On Monday, April 19 (“Budget Day”), Canada’s Minister of Finance Chrystia Freeland delivered Canada’s first full Budget since 2019, providing the Government’s analysis of the impact of the Covid-19 pandemic on our national finances and putting forward its plans and projections as we move forward. While the present government is a minority, the leader of the NDP has indicated that his party prefers to vote in favour of the Budget rather than triggering an election in the midst of a pandemic. As a result, it seems reasonable to expect that the devil will be in the details, with many of the proposals subject to public consultations, further discussion and refinement, and draft legislation to come.
The theme of the Budget is that of spending, primarily with a view to supporting pandemic recovery and future economic growth, with very little in the way of tax changes of broad application. This release is to provide a brief outline of many of the non-Covid tax changes that have been proposed, either in detail or for purposes of future consultation. The principal Budget document runs over 700 pages and includes a wide range of often highly complex initiatives, while the summaries which follow here are necessarily at a very high level and general in nature, and does not include discussion of all of the measures proposed. Readers seeking more detail should review the actual Budget document, and should consult their own professional advisors with respect to possible impacts of the proposals on their own situations.
The Budget document contains an extensive array of spending measures in relation to the pandemic fight, both new measures and continuations and modifications of existing measures. These measures will be addressed in a separate posting, and are not discussed here.
Business and International Income Tax Measures
In addition to direct Covid-related measures, the Minister put forward following income tax proposals to encourage specific business investments and activities.
- The costs of capital properties acquired for use in a business are generally deductible over time under the “capital cost allowance” (“CCA”) provisions of the Income Tax Act (Canada) (the “ITA”). The Budget proposes to allow Canadian-controlled private corporations (“CCPCs”) to immediately deduct the cost of certain capital properties acquired after Budget Day and made available for use in the business before 2024. This accelerated deduction is subject to a limit of $1.5 million per taxation year, and is not available in respect of certain comparatively long-lived assets such as buildings.
- The existing provisions of the ITA provide an accelerated rate of CCA in respect of certain clean energy generation and conservation equipment acquired for use in a business; eligible equipment is described in Classes 43.1 and 43.2 of the Regulations to the ITA. The Budget proposes to update the list of equipment included in these CCA Classes to add certain types of clean energy equipment that were unavailable when the Classes were originally formulated, and to remove other equipment which utilizes fossil fuel inputs.
- Also supporting green technologies, the Budget proposes temporary reductions in the rates of federal corporate tax imposed on manufacturing and processing income derived from the manufacture of certain zero-emission technology equipment. These reduced rates would apply for taxation years beginning after 2021, with a phase-down in taxation years beginning in 2029 through 2031.
The Budget also proposes a number of initiatives in the international tax sphere which reflect those arising from the “base erosion and profit shifting” (“BEPS”) work undertaken by the Organisation for Economic Co-operation and Development (“OECD”).
- The ITA already contains so-called “thin capitalization” rules which limit the deductibility of interest payable by a corporation to specified non-residents of Canada (very broadly, non-residents having a 25% direct or indirect equity interest in the Canadian corporation) where the related debt exceeds a 60/40 debt/equity ratio. Reflecting some of the recommendations of the OECD in this area, while retaining the thin capitalization rules, the Budget proposes to add an “earnings-stripping rule” which could further limit the deductibility of interest expense incurred by a corporation by reference to its “tax EBITDA” – essentially, taxable income before CCA and interest income and expense. The deduction limitation would be subject to a relatively rapid phase-in, with interest expense in taxation years beginning in 2023 being limited to 40% of tax EBITDA, and in taxation years beginning in or after 2024 being limited to 30% of tax EBITDA. The denial rule would apply to interest on all debt of a corporation; whether or not owing to a specified shareholder; whether the creditor is resident in Canada or not; and whether the debt was incurred before or after the date of the Budget. The Budget documents contain a number of references to possible exceptions and limitations, including an exemption for CCPCs and associated corporations with aggregate taxable capital employed in Canada of less than $15 million, an exemption for corporate groups with total interest expense of less than $250,000, and exceptions for corporate groups with no non-resident members and for certain types of financial institutions. Even without draft legislation, the Budget proposals are extremely complex; as the Government expects to release detailed legislative proposals for comment at some point in the summer, there will no doubt be active discussion within Canadian tax and business communities as to the merits and detailed operation of these rules.
- One focus of the OECD BEPS project has been so-called “hybrid mismatch arrangements”, in which related entities taxable in different jurisdictions take advantage of different tax rules to generate payments which are either deductible in one jurisdiction and not taxable in the other or deductible in both jurisdictions with no offsetting inclusion in either. One of the outputs of the BEPS project has been a recommendation that participating countries establish rules to eliminate the potential tax advantages of such arrangements. The Budget proposes to enact rules to implement the BEPS project recommendations with respect to hybrid mismatch arrangements. The Budget indicates that legislation to effect these changes would be introduced in two packages: the first, applicable in respect of hybrid financial instruments, would be released for comment later in 2021 and made applicable beginning July 1, 2022; and the second, applicable in respect of other hybrid mismatch arrangements, would be released after 2021 with application no earlier than 2023.
Finally, the Budget business and international proposals include a number of administrative and disclosure changes intended to enhance the ability of the Canada Revenue Agency (CRA) to audit taxpayers and collect tax debts.
- For a number of years, taxing authorities around the world (including in Canada) have increased pressure on what are often characterized by epithets such as “aggressive tax planning strategies”. With that perspective, the BEPS project made a number of recommendations for countries to implement “mandatory disclosure rules” which, while not imposing specific tax consequences, improves the ability of taxing authorities to consider and impose reassessments on such transactions (where supported by the law, including the “general anti-avoidance rule” (“GAAR”)) within the normal reassessment period. Having regard to those OECD recommendations and the enactment of such rules in other taxing jurisdictions, the Budget proposes stakeholder consultations with a view to a number of changes in Canada’s mandatory disclosure rules. The Budget proposals will be expanded upon in draft legislation and related materials to be released for comment in the coming weeks, which are to include the following.
- Changes to the existing “reportable transactions” rules. The existing rules require taxpayers to self-report transactions which exhibit two out of three generic “hallmarks” which the Government perceives to be indicative of “aggressive tax planning”, but which may or may not be subject to either existing specific anti-avoidance rules or GAAR. Following on recommendations in the BEPS report, the Budget proposes to expand the existing rules so as to require self-reporting of any transaction exhibiting only one (rather than two) of the listed “hallmarks”, and to be made within 45 days of entering into or agreeing to enter into the transaction, rather than simply requiring reporting with the taxpayer’s tax return. In addition, separate reporting will be required of taxpayers, promoters and advisors (other than where constrained by solicitor-client privilege) and other non-arm’s length persons in connection with the same transaction.
- A new “notifiable transactions” reporting rule. Drawing from both the BEPS report and existing disclosure rules in the United States, the Budget proposes that the Government be empowered to designate types of transactions as “notifiable transactions”, with self-reporting obligations then imposed on taxpayers, promoters and advisors comparable to those applied to “reportable transactions” described above. The “designation” of notifiable transactions would be made by the Minister of National Revenue in consultation with the Minister of Finance, and would not require review or approval by either Cabinet (in the form of a Regulation under the ITA) or Parliament.
- A new “uncertain tax treatment” reporting rule. Other countries (notably the United States) have implemented or are considering rules which require taxpayers to self-report tax positions in respect of which they are required to record a reserve on their audited financial statements. The Budget proposes that such a rule be implemented in Canada, applicable to a “reporting corporation” (being a corporation that is either resident in Canada or having a taxable presence in Canada) that has at least $50 million of assets and has audited financial statements, and that such reporting take place at the same time as the applicable corporate tax return is filed.
- Related rules extending normal reassessment periods and imposing penalties. The Budget proposes that the “normal reassessment period” in the ITA not start to run in respect of a transaction until the taxpayer has complied with the above reporting obligations in respect of that transaction; thus, if a taxpayer fails to comply with any of these reporting obligations, reassessment in respect of the transaction would never be statute-barred. In addition, potentially very significant new penalties would be imposed in relation to failures to satisfy these reporting requirements.
Stakeholder comments on the forthcoming draft legislation will be required by September 3, 2021. The new rules would apply to transactions entered into after 2021, although the additional penalties would not apply to transactions entered into before the related legislation receives Royal Assent.
- The Budget proposals reference an existing “tax debt avoidance rule” in the ITA which allows CRA to assess persons to which a taxpayer transfers assets for inadequate consideration where the taxpayer owes taxes for the year of transfer or a prior year. The Budget indicates that transactions have been undertaken by taxpayers seeking to avoid the technical application of the existing rule, with the result that CRA is unable to collect the tax debt. The proposals would address these perceived abuses with several rules.
- An anti-avoidance rule would be introduced to treat a tax debt as having arisen, for purposes of the existing tax debt avoidance rule, at such time as the taxpayer or a non-arm’s length person knew (or would have known after reasonable inquiry) that a future tax debt of the taxpayer would arise, and that one of the purposes of the asset transfer was to avoid payment of such future tax debt.
- A further anti-avoidance rule would be introduced to deem parties to deal not at arm’s length (and so potentially subject to the existing tax debt avoidance rule) if at some point within a series of transactions those parties do not deal at arm’s length and one of the purposes of at least one step in the series was to cause the parties to deal at arm’s length at the time of transfer.
- A valuation rule would be introduced to require that property transferred and consideration received be valued by reference to the entire series of transactions in issue rather than those values determined on a stand-alone basis at the time of transfer.
- A penalty would be imposed on “planners and promoters of tax debt avoidance schemes” which would mirror the existing third-party civil penalty rules. The penalty would equal 50% of the tax sought to be avoided, subject to a maximum of $100,000 plus the related compensation earned by the planner or promoter.
These rules would apply to transfers of property on or after Budget Day.
- In recent years, in the course of its ordinary audit activities CRA has frequently attempted to require officers and employees of taxpayers to be interviewed and to respond orally to questions from CRA with respect to the taxpayer and their affairs; however, following a challenge to these attempts, the court held that the obligations imposed on such officers and employees generally extended only to assistance in providing documents, and did not include a requirement to attend and answer questions. The Budget now proposes to extend the authority of CRA to cover such responses, and that “CRA officials have the authority to require persons to respond to questions orally or in writing, including in any form specified by the relevant CRA official”. While the Budget documents characterize these changes as “confirming” CRA authority and allowing it to continue to audit “in the same manner as it did prior to the decision”, it is clear that this is an extension of that authority beyond the existing limits determined by the court. While audits by CRA in the substantial majority of cases are carried out on a reasonable and cooperative basis between taxpayers and CRA officials, if these proposed changes are enacted, it seems likely that otherwise contentious audits will give rise to more disputes as to what constitutes “reasonable assistance” from a taxpayer’s employees and it what form such assistance may reasonably be demanded by CRA.
Personal Income Tax Measures
In addition to Covid-related measures, the Budget contains a number of comparatively minor personal tax proposals. While comparatively modest, these changes are quite detailed. Interested readers should consult the Budget document for specifics applicable to situations in which they are interested.
- The ITA provides a “disability tax credit” (“DTC”) for individuals having a severe and prolonged impairment in physical or mental functions which markedly restrict their ability to perform basic activities of daily living; this credit is $1,299 in 2021. The Budget proposes to somewhat expand the range of impairments qualifying for the DTC, in particular expanding the mental functions which will be regarded as necessary for daily living. In addition, the rules as to determination of time required for “extensive life-sustaining therapy” are to be broadened.
- The Canada Workers Benefit, a non-refundable tax credit which supplements income of lower-income workers, is to be modestly enhanced.
- Travel expenses eligible for the Northern Residents Deduction are to be expanded.
- Income from a post-doctorate fellowship is to be included in “earned income” for purposes of determining maximum contributions to an RRSP.
- Changes will be made to rules for defined-contribution pension plans to allow plan administrators more flexibility in correcting over-contributions and under-contributions.
- Where an individual files their income tax returns electronically, or a tax preparer does so on their behalf, CRA will be permitted to issue notices of assessment electronically as well. Business correspondence for taxpayers using the CRA “My Business Account” portal will by default also be provided electronically through that portal. Issuers of T4A and T5 forms will be permitted to be issued electronically by default.
Sales and Excise Tax Measures
Changes in this area range from fundamental shifts in the treatment of e-commerce transactions to very technical changes.
- In its Fall 2020 Economic Statement, the government proposed significant changes in the manner in which e-commerce activities are dealt with under the GST/HST regime. Since that Economic Statement, the Government has undertaken stakeholder consultations and received substantial comments on the proposals. As a result of those consultations and comments, the Budget proposes a number of changes to the Fall 2020 proposals, including the following.
- So-called “platform operators” who rely in good faith on representations from third parties to determine whether they are obligated to collect and remit GST/HST are to be relieved from liability; the third party supplier would remain liable for that GST/HST.
- Suppliers unable to collect payment from a purchaser for applicable GST/HST will be relieved from the obligation to remit that amount.
- The $30,000 threshold for determining whether a non-resident vendor or distribution platform operator is required to register under the GST/HST regime will be determined without regard to zero-rated sales (i.e., sales on which GST/HST would not otherwise be required to be collected and remitted).
- During a 12-month transition period following entry into force of the new regime on July 1 of this year, the Budget indicates that where affected businesses have taken reasonable measures but are not yet able to comply with the new regime, “the CRA will take a practical approach to compliance and exercise discretion in administering these measures”. It of course remains to be seen what that “practical approach” will mean in practice.
- The GST New Housing Rebate currently requires each joint purchaser of a new home to be acquiring that home as their primary residence or that of a “related” individual. This rule is to be amended, such that the New Housing Rebate will be available provided at least one of the joint purchasers is acquiring the home for such purpose. This change will be applicable to purchases after Budget Day or, in the case of owner-built homes, where construction or substantial renovation is substantially completed after Budget Day.
- Excise duty on cigarettes and other tobacco products will increase effective after Budget Day.
- A new excise tax will be imposed on vaping products beginning in 2022.
- Beginning in 2022, a “luxury tax” will be imposed purchases of personal-use cars and aircraft purchased for more than $100,000 and personal-use boats purchased for more than $250,000. The tax will be 20% of the purchase price in excess of these thresholds, subject to a maximum of 10% of the total purchase price. The same tax will be applicable on importation of such goods from outside Canada.
Previously Announced Measures
In addition to the changes to certain previously announced measures discussed above, the Budget confirms that the Government proposes to proceed with a long list of other previously announced measures. Interested parties should review the list at pages 662-663 of the Budget document.
 Links to online and PDF versions of the document may be found at https://www.budget.gc.ca/2021/home-accueil-en.html (retrieved 2021-04-19). For greater details with respect to the proposed measures discussed in this posting, see Annex 6 to the Budget document.