On April 19, 2021 ("Budget Day"), Finance Minister Chrystia Freeland delivered Canada's budget for 2021 ("Budget 2021") – the first federal budget released by the Department of Finance ("Finance") in more than two years. Budget 2021 offered plenty of spending measures, including (from a tax perspective) an extension of the Canada Emergency Wage and Rent Subsidy programs and a new Canadian Recovery Hiring Program, but few and relatively limited tax-relieving measures such as the immediate expensing of certain depreciable properties acquired by Canadian-controlled private corporations ("CCPCs"), accelerated capital cost allowance for clean energy equipment and a new rate reduction regime for zero-emission technology manufacturers.
Budget 2021 reaffirms the government's intention to modernize Canada's domestic general anti-avoidance rule (the "GAAR"), as announced in the 2020 Fall Economic Statement, and provides further details regarding its proposal for an interim digital services tax also announced in the same economic statement. Budget 2021 continues Canada's existing program of measures designed to protect the integrity of the tax system and protect the Canadian tax base from erosion. Highlights of newly-announced measures and proposals in this regard include:
- Introduction of mandatory disclosure and reporting rules for (i) taxpayers, advisors and promoters engaging in "aggressive" tax planning strategies, and (ii) certain large corporations with uncertain tax positions;
- Rules designed to counter steps taken by taxpayers to avoid the assumption of tax debts by a transferee on the transfer of property;
- The launch of a consultation on Canada's transfer pricing system;
- The introduction of a new interest-expense limitation or earnings stripping rule; and
- A phased-in cross-border anti-hybrid mismatch arrangement rule.
Budget 2021 has introduced a number of sales and excise tax measures, including most notably a tax on certain high-value luxury goods, relaxed documentary requirements for input tax credits and the new housing rebate, and amendments to the e-commerce rules first announced in the 2020 Fall Economic Statement.
Budget 2021 also proposes a 1% federal tax on vacant non-resident, non-Canadian owned residential real estate.
INTERNATIONAL TAX MEASURES
Review of Transfer Pricing Rules
Budget 2021 announces the government's intention to launch a consultation on Canada's transfer pricing rules in light of perceived shortcomings made evident by the Federal Court of Appeal's recent decision in Her Majesty the Queen v. Cameco Corporation. In the coming months, Finance will release a consultation paper to provide stakeholders with an opportunity to comment on possible measures to improve Canada's transfer pricing rules.
BEPS Measures – Interest Deductibility Limits and Hybrid Mismatch Arrangements
Budget 2021 proposes to build on the minimum standards already implemented under the base erosion and profit shifting action plan ("BEPS Action Plan") developed by the Organisation for Economic Co-operation and Development ("OECD") by implementing the best practices recommended in the BEPS Action Plan on interest deductibility and hybrid mismatch arrangements.
Interest Deductibility Limits – New Earnings-Stripping Rule
Budget 2021 proposes to introduce an earnings-stripping rule that would limit the amount of net interest expense that a corporation, trust, partnership or Canadian branch of a non-resident taxpayer may deduct in computing its taxable income to no more than a fixed ratio of "tax EBITDA" (taxable income before interest expense, interest income, income tax and deductions for depreciation and amortization, with adjustments for tax-free intercorporate dividends, certain interest equivalent payments, otherwise non-deductible interest expense and other items). Budget 2021 proposes that the fixed ratio be set at 40% of "tax EBITDA" for taxation years beginning on or after January 1, 2023 and 30% for taxation years beginning on or after January 1, 2024.
The new rule would not apply to (1) a CCPC that, together with any associated corporations, having 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 (2) groups of corporations and trusts whose aggregate net interest expense among Canadian members is $250,000 or less.
Finance does not currently contemplate any particular sectoral carve-outs, but has indicated its expectation that standalone Canadian corporations and Canadian corporations that are members of a group none of whose members is a non-resident would, in most cases, not have their interest expense deductions limited under the proposed rule.
Interest denied under the new earnings-stripping rule could be carried forward up to 20 years and carried back for up to three years (including on a limited basis to previous years during which the rule was not yet in effect), with adjustments based on the transitional phase-in of the limitation decreasing from 40% to 30%.
Canadian members of a group that have a ratio of net interest to "tax EBITDA" below the fixed ratio would be able to transfer unused capacity to deduct interest to other Canadian members of the group that would otherwise be limited by the rule. However, banks and life insurance companies will not be so permitted to transfer unused capacity to members of their corporate groups unless those members are also regulated banking or insurance entities.
The proposed measure will also include a "group ratio" rule that would allow a taxpayer to deduct interest expense 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 (based on audited consolidated financial statements) that a higher deduction limit would be appropriate. The consolidated group for these purposes would generally comprise the parent company and all subsidiaries that are fully consolidated in the parent company's audited financial statements, with adjustments for certain items such as negative EBITDA and certain interest payments to creditors outside of the consolidated group but that are related to or are significant shareholders of the Canadian group entities.
This measure would apply to taxation years beginning on or after January 1, 2023, with an anti-avoidance rule to prevent taxpayers from deferring the application of the measure, or of the 30% fixed ratio, and would apply with respect to existing as well as new borrowings. Draft legislative proposals are expected to be released for comment in the summer.
Budget 2021 will address hybrid mismatch arrangements. Hybrid mismatch arrangements arise in a cross-border context where the tax treatment of certain entities or financial instruments is different in the relevant countries resulting in inconsistent and beneficial tax treatment. The Action 2 Report of the BEPS Action Plan recommended that countries introduce measures to deny the tax benefits of these arrangements to multinational enterprises. There are two main forms of hybrid mismatches that Action 2 targeted:
- Deduction/ Non-inclusion Mismatches: where the country of the payor permits a deduction for the payment while the country of the recipient does not require inclusion of the amount in income within a reasonable period of time.
- Double Deduction Mismatches: where a tax deduction is provided in two or more countries for the single economic expense.
The rules proposed in Budget 2021 will deny the deductibility of payments made by Canadian residents under hybrid mismatch arrangements where the amount is not included in the ordinary income of the recipient or to the extent it gives rise to a further deduction in another country. Similarly, to the extent that a payment made by a non-resident entity is deductible for foreign income tax purposes, it will not be deductible in computing the income of a Canadian resident. Moreover, to the extent that a payment to a Canadian by a non-resident entity is deductible by the non-resident for foreign income tax purposes, the Canadian recipient must include the amount in its income and the amount would not be available for a deduction. This is the case even for dividends paid to a Canadian corporation by a foreign affiliate out of exempt surplus (generally out of the active business income of the subsidiary) which for decades under Canada's international tax system have generally been deductible to the Canadian recipient.
Additional rules may be introduced to implement BEPS Action 2 (mismatch arrangements, reverse hybrids, and imported mismatches) to the extent relevant and appropriate in the Canadian context.
The rules are intended to be mechanical in nature and will not depend on a purpose test. They will apply to payments between related parties and non-related parties if the arrangements are designed to produce a mismatch.
There will be two separate packages of legislation. The first will deal with deduction/non-inclusion mismatches. It will be released for comment later in 2021 and will be effective as of July 1, 2022. The second package will comprise rules recommended in BEPS Action Plan 2 that were not dealt with in the first package. They will be released for comment after 2021 and will apply no earlier than 2023.
Digital Services Tax
As announced in the 2020 Fall Economic Statement, Budget 2021 proposes to implement a Digital Services Tax ("DST") which is intended to ensure that revenue earned by large businesses from engagement with online users in Canada – typically by collecting data and content contribution from users and then monetizing that data and content – is subject to Canadian tax whether or not there is a physical presence in Canada. The international community has been discussing possible approaches for a number of years. The BEPS Action Plan contemplates a multilateral solution, but no agreement has been reached on a common approach with respect to corporate-level tax. The DST is intended to be interim in nature and apply as of January 1, 2022 until an acceptable multilateral approach comes into effect with respect to implicated businesses.
The DST would apply at a rate of 3% on revenue from certain digital services in which the participation of users is a key value driver and which rely on data and content contributions from Canadian users. The DST would apply to revenue from online marketplaces, social media, online advertising (including preferential search listings) that is targeted based on data gathered from users of an online interface and user data.
The DST would apply to an entity, or a member of a business group, that has global revenue from all sources of €750 million or more and in-scope revenue associated with Canadian users of more than $20 million in the particular calendar year. The DST would apply only to in-scope revenue associated with Canadian users in excess of the $20 million threshold.
In-scope revenue would be determined on a reasonable basis. Two general methods would be used. Where it is possible to trace revenues to relevant users in Canada on the basis of transactional information, such tracing would be required. Where such tracing is not possible, a specified formulaic allocation would be required.
The determination of whether a user of an interface is located in Canada or some other country for purposes of revenue sourcing would generally be based on the ordinary (i.e., usual) location of an individual user and the ordinary place of business of a business user. It is proposed that entities subject to the DST be required to file a return after the end of each calendar year and make a single payment in respect of each calendar year.
The government anticipates releasing draft legislation for public comment in the summer of 2021 and invites submission on the proposed DST.
BUSINESS INCOME TAX MEASURES
Immediate Expensing of Certain Depreciable Property by CCPCs
Budget 2021 proposes to allow CCPCs to immediately expense the cost of certain capital property. This measure would apply for "eligible property" acquired by a CCPC on or after Budget Day and that becomes available for use before January 1, 2024, up to a maximum amount of $1.5 million per taxation year. "Eligible property" would be property that is subject to the existing capital cost allowance ("CCA") rules, other than property included in CCA Classes 1 to 6, 14.1, 17, 49, and 51. Immediate expensing would only be available 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.
The immediate expensing would only be available for the year in which the property becomes available for use, and the limit would be prorated for taxation years that are shorter than 365 days. The half-year rule (the rule that generally limits the CCA allowed in the first year that a property was available for use to half the amount that would otherwise be available) would be suspended for property to which this measure applies. The $1.5 million limit would be shared among associated members of a group of CCPCs. For those CCPCs with less than $1.5 million of eligible capital costs, no carry-forward of excess capacity would be allowed. For a CCPC with more than $1.5 million of eligible capital costs, the CCPC would be able to decide to which CCA class the immediate expensing would apply and which class would be subject to the existing rules. Existing enhanced deductions continue to be available (including full expensing for manufacturing and processing machinery and for clean energy equipment) and do not reduce the $1.5 million maximum introduced by Budget 2021.
This measure will apply in respect of eligible property that is acquired on or after Budget Day and that becomes available for use before 2024.
Canada Recovery Hiring Program
Budget 2021 proposes to introduce the Canada Recovery Hiring Program (the "Hiring Subsidy") modelled along the lines of the Canada Emergency Wage Subsidy ("CEWS") program released last year. Essentially, if an eligible employer's total eligible remuneration paid to qualifying employees during a qualifying period (i.e., the same relevant qualifying periods used for purposes of the CEWS—that is, June 6 to July 3, 2021, and each subsequent 4-week period ending November 20, 2021) is greater than the total eligible remuneration paid to qualifying employees between March 14, 2021 to April 10, 2021, then the employer may be eligible to recover 50% of the amount of the increased remuneration paid, up to a maximum of $1,129 per week, per employee for the first three periods, and for the fourth, fifth, and sixth periods, to recover 40%, 30%, and 20%, respectively. The Hiring Subsidy encourages businesses to hire more employees, thereby increasing the total eligible remuneration paid to employees compared to the business' baseline period and, in turn, potentially qualifying for fiscal support.
Employers that qualify for the CEWS program are generally able to qualify for the Hiring Subsidy. To qualify for the Hiring Subsidy, an eligible employer would generally have to experience a decline in revenues in the first period and a decline in revenues of more than 10% in the following five four-week periods (i.e., between July 4 to November 20, 2021). Revenue for purposes of the Hiring Subsidy is measured in the same manner as that for purposes of the CEWS. Eligible employers are eligible to claim only one of the two wage subsidies—that is the Hiring Subsidy or the CEWS, but not both. If the amount of the CEWS is greater than the amount of the Hiring Subsidy for a qualifying period, then the amount of the Hiring Subsidy is deemed to be nil for that period, and vice versa.
Like the CEWS, the eligible remuneration that can be subsidized through the Hiring Subsidy generally consists of only salary, wages, and other remuneration for which the employer is required to withhold or deduct amounts on account of the employee's income tax obligations. To qualify as an eligible employee, the employee must be employed by the eligible entity primarily in Canada throughout the qualifying period (or the portion of the qualifying period throughout which the individual was employed by the eligible entity). Special rules apply for employees who do not deal at arm's length with the employer. The Hiring Subsidy is not available to furloughed employees (i.e., employees who are on leave with pay).
Canada Emergency Wage Subsidy
Budget 2021 proposes to extend the CEWS until September 25, 2021 and also provide the government with the legislative authority to add additional qualifying periods to the program to extend it further if need be. In addition, Budget 2021 proposes to gradually reduce the amount of the CEWS over the four four-week periods beginning June 6, 2021 and ending September 25, 2021. For example, an eligible employer that experiences a revenue decline between 11% to 50% compared to a prior reference period in the first four-week period beginning June 6, 2021 and ending July 3, 2021 would be entitled to a maximum weekly benefit of $677, $452 and $226 for each following four-week period, respectively. Beginning July 4, 2021, employers must experience a decline in revenues of more than 10% compared to the relevant prior reference period to be eligible for the CEWS.
Budget 2021 proposes to require public corporations to repay any CEWS amounts received for qualifying periods that begin after June 5, 2021 if the aggregate compensation for specified executives during the 2021 calendar year exceeds the aggregate compensation paid to specified executives during the 2019 calendar year. The amount that must be repaid is equal to the lesser of the amount of such difference in the specified executives' compensation for 2021 and 2019 and the amount of the CEWS received. Specified executives will consist of the named executive officers whose compensation is required to be disclosed under Canadian securities laws in annual information circulars, or similar executives in the case of corporations listed in another jurisdiction (i.e., CEOs, CFOs, and three other most highly compensated executives).
Canada Emergency Rent Subsidy
The Canadian Emergency Rent Subsidy has been extended for four more periods, June 6 to July 3, 2021 and each of the next three four week periods. Budget 2021 proposes a declining subsidy for the next four periods and a minimum revenue decline of greater than 10% to qualify in the last three periods. If a taxpayer's revenue decline is 70% or greater the subsidy will be 65% in the first extended period and reduced to 60%, 40% and 20% for the remaining three periods. Similar reductions apply where the revenue decrease is less than 70%. The 25% for "Lockdown Support" has also been extended for the qualifying periods from June 6, 2021 to September 25, 2021.
Rate Reduction for Zero-Emission Technology Manufacturers
Budget 2021 proposes a temporary reduction to corporate income tax rates for qualifying zero-emission technology manufacturers as follows (the "Reduced Rates"):
- 4.5% on income eligible for the small business deduction that would otherwise be taxed at the reduced 9% small business tax rate; and
- 7.5% on income that would have otherwise been taxed at the 15% general corporate tax rate.
Budget 2021 provides a list of zero-emission technology manufacturing or processing activities that would qualify for the Reduced Rates, including, but not limited to, the following:
- manufacturing solar, wind or water energy conversion equipment;
- manufacturing zero-emission vehicles as well as manufacturing batteries and charging systems for zero-emission and electric vehicles; and
- manufacturing of equipment used for the production of hydrogen by electrolysis of water, in addition to the actual production of hydrogen by electrolysis of water.
Activities eligible for the Reduced Rates exclude any activities that do not qualify as manufacturing or processing for the purpose of the CCA rules. Also, eligible activities only include the manufacturing of components or sub-assemblies if such equipment is manufactured exclusively for the purpose of the zero-emissions activity.
The Reduced Rates would only apply to "eligible income", which will generally be equal to "adjusted business income" multiplied by the proportion of total labour and capital costs that are used in eligible activities. The definition of "adjusted business income" as well as the method used to determine labour and capital costs would be substantially based on those used in calculating manufacturing and processing profits under current tax rules. Finance is seeking feedback from stakeholders on the proposed allocation method for these purposes and accepting submissions until June 18, 2021.
The Reduced Rates would only apply to eligible income if at least 10% of a taxpayer's gross revenue from all active businesses carried on in Canada is from eligible activities. Taxpayers with income subject to both the general and small business corporate tax rates would be able to choose to have their eligible income taxed at either the reduced rate of 4.5% for small businesses or the general reduced rate of 7.5%. The amount of income taxed at the 4.5% rate plus the amount of income taxed at the small business rate of 9% would not be allowed to exceed the business limit.
The Reduced Rates will apply to taxation years that begin after 2021 and will be gradually phased out starting in taxation years that begin in 2029 and fully phased out for taxation years that begin after 2031. Given the targeted and temporary nature of the Reduced Rates, Budget 2021 does not propose changes to the dividend tax credit or the allocation of corporate income for the purpose of dividend distributions.
Accelerated CCA for Clean Energy Equipment
Budget 2021 proposes to expand CCA classes 43.1 and 43.2 to provide accelerated CCA rates to investments in more clean energy generation and energy conservation equipment. In addition, changes are proposed to the eligibility criteria to limit the availability of accelerated CCA for less environmentally-friendly specified equipment related to fossil-fuelled and waste-fuelled electrical generation.
Mandatory Disclosure Rules
The Income Tax Act ("Tax Act") currently contains rules that require certain transactions to be reported to the Canada Revenue Agency ("CRA"). The purpose of these rules is to give CRA timely, comprehensive and relevant information of aggressive tax planning strategies. Budget 2021 proposes enhancements to the existing rules to address recommendations from the BEPS Action Plan as Finance believes that the current rules are insufficiently robust. Budget 2021 proposes three main enhancements:
- An overhaul of the existing "reportable transactions" regime;
- The introduction of a new "notifiable transactions" regime; and
- The introduction of a new "uncertain tax treatments" regime.
Each of these are discussed further below.
I. Reportable Transactions
Budget 2021 proposes several changes to the existing "reportable transactions" regime. First, Budget 2021 proposes that only one of the three (as opposed to two of the three under current rules) generic hallmarks of a "reportable transaction" need to be present for the transaction to be a "reportable transaction". The three hallmarks generally consist of:
- Entitlement of a promoter or advisor to a "contingent fee" that is attributable to or contingent upon the amount of or obtaining a tax benefit, or the number of taxpayers participating in the transaction and provided access to the advice;
- Requirement of the promoter or adviser to have confidential protection; and
- The taxpayer or participant to the transaction obtains "contractual protection" in respect of the transaction (otherwise than as a result of a fee described above).
Second, Budget 2021 proposes to amend and expand the definition of an "avoidance transaction" such that an "avoidance transaction" would include a transaction where "one of the main purposes of entering into the transaction is to obtain a tax benefit". This revised definition of avoidance transaction is meant to be broader than the definition in the general anti-avoidance rule. Third, Budget 2021 proposes to impose a dual reporting requirement for "reportable transactions" that would require both the taxpayer and the promoter or advisor to report on the "reportable transaction". Under the current rules, promoters and advisors need to be entitled to a particular fee in respect of the "reportable transaction". It is proposed that there be an exception to the reporting requirement for advisors where solicitor-client privilege applies. Fourth, Budget 2021 proposes to accelerate the timing of the reporting requirement from June 30th of the calendar year following the year in which the transaction became a reportable transaction to within 45 days of the earlier of the day the taxpayer becomes contractually obligated to enter into the transaction and the day the taxpayer enters into the transaction. Lastly, Budget 2021 proposes a new penalty regime, which is described in detail below.
II. Notifiable Transactions
Budget 2021 proposes to introduce a new reporting regime for "notifiable transactions". Instead of a hallmark triggering the reporting requirement, Budget 2021 states that the Minister of National Revenue would have the authority to designate, with the concurrence of Finance, a particular transaction as a "notifiable transaction". Such transactions would include transactions that the CRA has found to be abusive and transactions identified as transactions of interest. Sample descriptions of "notifiable transactions" are to be issued as part of the consultation on this new regime. Budget 2021 proposes that both taxpayers and advisors and promoters will be required to report all "notifiable transactions" (which would include transactions or series of transactions substantially similar to a notifiable transaction) to CRA. Budget 2021 proposes the same timing requirements for reporting and penalties for failure to file for "notifiable transactions" as for "reportable transactions".
III. Uncertain Tax Treatments
Budget 2021 proposes to introduce a new reporting regime for "uncertain tax treatments". The regime is proposed to apply to corporate taxpayers with the following characteristics:
- The corporation is required to file a Canadian income tax return for the taxation year (i.e., the corporation is resident of Canada or is non-resident with a taxable presence in Canada);
- At the end of the financial year that coincides with the taxation year (or the last financial year that ends before the end of the taxation year), the corporation has at least $50 million in assets (based on carrying value presented on the corporation's balance sheet);
- The corporation, or a related corporation, has audited financial statements prepared in accordance with International Financial Reporting Standards (IFRS) or other country-specific generally accepted accounting principles relevant for domestic public companies; and
- Uncertainty in respect of the corporation's Canadian income tax for the taxation year is reflected in those audited financial statements.
These rules are generally targeted at public corporations but would also apply to private corporations that choose to prepare financial statements in accordance with IFRS. Budget 2021 proposes that a corporation that is subject to the "uncertain tax treatments" regime would be required to provide prescribed information such as the quantum of taxes at issue, a concise description of the relevant facts, the tax treatment taken (including relevant sections of the Tax Act) and whether the uncertainty relates to a permanent or temporary difference in tax. Budget 2021 proposes that such information would be required to be reported at the same time that the reporting corporation's Canadian income tax return is due.
Budget 2021 proposes the following penalties in respect of each failure to report a "reportable transaction", "notifiable transaction", and "uncertain tax treatment" (with any person who would fall into two categories being subject solely to the higher of the applicable penalties):
"Uncertain Tax Treatments"
Taxpayer (other than those described in the next category)
$500 per week
Maximum: greater of $25,000 and 25% of the tax benefit
$500 per week
Maximum: greater of $25,000 and 25% of the tax benefit
Taxpayer (corporations with assets that have carrying value of $50 million or more)
$2,000 per week
Maximum: greater of $100,000 and 25% of the tax benefit
$2,000 per week
>Maximum: greater of $100,000 and 25% of the tax benefit
$2,000 per week
The total of:
(i) 100% of fees charged,
(ii) $10,000; and
(iii) $1,000 per day, to a maximum of $100,000
The total of:
(i) 100% of fees charged
(ii) $10,000; and
(iii) $1,000 per day, to a maximum of $100,000
Additionally, 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.
Budget 2021 proposes that (i) to the extent the proposals apply to taxation years, the changes made as a result of the consultation would apply to taxation years that begin after 2021 and (ii) to the extent the proposals apply to transactions, the changes made as a result of the consultation would apply to transactions entered into on or after January 1, 2022. Budget 2021 also proposes that penalties would not apply to transactions that occur before the date on which the enacting legislation receives Royal Assent. Budget 2021 states that draft legislation and sample "notifiable transactions" are expected to be released in the coming weeks. Budget 2021 invites stakeholders to provide comments to Finance on the proposals by September 3, 2021.
Avoidance of Tax Debts – Section 160 of the Tax Act
Budget 2021 announces Finance's intention to revisit section 160 of the Tax Act, as well as its counterparts found in other legislation. Section 160 of the Tax Act provides that where one person (the "Transferor") transfers property to another person, who is either a minor or a person with whom the Transferor does not deal at arm's length (the "Transferee"), at a time when the Transferor has an outstanding tax debt, the Transferee is jointly-liable with the Transferor for an amount equal to the lesser of the tax debt and the difference between the fair market value of the transferred property and the amount of consideration given by the Transferee for the transferred property.
Finance has identified that some taxpayers are engaging in tax planning designed to defeat the provision by, inter alia, shifting the timing of a tax debt to occur after the transfer, entering into arrangements that artificially alter the nature of the relationship between the parties to preclude a finding of a non-arm's length relationship, and preventing a situation where the value of property transferred exceeds the consideration paid by the Transferee (such as certain tax-free "butterfly" reorganization transactions involving a transfer of business assets from one corporation to another).
Budget 2021 proposes to introduce legislation to eliminate this type of planning by introducing the following rules that:
- Deem a tax debt to arise at an earlier time than it otherwise
would arise if:
- The Transferor (or a person not dealing at arm's length with the Transferor) knew (or ought to have known) that a tax debt would have arisen after the end of the relevant tax year; and
- The purpose of the transfer of property to the Transferee was to defeat that future tax debt;
- Deem a Transferor and Transferee (otherwise dealing at arm's length) not to deal at arm's length where it is reasonable to conclude that one of the purposes of a transaction or event was to cause the Transferor and the Transferee not to deal at arm's length at a given time; and
- Require taxpayers to adopt a method of valuation for transferred property that takes into account the valuation of the transferred property at various points in time throughout a series of transactions.
Further, Budget 2021 proposes to introduce a penalty for tax planners and promotors of tax debt avoidance schemes equal to the 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 scheme.
While no draft legislation to implement these rules was released with the proposals in Budget 2021, Finance has indicated that these proposed rules will apply to transactions that occur on or after Budget Day.
Budget 2021 proposes to expand the CRA's legislative audit powers with respect to an auditor's ability to compel oral or written answers to "proper questions" (i.e., any questions relating to the administration or enforcement of the Tax Act or Excise Tax Act ("ETA")). The amendments flow from a recent decision of the Federal Court of Appeal, MNR v Cameco Corporation (2019 FCA 67), where the court refused a CRA request to conduct oral interviews of multiple employees of the taxpayer. Budget 2021 amends the audit provisions of the Tax Act and the ETA to introduce a requirement for taxpayers to "answer all proper questions orally or in writing" from a CRA official. These measures come into force on Royal Assent. Also related to compliance and enforcement, Budget 2021 proposes to provide $230 million over five years for the CRA to improve its ability to collect outstanding taxes.
SALES AND EXCISE TAX MEASURES
Amendments/Clarification to E-Commerce Rules
As part of its 2020 Fall Economic Statement, Finance announced measures amending the ETA that would require certain non-residents and digital platform operators to register for goods and services tax/harmonized sales tax ("GST/HST") where their "threshold amount" exceeds $30,000. The measures would also require certain digital platform operators and fulfilment warehouses to file information returns. The new registration requirements included a new simplified registration system that denies access to input tax credits and rebates.
Budget 2021 proposes the following key amendments to clarify the intended application of the rules:
- Safe harbour for information from supplier: Budget 2021 proposes to limit an operator's liability for tax, and to expand the actual supplier's liability (i.e., the liability of the person who made the sale) in certain cases where the supplier provides false information to the platform operator, to the extent that the operator did not collect tax. This proposal provides some protection to operators who reasonably rely on the information they receive from their third-party suppliers when determining their GST/HST obligations.
- Certain rebates and bad debt credits available: Budget 2021 clarifies that persons registered under the simplified system will still be permitted to access the credit available for uncollectible bad debts, and to access certain rebates (e.g., provincial point of sale rebates).
- Threshold amount determination: Budget 2021 clarifies that consideration for zero-rated "specified supplies" are not included in the $30,000 "threshold amount" for that person.
- Platform operator information return: Budget 2021 clarifies that information returns need not be filed for operators who are not required to register for GST/HST.
- New e-commerce hotline: Budget 2021 announces a new hotline to receive more information on the proposed measures. For calls from Canada and the United States, the number is 1 (833) 585-1463.
The new GST/HST e-commerce rules remain scheduled to come into force on July 1, 2021. However, Budget 2021 suggests that the CRA will take a "practical approach to compliance" for a 12-month transition period after this date, in order to assist businesses that show they are taking reasonable measures to comply.
Amendments to Input Tax Credit Documentary Requirements
To prevent the cascading of "tax on tax", businesses can claim input tax credits and recover the GST/HST they pay on supplies used in their commercial activities. In order for the input tax credits to be allowed, there are certain documentary requirements that the business must meet. These requirements are more onerous for higher value transactions.
Budget 2021 proposes to ease the documentary requirements by amending the definition of "intermediary" in the Input Tax Credit Information (GST/HST) Regulations to include a "billing agent". This change would allow purchasers to rely on the GST/HST registration number of the billing agent (rather than the GST/HST number of the actual supplier) to support their claims for input tax credits. Budget 2021 will also increase the monetary thresholds that trigger higher documentary compliance, which reduces the compliance burden for transactions under $500.
These proposals come into force on the day after Budget Day.
Relaxed New Housing Rebate Conditions
The GST New Housing Rebate allows homebuyers to recover up to 36% of the GST (or federal component of HST) paid on the purchase of a new home or condominium unit. A provincial rebate is also available in respect of the provincial component of HST in Ontario. Under the existing legislation, every person who is named as a "purchaser" on an agreement of purchase and sale must satisfy the conditions of the new housing rebate. This includes individuals who are included as purchasers on agreements merely to act as co-signors or guarantors (for instance, at the insistence of lenders).
Budget 2021 proposes to remove the condition that where two or more individuals are listed as purchaser on the purchase agreement, each of them must be acquiring the home/condo unit for use as their (or their "relation's") primary place of residence. Provided at least one of the individuals listed as purchaser is acquiring the new home/condo unit for use as their (or their "relation's") primary place of residence, then the home/condo unit could qualify for the new housing rebate. This proposed change applies to both owner-built homes and to homes purchased from a builder. For homes purchased from a builder, this measure would apply to any supply made under an agreement of purchase and sale entered into after Budget Day. For owner-built homes, this measure would apply where construction or substantial renovation is substantially completed after Budget Day.
Various Excise Tax / Excise Duty Changes
Budget 2021 proposes the following additional changes in respect of federal (non-GST/HST) excise taxes and excise duties:
- Introduction of a joint election mechanism to allow vendors to apply for rebates of federal excise taxes embedded in the price of motive fuels, air conditioners in automobiles and fuel inefficient vehicles, which are purchased by a province for its own use. This measure only applies in respect of provinces that have not entered into reciprocal taxation agreements with the federal government, and it applies to goods purchased or imported by a province on or after January 1, 2022;
- An increase to the excise duty rates for tobacco products effective after Budget Day, plus a cigarette inventory tax of $0.02 per cigarette held by certain manufacturers, importers, wholesalers and retailers after Budget Day; and
- A proposal to implement an excise duty framework on vaping products commencing in 2022. The proposed framework is set out in detail in Annex 6 of the Budget, and written comments regarding the proposed framework are due by June 30, 2021.
New Luxury Tax
Budget 2021 proposes to introduce a tax on the retail sale of new luxury cars and aircraft priced over $100,000, and boats priced over $250,000, effective as of January 1, 2022. The tax would apply to vehicles, aircraft, and boats typically suitable for personal use with various exceptions, such as for motor and floating homes.
For vehicles and aircraft caught by this proposal, the tax would be the lesser of 10% of the full value of the vehicle or aircraft, or 20% of the value above $100,000. For boats, the tax would be the lesser of 10% of the full value of the boat or 20% of the value above $250,000. The tax would apply regardless of whether the good was purchased outright, financed, leased, or imported. GST/HST would still apply to the final sale price, inclusive of the proposed tax.
Draft legislation was not included in Budget 2021 for this proposal and Finance indicated that further details will be announced in the coming months.
SELECTED PERSONAL INCOME & OTHER TAX MEASURES
Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners
Budget 2021 proposes to introduce a national 1% tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused. The tax is to be imposed by a new statute and will target owners of residential property in Canada who are not Canadian citizens nor permanent residents of Canada. Beginning in 2023, all such owners would be required to file an annual declaration for the prior calendar year with the CRA in respect of each Canadian residential property they own even if the owner is not subject to tax in respect of the property for the year. The owner may be eligible for an exemption from the tax in respect of a property for the year, for example, where the property is leased to one or more qualified tenants in relation to the owner for a minimum period in a calendar year. Where no exemption is available, the owner would be required to report and remit the tax to the CRA by the filing due date. The failure to file a declaration could result in the loss of any exemptions in respect of the property for the calendar year in addition to penalties and interest and an unlimited assessment period.
In the coming months, Finance will release a backgrounder to provide an opportunity to comment on the parameters for this proposed tax, including the definition of "residential property", the value on which the tax would apply, how the tax would apply when there are multiple owners, potential exemptions and compliance mechanisms and how the tax would apply in certain smaller communities. This tax is proposed to be levied annually beginning in 2022.
Modification in Application of Penalty Tax for Registered Investments
A trust or corporation that is a registered investment for registered retirement savings plans ("RRSPs") and other deferred plans is subject to a penalty tax under Part X.2 of the Tax Act if it holds property that is not a qualified investment. The tax is equal to 1% of the fair market value of the property at the time it was acquired for each month that the property is held. Budget 2021 proposes to pro-rate the penalty tax, so that it would not apply to the proportion of units or shares in the registered investment that are held by investors that are themselves subject to the qualified investment rules. These changes would apply to Part X.2 tax in respect of months after 2020 and for those taxpayers whose Part X.2 liability for months prior to 2021 has not been finally determined by Budget Day.
Immediate Revocation of Registered Charity's Status on Listing as a Terrorist Entity and Expansion of Category of "Ineligible Individuals"
Budget 2021 proposes to permit the immediate revocation of charitable status for any registered charity that becomes listed as a terrorist entity under the Criminal Code. The category of persons who are not permitted to act as a director, trustee, officer or like official of a registered charity will be expanded to include an individual who is a member, director, trustee, officer or like official of, or who controlled or managed, a terrorist entity. These amendments will apply on Royal Assent.
Electronic Filing and Certification of Tax Information Returns
Budget 2021 introduces an adoption of electronic means as the new default for certain filings, certifications and communications with the CRA. In particular, Budget 2021 proposes to amend the Tax Act to permit the CRA to send electronic notices of assessment to taxpayers who file their returns electronically (either on their own or through a tax preparer), without prior authorization from the taxpayer. Electronic communication will also become the default method of correspondence for businesses that use the CRA's My Business Account portal.
For calendar years after 2021, persons or partnerships that file more than five information returns will be required to do so electronically. Similarly, tax preparers who file more than five returns are now subject to mandatory electronic filing. Budget 2021 also eliminates the thresholds for electronic filing that currently exist for returns of corporations and GST/HST registrants. As such, most corporations and GST/HST registrants will now be required to file returns electronically. These changes will come into force on Royal Assent of the enacting legislation (which has yet to be drafted).
PREVIOUSLY ANNOUNCED MEASURES
Budget 2021 also confirms Finance's intention to proceed with a list of at least 21 previously announced tax and related measures, as modified to take into account consultations and deliberations since their release, including:
- Anti-avoidance rules consultation and income tax measures announced in the 2020 Fall Economic Statement in respect of registered disability savings plans, employee stock options and patronage dividends paid in shares;
- Legislative proposals released on July 30, 2019 to implement certain income tax measures proposed in Budget 2019 in respect of, inter alia, the allocation to redeemers methodology for mutual funds, character conversion transactions, transfer pricing ordering rules, foreign affiliate dumping rules and cross-border share lending arrangements;
- The remaining regulatory proposals released on July 27, 2018 relating to the GST/HST, including the holding corporation input tax credit rules; and
- The income tax measures announced in Budget 2018 to implement enhanced annual reporting requirements for certain trusts.
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