Federal budget 2021, the first federal budget in two years, was tabled yesterday amid doom and gloom predictions of increases in the capital gains rates, taxation on the sale of principal residences, and a range of other tax increases to pay for COVID-19 relief programs. The worry proved to be all for naught—at least for now. What could well be a pre-election budget turned out to be relatively benign from a tax perspective and focused more on the continuation of a federal spending spree designed to carry us through the worst of the coronavirus pandemic. Exactly when the spending taps are turned off depends on vaccination rollouts and how quickly governments can control the spread of COVID-19 variants as we progress (slowly) towards a return to normal life.
Still, the extent of the federal deficit has reached levels virtually unimaginable prior to the crisis taking hold a little more than a year ago. At a projected $354.2 billion for 2020-21, the deficit is expected to drop to $154.7 billion in 2021-22 and $30.7 billion in 2025-26.
As the budget optimistically points out, “Economic activity could recover faster than in a typical recession due to the fact that the effects of this crisis on the economy are the result of a public health emergency rather than an unwillingness to spend … when the pandemic recedes, the release of pent-up demand could translate into a tangible if temporary boost to economic activity.”
We can only hope that the projected 5.8 per cent rise in real GDP this year, followed by projected growth of 4 per cent in 2022, is enough to cover the bill, but in reality it’s likely that there may be major tax changes—including significant increases—that lie ahead.
At more than 750 pages, Budget 2021 is a massive document that includes new or added spending in virtually every sector of the economy, covering every corner of Canadians’ lives, from corporate taxes and the environment to luxury consumption levies. Far too much to cover in any detail; however, here is a high-level summary of some of the main highlights for the business community and individuals:
COVID-19 Relief Measures
The budget proposes to extend the Canada Emergency Wage Subsidy, Canada Emergency Rent Subsidy and the Lockdown Support until September 2021, with subsidy rates gradually declining between July and September. The budget notes that the government may further extend the programs until November 20th, 2021, depending on the success of the vaccine rollout. The government is also proposing to expand the scope of the Canada Workers Benefit by raising the income threshold where the benefit starts being reduced, to $22,944 for single individuals without children and to $26,177 for families.
Budget 2021 would also introduce a new relief measure, the Canada Recovery Hiring Program— available for active employees between June 6th and November 20th, 2021—which would help eligible employers (including Canadian-controlled private corporations, charities, individuals and non-profits experiencing qualifying declines in revenue) cover reopening costs. The overall intent is to encourage organizations to rehire employees as quickly as possible. Employers would be allowed to claim the higher of the Canada Emergency Wage Subsidy or the Canada Recovery Hiring Program to cover a portion of costs such as employee wages or recruitment.
The government is proposing to set the federal minimum wage at $15 per hour for Canadians employed in the federally-regulated private sector. The budget also promises to tighten labour protections for gig workers and would examine an expansion of options available to organizations that choose to establish employee ownership trusts.
Luxury good and real estate taxes
Higher net-worth Canadians will have to shell out more for their high-priced toys as the government proposes new “luxury” taxes on automobiles and personal aircraft priced at $100,000 or more, and pleasure boats costing more than $250,000, beginning on January 1st, 2022. The tax would be set at the lesser of 20 per cent of the value above the threshold, or 10 per cent of the full value of the item.
In addition, the budget would levy a 1 per cent annual tax on non-resident, non-Canadian-owned residential real estate that is vacant or under-used, beginning January 1st, 2022. Non-Canadian citizen or permanent resident owners of such properties will be required to declare the current use of their properties.
Corporate taxation and international tax measures
A new Digital Services Tax of 3 per cent on the revenue of large digital services companies with gross revenue of 750 million euros or more would take effect on January 1st, 2022. The proposed measure would generate an estimated $3.4 billion in revenue over five years.
To limit excessive interest deductions by large companies, Ottawa would limit the amount of interest that certain businesses can deduct to 40 per cent of their earnings in the first year of the measure and 30 per cent thereafter. The new rules will also apply to trusts, partnerships and Canadian branches of non-resident taxpayers. Measures will be taken to shield small businesses from the changes, with details promised in summer.
The budget would also amend the Income Tax Act to eliminate the tax benefits of so-called hybrid mismatch arrangements, used by large multinational corporations to exploit differences between Canadian and foreign income tax laws to minimize corporate tax liabilities. The changes would begin taking effect on July 1st, 2022.
A new tax measure would allow Canadian-controlled private corporations to expense up to $1.5 million in eligible technology investments (including digital assets and intellectual property) made on or after April 19th, 2021, or before 2024.
Anti-tax avoidance measures
The budget proposes $304.1 million in new funding over five years for the Canada Revenue Agency to limit perceived tax avoidance and evasion by individuals and corporations including:
- Increasing corporate GST/HST audits
- Modernizing CRA risk assessment processes to prevent GST/HST fraud
- Better identifying tax evasion involving trusts
The agency would receive an additional $230 million over five years to enhance tax collection, with the goal of netting an additional $5 billion in outstanding taxes. The government intends to amend the Income Tax Act to limit aggressive tax planning by tightening existing rules that allow some high-net worth individuals to use non-arm’s length entities such as corporations to reduce their tax burden.
The budget would also provide $41.7 million in funding over three years to reduce processing time for T1 adjustments.
The budget introduced proposed changes to the Income Tax Act’s existing reportable transaction rules. They will commence consultations to address changes to the existing rules, a new requirement to report “notifiable” transactions and a new requirement for specified corporations to report uncertain tax treatments. The proposals also provide for, in certain circumstances, the extension of the applicable reassessment period and the introduction of penalties.
These proposed mandatory disclosure rules appear to cast a wide net and if passed as proposed could lead to a significant increase in audit activity, which aligns with the budget’s proposed enhanced funding toward the CRA.
The budget also proposed anti-avoidance rules to effectively enhance the “tax debt avoidance rule” currently provided for in the Act to deal with complex transactions that attempt to avoid the existing rules.
In addition to all these changes, the budget proposes a review of the general anti-avoidance rule, as the government previously announced.
Rate reduction for zero-emission technology manufacturers
The budget proposes to reduce corporate income tax rates on eligible income from eligible zero-emission technology manufacturing and processing activities starting with taxation years beginning after 2021. The rate for income eligible for the Small Business deduction would be reduced to 4.5 per cent from the current 9 per cent from 2022 through to 2028, and from there would gradually increase back up to 9 per cent in 2032. The general rate would be reduced to 7.5 per cent from the current 15 per cent from 2022 through to 2028 and, once again, would gradually increase back to 15 per cent by 2032.
Beneficial ownership transparency
The budget proposes to provide $2.1 million over two years to Innovation, Science and Economic Development Canada to assist with the implementation of a publicly accessible corporate beneficial ownership registry by 2025. The goal is to provide law enforcement, tax and other authorities access to current information on the individuals that own and control corporations as they look to catch those who attempt to launder money, evade taxes or commit other crimes.
Innovation and trade
Innovation, Science and Economic Development Canada would receive $1.4 billion over four years for everything from skills development training to micro-grants to help smaller SMEs adopt and implement new technologies. The Business Development Bank of Canada would also receive $2.6 billion over four years to help SMEs finance new technology adoption.
Other notable innovation-related investments would include:
- $250 million over three years for an Aerospace Regional Recovery Initiative
- Enhancing the Strategic Innovation Fund with an incremental $7.2 billion over seven years to support innovation in sectors such as the life sciences, automotive, aerospace, and agriculture
- A new Small Business and Entrepreneurship Development Program that would receive $101.4 million in funding over five years
- $146.9 million over four years to enhance the Women Entrepreneurship Strategy to provide women entrepreneurs with greater access to financing, mentorship, and training
- $51.7 million over four years for the Black Entrepreneurship Program
- $500 million over five years to expand the Industrial Research Assistance Program
- $450 million over five years for a renewed Venture Capital Catalyst Initiative to boost venture capital funding for entrepreneurs
- $1.9 billion over four years to recapitalize the National Trade Corridors Fund and encourage investment in infrastructure such as roads, rail, and shipping routes
- $656.1 million over five years for Canada Border Services Agency modernization including enhanced border security and the introduction of touchless, automated border technology
- $443.8 million over 10 years to support the Pan-Canadian Artificial Intelligence Strategy
- $1 billion over six years for the Universal Broadband Fund to enhance access to broadband internet across the country
Healthcare, childcare and senior care
As previously announced, Ottawa is committing up to $1 billion in one-time funding to support COVID-19 vaccination programs, along with a proposed $375 million in funding to support vaccination efforts in developing countries. The government would also spend $116 million over two years to combat substance abuse and addiction, which has increased significantly since the start of the pandemic.
One of the most ambitious budget items is a plan to commit $30 billion in new funding over five years to establish a national childcare program that would see parents pay an average of $10 a day for regulated childcare spaces by 2025-26.
To help seniors, Old-age Security pensioners aged 75 or older as of June, 2022, would receive a one-time payment of $500 in August 2021. Regular OAS payments for pensioners 75 and older would be increased by 10 per cent as of July, 2022. The measures are projected to cost $12 billion over five years.
To provide additional assistance to Canadians with disabilities, the budget would redefine qualification criteria to enhance access to the Disability Tax Credit.
Students and apprentices
The budget would extend the waiver of interest accrual on Canada Student Loans and Canada Apprentice Loans until March 31, 2023. The threshold for federal student loan repayment assistance for borrowers with low incomes is currently set at $25,000. That bar would be raised to $40,000 for borrowers living alone, while the income threshold would be indexed to inflation. The doubling of Canada Student Grants would be extended until July, 2023.
The budget would also commit $960 million over three years for the creation of a new Sectoral Workforce Solutions Program to deliver sector-specific employee training, along with $470 million over three years for a new Apprenticeship Service.
Employers would be eligible to receive up to $5,000 for all first-year apprenticeship opportunities, an amount that would be doubled for employers who hire from community groups including women, racialized Canadians, and persons with disabilities.
Among a host of new measures designed to combat climate change, the budget would provide $5 billion over seven years for the government’s Net Zero Accelerator program to reduce carbon emissions across the Canadian economy. Beginning January 1st, 2022, general corporate and small business income tax rates for businesses that manufacture zero-emission technologies would be reduced by 50 per cent, with the reductions being phased out by January 1st, 2032.
It would also provide $4.4 billion to the Canada Mortgage and Housing Corporation to help homeowners fund home retrofits with interest-free loans of as much as $40,000.
Among other measures, the budget would provide an additional $2.5 billion over seven years to the Canada Mortgage Housing Corporation to help fund the development of affordable housing and alleviate housing market pressures.
Arts and culture
The budget would commit $200 million to Canadian Heritage to support everything from arts festivals to heritage celebrations, along with $100 million in funding for Destination Canada marketing campaigns to encourage domestic travel. In addition, the budget would create a $500 million fund to help the tourism sector recover from the COVID-19 crisis, along with $300 million in funding over two years to establish a Recovery Fund for the heritage, arts, culture and sports sectors.
The budget would commit $1.2 billion in funding in 2021-22 to support the COVID-19 response across Indigenous communities, along with $1.4 billion over five years for First Nations and Inuit health care. An addition $6 billion over five years would be committed to build and repair infrastructure in Indigenous communities.
For more details on the budget measures, please contact a member of our team.
Armando Iannuzzi, Partner