2021 Federal Budget Commentary

On April 19, 2021, the Deputy Prime Minister and Finance Minister, the Honourable Chrystia Freeland, presented Budget 2021: A Recovery Plan for Jobs, Growth, and Resilience, to the House of Commons. No changes were made to personal or corporate tax rates (other than a temporary measure for zero-emission technology manufacturers), nor to the inclusion rate on taxable capital gains.

Highlights

Personal Measures

• The Canada Recovery Benefit and related programs will be extended.
• Individuals will have the option to claim a deduction in respect of the repayment of a COVID-19 benefit amount for the year when the benefit was received.
• Access to the disability tax credit will be broadened.

Business Measures

• The Canada Emergency Wage and Rent Subsidies (CEWS and CERS) will be extended.
• The Canada Recovery Hiring Program was introduced.
• The ability to immediately expense 100% of many capital asset purchases was introduced.
• The corporate tax rate on zero-emission technology manufacturing will be halved.
• The disclosure requirements for aggressive tax planning and filing positions will be expanded.

Sales and Excise Tax

• Access to the GST/HST New Housing Rebate will be broadened for co-owners.
• A new tax of up to 10% will apply to the purchase of luxury vehicles, aircrafts or boats.

International Measures

• A 1% tax on the value of vacant or underused real estate owned by non-residents will be implemented.

Electronic Filing, Payments and Certification

• Some CRA communications will be undertaken electronically without the taxpayer’s authorization.
• Certain levels of payments will be required to be made electronically.

Personal Measures

COVID-19 Benefit Amounts – Tax Treatment

Budget 2021 proposes to allow individuals the option to claim a deduction in respect of the repayment of a COVID‑19 benefit amount for the year when the benefit 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. Individuals may only deduct benefit amounts once they have been repaid. An individual who makes a repayment, but who has already filed their income tax return for the year in which the benefit was received, would be able to request an adjustment to the return for that year.

Canada Recovery Benefits (CRB)

Budget 2021 proposes the following in respect of CRB:

• The maximum CRB would be extended by 12 weeks to a maximum of 50 weeks. The first four additional weeks will be paid at $500 per week, with subsequent weeks paid at $300 per week. All new CRB claims after July 17, 2021 would receive the $300 per week benefit, which will be available until September 25, 2021.
• The maximum Canada Recovery Caregiving Benefit would be extended by 4 weeks, to a maximum of 42 weeks, paid at $500 per week.
• Legislative amendments would be made providing the authority for additional potential extensions of CRB, EI and related programs until November 20, 2021.

Employment Insurance (EI)

Temporary Measures

Budget 2021 proposes to extend many of the temporary EI measures commenced in 2020, including:

• Maintaining a 420-hour entrance requirement for regular and special benefits, with a 14-week minimum entitlement for regular benefits, and a new common earnings threshold for fishing benefits.
• Simplifying rules around the treatment of severance, vacation pay, and other monies paid on separation.
• Extending the temporary enhancements to the Work-Sharing program such as the possibility to establish longer work-sharing agreements and a streamlined application process.

Other Benefits

• Sickness benefits would increase from 15 to 26 weeks, as of summer 2022. 
• Self-employed fishers who submit an EI claim for the winter 2021 fishing benefit period would have extended temporary eligibility for the entire benefit period.

Disability Tax Credit (DTC)

Budget 2021 proposes several changes which would provide broader access to the DTC. These proposals would apply to the 2021 and subsequent taxation years, in respect of DTC certificates filed on or after Royal Assent. Budget 2021 proposes to expand the definition of mental functions necessary for everyday life. Furthermore, the type of activities regarded as life-sustaining therapy will also be expanded.

Canada Workers Benefit (CWB)

The CWB is a non-taxable refundable tax credit that supplements the earnings of low- and modest-income workers. Budget 2021 proposes to enhance the CWB by, for example, by increasing the phase-out thresholds for individuals without dependents and families (from $13,194 to $22,944 and from $17,522 to $26,177, respectively in 2021). The phase-out rate is also slightly increased. Corresponding changes would be made to the disability supplement. Budget 2021 also proposes to introduce a “secondary earner exemption” to the CWB which would allow the spouse or common-law partner with the lower working income to exclude up to $14,000 of their working income in the computation of their adjusted net income, for the purpose of the CWB phase-out.

Other Measures 

Budget 2021 also announced plans for a wide variety of other programs, including: 

• Child Care – Providing new investments totalling up to $30 billion over the next 5 years, and $8.3 billion ongoing for Early Learning and Child Care and Indigenous Early Learning and Child Care, with the goal of providing regulated child care for $10/day on average, within the next five years.
• Student Loans – Extending the waiver of interest accrual on Canada Student Loans and Canada Apprentice Loans until March 31, 2023 and extending the doubling of the Canada Student Grants until the end of July 2023.
• Home Renovation Loans – Providing interest-free loans of up to $40,000 to homeowners and landlords who undertake retrofits identified through an authorized EnerGuide energy assessment. This program will also include funding dedicated to support low-income homeowners and renters including cooperatives and not-for-profit owned housing. The program would be available by summer 2021.
• Old Age Security Enhancements – Providing pensioners who will be age 75 and older as of June, 2022 with a one-time additional payment of $500 in August 2021. Budget 2021 then proposes to increase regular OAS payments for pensioners 75 and over by 10% on an ongoing basis as of July 2022.

Business Measures

Canada Emergency Wage Subsidy (CEWS)

Extension and Phase-out for Active Employees

Budget 2021 proposes that CEWS will be extended to September 25, 2021 but will start phasing out after July 3, 2021. Only employers with more than a 10% decline in revenues will be eligible for the wage subsidy as of that date. The rates and limits are as follows:

CEWS Base and Top-up Rates, Periods 17 to 20

Reference Periods

The reference periods for determining the revenue decline are as follows:

CEWS Reference Periods, Periods 17 to 20

The approach chosen in the prior periods must be maintained.

Furloughed Employees 

CEWS for furloughed employees would continue to be available to eligible employers until August 28, 2021, ending four weeks earlier than CEWS for active employees. To maintain the alignment of CEWS for furloughed employees with benefits available under EI, Budget 2021 proposes to maintain their weekly wage subsidy at the lesser of:

• the amount of eligible remuneration paid in respect of the week; and
• the greater of: 

• $500; and
• 55% of pre-crisis remuneration for the employee, up to a maximum subsidy amount of $595.

The wage subsidy relating to the employer’s portion of CPP, EI, the Quebec Pension Plan and the Quebec Parental Insurance Plan in respect of furloughed employees will also remain available.

Baseline Remuneration

An employer’s entitlement to CEWS in respect of an employee may be affected by their baseline remuneration, also known as pre-crisis remuneration. Absent an election, baseline remuneration is calculated using the period beginning January 1, 2020 and ending March 15, 2020. Budget 2021 proposes to allow an eligible employer to elect to use the following alternative baseline remuneration periods:

• March 1 to June 30, 2019 or July 1 to December 31, 2019, for the qualifying period between June 6, 2021 and July 3, 2021; and
• July 1 to December 31, 2019, for qualifying periods beginning after July 3, 2021.

Requirement to Repay Wage Subsidy – Public Corporations

Budget 2021 proposes to require a publicly listed corporation to repay wage subsidy amounts received for a qualifying period that begins after June 5, 2021 in the event that its aggregate compensation for specified executives during the 2021 calendar year exceeds that of the 2019 calendar year. Specified executives are the Named Executive Officers whose compensation is required to be disclosed under Canadian securities laws in the annual information circular provided to shareholders, or similar executives in the case of a corporation listed in another jurisdiction.

Canada Emergency Rent Subsidy (CERS)

Extension and Phase-out

Budget 2021 proposes that CERS will be extended to September 25, 2021 but will start phasing out after July 3, 2021. Paralleling CEWS, only employers with more than a 10% decline in revenues will be eligible for CERS as of that date. The rates and limits are as follows:

CERS Rate Structure, Periods 10 to 13

Lockdown Support

Budget 2021 proposes to extend lockdown support to September 25, 2021 at a 25% rate (unchanged).

Canada Recovery Hiring Program (CRHP)

Budget 2021 proposes the new CRHP to provide eligible employers with a subsidy of up to 50% of the incremental remuneration paid to eligible employees between June 6, 2021 and November 20, 2021. The higher of CEWS or CRHP could be claimed for a particular qualifying period, but not both. Similar to CEWS and CERS, an application for a qualifying period would be required to be made no later than 180 days after the end of the qualifying period.

Eligible Employers

Employers eligible for CEWS would generally be eligible for CRHP. However, a for-profit corporation would be eligible for the hiring subsidy only if it is a Canadian-controlled private corporation (CCPC). Eligible employers (or their payroll service provider) must have had a CRA payroll account open March 15, 2020.

Eligible Employees

An eligible employee must be employed primarily in Canada by an eligible employer throughout a qualifying period (or the portion of the qualifying period throughout which the individual was employed by the eligible employer). CRHP will not be available for furloughed employees. A furloughed employee is an employee who is on leave with pay, meaning they are remunerated by the eligible employer but do not perform any work for the employer. However, an individual would not be considered to be on leave with pay for the purposes of the hiring subsidy if they are on a period of paid absence, such as vacation leave, sick leave, or a sabbatical.

Eligible Remuneration and Incremental Remuneration

The same types of remuneration eligible for CEWS would also be eligible for CRHP (e.g., salary, wages, and other remuneration for which employers are required to withhold or deduct amounts). The amount of remuneration for employees would be based solely on remuneration paid in respect of the qualifying period. 

Incremental remuneration for a qualifying period means the difference between:

• an employer’s total eligible remuneration paid to eligible employees for the qualifying period, and 
• its total eligible remuneration paid to eligible employees for the base period. 

Eligible remuneration for each eligible employee would be subject to a maximum of $1,129 per week, for both the qualifying period and the base period. Similar to CEWS, the eligible remuneration for a non-arm’s length employee for a week could not exceed their baseline remuneration determined for that week. The base period for all application periods is March 14 to April 10, 2021.

CRHP Rates, Periods 17* to 22

Required Revenue Decline

To qualify, the eligible employer would have to have experienced a decline in revenues. For the qualifying periods between June 6, 2021 and July 3, 2021, the decline would have to be greater than 0%. For later periods, the decline must be greater than 10%.

CRHP Reference Periods, Periods 17 to 22

Immediate Expensing of Capital Assets

Budget 2021 proposes to permit the full cost of “eligible property” acquired by a CCPC on or after Budget Day to be deducted, provided the property becomes available for use before January 1, 2024. Up to $1.5 million per taxation year is available for sharing among each associated group of CCPCs, with the limit being prorated for shorter taxation years. No carry-forward of excess capacity would be allowed.

Eligible Property

Eligible property includes 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. The excluded classes are generally those that have long lives, such as buildings, fences, and goodwill.

Interactions of the Immediate Expensing with Other Provisions

Where capital costs of eligible property exceed $1.5 million in a year, the taxpayer would be allowed to decide which assets would be deducted in full, with the remainder subject to the normal CCA rules.  Other enhanced deductions already available, such as the full expensing for manufacturing and processing machinery, would not reduce the maximum amount available ($1.5 million).

Restrictions

Generally, property acquired from a non-arm’s length person, or which was transferred to the taxpayer on a tax-deferred “rollover” basis, would not be eligible. Also, there are several other rules that limit CCA claims that would continue to apply, such as limits to claims on rental losses.

Rate Reduction for Zero-Emission Technology Manufacturers

Budget 2021 proposes a temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers, halving the tax rate on eligible zero-emission technology manufacturing and processing income to 7.5% on income subject to the general corporate tax rate (normally 15%), and 4.5% where that income would otherwise be eligible for the small business deduction (normally 9%). Provincial taxes would still apply to this income. For taxpayers with income subject to both the general and the small business corporate tax rates, taxpayers would be able to choose the income on which the rate would be halved.

Capital Cost Allowance (CCA) for Clean Energy Equipment

Under the CCA regime, Classes 43.1 and 43.2 provide accelerated CCA rates (30% and 50%, respectively) for investments in specified clean energy generation and energy conservation equipment. Budget 2021 proposes to expand Classes 43.1 and 43.2 to include a variety of assets used to generate energy from water, solar or geothermal sources or waste material, or related to hydrogen production or utilization. Accelerated CCA would be available in respect of these types of property only if, at the time the property becomes available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met. 

The expansion of Classes 43.1 and 43.2 would apply in respect of property that is acquired and that becomes available for use on or after Budget Day, where it has not been used or acquired for use for any purpose before Budget Day.

Film or Video Production Tax Credits

Budget 2021 proposes to temporarily extend certain timelines for the Canadian Film or Video Production Tax Credit and the Film or Video Production Services Tax Credit by 12 months (in addition to certain extensions previously announced). These measures would be available in respect of productions for which eligible expenditures were incurred by taxpayers in their taxation years ending in 2020 or 2021.

Mandatory Disclosure Rules

While past Budgets have proposed specific anti-avoidance provisions, Budget 2021 proposes broad-based disclosure requirements for tax strategies considered aggressive by the government. Certain transactions must presently be reported to CRA. The government is consulting on proposals to enhance Canada’s mandatory disclosure rules. This consultation will address:

• changes to the reportable transaction rules;
• a new requirement to report notifiable transactions;
• a new requirement for specified corporations to report uncertain tax treatments; and
• related rules providing for, in certain circumstances, the extension of the applicable reassessment period and the introduction of penalties.

Reportable Transactions

The Income Tax Act contains rules that require that certain transactions entered into by, or for the benefit of, a taxpayer be reported to CRA. Such transactions must meet the definition of an “avoidance transaction” – generally, undertaken for no bona fide purpose other than obtaining a tax benefit. The reporting obligation for reportable transactions would extend to the taxpayer, any other person involved in procuring a tax benefit for the taxpayer, and a promoter or advisor (as well as certain other persons who are entitled to receive a fee with respect to the transaction). An exception would apply where disclosure would violate solicitor-client privilege.

Notifiable Transactions

Budget 2021 proposes to introduce a category of specific hallmarks known as “notifiable transactions”. The Minister of National Revenue would have the authority to designate, with the concurrence of the Minister of Finance, a transaction as a notifiable transaction. A taxpayer who enters into a notifiable transaction would be required to report the transaction to CRA. Notifiable transactions would include both transactions that CRA has found to be abusive and transactions identified as transactions of interest. The description of a notifiable transaction would set out the fact patterns or outcomes that constitute that transaction in sufficient detail to enable taxpayers to comply with the disclosure rule. It would also include examples in appropriate circumstances

Reassessment Period

In support of the new mandatory disclosure rules, Budget 2021 proposes that, where a taxpayer has a reporting requirement in respect of a transaction relevant to the taxpayer’s income tax return for a taxation year, the normal reassessment period would not commence in respect of the transaction until the taxpayer has complied with the reporting requirement. As a result, if a taxpayer does not comply with a mandatory disclosure reporting requirement for a taxation year, a reassessment of that year in respect of the transaction would not become statute-barred. Significant penalties would also apply to taxpayers and promoters who fail to file these required disclosures.

Sales and Excise Tax Measures

GST New Housing Rebate 

The GST New Housing Rebate entitles homebuyers to recover 36% of the GST (or the federal component of the HST) paid on the purchase of a new home priced up to $350,000. The maximum rebate is $6,300. The GST New Housing Rebate is phased out for new homes priced between $350,000 and $450,000. There is no GST New Housing Rebate for new homes priced at $450,000 or more. In addition to these price thresholds, several other conditions must be met.

In particular, the purchaser must be acquiring the new home for use as their primary place of residence or as the primary place of residence of a relation (i.e., an individual related by blood, marriage, common-law partnership or adoption, or a former spouse or former common-law partner). Under the current rules, if two or more individuals who are not considered relations for GST New Housing Rebate purposes buy a new home together, all of those individuals must meet this condition – otherwise none of them will be eligible for the GST New Housing Rebate. Budget 2021 proposes to make the GST New Housing Rebate 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.

Tax on Select Luxury Goods

Budget 2021 proposes to introduce a tax on the retail sale of new luxury cars and personal aircraft priced over $100,000, and boats priced over $250,000, effective as of January 1, 2022. For vehicles, aircraft and boats sold in Canada, the tax would apply at the point of purchase if the final sale price paid by a consumer (not including GST/HST or provincial sales tax) is above the $100,000 or $250,000 price threshold, as the case may be. Importations of vehicles, aircraft and boats would also be subject to the tax.  

Upon purchase or lease, the seller or lessor would be responsible for remitting the full amount of the federal tax owing, regardless of whether the good was purchased outright, financed, or leased over a period of time. Exports will not be subject to the tax.  

For vehicles and aircraft priced over $100,000, the amount of the tax would be the lesser of 10% of the full value of the vehicle or the aircraft, or 20% of the value above $100,000. For boats priced over $250,000, the amount of the tax would be the lesser of 10% of the full value of the boat or 20% of the value above $250,000. GST/HST would apply to the final sale price, inclusive of the proposed tax, so GST/HST would also be payable on this new tax. Further details are to be announced in the coming months.

International Measures

Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners

Budget 2021 proposes to introduce this new national 1% tax on the value of vacant or underused real estate owned by non-resident, non-Canadians. The tax would be levied annually beginning in 2022. 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 in respect of each Canadian residential property they own, starting in 2023.

Electronic Filing, Payments and Certification

Notices of Assessment (NOA)

Budget 2021 proposes to provide CRA with the ability to send certain NOAs electronically without the taxpayer having to authorize CRA to do so. This proposal would apply in respect of individuals who file their income tax return electronically and those who use the services of a tax preparer that files their return electronically. Taxpayers who file their income tax returns in paper format would continue to receive a paper NOA from CRA. This measure would come into force on Royal Assent of the enacting legislation.

Correspondence with Businesses

Budget 2021 proposes to change the default method of correspondence for businesses that use CRA’s My Business Account portal to electronic only. However, businesses could still choose to also receive paper correspondence. This measure would come into force on Royal Assent of the enacting legislation.

Electronic Payments 

Budget 2021 proposes that electronic payments be required for remittances over $10,000 under the Income Tax Act and that the threshold for mandatory remittances for GST/HST purposes be lowered from $50,000 to $10,000. Budget 2021 also proposes to clarify that payments required to be made at a financial institution include online payments made through such an institution. This measure would apply to payments made on or after January 1, 2022.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. 

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.

Please contact Fazzari + Partners LLP if you have any questions. We can offer the tax advices that best meet your unique circumstances.

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