2021 Federal Budget Announced

On April 19, 2021 (“Budget Day”), the first Federal Budget (“Budget”) in two years was released.

There are many articles available from accounting firms and media outlets that summarize the Budget. Therefore, rather than providing yet another complete summary, this article instead focuses on certain aspects of the Budget that most interest us and which we believe will be of specific interest to our readers.

Things We Are Excited About

There are provisions in the Budget that, if passed, will likely benefit many of our clients.

Probably the most widely beneficial provisions will be the changes that allow for accelerated capital cost allowance (“CCA”) deductions. This includes:

  • Up to $1,500,000 will be deductible by Canadian-controlled private corporations (“CCPCs”) for depreciable capital property in the first year that the property is available for use, excluding “long-lived assets” in CCA classes 1 to 6, 14.1, 17. 47, 49 and 51 (such as buildings). This means that the CCPC can deduct up to an additional $1,500,000 CCA in the year that the property is available for use. While this will result in smaller deductions of CCA in future years, it effectively results in a significant tax deferral.
    • The CCPC can choose which CCA class to attribute the accelerated CCA claim to and the $1,500,000 is shared amongst associated corporations.
    • The requirements are:
      1. Property must be purchased on or after Budget Day;
      2. Property cannot be previously owned by taxpayer or a related person of the taxpayer;
      3. Property cannot be acquired on a tax-deferred basis; and
      4. Property must be available for use on or before December 31, 2023.
  • The Budget is also expanding CCA classes for clean energy equipment (Class 43.1 and 43.2) to include more types of equipment.[1]

Also widely beneficial will be additional employment income subsidies. Employers may now choose between the following two programs:

  • The Canada Emergency Wage Subsidy (“CEWS”), which was extended until September 25, 2021 with the rates starting to decline in July 2021 until it is fully phased out.

    OR,

  • The new Canada Recovery Hiring Program (“CRHP”), designed to encourage employers with moderate revenue reductions to increase hiring or employment from period 17 to period 22 (June 6, 2021 to November 20, 2021).

    • The CRHP will be available to employers who have experienced revenue reduction in periods 17 to 22 compared to pre-COVID-19 revenue levels, with the revenue reduction test being the same as under CEWS. For the period 17 (June 6, 2021 to July 3, 2021), no revenue reduction is required to qualify for CHRP. For periods 18 to 22 (July 4, 2021 to November 20, 2021), the employer must demonstrate at least a 10% revenue reduction.

    • The CHRP subsidy starts at a maximum of 50% of the incremental remuneration paid by employers to eligible employees and the rate declines to 40%, then 30%, the 20% in the for periods 20, 21 and 22.

    • Incremental remuneration is Eligible remuneration LESS Baseline remuneration.

    • Eligible remuneration generally means any amounts subject to payroll withholdings and is limited to $1,129 per week per employee.

    • Baseline remuneration is the eligible remuneration paid in the baseline period, being March 14, 2021 to April 10, 2021. This is also limited to $1,129 per week per employee.

    • Eligible employers are the same as under the CEWS except any for-profit corporations must be a CCPC to qualify for the CHRP.

    • CHRP is not available for furloughed employees.

The Budget also provides other measures which will benefit certain taxpayers. These include:

  • Temporary reduction to corporate tax rates for qualifying zero-emission technology manufacturers.
    • For general rate corporate income, the rate is reduced from 15% to 7.5%; for small business corporate income, the rate is reduced from 9% to 4.5%.
    • Reduced rates to start in 2022 and will be phased out from 2029 to 2031.
    • To qualify, at least 10% of the taxpayer’s gross revenue in active businesses carried on in Canada must be derived from eligible zero-emission technology manufacturing or processing activities.
    • Zero-emission technology includes, but is not limited to, solar energy or wind energy or water energy conversion equipment, geothermal energy equipment, and zero-emission vehicles.
  • The Government will begin consultations to review the barriers against employee ownership trusts and review how such trusts can benefit businesses. These types of trusts, if permitted, would permit employers greater flexibility to provide part ownership to employees as part of loyalty, retention and/or succession planning endeavours.
  • A $40,000 interest-free loan from CMHC to be made available to homeowners and landlords to undertake retrofits to make the home more energy efficient (identified though an authorized EnerGuide energy assessment).
  • The Budget will expand the eligibility requirements for the disability tax credit. This will permit more families to claim the disability tax credit and may permit more families to set up qualified disability trusts for adult children (or grandchildren) as part of estate planning.
  • Expand access to the travel component of the Northern Residents Deduction where a Northern resident who does not have employer-provided travel benefits will be able to claim up to $1,200 for eligible travel expenses.
  • The Budget announced $1.4 billion of funding over 4 years for training and advisory programs and micro-grants for businesses to increase their ability to do business digitally and adopt new technology.

 

Things We Are Concerned About

Despite rumours in the tax community, the Federal government did not make any fundamental changes to increases taxes, such as increasing the capital gains inclusion rate, limiting the principal residence exemption, or reducing lifetime capital gains deduction, to make up for financial deficits resulting from the COVID-19 support programs.

Instead, at least for now, they appear to be focusing on enforcement of existing tax rules. However, the proposals for how they aim to do this could potentially be problematic. These proposals include:

  • New reporting and disclosure rules to align with the OECD Base Erosion and Profit Shifting Project. This involves 4 components:
    1. Changes to reportable transactions rules;
    2. Requirement to report notifiable transactions;
    3. Requirement for specified corporations to report uncertain tax positions; and
    4. Extending the normal reassessment period and introducing new penalties.
    • Reportable Transactions are “avoidance transactions”, as defined under the general anti-avoidance rule under the Income Tax Act, that meets 2 out of 3 hallmarks.[2] These need to be reported by June 30th under the current rules.
      • Proposed changes:
        1. Only 1 out of the 3 hallmarks will need to be met instead of 2.
        2. Amend the “avoidance transaction” definition to be a transaction or a series of transactions resulting in a tax benefit where “it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit”.[3]
        3. The deadline for reporting will be within 45 days of the earlier of the day that the taxpayer is contractually obligated to enter into the transaction and the day that the taxpayer enters into the transaction.
        4. Reporting requirements to be imposed on promoters, advisors, and any non-arm’s length persons receiving a fee from either.
    • Notifiable Transactions will be other transactions subject to the same reporting requirements as Reportable Transactions.
      • The CRA will publish “specific identifiable aspects” on its website with details that would allow taxpayers to identify and understand which transactions are Notifiable Transactions.
      • This is a similar regime to the US’ “listed transactions” and “transactions of interest” regime.
    • Uncertain Tax Positions set out on audited financial statements of corporations with $50,000,000 or more in assets reported on their balance sheets will be subject to reporting.
      • The financial statements must be “prepared in accordance with Canadian generally accepted accounting principles”, which includes IFRS and, if applicable, US GAAP. It’s unclear if those prepared under ASPE will be captured under these rules.
      • The corporation must report details on every Uncertain Tax Position on its financial statements, including whether it is a timing difference or a permanent reduction in tax.
    • There will be consultations on these changes with amendments applying to transactions entered into on or after January 1, 2022. No penalties will apply until the legislation receives Royal Assent.
    • These concern us as it will increase the risks associated with tax planning.
  • The Budget includes general commentary that the general anti-avoidance rule (“GAAR”) will be strengthened and “modernized”. The Budget does not clarify what this means but it may mean expansion. This is concerning because, when GAAR applies, the CRA is effectively able to overrule the tax treatment according to the Income Tax Act. If GAAR is expanded this will further increase the risk associated with tax planning.
  • Expansion of the application of section 160 of the Income Tax Act, which applies when a tax debtor transfers assets to a non-arm’s length person. The CRA can then seek payment on tax debts against the non-arm’s length person. The proposed rules include:
    • Deeming rule of a tax debt within the tax year that the transfer of property occurred if, generally, the taxpayer had knowledge that a tax debt would arise after that tax year or one of the purposes of the transfer of property was to avoid payment of the future tax debt.
    • An anti-arm’s length deeming rule, which could deem the transferor and transferor to be non-arm’s length if, at any time within the series of transactions/events, they were not arm’s length and it is reasonable to conclude that one of the purposes of the transactions/events was to cause them to be arm’s length at the time of the transactions/event.
    • A valuation rule to determine the value of the transferred property based on its value throughout the series of transactions instead of simply the value at the time of the transfer.
    • Significant new penalties imposed on planners and promoters if caught by the rules.
    • No plan for consultation and these changes may apply to any transfers of property on or after Budget Day.
    • This concerns us because section 160 is one of the harshest provisions of the Income Tax Act, causing people to be liable for other peoples’ tax debt. It already often leads to grossly unfair results and expanding it is unlikely to improve matters.
  • The Budget has increased funding to CRA to improve its ability to collect outstanding taxes. It has also made amendments to the CRA’s audit powers that allow it to compel persons to answer all proper questions and provide all reasonable assistance to the CRA in an audit. This includes compelling oral or written answers.
  • The Budget suggest the Federal government will create a publicly accessible registry of corporate beneficial ownership. The Federal government already requires certain beneficial ownership information to be disclosed for Federal corporations (see here) and the new trust tax reporting requirements were implemented in 2021 (see here). It is unclear what the new registry will entail or include, but is slated to receive $2,100,000 in funding and expected to come into effect in 2025.

There are also some proposals that will likely result in increased taxes. These include:

  • Limitation to net interest deductions for certain multinational entities to no more than 30% of its “tax EBIDTA”[4] in 2023 and no more than 40% in subsequent years. These rules will apply to corporations, trusts, partnerships and Canadian branches of non-resident taxpayers. However, these rules effectively will not apply to standalone corporations that do not have any non-residents of Canada.
    • There are exemptions or relief for:
      • CCPCs that, together with its associated corporations, have less than $15,000,000 of taxable capital employed in Canada; or
      • Corporations and trusts groups that have aggregate net interest expense among its Canadian member sof $250,000 or less.
    • There is also a group ratio rule that permits Canadian members of a group to transfer unused “interest deduction capacity” to other Canadian members of the group.
    • Denied interest deductions can be carried back 3 years and forward 20 years.
    • There will be draft legislation released for commentary within this year.
  • International tax measures to prevent hybrid mismatch arrangements. The Federal government intends to propose rules to:
    • Deny the tax deduction where the Canadian resident would otherwise have one if the non-resident recipient did not need to include the amount that the deduction is premised upon in their income;
    • Deny the tax deduction where the Canadian resident would otherwise have one if he/she/it would receive a further deduction in another country;
    • Deny the tax deduction where the Canadian resident would otherwise have one if the non-resident payor would have already received a deduction in the other country for that amount;
    • These changes will be release in two legislative packages, with the first to be released in 2022 and the second to be released in 2024. The government anticipates the first set of legislation to come into effect in July 2022.
  • “Luxury” excise tax on new vehicles, private aircraft or boats effective January 1, 2022. It is equal to 10% of total value or 20% of value over a threshold, whichever is less ($100,000 threshold for vehicles and private aircraft; $250,000 threshold for boats). This new excise tax only applies to non-commercial items and it will be subject to GST. It will be collected at the point of sale.
  • Non-resident or non-Canadian citizens who own homes in Canada to be subject to tax of 1% on vacant or underused homes. This is similar to the vacancy tax regime in BC, where a declaration will be required annually and the tax is levied annually. This is set to begin in 2022.

If you have any questions or concerns, our Corporate Commercial Securities Group and Tax Team would be happy to assist you.

[1] In the 2018 Fall Economic Statement, the Federal government provided for a similar (but less broad) accelerated CCA rules for certain eligible property. This included the Accelerated Investment Incentive, clean energy equipment and manufacturing and processing of goods equipment. See here for more information.

[2] The hallmarks are: 1) A promoter or tax advisor, in respect to the transaction, is entitled to contingent fees that are attributable to the tax benefit from the transaction, or contingent upon obtaining a tax benefit from the transaction, or are attributable to the number of taxpayers who participate in the transaction (or been given access to the advice given by the promoter or advisor); 2) A promoter or tax advisor requires “confidential protection” with respect to the transaction; and 3) The taxpayer, or a person who entered into the transaction for the benefit of the taxpayer, obtains “contractual protection” in respect of the transaction.

[3] Compared to a transaction or series of transactions resulting in a tax benefit, unless the transaction is carried out primarily for bona fide purposes other than to obtain the tax benefit.

[4] Earnings before interest expense/income, income tax, depreciation, and amortization.