Highlights of Canada’s 2021 federal budget
On April 19, 2021 (Budget Day), Finance Minister Chrystia Freeland tabled the Liberal Government’s fifth budget—the first since the COVID-19 pandemic began1.
What you need to know
Tax rates: No general changes to the personal or business tax rates, but see our discussion below regarding the rate reduction for zero-emission technology manufacturers.
Interest deductibility: Consistent with recommendations in the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action 4 report, new rules will, subject to a “group ratio” rule and starting with taxation years beginning after 2022, limit the availability of interest deductions taken by certain taxpayers to no more than a fixed ratio of its “tax EBITDA”, which is generally defined as taxable income, before interest expense, interest income, income tax and depreciation/amortization. Exemptions will be available for Canadian-controlled private corporations (CCPCs) with taxable capital in Canada of less than $15 million and groups of entities with aggregate interest expense under $250,000. Detailed legislative proposals to implement these measures are expected to be released for comment later in 2021.
Hybrid mismatch arrangements: Consistent with the OECD’s BEPS Action 2, specific legislative measures will be introduced to deny tax benefits derived from certain hybrid mismatch arrangements and branch mismatch arrangements, which arise due to discrepancies in different jurisdictions’ tax treatment of certain instruments, entities or transactions. The proposed rules will be released in two separate legislative packages, the first of which would apply as of July 1, 2022 and the second would apply no earlier than 2023.
Mandatory disclosure rules: There will be a significant overhaul of the current taxpayer disclosure requirements in the Income Tax Act (Canada) (Tax Act), including the following: (i) expansion of the types of transactions which will be considered “reportable transactions”; (ii) addition of a new category of “notifiable transactions”, which is intended to allow the Canada Revenue Agency (CRA) an opportunity to challenge such transactions in a timely manner; (iii) addition of a requirement that corporations with at least $50 million in assets to report their uncertain tax positions as determined in accordance with International Financial Reporting Standards (IFRS) and reflected in their audited financial statements; and (iv) extension of the reassessment period in respect of transactions that are subject to the new disclosure rules and addition of penalties for failure to comply. The new rules would apply to taxation years that begin after 2021 and to transactions entered into after 2021 (however penalties would not apply to transactions that occur before the enacting legislation receives Royal Assent).
Immediate expensing of depreciable property for CCPCs: A CCPC will be entitled to immediate expensing of up to $1,500,000 in relation to most depreciable properties (other than long lived assets) acquired by it provided the property becomes available for use before 2024.
COVID-19 relief measures: Government relief programs including the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Rent Subsidy (CERS) have been extended through to September 2021. The Canada Recovery Hiring Program (CRHP) is also being introduced to provide alternative relief starting with periods beginning on June 6, 2021. For periods beginning after June 5, 2021, a new rule will require publicly listed corporations to repay wage subsidy amounts if the aggregate compensation for specified executives during the 2021 calendar year exceeds the comparable compensation for the 2019 calendar year.
Tax applicable to registered investments: Relief is provided with respect to the penalty tax applicable to pooled investment vehicles that are registered for purposes of certain registered plans (such as registered retirement savings plans) that hold non-qualified investments. Such penalty tax will now be reduced to take into account the proportion of interests in such registered investments that are held by investors through non-registered accounts.
Click below for analysis on key measures included in Budget 2021.
- International tax measures
- Business income tax measures
- Personal income tax measures
- GST/HST measures
- Status of outstanding tax measures
International tax measures
Interest deductibility limits
Budget 2021 proposes to introduce a new rule that further limits the availability of an interest deduction for certain taxpayers, supplementing the Tax Act’s current limitations which include the after-tax financing rules, the foreign affiliate dumping rules, and the thin capitalization rules (which Budget 2021 describes as being limited in scope). Budget 2021 only contains an overview of the proposed new rule, with draft legislation expected to be released for comment in the summer.
Budget 2021’s proposed interest deductibility limits are intended to implement the OECD’s BEPS Action 4 report2 into Canadian domestic law. In this regard, Budget 2021 states that the deductibility of interest raises the potential that excessive debt or interest expense can be placed in Canadian businesses in a way that erodes the tax base, for example, through:
- interest payments to related non-residents in low-tax jurisdictions;
- the use of debt to finance investments that earn non-taxable income; or
- having Canadian businesses bear a disproportionate burden of a multinational group’s third-party borrowings.
In response, Budget 2021 proposes to limit the amount of interest expense that a corporation, trust, partnership and Canadian branch of a non-resident taxpayer can deduct in computing its taxable income to no more than a fixed ratio of its “tax EBITDA.” Tax EBITDA will be comprised of taxable income (thereby excluding, amongst other things, certain dividends eligible for deductions) before taking into account interest expense, interest income, income tax, and deductions for depreciation and amortization, all as determined for tax purposes.
The rule would be phased in with a fixed ratio (subject to the “group ratio rule” discussed below) of 40% for taxation years beginning after 2022 but before 2024, and 30% for taxation years beginning after 2023. Interest denied under the new rule can be carried forward for up to twenty years or back for up to three years (including to taxation years that begin prior to the effective date of the rule, provided certain conditions are met). Moreover, Canadian members of a “group,” as that term will be defined in the legislation, will generally be able to transfer any unused capacity to deduct interest to other Canadian members of the group who would otherwise be limited by the rule.
Budget 2021 states that interest expense and interest income for purposes of the new rule would include not only amounts that are legally interest, but also certain payments that are economically equivalent to interest as well as other financing-related expenses and income. We hope to see clarification as to what constitutes an “equivalent-to-interest” payment in the draft legislation, as there are many payments that economically resemble interest but are not generally thought of as being interest at law. Such payments include rent, sharia-compliant financial products, repurchase agreements, futures, options and forwards, discounts, premiums, and early payment discounts on receivables. Torys has previously written on this topic that without a bright line test, drawing the distinction between the allowed and the disallowed will either add additional uncertainty or default to purpose tests or to reliance on the general anti avoidance rule in section 245 of the Tax Act (GAAR) when distinguishing taxpayers entering into equivalent-to-interest transactions for bona fide business purposes from those seeking to abuse the legislation3.
Exemptions from the new rule would be available for CCPCs that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million and groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less. This is a welcome exception considering that many Canadian small businesses have had to borrow heavily to adapt to and survive the COVID-19 pandemic. However, exceptions may also be necessary for small businesses that do not have CCPC status but are not eligible for the “group ratio” rules (described below) because, for example, they do not maintain audited financial statements.
Budget 2021 also contemplates that interest expense and interest income related to debts owing between Canadian members of a corporate group would generally be excluded from the application of the rule to ensure (amongst other reasons) that otherwise permitted loss shifting within a corporate group will not be adversely impacted.
The most complex element of the proposals is the “group ratio” concept that would allow a taxpayer to deduct interest in excess of the fixed ratio of tax EBITDA where the taxpayer is able to demonstrate that the ratio of net third party interest to book EBITDA of its “consolidated group” (generally defined as the parent company and all of its subsidiaries that are fully consolidated in its audited consolidated financial statements) implies that a higher deduction limit would be “appropriate.” The determination of the amount of unused capacity to deduct interest, which can be transferred between the Canadian members of a group, would take into consideration the higher group ratio.
While the proposals do not define what constitutes an “appropriate” higher deduction limit, they do state that the analysis will be based on the group’s audited consolidated financial statements with “appropriate adjustments” made. Such appropriate adjustments will include adjustments for interest payments to certain third-party creditors that are related to, or are significant shareholders of, Canadian group entities, and adjustments made to account for entities in the consolidated group with negative book EBITDA.
Moreover, Budget 2021 states that “consistent with the rationale of the group ratio rule, it is expected that standalone Canadian corporations and Canadian corporations that are members of a group none of whose members is a non-resident would, in most cases, not have their interest expense deductions limited under the proposed rule. Measures to reduce the compliance burden on these entities and groups will be explored.” We read this as saying that the Government expects that the group ratio rules should operate such that Canadian corporations and Canadian corporate groups should generally not be impacted by the proposals. We do not read this as saying that there will be a specific carveout for such entities. We also note that the interest deductibility proposals are in the “International Tax Measures” portion of Budget 2021’s tax measures, which further indicates that the rules are not targeted at taxpayers with only a Canadian presence.
Budget 2021 recognizes that the group ratio will present challenges when dealing with certain types of financial institutions that earn more interest than they expense. Because the proposals are based on net interest expense, Budget 2021 proposes to prevent banks and life insurance companies from transferring unused capacity to deduct interest to members of their corporate groups that are not themselves regulated banking or insurance entities. The Government is considering additional measures relating to regulated banks and life insurance companies and is inviting comments from stakeholders in this regard.
The new rule would apply to taxation years that begin after 2022 (with an anti-avoidance rule to prevent taxpayers from deferring the application of the measure) and would apply with respect to existing as well as new borrowings.
Hybrid mismatch arrangements
Budget 2021 proposes addressing “hybrid mismatch arrangements” in connection with the OECD’s 2015 report: Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 (BEPS Action 2)4. Generally, hybrid mismatch arrangements are cross-border structures in which the participants rely on discrepancies in different jurisdictions’ tax treatment of certain instruments, entities or transfers to obtain overall tax benefits to one or more of the participants. The OECD has released detailed rules for countries to adopt in order to deny tax benefits derived from hybrid mismatch arrangements.
The Government is concerned that these arrangements, among other things, “significantly” erode the tax base of affected countries, and that they may distort investment decisions and provide an unfair advantage to multinational enterprises over domestic ones. Budget 2021 draws attention to four types of hybrid mismatch arrangements:
- deduction/non-inclusion (D/NI) mismatches – where one country allows a cross-border payment to be deducted from income, but the payment is not included in the recipient’s income (within a reasonable period of time);
- double deduction mismatches – where a deduction in respect of a single expense is available in two or more countries;
- imported mismatches – where a payment is deductible by an entity in one country and included in the income of a second entity in a second country, but that inclusion is set off against a deduction under a hybrid mismatch arrangement between the second entity and a third entity in a third country; and
- reverse hybrids – these involve using an entity which is treated as fiscally transparent under the laws of the country in which it is formed, but as a separate entity under the laws of its investors (i.e. its shareholders, members, etc.).
Budget 2021 also addresses “branch mismatch arrangements” (collectively with hybrid mismatch arrangements, hybrid arrangements), which the OECD discusses in a 2017 supplement to the 2015 report: Neutralising the Effects of Branch Mismatch Arrangements5. Generally, branch mismatch arrangements occur where a taxpayer, taxed in one country, has a branch, which is taxed in a different country, but the ordinary rules for allocating income and expenditure between the countries result in income escaping tax in both countries. The Government is concerned that branch mismatch arrangements can generate similar mismatches to hybrid mismatch arrangements.
Although the Government is of the view that there are existing rules it can use to challenge hybrid arrangements, Budget 2021 indicates that its preference is to introduce specific legislative measures, based on BEPS Action 2, in order to provide (i) certainty to taxpayers and (ii) consistency across OECD jurisdictions. The Government notes that the United States, United Kingdom, Australia and the European Union member states have already implemented, or committed to implement, rules consistent with the BEPS Action 2 recommendations, and that the BEPS Action 2 report recognizes the need for international coordination to ensure that efforts do not give rise to double taxation or other “unintended consequences.”
Although Budget 2021 does not include draft legislation to implement these BEPS Action 2 recommendations, the Government has indicated an intention to introduce rules to address D/NI mismatches that would prevent payments made by Canadian residents under hybrid mismatch arrangements from being deductible to the extent that they are not included in a non-resident recipient’s income. Similarly, Canadian residents receiving payments, including dividends, under a D/NI mismatch arrangement would not be permitted to claim a deduction to the extent the payment is deductible by the payor. The Government also intends to introduce rules addressing the other forms of hybrid arrangements noted above “to the extent relevant and appropriate.”
Finally, the Government outlined certain criteria, based on the BEPS Action 2 recommendations, that it intends to apply to the new rules. The rules will be mechanical and not conditioned on a purpose test. They will generally apply to related parties, but also to certain arrangements between unrelated parties. The Government will also order the application of the proposed rules so that they are applied similarly to comparable rules in other countries.
The Government intends to release a legislative package comprising rules to implement certain BEPS Action 2 recommendations (generally D/NI mismatches arising from payments in respect of financial instruments) for stakeholder comment “later in 2021.” These rules would apply as of July 1, 2022. Generally, these recommendations include: (i) denying deductions or otherwise including amounts in income when a payment would give rise to a D/NI mismatch and (ii) limiting dividend exemptions (i.e. deductions) and credits in respect of withholding tax.
A second legislative package including rules to address the balance of the BEPS Action 2 recommendations that the Government intends to implement will be released for stakeholder comment sometime after 2021, with rules to apply no earlier than 2023.
Transfer pricing
The Federal Court of Appeal released its decision in The Queen v. Cameco Corporation6 on June 26, 2020 (the Supreme Court of Canada refused the Crown leave to appeal on February 18, 2021). Budget 2021 reflects the Government’s view that the decision “highlighted concerns” with Canada’s transfer pricing rules, which might allow taxpayers (and the Government specifically refers to large corporations) to inappropriately shift income out of Canada.
Budget 2021 announces the Government’s intention to release a consultation paper regarding amendments to Canada’s transfer pricing rules “in the coming months.” The Government also confirmed its intention to “take next steps” to revise Canada’s GAAR, as originally announced in its 2020 Fall Economic Statement, although it did not provide a timeline.
The Government also confirmed its intention to implement transfer pricing measures originally released on July 30, 2019, with respect to the transfer pricing rules’ order of application and the broadened definition of “transaction” for purposes of the extended reassessment period for non-arm’s length transactions with non-residents.
Return to the list of measures.
Business income tax measures
Mandatory disclosure rules
The Government sets out a number of proposals to enhance the mandatory disclosure rules of the Tax Act. The new rules would be a significant overhaul of existing requirements in the Tax Act.
The new rules would apply to taxation years that begin after 2021, and to the extent a proposed measure applies to transactions, the amendments would apply to transactions entered into after 2021. Any penalties would not apply to transactions that occur before the date on which the enacting legislation receives Royal Assent.
The Government invites comments on the following proposals by September 3, 2021.
Reportable transactions
The Tax Act currently requires taxpayers to report to a transaction to the CRA where:
- The transaction is an “avoidance transaction” for purposes of the GAAR. Generally, such an avoidance transaction is any transaction that would result in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
- The transaction bears at least two of three generic hallmarks, described very generally as follows:
- A promoter or tax advisor in respect of the transaction is entitled to certain contingent fees.
- A promoter or tax advisor requires “confidential protection” with respect to the transaction.
- The taxpayer, or the person who entered into the transaction for the benefit of the taxpayer, obtains “contractual protection” in respect of the transaction (otherwise than as a result of a fee described in the first hallmark).
A reportable transaction must be reported to the CRA on or before June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction.
The current rules have resulted in only limited reporting by taxpayers to the CRA.
The Government proposes the following amendments to the existing regime:
- Only one of the three generic hallmarks listed above will need to be present for a transaction to be reportable.
- A transaction will be considered an “avoidance transaction” for purposes of the new rules if it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit.
- Taxpayers will be required to report transactions to the CRA within 45 days of the earlier of the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction or enters into the transaction.
- Both taxpayers and promoters or advisors for such reportable transactions will be required to report the transactions to the CRA within the same deadlines—with an exception available for advisors where solicitor-client privilege applies.
Notifiable transactions
The Government also proposes to add reporting requirements in the Tax Act for transactions with specific hallmarks, referred to as notifiable transactions. Sample descriptions of notifiable transactions will be issued as part of the upcoming consultation.
Similar to reportable transactions, both taxpayers and promoters or advisors will be required to report transactions to the CRA within 45 days of the earlier of the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction or enters into the transaction. An exception to the reporting requirement will be available for advisors to the extent that solicitor-client privilege applies.
The purpose of the notifiable transaction regime would be to allow the CRA to challenge in a timely manner specific tax plans that the Government considers aggressive.
Uncertain tax treatments
Canadian publicly-traded corporations are required by provincial securities legislation to ensure that the financial statements they issue for public consumption are reliable and accurately reflect their financial situation. Canadian generally accepted accounting principles (GAAP) mandate that public corporations use IFRS to prepare financial statements. Private corporations may also choose to adopt IFRS.
Under IFRS, when a corporation determines that it is not probable that the courts will accept an uncertain tax treatment, the effect of that uncertainty must be reflected in the corporation’s financial statements.
There is currently no requirement for Canadian corporations to report uncertain tax positions to the CRA. In BP Canada Energy Company v. Canada (National Revenue)7, the Federal Court of Appeal found that the CRA, in the context of a tax audit, was not entitled to compel disclosure of tax accrual working papers that reflected a public corporation’s uncertain tax positions. In particular, the court expressed concern that compelling the disclosure of uncertain tax positions to the CRA might have a negative impact on the integrity of financial reporting.
Generally, the proposed legislation would create a requirement for corporations with at least $50 million in assets to report uncertain tax positions to the CRA where the corporation was required to file a Canadian return of income for the taxation year, had audited financial statements prepared in accordance with IFRS (or equivalent such as U.S. GAAP), and uncertainty in respect of the corporation’s Canadian income tax for the taxation year was reflected in the audited financial statements.
Uncertain tax treatments would be reported to the CRA at the same time as the corporation’s tax return. For each reportable uncertain tax treatment of a corporation, the corporation would be required to provide prescribed information, such as the quantum of taxes at issue, a concise description of the relevant facts, the tax treatment taken (including the relevant sections of the Tax Act) and whether the uncertainty relates to a permanent or temporary difference in tax.
Corporations sometimes rely on legal advice in relation to uncertain tax treatments, which may create issues should the requirement to disclose prescribed information to the CRA conflict with solicitor-client privilege.
Extension of the reassessment period and new penalties
Generally, the CRA’s deadline to reassess a taxpayer is 3 or 4 years after issuing an original assessment (referred to as the normal reassessment period). To accompany the new mandatory disclosure rules, the Government proposes that the normal reassessment period will not start in respect of a transaction until the taxpayer complies with the mandatory disclosure rules for that transaction. This would allow the CRA indefinite time to issue reassessments for a transaction where the reporting requirements are not met for that transaction.
In addition, the Government proposes new taxpayer and promoter penalties for failure to report a reportable transaction or a notifiable transaction, and a new penalty for corporations that fail to report uncertain tax treatments. The new penalties apply individually to each failure to report, so multiple failures in the same taxation year could give rise to multiple penalties.
Avoidance of tax debts
The Tax Act’s current tax debt anti-avoidance rule in subsection 160(1) is intended to prevent taxpayers from “creditor proofing” by transferring their assets to non-arm’s length transferees for insufficient consideration. For instance, subsection 160(1) of the Tax Act is meant to apply to a scenario where a corporate tax debtor pays a dividend to its sole shareholder, leaving the corporation with insufficient assets that the CRA may seize to satisfy the debt. When it applies, the current tax debt anti-avoidance rule makes the transferee jointly liable for the tax debt to the extent that the value of the assets transferred exceeds the value of consideration received by the indebted taxpayer in exchange.
The Government asserts that taxpayers have used aggressive tax planning to avoid the rule’s technical application and ensure that the CRA would be unable to collect the tax debt through the following strategies:
- Deferral of tax debts to a different year than when the transfer occurred;
- Avoidance of non-arm’s length status at the time of the transfer; and
- Stripping the transferor’s net asset value prior to the point-in-time valuation of the transfer.
The Government proposes to address these strategies through the following measures:
- Deferral of tax debts: A proposed anti-avoidance rule will deem a tax debt to have arisen in the same taxation year as when the transfer of property occurred if it is reasonable to conclude that: (i) a transferor (or non-arm’s length person) would have known through reasonable inquiries that the transferor would owe a tax amount after the end of the taxation year; and (ii) one of the purposes of the asset transfer was to avoid payment of that future tax debt.
- Avoidance of non-arm’s length status: A proposed anti-avoidance rule will deem an otherwise arm’s length transferor and transferee to not be operating at arm’s length if, at the time of the asset transfer: (i) the parties were not at arm’s length at any time within the series of transactions or events that include the transfer; and (ii) it is reasonable to conclude one of the purposes of the transactions or events was to ensure that the transferor and transferee were at arm’s length at the time of the asset transfer.
- Valuations: The valuation of assets transferred and consideration received in return will be determined with consideration to the overall result of the series of associated transactions, rather than solely at the point in time the assets were transferred.
- Penalty: The Government plans to penalize planners and promoters of tax debt avoidance schemes with a penalty equal to the lesser of: (i) 50% of the tax that they attempt to avoid; and (ii) $100,000 plus the planner’s or promoter’s compensation for the scheme.
The proposed rules will apply to transfers of property that occur on or after Budget Day.
Strengthening the CRA
Reminiscent to Budget 2019, the Government plans to allocate an additional $230 million over the next five years to the CRA to improve its collection abilities, as the Government increasingly looks for ways to address the debt accumulated during the COVID-19 pandemic.
Audit authorities
In Canada (National Revenue) v. Cameco Corporation8, the Federal Court of Appeal ruled that the CRA does not have the authority to compel taxpayers to attend oral interviews during a tax audit.
The Government proposes to overturn the outcome from Cameco. Amendments to the Tax Act and other tax statutes released with Budget 2021 provide that CRA officials have the authority to require persons to respond to questions orally or in writing, including in any form specified by the CRA official. These amendments also confirm that CRA officials have the authority to require persons to answer all proper questions, and to provide all reasonable assistance, for any purpose related to the administration or enforcement of the relevant tax statute.
Immediate expensing of depreciable properties for CCPCs
Where depreciable properties are acquired by a taxpayer, the Tax Act prohibits a deduction of the capital cost thereof as a current expense. Instead, the Tax Act allows “tax depreciation” to be claimed by way of capital cost allowance (CCA). Generally, a depreciable property belongs to a CCA Class which determines the applicable CCA rate. With respect to the year of acquisition, the “half-year rule” (which applies to most depreciable properties) provides that the allowable CCA is one-half of the amount otherwise determined. Pursuant to the 2018 Fall Economic Statement, the Government introduced the Accelerated Investment Incentive which tripled the amount of permissible CCA in the year of acquisition. In addition, the 2018 Fall Economic Statement provided for immediate expensing of certain manufacturing and processing equipment as well as certain clean energy equipment.
Budget 2021 proposes to provide immediate expensing of up to $1,500,000 in relation to “eligible property” acquired by a CCPC on or after Budget Day that becomes available for use before 2024. This enhanced deduction is only available for the taxation year in which the eligible property becomes available for use. This $1,500,000 limit is to be prorated for short taxation years and must be shared among associated members of a group of CCPCs. This enhanced measure effectively suspends the “half-year rule” otherwise applicable to properties for which this measure is used and can be combined with other available enhanced deductions under the existing rules, such as those introduced in the 2018 Fall Economic Statement relating to certain manufacturing and processing equipment and clean energy equipment.
“Eligible property” would generally be depreciable property, other than that belonging to Classes 1 to 6, 14.1, 17, 47, 49 and 51 (generally assets with a long life), provided that neither the taxpayer nor a non-arm's length person previously owned the property and the property has not been transferred to the taxpayer on a tax-deferred basis. Where there is more than $1,500,000 of available CCA under this enhanced measure, it is expected that the taxpayers would opt to claim such enhanced CCA for CCA Classes with the lowest CCA rates. If a CCPC uses less than its $1,500,000 limit, no carryforward of the excess capacity would be permitted.
Capital cost allowance for clean energy equipment
The Tax Act currently provides for enhanced rates of CCA to promote clean energy projects and environmental efficiency. In particular, Classes 43.1 and 43.2 provide accelerated CCA rates (of 30% and 50% respectively) for power generation assets and high efficiency co-generation systems. Property that is eligible for Class 43.1 will generally be eligible for Class 43.2 provided that additional conditions regarding the heat efficiency of fuel used are met.
Budget 2021 proposes to expand Classes 43.1 and 43.2 to include the following properties:
- pumped hydroelectric storage equipment;
- certain electricity generation equipment that uses water current, wave or tidal energy technologies;
- active solar heating systems, ground source heat pump systems, and geothermal energy systems that are used to heat water for a swimming pool;
- equipment used to produce fuels from specified waste material or carbon dioxide;
- certain equipment used for hydrogen production by electrolysis of water; and
- certain hydrogen refueling equipment.
To qualify for the accelerated CCA rate, the requirements of all applicable Canadian environmental laws, by-laws and regulations in respect of the particular property must be met at the time the property becomes available for use. The expanded Classes can also assist intangible expenses (associated with the start-up of renewable energy and energy conservation projects) to qualify as Canadian Renewable and Conservation Expenses, which are generally fully deductible.
Budget 2021 also proposes to remove or restrict the eligibility of the following types of property from Classes 43.1 and 43.2:
- fossil-fuelled cogeneration systems;
- fossil-fuelled enhanced combined cycle systems;
- certain specified waste-fuelled electrical generation systems;
- certain specified waste-fuelled heat production equipment; and
- certain producer gas generating equipment.
The expansion of Classes 43.1 and 43.2 will apply in respect of property that is acquired and becomes available for use on or after Budget Day. The removal or restriction from eligibility of Classes 43.1 and 43.2 will apply in respect of property that becomes available for use after 2024.
Rate reduction for zero-emission technology manufacturers
Budget 2021 proposes a temporary reduction of the corporate income tax rates on certain eligible manufacturing and processing income. In particular, taxpayers can benefit from the following reduced rates:
- 7.5% (where the income would otherwise have been taxed at the 15% general corporate rate); or
- 4.5% (where the income would otherwise have been taxed at the 9% small business tax rate).
Various zero-emission technology manufacturing or processing activities may qualify for this measure, as set out in greater detail in Budget 2021. In order to qualify for the reduced rates on eligible income, at least 10% of a taxpayer’s gross revenue from all active businesses carried on in Canada must be derived from eligible activities.
Budget 2021 proposes that the calculation of eligible income will be based on a proportion of the taxpayer’s cost of labour and capital costs used in the eligible activities. Stakeholders are invited to comment on the proposed allocation method until June 18, 2021.
Small businesses with income subject to both the general and small business corporate tax rates will be able to choose to have their eligible income taxed at either the 4.5% or 7.5% tax rate. However, the amount of income taxed at the 4.5% tax rate and the 9% small business tax rate may not exceed the taxpayer’s small business limit.
No changes are proposed to the dividend tax credit rates and gross up factors as a result of the temporary rate reduction.
The reduced corporate income tax rates will apply to taxation years beginning in 2022 and will be gradually phased out starting in 2029, such that the reduced rates will be fully phased out for taxation years beginning in 2032.
Canada Emergency Wage Subsidy
Budget 2021 proposes to extend the availability of the CEWS. The CEWS was set to end on June 5, 2021, but now would be available from June 6, 2021 through to September 25, 2021. The proposals also provide legislative authority to further extend the availability of the CEWS until November 20, 2021.
For active employees, the CEWS includes a base subsidy for employers that have experienced a revenue decline as well as a top-up subsidy for employers that have experienced a revenue decline of 50% or greater. Under Budget 2021 proposals, the subsidy rates will be gradually phased out starting on July 4, 2021. Starting at this time, only employers with a revenue decline of more than 10% can qualify for the CEWS. Budget 2021 proposes the rate structures for periods from June 6, 2021 to September 25, 2021 as set out in Table 2, “Canada Emergency Wage Subsidy Base and Top-up Rate Structure, Periods 17 to 20” in Annex 6 of Budget 2021, available here. The revenue decline is calculated by comparing the current period to the reference period, using either the general approach or alternative approach. For periods from June 6, 2021 to September 25, 2021, Budget 2021 proposes the reference periods for determining an employer’s decline in revenues as set out in Table 3, “Canada Emergency Wage Subsidy Reference Periods 17 to 20” in Annex 6 of Budget 2021. Employers are required to continue to use the reference period approach (general or alternative) that they had previously used when applying for the CEWS.
A separate wage subsidy rate structure applies for furloughed employees. For furloughed employees, the wage subsidy is aligned with the benefits that are provided through Employment Insurance (EI) through June 5, 2021. To ensure that this alignment continues, Budget 2021 proposes that the weekly wage subsidy for a furloughed employee (for June 6, 2021 to August 28, 2021) be the lesser of:
Amount of eligible remuneration paid in respect of the week; and
The greater of: (i) $500; and (ii) 55% of pre-crisis remuneration, up to a maximum subsidy of $595.
The wage subsidy for furloughed employees would be available to employers who qualify for the wage subsidy for active employees with respect to the relevant period until August 28, 2021.
Budget 2021 proposes a new rule that would require a publicly listed corporation (or a corporation controlled by such a corporation) to repay wage subsidy amounts received for active employees for periods beginning after June 5, 2021 if the aggregate compensation for specified executives during the 2021 calendar year exceeds the aggregate compensation for specified executives during the 2019 calendar year. Specified executives include Named Executive Officers whose compensation is required to be disclosed under Canadian securities laws in the annual information circular or similar executives for a corporation listed in another jurisdiction. The executive compensation for a calendar year would be computed by prorating the compensation of specified executives for each of the taxation years which overlap with the calendar year. The requirement to repay the subsidy would be applied at the group level and could apply to subsidy amounts paid to any entity within the group. The amount that would be required to be repaid is equal to the lesser of: (i) total wage subsidy amounts received for active employees for periods beginning after June 5, 2021; and (ii) the amount by which the aggregate specified executives’ compensation for 2021 exceeds the aggregate specified executives’ compensation for 2019.
Canada Recovery Hiring Program
Budget 2021 proposes to introduce the CRHP, a new program, for periods between June 6, 2021 and November 20, 2021. An eligible employer would be entitled to whichever of the CEWS or the CRHP is greater for a given period, but not to both.
Essentially, the CRHP would subsidize eligible employers to the extent that they are able to increase their payroll for qualifying periods between June 6, 2021 and November 20, 2021 over what it was from March 14, 2021 to April 10, 2021, subject to caps and other eligibility requirements outlined below. It is aimed at encouraging more hiring and transitioning employees back to work.
Generally, employers eligible for the CEWS would be eligible for the CRHP, but the CRHP would include some additional restrictions on eligibility by creating a new definition of “qualifying recovery entity.” A “qualifying recovery entity” is an eligible entity that: (i) if it is a corporation (other than a corporation exempt from Part I tax), is a CCPC or a cooperative corporation eligible for the small business deduction; and (ii) if it is a partnership, at least 50% of the fair market value of interests in the partnership are owned, directly or indirectly through one or more partnerships, by eligible entities or by corporations that are themselves “qualifying recovery entities.”
For periods commencing July 4, 2021, the CRHP would be available only to employers with a revenue reduction percentage greater than 10%. The revenue reduction percentage calculation would be the same as that used for CEWS. As is the case for the CEWS, an employer would have to apply for the CRHP no later than 180 days after the end of a qualifying period.
The CRHP subsidy would apply to the difference between: (i) an eligible employer’s total eligible remuneration (or baseline remuneration for non-arm’s length employees) paid to eligible employees for the relevant period (defined in the Tax Act as “total current period remuneration”); and (ii) its total eligible remuneration paid to eligible employees for the base period (or baseline remuneration for non-arm’s length employees) (defined in the Tax Act as “total base period remuneration”) (incremental remuneration). The base period is March 14, 2021 to April 10, 2021. Both the total current period remuneration and total base period remuneration are subject to a cap of $1,129 per eligible employee per week. The determination of eligible remuneration and eligible employee would be the same as for the CEWS. The CRHP would not apply to amounts paid to furloughed employees.
The subsidy rate would be 50% of incremental remuneration for periods from June 6, 2021 to August 28, 2021 and would then reduce to 40% for the period from August 29 to September 25, 2021, 30% for the period from September 26 to October 23, 2021, and 20% for the period from October 24, 2021 to November 20, 2021.
Anti-avoidance rules would deny the subsidy and apply a penalty tax where an eligible entity (or non-arm’s length person or partnership) participated in a transaction or event (or series of transactions or events) or took (or failed to take) any action for the purpose of increasing its CRHP subsidy. Similar to the CEWS, the penalty tax would be 25% of the CRHP subsidy that would have been received if the anti-avoidance rules had not been triggered.
Canada Emergency Rent Subsidy
The CERS was introduced in November 2020 for periods beginning September 27, 2020. The CERS may be claimed for “qualifying rent expenses” for certain properties of eligible entities, subject to a cap per location and overall cap shared among affiliated entities. Very generally, an entity that is eligible for the CEWS will likely be eligible for the CERS if it has eligible expenses.
Budget 2021 proposes to extend the CERS to September 25, 2021 with legislative authority to further extend the CERS program until November 30, 2021. As with the CEWS program, Budget 2021 proposes that the subsidy rates would be gradually phased out starting on July 4, 2021 and only organizations with a decline in revenues of more than 10% would be eligible for the CERS and Lockdown Support (as identified below). The base rent subsidy structure set out in Table 4, “Canada Emergency Rent Subsidy Base Rate Structure, Periods 17 to 20” in Annex 6 of Budget 2021, available here, would apply for periods from June 6, 2021 to September 25, 2021.
As part of the CERS program, for organizations that qualify for the base rent subsidy, the Government provided an additional 25% in respect of locations that are required to cease operations or significantly limit their activities under a public health order issued under the laws of Canada, a province or territory (Lockdown Support).
Budget 2021 also proposes to extend the Lockdown Support under the CERS to September 25, 2021. The proposals also allow for a different percentage to be prescribed in subsequent periods if the program is further extended.
Further, in connection with determining eligibility for the Lockdown Support, Budget 2021 proposes to amend the definition of “public health restriction” to cover situations in which a non-arm’s length party rents, directly or indirectly, the qualifying property from the entity. Generally, if the non-arm’s length party is subject to a “public health restriction”, the entity may be eligible for the Lockdown Support. This change would be deemed to have come into force on September 27, 2020.
In order to qualify for the CERS, an organization must have had a business number with the CRA on September 27, 2020. This is similar to the requirement under the CEWS program that the claimant must have had a payroll account with the CRA (or engaged a qualifying payroll service provider) on March 15, 2020. The existing rules under the CEWS program provide that in the case of certain asset sales in which the buyer acquires all or substantially all of the assets that a seller used in the course of carrying on a business in Canada, the buyer is deemed to have met the CEWS payroll account requirement if the seller did. Budget 2021 proposes to add that the buyer is deemed to have met the CERS business number requirement if the seller did. This change would be deemed to have come into force on September 27, 2020.
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Personal income tax measures
Taxes applicable to registered investments
Registered plans, including registered retirement savings plans, registered retirement income funds, registered education savings plans, registered disability savings plans, tax-free savings accounts and deferred profit sharing plans (each a Registered Plan) are permitted to invest in pooled investment vehicles that have been registered under Part X.2 of the Tax Act as a “qualified investment” for the particular type of Registered Plan for which it was registered.
Where a pooled investment vehicle has become a “registered investment”, the registered investment (other than certain vehicles such as mutual fund trusts and mutual fund corporations) generally must limit its own investments to qualified investments for the type of Registered Plan for which they were registered. If a registered investment that is subject to such investment holding restrictions holds property at the end of any month that is not a qualified investment for the type of plan for which it was registered, Part X.2 of the Tax Act imposes a penalty tax equal to 1% of the property’s fair market value, at the time that it was acquired, in respect of that month (Part X.2 Tax).
Under the current rules, the amount of Part X.2 Tax liability does not consider the proportion of interests in a registered investment that are held by Registered Plans compared to those held by other investors. Budget 2021 proposes relieving amendments that recognize that Part X.2 Tax may be unduly punitive in situations in which some interests in a registered investment are held by investors that are not themselves subject to the qualified investment rules. Under the proposals, the tax would be prorated based on the proportion of shares or units of the registered investment that are held by a Registered Plan or registered investment to which Part X.2 Tax can apply. For example, if 20% of the interests in a registered investment are held by a Registered Plan and 80% of the interests are held by investors through non-registered accounts, the monthly tax would be 20% of 1%, or 0.2%, of the value of a non-qualified investment held by the registered investment.
The changes would apply in respect of months after 2020 and earlier for taxpayers whose Part X.2 Tax liability in respect of months before 2021 has not finally been determined as of Budget Day.
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GST/HST measures
E-Commerce
In the 2020 Fall Economic Statement, the Government proposed a number of changes to the Goods and Services Tax/Harmonized Sales Tax (GST/HST) system with respect to e-commerce (E-Commerce Proposals). In general, the E-Commerce Proposals would require non-resident digital platform operators and online vendors to register for and collect and remit GST/HST on taxable sales to Canadian consumers of digital products and services (such as mobile apps, online video gaming, and video and music streaming services). The proposals would also require GST/HST to be collected and remitted on sales to Canadians of goods that are located in Canadian fulfillment warehouses where such sales are facilitated by digital platform operators for non-registered vendors or are made directly by non-resident vendors. In addition, the proposals would require GST/HST to be collected and remitted on all platform-based short-term accommodation supplied in Canada. These requirements were generally subject to a $30,000/year sales threshold. To support compliance, a simplified GST/HST registration and remittance framework would be made available to non-resident vendors and to non-resident distribution platform operators and non-resident accommodation platform operators that do not carry on business in Canada. The E-Commerce Proposals were proposed to be effective commencing on July 1, 2021. See our previous bulletin for further details.
Budget 2021 proposes a number of amendments to the E-Commerce Proposals, including:
(a) Safe harbour rules
Budget 2021 proposes to add safe harbour rules under which, if a third-party supplier provides false information that is relevant to whether or how much GST/HST a digital platform operator or accommodation platform operator is required to collect and remit, the third-party supplier is jointly and severally liable with the operator for any GST/HST with respect to supplies deemed to be made by the operator. Further, where a digital platform operator or accommodation platform operator rely in good faith on false information provided by a third-party supplier in not collecting GST/HST, the third-party supplier is solely liable for the uncollected GST/HST.
(b) Eligible deductions
Budget 2021 proposes to clarify that suppliers registered for the GST/HST under the simplified framework provided for in the E-Commerce Proposals can deduct bad debts for uncollected GST/HST and certain rebates from the GST/HST they are required to remit.
(c) Registration threshold
Budget 2021 proposes to clarify that supplies of digital products or services that are zero-rated are not included in the threshold for determining whether a non-resident vendor or distribution platform operator is required to register for GST/HST under the simplified framework.
(d) Platform operator information return
Budget 2021 proposes to clarify that the requirement to file an annual information return for platform operators that facilitate supplies of short-term accommodation in Canada or sales by registered vendors of goods located in Canadian fulfillment warehouses only applies to platform operators that are registered (or are required to be registered) for GST/HST.
(e) Discretionary registration authority
Budget 2021 proposes to provide the CRA with the authority to register a person that is not registered under the simplified framework if the CRA has reason to believe that the person should be so registered.
These amendments will be effective when the E-Commerce Proposals become effective on July 1, 2021.
Apart from these amendments, Budget 2021 also announces that CRA will work closely with affected businesses and platform operators to assist them in meeting their obligations. Where affected businesses and platform operators have taken reasonable steps but are unable to meet their new obligations for operational reasons, the CRA will take a practical approach to compliance and exercise discretion in administering these rules for a 12-month transition period, starting from the July 1, 2021 effective date.
Input tax credit information requirements
Under the GST/HST framework, a recipient of a supply of goods or services must obtain certain information in invoices, receipts or other documents from suppliers in order to support a claim for input tax credits (ITCs). Progressively more information is required as the consideration for the supply of goods or services increases, with the current thresholds being $30 or $150.
In addition, the recipient must obtain the information of the supplier or an intermediary on the supporting documents. However, for these purposes, an intermediary does not include a billing agent. Therefore, where a billing agent is involved, the supporting documents must provide the underlying vendor’s information rather than the billing agent’s information.
Budget 2021 proposes to increase the ITC supporting information thresholds to $100 and $500 (from $30 and $150, respectively) and to allow billing agents to be treated as intermediaries for purposes of the ITC supporting information requirements.
These proposals would come into force on the day after Budget Day.
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Status of outstanding tax measures
In Budget 2021, the Government confirmed its intention to proceed with a number of proposals that were previously announced, as modified to take into account consultations and deliberations since their release, including in particular:
- legislative proposals released on February 24 and March 3, 2021 in respect of the CEWS;
- the anti-avoidance rules consultation and income tax measures announced in the 2020 Fall Economic Statement, including in respect of employee stock options; and
- legislative proposals from Budget 2019, including in respect of the allocation to redeemers methodology for mutual funds, character conversion transactions, transfer pricing rules, the foreign affiliate dumping rules and cross-border share lending arrangements.
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1 https://www.budget.gc.ca/2021/home-accueil-en.html
6 2020 FCA 112.
7 2017 FCA 61.
8 2019 FCA 67.
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