneration would be remuneration eligible for the CEWS, including salary, wages, and other amounts for which employers are required to withhold and deduct amounts on account of the employee’s income tax obligations. Severance pay, stock option benefits, and benefits related to the personal use of a corporate vehicle would not be eligible.
Incremental remuneration for a qualifying period means the difference between an employer’s total eligible remuneration paid to eligible employees for the qualifying period and the employer’s total eligible remuneration paid to eligible employees for the baseline period. In both the qualifying period and the baseline period, eligible remuneration for each eligible employee would be subject to a maximum of $1,129 per week.
For the duration of the CRHP, there would be six qualifying periods, with the first period of the CRHP being Period 17 of the CEWS. The relevant baseline period for the calculation of incremental remuneration would be March 14 to April 10, 2020.
If an eligible employer’s decline in revenue exceeds the revenue-decline threshold for a qualifying period, the employer’s subsidy in that period would be its incremental remuneration multiplied by the applicable hiring subsidy rate. The hiring subsidy rates would be 50% for the first three periods, 40% for the fourth period, 30% for the fifth period and 20% for the final sixth period.
To qualify for a hiring subsidy in a qualifying period, an eligible employer would have to have experienced a decline in revenue that would be sufficient to qualify for CEWS. For qualifying periods when the CEWS is no longer in effect, an eligible employer would have to have a decline in revenue of more than 10%. An employer’s decline in revenues would be determined in the same manner as under the CEWS. Employers would be required to continue to use the approach that they have previously used for the CEWS, be it the general approach or the alternative approach.
The deadline for an application for the hiring subsidy for a qualifying period would be 180 days after the end of the qualifying period.
Budget 2021 proposes to allow Canadian-controlled private corporations to immediately expense up to $1.5 million per year in respect of certain eligible property purchases made after Budget Day and available for use prior to 2024. Eligible property under this proposed measure would be 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, which are generally long-lived assets. Immediate expensing is only available during the year in which the eligible property becomes available for use. Any unused portion of the yearly $1.5 million limit cannot be carried forward to future tax years. The limit is also to be shared amongst members of an associated group. The half-year rule for depreciable property is suspended for property in respect of which this measure is applied.
Clean Energy Initiatives
Corporate Tax Rate Reduction
Budget 2021 proposes to reduce the corporate income tax rates for qualifying zero-emission technology manufacturers for income from eligible manufacturing activities. The federal general corporate tax rate would be decreased from 15% to 7.5% and the federal small business tax rate would be decreased from 9% to 4.5% for income of qualifying taxpayers from such activities. A taxpayer may qualify for this measure if at least 10 per cent of its gross revenue from all active businesses carried on in Canada is derived from eligible activities. The reduced tax rates would apply to taxation years that begin after 2021, and would be gradually phased out beginning in 2029 and fully phased out for taxation years that begin after 2031.
Capital Cost Allowance for Clean Energy Equipment
Budget 2021 proposes to expand capital cost allowance (CCA) classes 43.1 and 43.2, which provide access to accelerated depreciation rates, to include certain types of equipment related to clean energy generation or conservation and to remove certain other types of equipment. Changes in the eligibility criteria for classes 43.1 and 43.2 are proposed to include a broader range of clean energy generation equipment used today. Changes are also proposed to remove eligibility for certain energy generation equipment which derives more than one quarter of its energy output from fossil fuels. Changes to expand eligibility apply in respect of property available for use after Budget Day, and changes to limit eligibility apply to property that is available for use after 2024.
Mandatory Disclosure Rules
Taxpayers already have an obligation to report certain tax avoidance transactions to the CRA. However, Budget 2021 proposes to broaden these reporting requirements based on the recommendations in the Base Erosion and Profit Shifting Project, Action 12: Final Report (the “BEPS Action 12 Report”). This includes: (i) amendments to the ITA’s reportable transaction rules; (ii) a new requirement to report notifiable transactions; (iii) a new requirement, for specified corporations, to report uncertain tax treatments; and (iv) related rules extending the reassessment period for certain transactions and the introduction of new penalties.
Under the current rules, a taxpayer must report an avoidance transaction to the CRA that contains at least two of three generic hallmarks: (i) a promoter/tax advisor is entitled to certain contingent fees in respect of the transaction (e.g. a contingent fee attributable to the tax benefits derived from the transaction); (ii) a promoter/tax advisor requires confidential protection with respect to the transaction; and/or (iii) the taxpayer, or a person who entered the transaction for the benefit of the taxpayer, obtains contractual protection in respect of the transaction (e.g. insurance protecting against a failure to achieve any tax benefit from the transaction). A taxpayer must report a reportable transaction by June 30th of the calendar year following the calendar year in which the transaction first became a reportable transaction.
Budget 2021 proposes four key amendments to the reportable transaction regime. These amendments provide that:
- a transaction will qualify as a “reportable transaction” if only one generic hallmark is present in respect of the transaction (not at least 2 of 3):
- an “avoidance transaction” will include a transaction if it can be reasonably concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit;
- a taxpayer who enters into a reportable transaction will be required to report the transaction within 45 days of the earlier of the day the taxpayer becomes contractually obligated to enter into the transaction and the day the taxpayers enters into the transaction (this requirement may also apply in respect of a person who enters a transaction to obtain a tax benefit for another taxpayer); and
- certain promoters/advisors will be required to report certain information in respect of a scheme (with an exception for advisors to the extent that solicitor-client privilege is applicable).
Budget 2021 proposes the introduction of a category of specific hallmarks known as “notifiable transactions”. The Minister of National Revenue, with the concurrence of the Minister of Finance, will have the authority to designate a transaction as a notifiable transaction. Notifiable transactions will include transactions that the CRA has found to be abusive and transactions identified as transactions of interest (the CRA will provide taxpayers with a description of, and other information relating to, transactions designated as notifiable transactions).
If a taxpayer enters a notifiable transaction, or a transaction or series of transactions substantially similar to a notifiable transaction, the taxpayer must report the transaction or series to the CRA (in prescribed form) within 45 days of the earlier of: (i) the day the taxpayer becomes contractually obligated to enter into the transaction (or series); and (ii) the day the taxpayer enters into the transaction or series. The reporting requirements may also apply in respect of a person who enters into such a transaction or series to procure a benefit for the taxpayer.
In addition, these reporting requirements may also apply to promoters or advisers offering a scheme that constitutes a notifiable transaction or a transaction or series of transactions substantially similar to a notifiable transaction (with an exception for advisors to the extent that solicitor-client privilege is applicable).
Uncertain Tax Treatments
Budget 2021 also proposes the introduction of a reporting regime with respect to uncertain tax treatments (similar to the regimes adopted in the US and Australia). The Budget defines an uncertain tax treatment as a tax treatment used, or planned to be used, in an entity’s income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law. Under the proposed regime, specified corporate taxpayers must report an uncertain tax treatment in respect of a taxation year where:
- the corporation is required to file a Canadian return of income for the taxation year (e.g. the corporation is resident in Canada or it is a non-resident corporation with a taxable presence in Canada);
- the corporation has at least $50 million in assets at the end of the financial year coinciding with the taxation year (or the last financial year that ends before the end of the taxation year);
- the corporation, or a related corporation, has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies (e.g. U.S. GAAP); and
- uncertainty in respect of the corporation’s Canadian income tax for the taxation year is reflected in those audited financial statements (i.e., the entity has concluded that it is not probable that a taxation authority will accept an uncertain tax treatment).
A corporation will need to provide prescribed information for each reportable uncertain tax treatment. In addition, the corporation will need to report the uncertain tax treatments at the same time that the corporation’s income tax return becomes due.
Reassessment Period and Penalties
Budget 2021 further proposes that the reassessment period for a transaction will not commence until a taxpayer complies with the mandatory reporting requirements in respect of the transaction (i.e. the transaction will not be statute-barred).
In addition, Budget 2021 proposes the implementation of penalties to support the mandatory disclosure requirement regime. This includes (i) a taxpayer penalty, (ii) a promoter penalty, and (iii) an uncertain tax treatment penalty:
- Taxpayer Penalty – If a taxpayer enters a reportable or notifiable transaction (or a benefit results for the taxpayer from a reportable or notifiable transaction), the taxpayer may be liable for a penalty of $500/week for each failure to report a reportable transaction or a notifiable transaction up to a greater of $25,000 and 25% of the tax benefit (and, for certain corporations, a penalty of $2,000/week up to the greater of $100,000 and 25% of the tax benefit).
- Promoter Penalty – A promoter or advisor of reportable or notifiable transactions (or certain persons not dealing at arm’s length with the promoter/advisor) may be liable for a penalty for each failure to report equal to the total of (i) 100% of certain fees charged by the promoter or advisor (or non-arm’s length person), (ii) $10,000, and (iii) $1,000/day during which the failure to report the transaction continues up to a maximum of $100,000.
- Uncertain Tax Treatment Penalty – If a corporation has an obligation to report one or more uncertain tax treatments and it fails to report such treatments, the corporation may be liable for a penalty, in respect of each unreported treatment, of $2,000/week up to a maximum of $100,000.
Budget 2021 proposes that the aforementioned mandatory disclosure measures will apply to taxation years beginning after 2021.
Avoidance of Tax Debts
Budget 2021 proposes to introduce anti-avoidance rules to address tax planning intended to avoid section 160 of the ITA (“Section 160”) and comparable provisions in other federal legislation.
Section 160 generally applies where a taxpayer with existing tax debts transfers assets to non-arm’s length persons for less than fair market value consideration. If applicable, Section 160 causes the transferee to be jointly and severally liable with the transferor for tax debts of the transferor for the current or any prior taxation year, to the extent that the value of the property transferred exceeds the amount of consideration given for the property.
Budget 2021 notes that some taxpayers have engaged in planning intended to avoid the technical application of this rule by:
- arranging for a tax debt to crystallize after the end of the taxation year in which the property transfer occurs;
- arranging for the transferor to be dealing at arm’s length with the transferee at the time of the property transfer; or
- stripping out the assets of the transferor in a manner that otherwise complies with the point-in-time valuation test for the property transferred and consideration given in return.
Budget 2021 proposes the following measures to deal with these concerns.
First, an anti-avoidance rule will be introduced that would provide that, for the purposes of Section 160, a tax debt would be deemed to have arisen before the end of the taxation year in which a transfer of property occurs if it is reasonable to conclude that: (i) the transferor (or a non-arm’s length person) knew that there would be a tax amount owing by the transferor, or there would be a tax amount owing if not for additional tax planning done as part of the series of transactions that includes the transfer, that would arise after the end of the taxation year; and (ii) one of the purposes for the transfer of property was to avoid the payment of the future tax debt.
Second, an anti-avoidance rule will be introduced that would provide that, for purposes of Section 160, a transferor and transferee that, at the time of a transfer of property, would otherwise be considered to be dealing with each other at arm's length, would be deemed to have not been dealing with each other at arm's length at that time if: (i) at any time within a series of transactions or events that includes the transfer, the transferor and transferee do not deal at arm's length; and (ii) it is reasonable to conclude that one of the purposes of a transaction or event (or a series of transactions or events) within that series was to cause the transferor and transferee to deal at arm's length at the time of transfer.
Third, a rule would be introduced such that, for transfers of property that are part of a series of transactions or events, the overall result of the series would be considered in determining the values of the property transferred and the consideration given for the property, rather than relying on the values at the time of transfer.
A penalty would also be introduced for planners and promoters of these avoidance schemes. This penalty would mirror the "third-party civil penalty" rules in the ITA. The penalty would be equal to the lesser of: (i) 50% of the tax that was attempted to be avoided; and (ii) $100,000 plus the promoter’s or planner’s compensation for the scheme.
The proposed rules would apply in respect of transfers of property that occur on or after Budget Day and similar amendments would be made to comparable provisions in the other federal legislation legislation including section 325 of the ETA, section 297 of the EA and section 161 of the Greenhouse Gas Pollution Pricing Act.
The New Earnings Stripping Rule
The Budget 2021 documents express a concern with an erosion of the Canadian tax base due to deductions for interest paid disproportionately by Canadian members of multinational groups on third party borrowings and paid by Canadian members on related party borrowings to group members located in low tax jurisdictions. Budget 2021 proposes an earnings stripping rule consistent with recommendations made in the OECD’s BEPS Action Plan. The rule would limit the amount of net interest expense that a corporation could deduct to no more than a fixed ratio of “tax EBITDA”. The new rule would also apply to trusts, partnerships and Canadian branches of non-resident taxpayers.
The fixed ratio applies to existing and new borrowings. For taxation years beginning in 2023 when the new rule begins to apply, the fixed ratio is 40%. For taxation years beginning on or after January 1, 2024, the fixed ratio is reduced to 30%. However, a “group ratio” will allow a taxpayer to deduct interest in excess of the fixed ratio if the taxpayer demonstrates that the corporate group has a higher ratio of net third party interest to book EBITDA that is appropriate.
Tax EBITDA is a corporation’s taxable income before taking into account interest expense, interest income, income tax and deductions for depreciation and amortization, each as determined for tax purposes. Tax EBITDA would exclude inter-corporate and foreign affiliate dividends that qualify for certain dividend received deductions. Interest would include other financing related expenses and amounts economically equivalent to interest. Interest expense would not include interest that is otherwise not deductible for tax purposes, such as interest denied under the thin capitalization rule. Interest expense and interest income on debts between Canadian members of a corporate group would generally be excluded from the new rule.
Interest denied under the earnings stripping rule can be carried-forward for up to twenty taxation years or back for up to three years, including for years prior to the introduction of the new rule, subject to certain restrictions. Also, a taxpayer that is part of a group (other than a bank or a life insurance company) and that has excess capacity to deduct interest under the earnings stripping rule can generally transfer such available capacity to other Canadian group members.
The earnings stripping rule would not apply to Canadian-controlled private corporations having taxable capital employed in Canada together with associated corporations of less than $15 million or to groups of corporations and trusts with combined net interest expense among Canadian members of $250,000 or less. Also, in general, standalone Canadian corporations and Canadian corporations that are members of a group that does not include non-resident members would not have their interest expense denied under the earnings stripping rule.
Hybrid Mismatch Arrangements
Following OECD BEPS recommendations, the budget proposes to implement new rules to eliminate the tax benefits from hybrid mismatch arrangements. Hybrid mismatch arrangements are cross-border transactions that are characterized differently under the tax laws of different countries. For example, certain financial instruments can be treated as debt in one country and equity in another country. Hybrid mismatches can also involve certain entities that are treated as separate taxpayers in one country but as fiscally transparent in another country.
The budget does not contain detailed new provisions, but instead promises the release of two packages of new rules for public comments to address hybrid mismatch arrangements.
The first package is to be released later in 2021 with rules ultimately adopted with an effective date of July 1, 2022. These rules will provide that a payment under a hybrid mismatch will not be deductible in Canada to the extent it produces a deduction in another country or is not included in the ordinary income of a non-resident recipient. A payment by a non-resident under a hybrid mismatch arrangement that produces a deduction for foreign tax purposes will not be eligible for deduction against the income of a Canadian resident. A payment made by a non-resident to a Canadian resident would be included in the income of the Canadian resident to the extent it is deductible in another country, and will not be eligible for a dividend received deduction where paid by a foreign affiliate.
The second package of rules is to be released after 2021 for public comment with rules ultimately adopted no earlier than 2023. These new rules are to address “imported mismatches”, “branch mismatches” and “reverse hybrids”. An imported mismatch is an arrangement in which a payment is deductible in one country and included in the income of an entity in another country, but where that income inclusion is offset by a deduction under a hybrid mismatch arrangement with an entity in a third country. Branch mismatch arrangements involve differences in tax laws of different countries in respect of the allocation of income and expenditures of a branch. Reverse hybrids are entities that are treated as fiscally transparent in the country in which they are formed, but as separate taxpayers in an investor’s country.
The proposed rules are to apply in respect of transactions between related parties and payments between unrelated parties that are designed to produce a mismatch. Ordering rules are to coordinate the application of the proposed rules with the hybrid rules of other countries so as to avoid double taxation or other unintended consequences.
Tax Treatment of COVID-19 Benefit Amounts
Budget 2021 proposes to amend the ITA to allow individuals to claim a deduction in respect of the repayment of an amount for the COVID-19 benefits listed below for the year in which the benefit was received rather than the year in which the repayment was made:
- Canada Emergency Response Benefits/Employment Insurance Emergency Response Benefits;
- Canada Emergency Student Benefits;
- Canada Recovery Benefits;
- Canada Recovery Sickness Benefits; and
- Canada Recovery Caregiving Benefits.
This option will be available for benefit amounts repaid at any time before 2023.
Individuals may only deduct benefit amounts once they have been repaid. An individual who makes a repayment, but who has already filed their income tax return for the year in which the benefit was received, would be able to request an adjustment to the return for that year.
Budget 2021 also proposes to amend the ITA to ensure that the COVID-19 benefit amounts noted above, and similar provincial or territorial benefit amounts, are included in the taxable income of those individuals who reside in Canada but are considered non-resident persons for income tax purposes, and taxed in a manner generally similar to employment and business income earned in Canada.
Taxes Applicable to Registered Investments
Where a registered investment that is not widely held holds property that is not a qualified investment for the type of registered plans for which it is registered, the registered investment is liable to pay a tax under Part X.2 of the ITA that is equal to 1% of the property's fair market value, at the time it was acquired, for each month that the registered investment holds the property. However, in some cases, the effect of the tax can be disproportionate because the tax applies without regard to the proportion of the shares or units of the registered investment that are held by investors that are themselves subject to the qualified investment rules.
Budget 2021 proposes that the tax imposed under Part X.2 of the ITA be pro-rated based on the proportion of shares or units of the registered investment that are held by investors that are themselves subject to the qualified investment rules.
This measure will apply to taxes imposed under Part X.2 of the ITA in respect of months after 2020. However, the measure would also apply to taxpayers whose tax liability under Part X.2 in respect of months before 2021 has not been finally determined by the CRA as of Budget Day.
Registration and Revocation Rules Applicable to Charities
Listed Terrorist Entities
Budget 2021 proposes a number of amendments to the ITA to allow the CRA to immediately revoke the registration of a charity or other qualified donee upon its listing as a terrorist entity under the Criminal Code.
Where a charity or Canadian amateur athletic association has an “ineligible individual” as a director, trustee, officer or like official, or where such an individual controls or manages the charity or association, the ITA provides the CRA with the discretion to refuse or revoke its registration, or to suspend its authority to issue official donation receipts.
Budget 2021 proposes to amend the “ineligible individual” definition so that it includes an individual who:
- is, or is a member of, a listed terrorist entity; or
- in respect of a listed terrorist entity, was, during a period in which the entity supported or engaged in terrorist activities,
- a director, trustee, officer or like official of the entity; or
- an individual that controlled or managed, directly or indirectly, in any manner whatever, the entity.
The existing rule that requires the CRA to only consider circumstances occurring within the preceding five-year period would not apply in relation to this measure.
Budget 2021 proposes to allow the CRA to suspend the authority of a registered charity to issue official donation receipts for one year or to revoke its registration where a false statement amounting to culpable conduct was made for the purpose of maintaining its registration.
All of the measures noted above will apply on Royal Assent.
Electronic Filing and Certification of Tax and Information Returns
Notices of Assessment
Budget 2021 proposes to amend the ITA 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 would apply in respect of individuals and tax preparers who file their income tax return electronically. Taxpayers who continue to file their returns in paper format would continue to receive a paper notice of assessment from the CRA.
This measure will come into force on Royal Assent of the enacting legislation.
Correspondence with Businesses
Budget 2021 proposes to change the default method of correspondence for businesses that use the CRA's My Business Account portal to electronic only. However, businesses could still choose to also receive paper correspondence. This measure would apply in respect of the ITA, ETA, EA, Air Travellers Security Charge Act and Part 1 of the Greenhouse Gas Pollution Pricing Act.
This measure will come into force on Royal Assent of the enacting legislation.
Budget 2021 proposes to amend the Income Tax Regulations 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.
This measure will apply in respect of information returns sent after 2021.
Filing of Income Tax Returns
Budget 2021 proposes to amend the rule in the ITA that requires, subject to the exception below, professional preparers of income tax returns to file electronically where they prepare more than 10 income tax returns of corporations or 10 income tax returns of individuals (other than trusts) to apply instead where they file more than 5 of either type of return for a calendar year. The exception for trusts would be removed.
Budget 2021 also proposes to decrease the maximum number of paper income tax returns a tax preparer is allowed to file for each calendar year from 10 to 5 for both corporations and individuals, respectively.
These measures will apply in respect of calendar years after 2021.
Filing of Information Returns
Budget 2021 proposes that the threshold for mandatory electronic filing of income tax information returns for a calendar year under the ITA be lowered from 50 to 5 returns, in respect of a particular type of information return. Entities that file more than 5 information returns of a particular type for a calendar year would be required to file them electronically.
This measure will apply in respect of calendar years after 2021.
Filing of GST/HST and Corporate Income Tax Returns
Budget 2021 proposes to eliminate the mandatory electronic filing thresholds for returns of corporations under the ITA and of GST/HST registrants (other than for charities or Selected Listed Financial Institutions) under the ETA so that such returns would generally be required to be filed electronically.
This measure will apply in respect of taxation years that begin after 2021 for the ITA amendments and in respect of reporting periods that begin after 2021 for the ETA amendments.
Budget 2021 proposes to clarify that payments required to be made at a financial institution under the ITA, the GST/HST portion of the ETA, the EA, the Air Travellers Security Charge Act and Part 1 of the Greenhouse Gas Pollution Pricing Act, include online payments made through such an institution. The threshold for mandatory remittances to be made at a financial institution under these legislations would be lowered from $50,000 to $10,000. Electronic payments would be required for remittances over $10,000.
This measure will apply to payments made on or after January 1, 2022.
GST/HST and eCommerce
On November 30, 2020, the Federal Government released draft legislative proposals outlining new rules for the imposition of GST/HST on digital products and services and certain imports of qualifying tangible personal property (as outlined in the Fall Economic Statement 2020 titled: Supporting Canadians and Fighting COVID-19). These rules generally provide that:
- Digital Products and Services – A specified non-resident supplier (i.e. a supplier not resident in Canada, not registered for GST/HST, and not making supplies in the course of a business carried on in Canada) must register for, collect, and remit GST/HST in respect of sales of digital products and services made to specified Canadian recipients. A platform operator may also need to register for, collect, and remit GST/HST in respect of sales of digital products and services made, by specified non-resident suppliers, through its distribution platform.
- Qualifying Tangible Personal Property – A non-resident supplier must register for, collect, and remit GST/HST in respect of sales of qualifying tangible personal property and a platform operator may need to register for, collect, and remit GST/HST in respect of supplies of qualifying tangible personal property made through its distribution platform.
- Short-term Accommodation – Certain platform operators must register for, collect, and remit GST/HST in respect of rentals of short-term accommodations made, by non-registered suppliers, through its accommodation platform. These new rules will affect most platforms with listings of vacation properties in Canada.
Budget 2021 proposes amendments to the aforementioned draft legislative proposals (as announced in the Fall Economic Statement 2020). These amendments include the following changes:
Safe Harbour Rules for Platform Operators
Under the draft proposals (in the Fall Economic Statement), a platform operator must collect and remit GST/HST with respect to supplies made by unregistered third parties through the operator’s platform. However, in general, a platform operator does not have an obligation to collect GST/HST with respect to supplies made by a registered supplier (registered under the traditional method) through its platform. A platform operator must collect and rely on information provided by a supplier to determine whether it must collect GST/HST in respect of a supply (e.g. information relating to whether the third-party supplier is or is not registered for GST/HST).
Budget 2021 proposes additional “safe harbour” rules for platform operators. These rules provide that a platform operator and a third-party supplier will be jointly and severally, or solidarily, liable for the collection and remittance of GST/HST (if the supplier makes a false statement to the operator). In addition, a platform operator liability’s for a failure to collect and remit GST/HST will be limited to the extent that the operator reasonably relied on false statements (in good faith) of the supplier in deciding not to collect or remit GST/HST.
Budget 2021 proposes an amendment clarifying that suppliers registered under the simplified GST/HST registration process (as introduced in the draft proposals for the 2020 Fall Economic Statement) may deduct amounts for bad debt and certain provincial HST point-of-sale rebates to purchasers.
Threshold Amount Determination
Under the draft proposals (in the Fall Economic Statement), a specified non-resident supplier must register for GST/HST if the supplier makes more than $30,000 of digital products and services to specified Canadian recipients over a 12-month period (not including supplies made through a registered specified distribution platform). A platform operator must register for GST/HST if specified non-resident suppliers make, through the operator’s platform, more than $30,000 of supplies of digital products and services to specified Canadian recipients over a 12-month period.
Budget 2021 proposes amendments to the draft legislative proposals clarifying that the calculation of the threshold amount does not include amounts for zero-rated supplies (for purposes of determining whether a supplier must register under the simplified framework).
Platform Operator Information Return
Under the draft proposals (in the Fall Economic Statement), a platform operator may need to file an annual information return if the operator facilitates (i) the supply of short-term accommodation in Canada or (ii) the sale, by a non-registered vendor, of goods located in a fulfillment warehouse in Canada.
Budget 2021 proposes amendments clarifying that the requirement to file an annual information return only applies to registered platform operators, platform operators required to be registered, and/or registrants.
Minister’s Authority to Register a Person
Budget 2021 proposes amendments providing that the CRA may register a person under the simplified registration process if the Minister is not satisfied that the person is not required to be registered.
Digital Services Tax
Budget 2021 proposes the implementation of an interim digital services tax (the “DST”) applicable as of January 1, 2022 (and until an acceptable multilateral approach comes into effect). The DST has the following key features:
- Rate and Base – The DST will apply at the rate of 3% on revenue earned from certain digital services reliant on the engagement, data, and content contributions of Canadian users (not including any value-added tax or sales tax amounts collected on the revenue).
- In-scope Revenue – The DST will apply to revenue from online business models in which the participation of users is a key value driver (including the provision of data and content contributions). This includes revenue from (i) online marketplaces, (ii) social media, (iii) services aimed at the placing of online advertisements targeted based on data gathered from users of an online interface, and (iv) the sale or licensing of user data (i.e. in-scope revenue).
- Taxpayers – The DST will apply to businesses organized under various forms, including partnerships and trusts, meeting certain revenue thresholds. An entity will meet the revenue threshold for a calendar year if: (i) the entity, or the entity’s business group, has global revenue from all sources of €750 million or more in the previous calendar year; and (ii) the entity has in-scope revenue associated with Canadian users of more than $20 million in the calendar year (the DST would only apply to in-scope revenue associated with Canadian users in excess of the $20 million threshold).
- Revenue Sourcing – If an entity’s revenue is contractually related to activities within the scope of the DST and other activities, one will need to determine the amount of the entity’s in-scope revenue on a reasonable basis. Budget 2021 proposes two methods for determining the amount of in-scope revenue associated with users in Canada: (i) a transactional method (i.e. tracing revenue to relevant users in Canada on the basis of transactional information); and (ii) a non-transactional method (i.e. allocation of revenue on a formulaic basis). The application of these methods will vary depending on the type of revenue to which the methods are being applied. Budget 2021 also briefly addresses how one would determine whether the user of an interface is located in Canada for revenue sourcing purposes.
- Treatment of DST for Income Tax Purposes – The deductibility of a DST liability in computing an entity’s income tax liability will depend on the application of general principles (e.g. whether the entity incurred the DST for the purpose of earning the entity’s income subject to Canadian income tax). The DST liability will not be eligible for a credit against Canadian income tax payable.
- Administration – Firms subject to the DST will need to file an annual return (in addition to the making of an annual payment after the end of the applicable reporting period). It should also be noted that each entity in a group will be jointly and severally liable for DST payable by any other member of the group.
Input Tax Credit Information Requirements
In order to support a claim for input tax credit, businesses must obtain and retain certain information. The amount of information required is graduated, with progressively more information required when the amount paid or payable in respect of a supply equals or exceeds thresholds of $30 and $150.
Budget 2021 proposes to increase such thresholds to $100 (from $30) and $500 (from $150), and to allow billing agents (i.e. agents that collect consideration and tax on behalf of an underlying vendor but do not otherwise cause or facilitate a supply) to be treated as intermediaries for purposes of the input tax credit information rules.
These measures will come into force on the day after Budget Day.
GST New Housing Rebate Conditions
Budget 2021 proposes to remove from the qualifications for claiming the GST New Housing Rebate 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 primary place of residence or the primary place of residence of a relation. Instead, the rebate would be available as long as the new 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. The proposed change would also apply to rebates in respect of the provincial component of the HST.
This measure will apply to a supply made under an agreement of purchase and sale entered into after Budget Day. However, in the case of a rebate for owner-built homes, the measure will apply where construction or substantial renovation of the residential complex is substantially completed after Budget Day.
Excise Duty on Tobacco
Budget 2021 proposes to increase the tobacco excise duty rate by $4 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates for other tobacco products as follows:
- Cigarettes (per five cigarettes or fraction thereof): from $0.62725 to $0.72725;
- Tobacco Sticks (per stick): from $0.12545 to $0.14545;
- Manufactured Tobacco (per 50 grams or fraction thereof): from $7.84062 to $9.09062; and
- Cigars: from $27.30379 per 1,000 cigars plus the greater of $0.09814 per cigar and 88 per cent of the sale price or duty-paid value to $31.65673 per 1,000 cigars plus the greater of $0.11379 per cigar and 88 per cent of the sale price or duty-paid value.
Budget 2021 also proposes that inventories of cigarettes held by certain manufacturers, importers, wholesalers and retailers at the beginning of the day after Budget Day will be subject to an inventory tax of $0.02 per cigarette (subject to certain exemptions). Taxpayers will have until June 30, 2021 to file a return and pay the cigarette inventory tax.
This measure will come into force on the day after Budget Day.
Excise Duty on Vaping Products
Budget 2021 proposes to implement a tax on vaping products in 2022 through the introduction of a new excise duty framework as part of the existing EA, which currently applies excise duties on tobacco, wine, spirits, and cannabis products.
The new duty would apply solely to vaping liquids that are (i) produced in Canada or imported and (ii) intended for use in a vaping device in Canada. The new duty would apply to these vaping liquids whether or not they contain nicotine. Cannabis-based vaping products would be explicitly exempt from this framework, as they are already subject to cannabis excise duties under the EA.
The proposed framework would impose a single flat rate duty on every 10 millilitres (ml) of vaping liquid or fraction thereof, within an immediate container (i.e., the container holding the liquid itself). Generally, the flat rate would be imposed and payable at the time of packaging or importation. The last federal licensee in the supply chain who packaged the vaping product for final retail sale, including vape shops holding an excise licence, would be liable to pay the applicable excise duty.
The CRA would be responsible for administering and enforcing the new excise duty framework for vaping products. The Canada Border Services Agency (“CBSA”) would be responsible for administering and enforcing the framework at the border. To promote compliance with the taxation of vaping products, penalty and offence provisions broadly similar to those applying to alcohol, tobacco and cannabis duties would apply.
Manufacturers and importers of dutiable vaping products would be required to obtain a licence for their activities from the CRA. This would include any vape shops that would like to obtain and then use non-duty paid, bulk vaping products to mix or manufacture new vaping products on-site for immediate or subsequent sale to final customers, upon which duty would apply and need to be remitted.
It is proposed that all dutiable vaping products removed from the premises of a federal licensee to enter the Canadian duty-paid market would be required to be packaged in a container intended for sale at the retail level (a "retail package"), and would be required to bear an excise stamp showing that duties have been paid. As with the current tobacco and cannabis stamping programs, a stamp would need to be affixed to a retail package. The issuance of stamps would be administered by the CRA, and the stamps would be sold through an authorized provider.
Budget 2021 indicates that the federal government will work collaboratively with any interested provinces and territories to create a federally coordinated approach to taxing vaping products.
Tax on Select Luxury Goods
Budget 2021 proposes to introduce a tax on the retail sale of new luxury cars and personal aircraft priced over $100,000, and boats priced over $250,000, For vehicles, aircraft and boats sold in Canada, the tax would apply at the point of purchase if the final sale price paid by a consumer (not including the GST/HST or provincial sales tax) is above the $100,000 and $250,000 price threshold, respectively. Importations of vehicles, aircraft and boats would be subject to the proposed tax while exports would be excluded. The GST/HST would apply to the final sale price, inclusive of the proposed tax.
For vehicles and aircraft priced over $100,000, the amount of the tax would be the lesser of 10 per cent of the full value of the vehicle or the aircraft, or 20 per cent of the value above $100,000.
For boats priced over $250,000, the amount of the tax would be the lesser of 10 per cent of the full value of the boat or 20 per cent of the value above $250,000.
The tax would generally apply at the final point of purchase of new luxury vehicles, aircraft and boats in Canada. In the case of imports, application would generally be either at the time of importation (in cases where there will not be a further sale of the goods in Canada) or at the time of the final point of purchase in Canada following importation.
Upon purchase or lease, the seller or lessor would be responsible for remitting the full amount of the federal tax owing, regardless of whether the good was purchased outright, financed, or leased over a period of time.
This measure will come into force on January 1, 2022. Further details will be announced in the coming months.
Duty and Tax Collection on Imported Goods
Budget 2021 proposes amendments to the Customs Act and related regulations to ensure that all importers value their goods using the value of the last sale for export to a purchaser in Canada, ensuring fairness for all importers and enhancing consistency with international rules.
Budget 2021 also proposes changes to support the implementation and enforcement of a streamlined and harmonized billing cycle for commercial importations that will include flexibility to make good-faith corrections without incurring penalties or interest. These proposed changes would coincide with the implementation of key functionalities of the CBSA Assessment and Revenue Management initiative that is set to serve as a single portal for commercial importers.
Budget 2021 confirms the Federal Government’s intention to proceed with previously announced tax and related measures including:
- legislative proposals released on March 3, 2021 and on February 24, 2021 in respect of the CEWS and CERS;
- legislative proposals released on December 16, 2020 extending timelines in respect of flow-through shares by 12 months;
- the anti-avoidance rules consultation and the income tax measures announced on November 30, 2020 in the Fall Economic Statement 2020 in respect of registered disability savings plan, employee stock options; and patronage dividends paid in shares;
- 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 the COVID-19 pandemic;
- legislative proposals released on April 17, 2020 to clarify support for Canadian journalism;
- legislative proposals released on July 30, 2019 to implement certain Budget 2019 income tax measures;
- legislative proposals released on May 17, 2019 and remaining regulatory proposals released on July 27, 2018 relating to the GST/HST;
- income tax measures announced in Budget 2018 to implement enhanced reporting requirements for certain trusts to provide additional information on an annual basis; and
- measures confirmed in Budget 2016 relating to the GST/HST joint venture election.
Budget 2021 reaffirms the government’s commitment to move forward as required with technical amendments to improve the certainty and integrity of the tax system.