On Monday April 19, 2021, the Federal Government released its budget – the first in over two years. As expected, Budget 2021 extended several COVID support items but did not contain any broad sweeping tax rate changes.
The main tax increases introduced focused on applying GST/HST to certain e-commerce activities, limiting the interest expense deduction for certain large multi-national companies and increasing tax on certain luxury goods.
More funding has also been provided to the Canada Revenue Agency to expand their auditing and collections.
While full details of Budget 2021 can be found by clicking here, summarized below are a few of the items we believe most relevant to private companies.
Additional Funding for Canada Revenue Agency (CRA)
Budget 2021 proposes an additional $304.1 million over five years, starting in 2021–22, to allow the CRA to fund new initiatives and extend existing programs, including:
- Increasing GST/HST audits of large businesses where risk assessment models have found the greatest risk of non-compliance.
- Modernizing the CRA’s risk assessment process to prevent unwarranted and fraudulent GST/HST refund and rebate claims at the outset and improve the ability to issue refunds for compliant businesses as quickly as possible.
- Enhancing capacity to identify tax evasion involving trusts and provide better service to executors and trustees.
Budget 2021 also proposes to provide $230 million over five years, starting in 2021-22, for the CRA to improve its ability to collect outstanding taxes. It is anticipated that this proposal will lead to the collection of an additional $5 billion in outstanding taxes over five years.
Business Tax Measures
Corporate income tax rates
No changes to the corporate income tax rates are proposed. As such, the income tax rates as of January 1, 2021, will remain as follows:
|BC||Combined (Federal and BC)|
Extension of Emergency Business Supports
Budget 2021 proposes to extend the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy, and the Lockdown Support until September 2021. The subsidy rates will gradually decline over the July-to-September period.
Budget 2021 also proposes to provide the government with the legislative authority to add additional qualifying periods for these measures until November 20, 2021, should the economic and public health situation warrant it.
Canada Emergency Wage Subsidy
Budget 2021 proposes that the wage subsidy rates would be gradually phased out starting on July 4, 2021 to September 25, 2021. The maximum subsidy rate of 75% and maximum weekly benefit per employee of $847 will be reduced as follows:
- 60% and $677 for period 18 (July 4 to July 31, 2021)
- 40% and $452 for period 19 (August 1 to August 28, 2021)
- 20% and $226 for period 20 (August 29 to September 25, 2021)
Only employers with a decline in revenues of more than 10 per cent would be eligible for the wage subsidy as of July 4, 2021.
Canada Emergency Rent Subsidy
Currently, the maximum base rent subsidy rate is set at 65% through the qualifying period ending on June 5, 2021.
Budget 2021 proposes that the maximum base rent subsidy rates would be gradually phased out starting on July 4, 2021, until September 25, 2021 (from a maximum of 65% to a maximum of 20%). Furthermore, only organizations with a decline in revenues of more than 10 percent would be eligible for the base rent subsidy and the Lockdown Support.
Canada Recovery Hiring Program
Budget 2021 proposes to introduce the new Canada Recovery Hiring Program 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.
Employers eligible for the Canada Emergency Wage Subsidy would generally be eligible for the hiring subsidy. However, a for-profit corporation would be eligible for the hiring subsidy only if it is a Canadian-controlled private corporation (including a cooperative corporation that is eligible for the small business deduction).
An eligible employer would be permitted to claim either the hiring subsidy or the Canada Emergency Wage Subsidy for a particular qualifying period, but not both.
The types of remuneration eligible for the Canada Emergency Wage Subsidy would also be eligible for the hiring subsidy. Eligible remuneration generally 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. However, it does not include severance pay or items such as stock option benefits or the personal use of a corporate vehicle. The amount of remuneration for employees would be based solely on remuneration paid in respect of the qualifying period.
In both the qualifying period (June 6 to November 20, 2021) and the baseline period (March 14 to April 10, 2021), eligible remuneration for each eligible employee would be subject to a maximum of $1,129 per week.
Provided that an eligible employer’s decline in revenues meets the threshold (>0% decline between June 6, 2021 to July 3, 2021 and >10% decline between July 4, 2021 to November 20, 2021), its subsidy in that qualifying period would be equal to its incremental remuneration multiplied by the applicable hiring subsidy rate for that qualifying period. The hiring subsidy rates are:
- 50% for period 17 to 19 (June 6 to August 28)
- 40% for period 20 (August 29 to September 25)
- 30% for period 21 (September 26 to October 23)
- 20% for period 22 (October 24 to November 20)
An employer’s decline in revenues would be determined in the same manner as under the Canada Emergency Wage Subsidy.
Applications for the Canada Recovery Hiring Program must be made no later than 180 days after the end of the qualifying period.
Budget 2021 proposes to provide temporary immediate expensing in respect of certain property acquired by a Canadian-Controlled Private Corporation (CCPC). This immediate expensing would be available for “eligible property” acquired by a CCPC on or after April 18, 2021, and that becomes available for use before January 1, 2024, up to a maximum amount of $1.5 million per taxation year. The immediate expensing would only be available for the year in which the property becomes available for use. The $1.5 million limit would be shared among associated members of a group of CCPCs. The limit would be prorated for taxation years that are shorter than 365 days. The half-year rule would be suspended for property for which this measure is used. For those CCPCs with less than $1.5 million of eligible capital costs, no carry-forward of excess capacity would be allowed.
Eligible property under this new measure would be a capital property that is subject to the CCA rules, other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51, which are generally long-lived assets.
Certain additional restrictions would be placed on property eligible for this new measure. Property that has been used, or acquired for use, for any purpose before it was acquired by the taxpayer would be eligible for the immediate expensing only if both of the following conditions are met:
- 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 “rollover” basis.
Limitations on Excessive Interest Deductions
Budget 2021 proposes that, starting in 2023, the amount of interest that certain businesses can deduct will be limited to 40 per cent of their earnings in the first year of the measure and 30 per cent thereafter.
The new earnings-stripping rule would also apply to trusts, partnerships, and Canadian branches of non-resident taxpayers.
Exemptions from the new rule would be available for:
- Canadian-controlled private corporations that, together with associated corporations, have taxable capital employed in Canada of less than $15 million (i.e., the top end of the phase-out range for the small business deduction); and
- groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.
The government expects to release draft legislation this summer and will seek stakeholder input on the new rules.
Employee Ownership Trusts
Employee ownership trusts encourage employee ownership of a business and facilitate the transition of privately owned businesses to employees. Both the United States and the United Kingdom support and encourage employee ownership through these types of arrangements.
Budget 2021 announces that the government will engage with stakeholders to examine what barriers exist to the creation of employee ownership trusts in Canada, and how workers and owners of private businesses in Canada could benefit from the use of employee ownership trusts.
Personal Tax Measures
Personal Income Tax Rates
No changes to the personal income tax rates are proposed. As such, BC’s top personal income tax rates for 2021 will be as follows:
|Personal Top Marginal Rates (Income > $220,000)|
|Interest and regular income||53.50%|
Tax Treatment of COVID-19 Benefit Amounts
Budget 2021 proposes to amend the Income Tax Act to allow individuals the option to claim a deduction in respect of the repayment of a COVID‑19 benefit amount in computing their income for the year in which the benefit amount was received rather than the year in which the repayment was made. This option would be available for benefit amounts repaid at any time before 2023.
Lower Home Energy Bills Through Interest-free Loans for Retrofits
Budget 2021 proposes to provide $4.4 billion to the Canada Mortgage and Housing Corporation (CMHC) to help homeowners complete deep home retrofits through interest-free loans worth up to $40,000. Loans would be available to homeowners and landlords who undertake retrofits identified through an authorized EnerGuide energy assessment.
The program would be available by summer 2021 and expected to be easily accessible through straightforward online tools.
Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners
Budget 2021 announces the government’s intention to implement a national, annual 1 percent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused, effective January 1, 2022. 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 property, with significant penalties for failure to file.
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 the Canada Revenue Agency (CRA) in respect of each Canadian residential property they own. The requirement to file this declaration would apply irrespective of whether the owner is subject to tax in respect of the property for the year.
In a declaration in respect of a property, the owner would be required to report information such as the property address, the property value and the owner’s interest in the property. The owner may also be eligible to claim in their declaration an exemption from the tax in respect of a property for the year. An exemption may be available, for instance, where a property is leased to one or more qualified tenants in relation to the owner for a minimum period in a calendar year. Where an exemption in respect of a property for the year is not available, the owner would be required to calculate the amount of tax owing and report and remit it to the CRA by the filing due date.
The failure to file a declaration with respect to a property for a calendar year as and when required could result in the loss of any available exemptions in respect of the property for the calendar year. Penalties and interest would also be applicable, and the assessment period would be unlimited.
In the coming months, the government will release a backgrounder to provide stakeholders with an opportunity to comment on further parameters of the proposed tax. These parameters would include, for example, the definition of residential property, the value on which the tax would apply, how the tax would apply where a property is owned by multiple individuals and/or non-individuals, potential exemptions and compliance and enforcement mechanisms. Additionally, the consultation will consider whether, how and when the proposed tax would apply in smaller, resort and tourism communities.
Tax on Select Luxury Goods
Budget 2021 proposes to introduce a tax on the sales of personal luxury goods including luxury cars and personal aircraft with a retail sales price of over $100,000, and boats with a price of over $250,000. The tax would be calculated at the lesser of 20 per cent of the value above the threshold ($100,000 for cars and personal aircraft, $250,000 for boats) or 10 per cent of the full value of the luxury car, boat, or personal aircraft. This measure would come into force on January 1, 2022.
For more information on how any of the proposed changes may impact your business or you, contact your Rise Advisor.