Federal budget tax changes

TAXATION

Chrystia Freeland presented her first budget as federal Finance Minister on April 19, 2021. This is also the first budget delivered by the minority Liberal government in two years, focusing on finishing the fight against COVID-19 and building recovery from the pandemic recession. Key tax changes announced in the budget, other than those dealing with COVID-19 support, are summarized below.

Personal tax changes

Disability Tax Credit (DTC) and other related benefits

The DTC is a non-refundable tax credit that is designed to offset some non-itemizable costs related to disability. A medical professional must complete a certificate confirming that you have a severe and prolonged impairment in physical or mental function. Proposed changes to broaden the eligibility criteria for impairment of mental function, and the criteria for life-sustaining therapy, will increase access to the DTC and other related benefits, including the Registered Disability Savings Plan, the Child Disability Benefit and the disability supplement to the Canada Workers Benefit (CWB).

Lower income workers

The budget includes targeted support for low-wage workers, including an increase in the federal minimum wage to $15 per hour and enhancements to the CWB, which supplements the earnings of lower income workers.

This benefit is available to individuals with more than $3,000 in working income, which generally includes employment and business income, calculated at 26 per cent of working income over that amount to a maximum of $1,395 for individuals and $2,403 for families. The budget proposes to increase this phase-in rate to 27 per cent. It also proposes increasing the adjusted net income level at which the benefit starts to be reduced from $13,194 to $22,944 for single individuals, and $17,522 to $26,177 for families, with an increase in the phase-out rate from 12 to 15 per cent of income over the threshold.

Additionally, a new proposal was introduced for couples, allowing the lower income spouse to earn up to $14,000 without reducing the CWB otherwise determined. As noted above, there is a supplement to CWB for individuals who qualify for the DTC; corresponding changes will be made to the phase-out thresholds and rate for the supplement.

Northern Residents Deduction

Proposed changes to the travel component of the Northern Residents Deduction will expand access for people who live in prescribed northern areas of Canada. These changes provide the option of a flat-rate deduction and expand access to those who do not have employer-provided travel benefits for non-medical trips under certain circumstances.

Post-doctoral fellows

A proposed amendment to the Income Tax Act will recognize post-doctoral fellows as students, correcting an anomaly that did not recognize their fellowship income as earned income for the purpose of determining their Registered Retirement Savings Plan contribution room. This change will be applied retroactively to post-doctoral fellowship income earned in 2011 and after, when the taxpayer submits a request to the Canada Revenue Agency (CRA) in writing.

Defined contributions to pension plans

A proposed amendment in the budget will allow additional flexibility to administrators of defined contribution pension plans to correct both under-contribution and over-contribution errors to an employee’s account.

Reduced paper filing proposal

There are a series of proposals that will reduce paper filings of tax and information returns with the CRA and CRA’s correspondence with taxpayers. This includes the CRA being able to send certain notices of assessment electronically without the taxpayer having to authorize the CRA to do so. This measure would be effective upon Royal Assent of the enacting legislation.

Amendments will also allow those who prepare T4As (Statement of Pension, Retirement, Annuity and Other Income) and T5s (Statement of Investment Income) returns to provide them solely in an electronic format without the taxpayer having to authorize them to do so. This measure would come into effect for returns after 2021.

Old Age Security pension

Old Age Security pensioners who are over the age of 75 as of June 2022 will receive a $500 one-time additional payment in August 2021 and a 10 per cent increase in monthly payments next year.

Sickness benefits

The budget proposes to extend sickness benefits available under the Employment Insurance program from 15 weeks to 26 weeks, effective summer 2022.

Real estate and measures for Canadian homeowners

The budget proposes a new one per cent tax on the value of vacant or underused residential real estate owned by non-resident, non-Canadians effective January 1, 2022.

Canadian homeowners, including landlords, may be eligible for up to $40,000 of interest-free loans to make their homes more energy efficient through the Canada Mortgage and Housing Corporation.

Corporate tax changes

Capital cost allowance

The capital cost allowance (CCA) system determines what portion of the cost to purchase capital property may be deducted each year. The 2021 budget proposes a temporary immediate expensing of up to $1.5 million per taxation year for the purchase of eligible property by Canadian-controlled private corporations (CCPCs).

Eligible property includes capital purchases made after April 19, 2021 that are available for use by January 1, 2024. It excludes certain long-lived assets, such as buildings and intangible property without a limited life. The annual limit of $1.5 million must be shared by associated companies and any unused annual limit cannot be carried forward to future years.

The CCA rules for what assets qualify under the classes for Clean Energy Equipment (Classes 43.1 and 43.2), which have accelerated deductions, will be broadened under this budget effective for assets acquired and that become available for use after April 19, 2021.

Manufacturing and processing income

The budget proposes a temporary measure to reduce corporate income tax rates on income from the manufacturing and processing of zero-emission technology earned after 2021. The tax rate will decrease from 9 to 4.5 per cent for income eligible for the small business deduction, and from 15 to 7.5 per cent for other income, earned in 2022 to 2028, and then will gradually return to the original rates by 2032. Since these changes are targeted and temporary, there will be no corresponding changes to the Dividend Tax Credit rates during this period.

Introducing the Digital Services Tax

As previously announced in the 2020 Fall Economic Statement, the budget proposes a new three per cent Digital Services Tax (DST) effective January 1, 2022. The DST will apply to large global businesses earning revenue in excess of $20 million in a calendar year from certain digital services that rely on data and content contributions of Canadian users. It is intended to be temporary until the Organization of Economic Cooperation and Development and G20 countries implement an acceptable multinational solution. Draft legislation for the DST will be released in the summer of 2021 after consultation with stakeholders.

Other corporate tax changes

Additional changes are proposed to improve the administration of the tax system. These include changes to the deadlines for existing reportable “avoidance transactions” as defined in the Income Tax Act and new reporting requirements for “notifiable transactions.” Notifiable transactions will include those that the CRA finds to be abusive and transactions identified as transactions of interest. Certain large corporations will be required to disclose uncertain tax positions reflected in their audited financial statements as well.

The budget also proposes to introduce an anti-avoidance rule for transfers of property where there would be a tax debt owing. It also includes a proposal to assist Innovation, Science and Economic Development Canada in the implementation of a publicly accessible corporate beneficial ownership registry by 2025. This registry will facilitate the enforcement of legislation combatting tax avoidance and evasion, money laundering and other financial crimes.

To address delays caused by the pandemic, the budget will temporarily provide a 12-month extension to certain timelines for when eligible expenditures must be made for the Canadian Film or Video Production Tax Credit and the Film or Video Production Services Tax Credit.

International tax measures

As part of the government’s commitment to minimize Base Erosion and Profit Shifting, the budget proposes
to introduce a new rule to limit net interest expense that may be deducted to a fixed ratio of taxable income before interest, income tax, depreciation and amortization. This rule will apply to corporations, trusts, partnerships and Canadian branches of non-resident corporations, phased in for taxation years beginning on or after January 1, 2023. There will be exemptions for CCPCs that are part of an associated group with taxable capital employed in Canada of less than $15 million and groups of corporations and trusts whose aggregate net interest expense is less than $250,000.

The budget also proposes that Canada adopt detailed rules to eliminate the tax benefit from cross-border hybrid mismanaged arrangements. These transactions are generally characterized differently under the tax laws of different countries.

The government will be engaging in a stakeholder consultation to address perceived shortcomings in the
current transfer pricing rules.

Sales tax measures

The budget proposes a new tax on the purchase, for personal use, of luxury cars and personal aircraft with a retail sales price over $100,000 or boats with a retail sales price over $250,000. The tax will be calculated as the lesser of 20% of the value above the respective threshold and 10% of the total value of the luxury car, airplane or boat. This tax will come into effect on January 1, 2022.

The budget clarifies and amends draft legislation released last year to streamline the GST/HST requirements for non-resident ecommerce businesses. This becomes effective July 1, 2021 and includes platform operators who will be required to collect and remit the GST/HST on behalf of third parties who are not registered for the GST/HST.

The documentation requirements to claim Input Tax Credits are based on the cost of the taxable supply, with graduated thresholds of $30 or $150. The budget proposes that these thresholds will increase to $100 and $500 respectively, and allows billing agents to be treated as intermediaries to simplify compliance for businesses.

Amendments are proposed to make the GST New Housing Rebate available when two or more non-related
individuals buy a new home together, but not all of them will be using the house as their primary residence, or the primary residence of a relative.

The budget proposes a taxation framework that will impose excise duties on vaping products in 2022 and will seek input from the industry and other stakeholders. It also increases the excise duty on tobacco products effective April 20, 2021.

Looking for more information?

To learn more about the impact of these tax changes, contact your accounting firm. A CPA will be able to
provide additional commentary, analysis and guidance.