2021 Federal Budget – Spend, spend, spend (part deux) with some interesting tax measures
Kim G C Moody FCPA, FCA, TEP and members of the Moodys Tax Law team in Calgary provide commentary and analysis of Budget 2021
CALGARY – On April 19, 2021, the Federal Government released its long-awaited budget.
With a record 25 months between budgets, there was no shortage of predictions about the content. However, the night before, news services Reuters and the Globe and Mail released very detailed content about what to expect and such predictions from "sources" largely turned out to be correct. (Whatever happened to the sacrosanct concept of budget secrecy and who was the source(s) of these inappropriate leaks? Will this be investigated?).
The last time our firm wrote about a federal budget was March 19, 2019 and the title of our budget blog was 2019 Federal Budget - Spend, Spend, Spend, With No Real Competitiveness Measures. The 2021 budget turned out - again - to be a massive spending budget. Somehow the federal government is happy that its deficit for last year is less than $400B while the projected deficit for 2021-2022 will continue to be high at $154.7B - a staggering number. Clearly, this is a pre-election budget. Tax measures in the budget are, overall, rather benign to the average person notwithstanding there are some interesting proposals that we discuss below. Accordingly, when choosing the title of our firm's 2021 budget blog, we decided to mostly recycle our 2019 title with a slight modification.
Effectively what we got on April 19, 2021 seems to be a work-in-progress with Part 1 of what will effectively be a two- part budget. Part 1 is a pre-election announcement of large spending initiatives and a lot of consultations. It appears that the tax hikes that we know must inevitably follow a budget so full of election goodies will effectively be Part 2 of a budget to be released after the expected upcoming election. Items that we expect to be included in Part 2 of this budget may include an increase in the capital gains inclusion rate, changes to the principal residence exemption, increases to personal and corporate tax rates, restrictions to planning measures commonly used by Canadians, as well as the introduction a wealth tax.
While we are grateful that all tax planning opportunities continue to apply for now, and we would most certainly not welcome these potential Part 2 budget changes, clearly something will need to be done to support the spending spree announced yesterday. In our view, Part 2 should include an announcement of long overdue comprehensive tax review and reforms; however, we are not optimistic on this front.
The Liberals have again styled the 2021 budget for "middle class" Canadians, a term which has notoriously gone undefined in years past. This time around it seems that, as discussed further below, if your new yacht costs less than $250,000 or your new car less than $100,000, well, then you are clearly middle class as you will not be affected by the new so-called luxury tax which will otherwise apply to these goods. And while these measures seem generous, they will undoubtedly be distortive to the luxury goods market.
For those that are not interested in reading the entire blog, below is an executive summary of the tax measures relevant to our clients:
- There are no personal tax or corporate tax rate increases or reductions with the exception of proposed 50% corporate tax rate reductions for certain "green businesses". More details below.
- Although widely speculated, there were no increases to the capital gains inclusion rate from its current 50% inclusion rate, no introduction of a wealth tax and no changes to the current principal residence exemption.
- The CEWS and CERS programs have been extended to September 2021. In addition, the Budget proposes to introduce a new hiring credit for employers - the Canada Recovery Hiring Program. These amendments are explained in our Firm's separate blog on this and can be accessed here.
- As already mentioned in the introduction, a new luxury tax is proposed for the purchase of cars and personal aircraft with a retail sales price over $100,000 and boats, for personal use, over $250,000. The tax will be calculated at the lesser of 20% of the value above the threshold or 10% of the full value of the purchase. The new luxury tax would come into force on January 1, 2022. This is a clear attack on the so-called "wealthy".
- Budget 2021 proposes to enable a Canadian Controlled Private Corporation to immediately expense certain property acquired by that corporation. This would allow Canadian Controlled Private Corporations to immediately expense "eligible property" that becomes available for use prior to January 1, 2024, up to a maximum of $1.5 million per taxation year.
- The government is consulting on an expanded set of reporting rules that will expand Canada's existing "reportable transaction" rules that are in the Income Tax Act; implement a new requirement to report "notifiable transactions"; introduce a new requirement for specified corporations to report "uncertain tax treatments"; and introduce related rules providing for, in certain circumstances, the extension of the applicable reassessment period and the introduction of penalties.
- Introduction of a 3% Digital Services Tax that will apply to certain large technology companies that derive business from Canadians.
- The government will engage in a consultation regarding the effectiveness of Canada's existing transfer pricing rules in light of a recent court case - Cameco - that the government was not successful in.
- Effective January 1, 2022, a proposed 1% tax will be imposed on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused. All owners of property, other than Canadian citizens or permanent residents of Canada, will be required to file a declaration as to the current use of their property, with significant penalties for failure to file. Further consultations with stakeholders will take place on this proposal.
- Significant new monies were announced for the funding of the Canada Revenue Agency ("CRA") for various initiatives.
- The Government reiterated its previous announcement from its 2020 Fall Economic Statement that it will take steps to "strengthen and modernize Canada's general anti-avoidance rule (GAAR) rules".
- The Budget proposes rules to allow the Government to fast track the revocation of charitable status for an organization that is listed as a terrorist entity under the Criminal Code, or organizations with terrorists as a director or other official.
- The Budget proposes to restrict interest deductions for certain taxpayers. The proposal applies to corporations, trusts, partnerships, and Canadian branches of non-resident taxpayers, and limits interest deductions to 40% of a taxpayer's "tax EBITDA" starting in 2023, and 30% in subsequent years. A general exclusion is proposed for Canadian-controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million and groups with net interest expenses of $250,000 or less. The Department of Finance will consult further with stakeholders on this proposal.
- The government has promised to initiate a consultation with stakeholders to examine the benefits and barriers to the creation of employee ownership trusts.
- The government will enable repayment of certain COVID supports reports received by taxpayers to be deducted in the year the supports were received rather than in the year of repayment.
- Certain targeted changes to the disability tax credit are being proposed.
- The government is introducing targeted new rules that will eliminate abusive tax avoidance collection strategies.
- The federal government has clearly expressed its desire is to have a publicly accessible "beneficial ownership" registry. The 2021 Budget proposes to provide $2.1 million to Innovation, Science and Economic Development Canada to implement such a registry by 2025.
- There are proposals to expand the audit powers of the Canada Revenue Agency.
- The Budget proposes to amend the Act to target "hybrid mismatch arrangements".
- New rules would force many taxpayers and tax preparers to deal exclusively on an electronic basis with the Canada Revenue Agency.
- There are some interesting disclosures in the Budget expenditures relating to changes to the Elections Act. There is sparse detail other than "temporary amendments to the Canada Elections Act to ensure the health and safety of electors and election workers during a general election if it takes place during the pandemic, including introducing a 3-day polling period." A second Elections Act related amendment is to "introduce amendments to the Canada Elections Act to specify that making or publishing a false statement in relation to a candidate, prospective candidate, or party leader would be an offence only if the person or entity knows that the statement is false." These proposals need further explanation because, at face value, they appear unacceptable.
- The Government proposes to introduce significant federal corporate income tax reductions for qualifying "zero-emission" technology manufacturers.
Read the full blog post, with video commentary and analysis, on Moodys Tax Law.
Kim G.C. Moody, Kenneth Keung, Aasim Hirji, Christopher Ellett, Elan Harper and Brad Severin are members of the team at Moodys Tax Law LLP in Calgary.