Federal budget 2021

On April 19, 2021, The Honourable Chrystia Freeland presented her first budget as the Minister of Finance.  It was the federal government’s first budget in over two years, as last year’s budget was postponed due to the COVID-19 global pandemic.

The last budget projected an annual deficit of just under $20B for 2020 fiscal period (April 1, 2019 to March 31, 2020). The 2021 fiscal year is projected to have a deficit of $354B, with the deficit improving to $155B in 2021-2022. COVID-19 programs such as the Canada Emergency Response Benefit (CERB), Canada Recovery Benefits (CRB), Canada Emergency Wage Subsidy (CEWS) and an increase in Employment Insurance Benefits account for most of the increased spending. While some of these programs will continue into the new year, the cost  is expected to decline significantly as we complete our recovery from COVID-19.

As one can imagine, COVID-19 was the main theme of the budget, as demonstrated through programs and funding for “Finishing the Fight Against COVID-19”, “Creating Jobs and Growth” as our economy recovers from the COVID-19 recession and creating “A Resilient and Inclusive Recovery” from the pandemic.

The budget is big on spending with very little in additional taxes. It is exactly what we expected.  There were none of the speculated tax increases (e.g., increase in the capital gains inclusion rate, a wealth tax or possibly taxing some or all of the gains on your principal residence).

“Finishing the Fight against COVID-19”

The government announced that it has secured enough vaccines so that every Canadian, can be fully vaccinated by September of this year.  It has  also announced funding for:

• Strengthening long-term care and supportive care – including $3B to support national standards for long-term care
• Strengthening our health system – increasing the Canada Health Transfer to the provinces to $43.1B in fiscal 2022
• Supporting mental health – development of a national mental health service standard
• Investing in research and science – $2.2B of funding towards the life sciences sector
• Protecting jobs and supporting businesses – extending the CEWS and the Canada Emergency Rent Subsidy (CERS) until September 2021
• Supporting affected works – extending the CRB and the Canada Recovery Caregiving Benefit

“Creating jobs and growth”

The government announced a national child-care plan by committing up to $30B over the next five years for Early Learning and Child Care and Indigenous Early Learning and Child Care. The intent is to reduce the cost of regulated childcare down to $10 per day within the five years. More affordable childcare is expected to support children’s future academic success, increase participation of women in the workforce, and boost the economy by creating 240,000 new jobs.

Support for Canadian youth was announced and includes extending the waiver of interest accrual on Canada Student Loans Program, doubling the Canada Student Grants for an additional two years, and increasing funding for Student Work Placement Program, Youth Employment and Skills Strategy,  and the Canada Summer Jobs program.

The federal government announced that it will also establish a federal minimum wage of $15 per hour that will raise with inflation. This will apply to workers in the federally regulated private sector and is expected to benefit 26,000 workers.

A new Canada Recovery Hiring Program was announced for eligible employers who are hiring more staff or increasing wages or hours worked, while experiencing the impacts of COVID-19.

To support investment in new technologies and increase capital spending, Canadian-controlled private corporations will be able to expense up to $1.5M of eligible investments made after the budget date and before 2024.

Working from home during COVID-19 has proven challenging for those without access to fast and reliable high-speed internet services. An additional $1B will be provided to the Universal Broadband Fund to support broadband projects in an effort to provide access to rural and remote communities that do not currently have high-speed internet access.

As the world recovers from COVID-19, it will once again focus on dealing with climate change. The government is proposing $17.6B towards “a green recovery to create jobs, build a clean economy, and fight and protect against climate change”.  Some of the program’s funding includes:

• Support for the Net Zero Accelerator
• Funding of up to $1B for private sector investment in clean tech projects
• 50% reduction in corporate tax rate for businesses that manufacture zero-emission technologies
• Investment tax credits for capital invested in Carbon Capture, Utilization and Storage (CCUS) projects
• Additional funding to Environment and Climate Change Canada, Parks Canada, and the Department of Fisheries and Oceans

Tourism, arts, culture, and sports were all significantly impacted by COVID-19. To help businesses in this sector recover, the government announced:

• $200M to support local festivals, cultural events, heritage celebrations, local museums, and amateur sport events
• $500M to fund a Tourism Relief Fund that will support investment by local tourism businesses as they adapt to public health measures
• $300M to Canadian Heritage to establish a Recovery Fund for Arts, Culture, Heritage, and Sports Sectors
• $70M for the Canada Music Fund
• $755M for the Social Finance Fund

The budget includes a plan to invest in Canada’s infrastructure and build projects that contribute to a clean environment and create jobs This includes a Permanent Public Transit Fund. Earlier this year, the government announced $14.9B of funding for public transit projects across the country.

The Canadian wine sector and food processors are to receive financial support. $101M over two years starting in 2022-23 will be provided to Agriculture and Agri-Food Canada to implement a program that will support wineries in adapting to ongoing and emerging challenges resulting from Canada’s trade obligations. $292.5M will be provided over the next two years to a Processors Investment Fund to help processors of all supply-managed agricultural products adapt to Comprehensive Economic and Trade Agreement (CETA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

“A Resilient and Inclusive Recovery”

Indigenous, Black and racialized people, people living with disabilities, and members of the LGBTQ2 communities know all too well that systemic racism and discrimination exist in our country. The government announced programs and funding of the following:

• Canada Race Relations Foundation
• Communities at Risk: Security Infrastructure Program
• Establishment of a new Black-led Philanthropic Endowment Fund
• The Supporting Black Canadian Communities Initiative

In an effort to support people with disabilities, funding is being provided to undertake consultations to reform the eligibility process for federal disability programs and benefits. Changes were also announced to the eligibility criteria for the Disability Tax Credit. The government estimates that an additional 45,000 people will qualify for the tax credit as a result of the changes.

Indigenous communities will receive an additional $1.2B to support their response to COVID-19, including $478M to support the hire of nurses, help at-risk people to isolate and distribute personal protective care, and $760M for the Indigenous Community Support Fund. $1.4B is being committed to maintain essential health care services for First Nations and Inuit, while $1.2B is proposed to support education on reserves.

“Fair and Responsible Government”

The Fuller Landau Tax team provides detailed summaries of some of the key tax changes announced in the budget below, as well as some of the programs mentioned above including:

• CEWS and CERS program extensions
• Canada Recovery Hiring Program
• Tax on unproductive use of Canadian housing by foreign non-resident owners
• GST New Housing Rebate – eligibility conditions modified
• Immediate expensing of eligible property for CCPCs
• GST/HST changes for non-resident vendors
• Preventing cross-border tax schemes
• Restriction on deductibility of interest
• Tax on select luxury goods

Our conclusion

The only controversy with this budget is the amount of spending that it includes. It will be difficult for the opposition parties to oppose the budget as they do not want to force a federal election while we are still in the midst of the pandemic. If the infrastructure and program spending does spur on economic growth like we were experiencing before this most recent wave of COVID-19 infections, it may lead to a general election before the next budget, but with the Liberals seeking out another term.

Select detailed summaries of key tax changes and programs

CEWS and CERS program extensions

Budget 2021 extends the CEWS and CERS to September 25, 2021.

CEWS program changes

While the methodology for determining CEWS has stayed the same, the subsidy rates will gradually start to decrease starting with the July 4, 2021 qualifying period (period 18).

Recall that the overall CEWS rate is equal to the sum of the base CEWS rate and top-up CEWS rate.

The base rate for CEWS for periods 17 onwards will be determined using the below table. Note that only employers with a revenue decline greater than 10% will be eligible for the CEWS from period 18 onwards.

The top-up rate for the periods under the proposed extension will be determined using the below table. Similar to the Base CEWS rate, the top-up rate gradually decreases from period 18 onwards.

Budget 2021 also requires that any publicly listed corporation receiving the wage subsidy and found to be paying its top executives more in calendar year 2021 than in calendar year 2019 will need to repay all or part of its wage subsidy.

The amount required to be repaid is the lesser of:

• The total of all wage subsidy amounts received in respect of active employees for qualifying periods that begin after June 5, 2021; or
• The amount by which the corporation’s aggregate specified executives’ compensation for 2021 exceeds the aggregate specified executives’ compensation for 2019.

For the purposes of this rule, specified executives of a publicly listed corporation will be its Named Executive Officers whose compensation is required to be disclosed under Canadian securities laws in its annual information circular provided to shareholders. This generally includes a corporation’s CEO, CFO, and three other most highly compensated executives.

The requirement to repay the CEWS would be applied at the group level and would apply to wage subsidy amounts paid to any entity in the group.

The budget also introduces alternative baseline remuneration periods for furloughed and non-arm’s length employees for the qualifying periods starting June 6, 2021

CERS program changes

While the methodology for determining CERS has stayed the same, the subsidy rates will gradually start to decrease starting with the July 4, 2021 qualifying period (period 11).

The base rate for CERS for the periods under the proposed extension will be determined using the table below. Note that only companies with a revenue decline greater than 10% will be eligible for the CERS from period 11 onwards.

The Lockdown Support, which is an additional 25% top-up rate applied to the CERS for locations that must cease operations or significantly limit their activities under a public health order, is also extended from June 6, 2021 to September 25, 2021.

Canada Recovery Hiring Program

Budget 2021 introduces the new Canada Recovery Hiring Program (CRHP) which aims 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. Eligible employers can claim either the hiring subsidy or the wage subsidy for any particular qualifying period but can not apply for both.

Eligibility

Eligibility requirements for the hiring subsidy are the same as for the wage subsidy except for the requirement that a for-profit corporation must be a Canadian-controlled private corporation in order to be eligible for the hiring subsidy. Other eligible employers would include individuals, non‑profit organizations, registered charities, and certain partnerships.

Eligible employees must be employed primarily in Canada by an eligible employer throughout a qualifying period (or the portion of the qualifying period throughout which the individual was employed by the eligible employer).

The types of remuneration eligible for the CRHP would mirror those eligible for the CEWS. This includes salary, wages, and other remuneration for which employers are required to withhold or deduct amounts on account of the employee’s income tax obligations.

Incremental remuneration for the purposes of the CRHP means the difference between an employer’s total eligible remuneration paid to eligible employees for the qualifying period and its total eligible remuneration paid to eligible employees for the baseline period. The baseline period for the CRHP is March 14, 2021 to April 10, 2021. Eligible remuneration for both the qualifying and baseline period is subject to a maximum of $1,129 per week.

CRHP Qualifying Periods and Rates

The revenue decline is determined in the same manner as under the CEWS and CERS. Similar to the CEWS and CERS, the deadline for applying for the CRHP is 180 days after the end of the qualifying period.

Tax on unproductive use of Canadian housing by foreign non-resident owners

Canadian real estate has long been a stable and an attractive investment for foreign investors. In recent years, prices of homes in certain parts of Canada have risen to the point that it has become unaffordable for young Canadians to purchase their first home. In addition to the non-resident speculation tax that had been implemented by certain provinces over the years, the federal government introduced in the Budget 2021 a tax that targets the unproductive use of residential real estate owned by non-resident, non-Canadians. The objective of these measures is to ensure foreign, non-resident owners do not use Canadian residential real estate for their speculative benefits while driving up housing demand and prices for Canadians looking for an affordable home.

Effective January 1, 2022, there will be a federal annual one per cent tax on the value of residential real estate owned by non-resident, non-Canadians that is vacant or underused. The tax will require all owners, other than Canadian citizens or permanent residents of Canada, to file a declaration as to the current use of the residential property. Failure to file and/or disclose will be subject significant penalties.

The government intends to seek consultation from stakeholders on the proposed tax, including a plan to work closely with provincial and municipal governments to make purchasing a home more accessible and affordable for Canadians.

GST New Housing Rebate – eligibility conditions modified

The current GST New Housing Rebate entitles a homebuyer to recover 36 per cent of the

GST (or the federal component of the HST) paid on the purchase of a new home with a fair market value of $350,000 or less. If the new home is priced higher than $350,000 but less than $450,000, there is a partial rebate. There is no GST New Housing Rebate for new homes priced $450,000 or higher.

In addition to the price thresholds, the buyer must meet certain conditions in order to qualify for the GST New Housing Rebate. For example, the buyer must acquire the new home for use as the primary place of residence or as the primary place of residence of a related person.

If two or more individuals who are not related for GST New Housing Rebate purposes buys a new home together, all the individuals must meet the condition of the property being their primary place of residence in order to be eligible.

Budget 2021 proposes to remove the condition where two or more unrelated individuals who buy a new home together must all be acquiring the home for use as their primary place of residence or the primary place of residence of a relation. The proposed condition is that the GST New Housing Rebate would be available as long as the new home is acquired for use as the primary place of residence for any one of the purchasers or a relation of any one of the purchasers.

The proposed change will also apply to new housing rebates in respect of the provincial component of the HST.

Immediate expensing of eligible property for CCPCs

To help support Canadian businesses, Budget 2021 proposes a new incentive that will allow for the immediate expensing of up to $1.5M of eligible investments. This expands on the business investment incentives previously introduced in the 2018 Fall Economic Statement, which have provided for enhanced and immediate expensing for certain capital investments.

Eligible taxpayers

Canadian corporations that are Canadian Controlled Private Corporations (CCPCs) will be eligible for this new incentive. A corporation controlled either directly, or indirectly by a non-resident and/or public corporation will not qualify.

Eligible property

The incentive targets short to medium term investments, aimed at driving growth and recovery.

Eligible investments will include any capital property subject to the CCA rules, other than property that falls into the following non-eligible CCA classes, which are generally longer-term investments:

• Classes 1 through 6 and 17 – budlings and parking lots
• Class 14.1 – goodwill and property that was eligible capital property
• Class 47, 49, and 51 – facilities and infrastructure relating to natural gas and pipelines

The acquisition of used or previously owned property will be eligible for the incentive as long as both of the following conditions are met:

• The property was not previously owned by the taxpayer or someone not dealing at arm’s length with the taxpayer
• The property was not transferred to the taxpayer on a tax deferred rollover basis

Relevant period

This incentive will apply to eligible investments acquired and made available for use on or after April 19, 2021 (budget day) and before 2024.

How it works

For CCPCs that make an eligible investment, a full deduction will be available for the cost of the investment in the year it becomes available for use. The deduction will not be subject to the half year rule.

The deduction will be limited to a maximum of $1.5M per taxation year, with no option to carry forward unused deduction room.  Where a tax year is shorter than 365 days, the limit will be pro-rated.  The $1.5M limit will be shared among an associated group of CCPCs.

Where a taxpayer has eligible property in excess of the $1.5M limit, they will be able to choose which CCA class to apply the immediate deduction. Any residual capital cost in excess of the limit will be subject to regular CCA rules.

If a CCPC makes qualifying purchases that are also eligible under existing incentives, such as the full expensing of manufacturing and processing equipment introduced in the 2018 Fall Economic Statement, it will not reduce the amount available to deduct under this new incentive.

GST/HST changes for non-resident vendors

The federal government first proposed changes to the GST/HST regime for foreign-based vendors in the Fall Economic Statement 2020. Budget 2021 proposes further amendments to clarify the application of the proposed changes.

The following outlines key changes that have been proposed to date with regards to the GST/HST requirements for foreign-based vendors that will come into effect on July 1, 2021.

Sale of Digital Products and Services

Under the existing GST/HST regime, foreign-based vendors that do not have a permanent establishment in Canada, or who are not carrying on business in Canada for GST/HST purposes, generally do not need to register and collect GST/HST on sales of digital products such as video streaming, online gaming, or mobile apps to Canadian consumers. This created an influx of foreign-based vendors without any sales tax implications while local Canadian vendors remained obligated to collect GST/HST on the same sale to Canadian consumers.

Under the proposed changes, a simplified GST/HST regime will be put in place and will require foreign-based vendors to register for GST/HST if they sell digital products and services to Canadian consumers. The requirement to register also applies to digital marketplace platforms, such as app stores, that facilitate online sales of digital products and services between a foreign-based vendor and a Canadian consumer.

Under the simplified GST/HST regime, registration is required when the following are met:

• The sales must exceed, or are expected to exceed, a threshold of CAD $30,000 in a 12-month period. Zero-rated supplies are specifically excluded from the threshold figure.
• The sales must be made to Canadian consumers that are not registered for GST/HST. This means that sales to Canadian resellers or other businesses, who are often already registered for GST/HST, are excluded as a Canadian consumer.

As the regime is meant to be simplified, input tax credits paid on expenses cannot be claimed.

It must be noted that foreign-based vendors and digital marketplace platform operators can still choose to voluntarily register under the existing GST/HST regime if they wish to claim input tax credits paid.

Short-Term Accommodation through Digital Platforms

Not all property owners in the short-term rental market are aware of the GST/HST requirements for short-term residential rent. This led to an inconsistency of GST/HST registration and collection by property owners compared to hotels that operate in the same market.

The proposed changes require GST/HST to be collected on all digital platforms (i.e., website, electronic portal) that are used to facilitate short-term accommodations in Canada regardless of whether the property is owned by a Canadian or a foreign person. If the property owner is already registered for GST/HST, then the responsibility for collecting and remitting GST/HST remains with the property owner. Budget 2021 provides safe harbour rules to offer protection to digital platform operators who often rely on property owners to provide accurate information about their GST/HST registration status. The proposals impose a joint and several, or solidarity, liability on the platform operator and property owner for the collection and remittance of tax. However, the liability of the platform operator for failure to collect and remit tax is limited if they reasonably relied on information supplied by the property owner.

If the property owner is not registered for GST/HST, then the digital platform operator is deemed to be the supplier of the short-term accommodation. In such a case, the digital platform operator will have to assess and see if they already meet the registration requirements under the existing GST/HST regime. If they do not, then they will need to verify if they meet the registration requirements under the simplified GST/HST regime described above.

To add on the compliance, digital platform operators who become registered for GST/HST, under either the simplified or existing GST/HST regime, must also file an annual information return, which is due six months after the end of a calendar year.

Sale of tangible goods through fulfillment warehouses

With the accelerated growth in the digital economy, Canadian consumers are shifting more towards purchasing goods using online marketplaces, such as Amazon, that have fulfilment centres in Canada. Depending on the facts and circumstances of the situation, the existing GST/HST regime may not always require the foreign-based vendor or distribution platform operator to register for GST/HST.

Under the proposed changes, when an unregistered foreign-based vendor uses any distribution platform to sell goods to a Canadian consumer and the goods are located in fulfillment warehouses in Canada, or are shipped from a place in Canada to the Canadian consumer, the operator of the distribution platform must now register under the existing GST/HST regime (instead of the simplified GST/HST regime). The requirement to register under the existing GST/HST regime also applies to foreign-based vendors who use their own website, instead of a third-party distribution platform, to sell goods that are located in Canadian fulfilment centres to Canadian consumers.

Similar to short-term accommodation digital platform operators, distribution platform operators who become registered for GST/HST must also file an annual information return, which is due six months after the end of a calendar year.

Authority for the Minister to register

Where a person does not register under the simplified GST/HST regime, it must be noted that the Minister will have the authority to register that person if the Minister believes the conditions for registration are met. This type of authority is already allowed under the current GST/HST regime.

Preventing cross-border tax schemes

Budget 2021 proposes to address the hybrids mismatch arrangements which is one arrangement resulting in deductions in two different countries. Hybrid mismatch arrangements are cross-border tax schemes, used by multinational corporations, that exploit differences between Canada and foreign tax laws to avoid tax. The budget proposes that payments made by Canadian resident taxpayers under the hybrid mismatch arrangements will not be entitled for a deduction for Canadian tax purposes to the extent that a non-resident recipient receives an additional deduction in their country or does not have to include the payment into income. On the other hand, if payment by a non-resident corporation is deductible for foreign income tax in their country, the Canadian resident recipient will not be allowed a deduction for Canadian tax against the income inclusion.

The proposals around the hybrid mismatch arrangements would be implemented in two stages. The first stage would be effective starting July 1, 2022 and will include rules intended to neutralize a deduction or non-inclusion mismatches resulting from a payment in respect of a financial instrument.

Comments regarding the second stage will be released after 2021 and those rules would apply no earlier than 2023.

Mandatory disclosure rules

As a participant in the Organization of Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Project, Canada has been implementing a number of recommendations made by the OECD.  This budget is launching public consultation on changes to Canada’s reporting requirements on reportable transactions including a new requirement to report notifiable transactions and uncertain tax treatments.

Tackling tax avoidance and evasion

The budget also announced additional funds to allow the CRA to start new initiatives and extend existing programs aimed at finding tax avoidance and evasion including increasing GST/HST audits for large businesses, modernizing CRA’s risk assessment process to prevent fraudulent GST/HST refunds and rebates, and enhancing their ability to identify tax evasion involving trusts.  It is expected that these initiatives will recover $810M over five years while costing $304M.

Restriction on deductibility of interest

Currently, where a non-resident owns 25% or more (by votes or value) of the shares of a Canadian corporation (debtor), thin-capitalization rules may restrict the ability of such Canadian corporation to deduct interest expenses on the debt owing to related non-residents. Restriction applies when the proportion of the debtor’s amounts owing to related non-residents exceeds 1.5 times the debtor’s equity attributable to non-resident shareholders. Any denied interest is treated as a deemed dividend subject to a withholding tax rate of 25%, with potential rate reduction based on the applicable tax treaty. In their modified form, thin capitalization rules also apply to trusts and Canadian branches of non-resident corporations.

Budget 2021 proposes to implement further limitations on the interest deductibility in line with the recommendations of the Action 4 Report of the base erosion and profit-shifting action plan (BEPS Action Plan) developed by the OECD”. Under the proposed rules, net interest expense that may be deducted in computing taxable income for the year would be limited to a “fixed ratio” of “tax EBITDA”. Tax EBITDA is defined as taxable income before interest expense, interest income and income tax, and deductions for depreciation and amortization, where each of these items is as determined for tax purposes. In addition, for purposes of the proposed rules, the following additional considerations would apply:

• Any dividends that qualify for a deduction as inter-corporate dividends, or deduction applicable to certain dividends received from foreign affiliates, would be excluded from EBITDA calculation.
• Interest income and expense would include amounts that are economically equivalent to interest.
• Any interest denied under existing income tax laws (primarily aforementioned thin capitalization rules) would be excluded from the calculation under proposed rules.
• Interest income and expenses in respect of the debts owed between Canadian members of the corporate group would also be excluded.

Proposed rules will apply to Canadian corporations, trusts, partnerships, and Canadian branches of non-resident corporations. Proposed rules will be applicable to both existing and new debt for the taxation years that begin on or after January 1, 2023 and will be phased-in as follows:

• A “fixed ratio” of 40% for taxation years beginning on or after January 1, 2023 but before January 1, 2024;
• A “fixed ratio” of 30% for taxation years beginning on or after January 1, 2024.

Any interest that is denied under the proposed rules can be carried forward for up to twenty years or back for up to three years. Additionally, denied interest can also be carried back to the years prior to the effective date of the proposed rules, but only to the extent that the taxpayer would have been able to utilize the denied interest expense in those years had the proposed rules been in effect in those years. At the same time, unused capacity to deduct interest based on the proposed rules can be shifted between Canadian members of the same group (with the exception of banks and life insurance companies).

A number of exemptions would be available from the proposed rules:

• CCPCs whose taxable capital employed in Canada, together with the associated corporations, is less than $15M;
• Groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.

Lastly, it appears that standalone Canadian corporations, and Canadian corporations that are members of the groups that have no non-resident members, would not be subject to the proposed rules.

Tax on select luxury goods

Budget 2021 proposes to introduce a tax on the retail sale of new luxury goods, effective  January 1, 2022. This new measure would apply to cars and personal aircraft priced over $100,000, as well as boats priced over $250,000, at the final point of purchase on the sales price paid by a consumer.

The tax on such luxury goods would be calculated as the lesser of the following amounts:

1. 20% of the value above the threshold (i.e., $100,000 for cars and aircrafts; $250,000 for boats)
2. 10% of the full value of the luxury good

For illustrative purposes, purchases of luxury cars and personal aircrafts would result in additional taxes as follows:

The tax on cars is proposed to apply to all new passenger vehicles typically suitable for personal use. However, exclusions are available for motorcycles and certain off-road vehicles, racing cars, and motor homes. Commercial vehicles such as construction and farm vehicles, and public sector vehicles such as buses and ambulances would also be excluded from this tax.