Canada Federal Budget 2021 Highlights
Prepared by Andersen in Canada, Montréal Partner Patrick Coutu and Tax Managers Divya Katyal and Omar Yassine.
On April 19, 2021, the Minister of Finance, Chrystia Freeland, presented the 2021 Federal Government’s budget. Below is an overview of some of the major tax related announcements of this budget:
1. Application of the GST/HST to E-commerce
This budget confirmed the announced expansion of GST/HST registration requirements to certain e-commerce taxpayers. Most of the proposals announced during the 2020 Fall Economic Statement will come into effect on July 1, 2021, with the below mentioned amendments provided through this budget:
- Introduction of Safe Harbour Rules to limit the platform operator’s liability in case where the third-party sellers provide false information to platform operators.
- The $30,000 sales threshold for registration will not take into consideration zero-rated supplies.
- Requirement to file a return will only apply to platform operators that are registered or required to be registered for GST/HST.
- The Minister of National Revenue will have the authority to register persons that he believes should be registered under the simplified method.
- Suppliers registered to GST/HST under the simplified method will be eligible to deduct amounts related to bad debts and certain provincial HST point-of-sale rebates.
Therefore, as of July 2021, the below non-resident suppliers are required to be registered for GST/ HST and collect and remit the tax on their taxable supplies to Canadian consumers:
- Vendors supplying digital products or services (including traditional services).
- Distribution platform operators facilitating supplying digital products or services.
- Vendors that make sales of goods shipped from a fulfillment warehouse or another place in Canada.
- Distribution platform operators in respect of sales of goods shipped from a fulfillment warehouse or another place in Canada.
- Digital platform operators facilitating supplies of short-term accommodation in Canada.
2. Upcoming Digital Services Tax
This budget proposed to implement the Digital Services Tax (DST) as presented in the 2020 Fall Economic Statement. This is inline with similar DST provisions in several other countries, including France. The budget proposed as below for consultation:
- 3% tax on the revenue in excess of $20 million from digital services that rely on engagement, data and content contributions of the Canadian users.
- Will apply as of January 1, 2022.
- Will be applicable to groups with global revenue from all sources in the previous calendar year of at least 750 million euros.
- Will apply until an acceptable multilateral approach comes into effect under the OECD’s Pillar I and Pillar II initiatives.
3. Documentation for Input Tax Credits
GST/HST registrants must keep relevant information and/or documentation in relation to Input Tax Credits (ITC) for a period of 6 years. Such information and/or documentation must meet certain requirements and these requirements increase gradually on thresholds of $30 and $150. This budget proposes to increase these thresholds to respectively $100 and $500, effective April 20, 2021.
4. Excise Duties on Tobacco and Vaping Products
This budget proposes to increase excise duties on tobacco and to subject certain manufacturers, importers, wholesales and retailers to a tax on current inventories of cigarettes.
It also proposes to implement excise duties on vaping products in 2022. Manufacturers and importers of vaping products would also be required to obtain a license from the Canada Revenue Agency (CRA) and would need to file monthly information returns.
5. Tax on Luxury Goods
Budget 2021 proposes to introduce a tax on the retail sale of new luxury cars, personal aircraft priced over $100,000, and boats priced over $250,000, effective as of January 1, 2022.
The proposed tax would be lesser of 10% of the full value; or 20% of the value over $100,000 (for vehicles and aircraft) and $250,000 (for boats).
6. Improving Duty and Tax Collection on Imported Goods
This budget proposes changes to the Customs Act to improve the collection duty and tax collection, to ensure that importers value their goods using the value of the last sale for export to a purchaser in Canada, and not another country.
New measures were also announced regarding the modernization of the payment process for commercial importers.
7. New Earnings-Stripping Rule
In line with Action 4 Report of the BEPS Action Plan, the government proposes a limit on the amount of deductible interest to a fixed ratio of EBITDA for certain taxpayers.
The ratio will initially be set at 40% for the taxation years beginning on or after January 1, 2023, and then 30% for the taxation years beginning on or after January 1, 2024.
The proposed measure also includes a “group ratio” rule 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 implies that a higher deduction limit would be appropriate.
Exemptions available for CCPC (Canadian-Controlled Private Corporations) that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million; and group’s aggregate net interest expense among their Canadian members is $250,000 or less.
Interest denied under the earnings-stripping rule would be able to be carried forward for up to 20 years or back for up to 3 years.
8. Transfer Pricing Consultation
Following the judgement of Her Majesty The Queen v Cameco Corporation, the Government has observed that the current transfer pricing rules may result in the inappropriate shifting of corporate income out of Canada, artificially reducing corporation’s taxes owed in Canada.
Therefore, in this budget, the Government announces its intention to release a consultation paper in the coming months to provide stakeholders with an opportunity to comment on possible measures to improve Canada’s transfer pricing rules.
The Government will also take next steps to strengthen and modernize Canada’s General Anti-Avoidance Rule (GAAR), as announced in the 2020 Fall Economic Statement.
9. Avoidance of Tax Debts
This budget proposes a number of new anti-avoidance measures to address tax planning put in place to circumvent the application of section 160 of the Income Tax Act (ITA).
A new penalty for planners and promoters of tax debt avoidance planning is also introduced – lesser of 50% of the tax that is attempted to be avoided; and $100,000 plus the promoter’s or planner’s compensation for the planning.
10. Mandatory Disclosure Rules
To improve the effectiveness of Canada’s mandatory disclosure rules and to bring them in line with international best practices (BEPS Action 12 Report), amendments to the reportable transaction rules are proposed. The government is consulting on the proposal. The amendments would apply to transactions entered into or after January 1, 2022.
Reportable transactions – Thebudget proposed to the reduce the required generic hallmarks of the transaction to be considered as a “avoidance transaction’’, and thus reportable, to just one, i.e. the main purposes of entering into the transaction is to obtain a tax benefit.
Notifiable Transactions – The budget proposed a category of specific hallmarks known as “notifiable transactions” that would include both transactions that the CRA has found to be abusive as well as transactions identified as transactions of interest.
Reporting of uncertain tax positions- It is proposed that specified corporate taxpayers be required to report particular uncertain tax treatments to the CRA, where the following conditions are met:
- Resident in Canada, or non-resident corporation with a taxable presence in Canada;
- Have at least $50 million in assets;
- The corporation, or a related corporation, has audited financial statements in accordance with IFRS or other country-specific GAAP relevant for domestic public companies; and
- Uncertainty in respect of the corporation’s Canadian income tax is reflected in those audited financial statements.
The reassessment period of the year in respect of the transaction would not become statute-barred, if a taxpayer does not comply with the mandatory disclosure reporting requirements. There are several penalties of non-compliance in the budget, reaching up to $100,000 for both promoter and the taxpayer.
11. Hybrid Entity Rules
This budget proposes to implement rules consistent with the Action 2 report of the BEPS Action Plan, with appropriate adaptations to the Canadian income tax context, in relation to the branch mismatches, imported mismatches and reverse hybrids.
The first legislative package would be released for stakeholder’s comments later in 2021, and those rules would apply as of July 1, 2022. The second legislative package would be released for stakeholder’s comments after 2021, and those rules would apply no earlier than 2023.
12. Authority of CRA Officials
Amendments to the various legislations are proposed, to confirm that CRA officials have the authority to require persons to answer all proper questions and provide all reasonable assistance for any purpose related to the administration or enforcement of the relevant statute; and require to respond to questions orally or in writing, including in any form specified by the relevant CRA official. These amendments would allow the CRA officials to undertake audit and other compliance activities in the same manner as it did prior to the several court decisions which questioned the extent and manner of CRA officials to inquire information from taxpayers.
13. Immediate Expensing of Eligible Property
The budget proposes to provide a temporary immediate expensing in respect of an eligible property acquired by a CCPC, available for use before January 1, 2024. Such expense can be claimed up to a maximum amount of $1.5 million per taxation year, in the year the property becomes available for use. This expense limit would be shared amongst associated members of a group of CCPCs. An eligible property would be a capital property other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51.
14. Zero-Emission Technology Manufacturers Rate Reduction
The budget temporarily reduces the small business tax rate to 4.5% (from 9%) and the general corporate tax rate to 7.5% (from 15%) on eligible zero-emission technology manufacturing and processing income.
15. Capital Cost Allowance for Clean Energy Equipment
Classes 43.1 and 43.2 currently include vehicle charging stations and geothermal heat recovery equipment. This budget will broaden the definition of Classes 43.1 and 43.2 to include new types of assets such as active solar heating systems and equipment used to produce hydrogen.
16. COVID-19 Relief Measures
The budget proposes to:
- Extend the Canada Emergency Wage Subsidy (CEWS) program until September 25, 2021, and gradually decrease the subsidy rate from 75% to 20% beginning July 4, 2021 (depending on the severity of the employer’s revenue decline);
- Extend the rent subsidy and lockdown support until September 25, 2021, and gradually decrease the subsidy rate from 65% to 20% beginning July 4, 2021 (also depending on the severity of the employer’s revenue decline);
- Extend the Canada Emergency Business Account application deadline to June 30, 2021; and
- Introduces a new wage subsidy program, the Canada Recovery Hiring Program (CRHP), to provide eligible employers (with at least 10% revenue decline) a subsidy of up to 50% of the incremental remuneration paid to eligible employees between June 6, 2021 and November 20, 2021.
17. Tax on Unproductive Use of Canadian Housing by Non-resident Owners
Beginning in 2022, the budget proposes to introduce a new national 1% tax on the value of non-resident, non-Canadian owned residential real estate considered to be vacant or underused.
Beginning in 2023, 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 CRA for each Canadian residential property they own. The owner may also be eligible to claim in their declaration an exemption from the tax in respect of a property for the year.
The failure to file a declaration could result in the loss of any available exemptions, penalties, interest and the assessment period would be unlimited.
18. New housing Rebate
This budget proposes to remove the condition that where two or more individuals buy a new home together, each of them must be acquiring the home for use as their primary place of residence or the primary place of residence of a relation. Instead, the GST New Housing 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.
19. Disability Tax Credits
The budget updates the list of mental functions of everyday life that is used for assessment for the Disability Tax Credit. It also proposed to recognize more activities in determining time spent on life-sustaining therapy and to reduce the minimum required frequency of therapy to qualify for the Disability Tax Credit.
20. Postdoctoral Fellowship Income
The Budget proposes to include postdoctoral fellowship income in the “earned income” definition for RRSP purposes, which would allow postdoctoral fellowships to contribute to RRSP.