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Annex 6:
Tax Measures - Supplementary Information

Table of Contents

Overview

This annex provides detailed information on tax measures proposed in the Budget.

Table 1 lists these measures and provides estimates of their fiscal impact.

The annex also provides Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act, the Excise Act, 2001 and other legislation and draft amendments to various regulations.

In this annex, references to "Budget Day" are to be read as references to the day on which this Budget is presented.

Table 1
Cost of Proposed Tax Measures1, 2
Fiscal Costs (millions of dollars)
  2020–2021 2021–2022 2022–2023 2023–2024 2024–2025 2025–2026 Total
Personal Income Tax              
Disability Tax Credit
- 19 84 90 91 92 376
Canada Workers Benefit
460 1,795 1,670 1,665 1,665 1,675 8,930
Northern Residents Deductions
- 26 26 26 26 26 128
Postdoctoral Fellowship Income
- - - - 1 1 2
Tax Treatment of COVID-19 Benefit Amounts
- - - - - - -
Fixing Contribution Errors in Defined Contribution Pension Plans
- 1 - - - - 1
Taxes Applicable to Registered Investments
2 6 6 6 6 6 32
Registration and Revocation Rules Applicable to Charities
- - - - - - -
Electronic Filing and Certification of Tax and Information Returns
- - - - - - -
Business Income Tax Measures              
Emergency Business Supports
             
Canada Emergency Wage Subsidy
- 10,140 - - - - 10,140
Canada Emergency Rent Subsidy and Lockdown Support
- 1,920 - - - - 1,920
Canada Recovery Hiring Program
- 595 - - - - 595
Immediate Expensing
- 615 1,055 985 -145 -265 2,245
Rate Reduction for Zero-Emission Technology Manufacturers
- 1 10 10 10 15 46
Capital Cost Allowance for Clean Energy Equipment
- 14 22 30 34 42 142
Film or Video Production Tax Credits
- - 20 25 15 5 65
Mandatory Disclosure Rules
- - - - - - -
Avoidance of Tax Debts
- - - - - - -
Audit Authorities
- - - - - - -
International Tax Measures              
Base Erosion and Profit Shifting
             
Interest Deductibility Limits3
- -26  -398 -1,329 -1,754 -1,809 -5,316
Hybrid Mismatch Arrangements
- - -130 -205 -215 -225 -775
Sales and Excise Tax Measures              
Application of the GST/HST to E-commerce4
- - - - - - -
Input Tax Credit Information Requirements
- - - - - - -
GST New Housing Rebate Conditions
- - - - - - -
Rebate of Excise Tax for Goods Purchased by Provinces
- - - - - - -
Excise Duty on Tobacco
- -415 -440 -435 -425 -420 -2,135
Tax on Select Luxury Goods
- -34 -140 -140 -145 -145 -604
Customs Tariff and Tax Measures              
Duty and Tax Collection on Imported Goods
- -88 -150 -150 -150 -150 -688
Other Tax Measures5              
Digital Services Tax
- -200 -700 -800 -800 -900 -3,400
Less: Amounts Provisioned in the Fiscal Framework
- 200 700 800 800 900 3,400
Administrative Costs
- 17 7 4 4 4 35
Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners
- - -200 -170 -165 -165 -700
1 A "–" indicates a nil amount, a small amount (less than $500,000) or an amount that cannot be determined in respect of a measure that is intended to protect the tax base.
2 Totals may not add due to rounding.
3 An important proportion of the overall projected revenue impact (75%) relates to the expectation that the measure will help in preventing the shifting of debt into Canada.
4 The projected revenues from the GST/HST e-commerce proposals are set out in the 2020 Fall Economic Statement and have already been provisioned in the fiscal framework. This budget describes revisions to those proposals and the associated draft legislation in the attached Notice of Ways and Means Motion, following consultations with stakeholders.
5 Details of these proposed tax measures are presented in Annex 7.

Personal Income Tax Measures

Disability Tax Credit

The Disability Tax Credit (DTC) is a non-refundable tax credit that is intended to recognize the impact of non-itemizable disability-related costs on the ability to pay tax. For 2021, the value of the credit is $1,299.

To be eligible for the DTC, an individual must have a certificate confirming that they have a severe and prolonged impairment in physical or mental functions. The effects of the impairment must be such that, even with appropriate devices, medication and therapy, the individual is blind or is:

For these purposes, the Income Tax Act recognizes the following basic activities of daily living: walking; feeding or dressing oneself; mental functions necessary for everyday life; speaking; hearing; eliminating bodily waste; and, for the purposes of the "significantly restricted" test noted above, includes seeing.

A valid DTC certificate is also a requirement for accessing certain other tax-related measures, including Registered Disability Savings Plans, the Child Disability Benefit and the disability supplement to the Canada Workers Benefit.

Mental Functions Necessary for Everyday Life

Under current rules, mental functions necessary for everyday life include:

To ensure that the eligibility criteria for the DTC better articulate the range of mental functions necessary for everyday life, Budget 2021 proposes that, for the purposes of the DTC, mental functions necessary for everyday life include:

Life-Sustaining Therapy

Under current rules, extensive life-sustaining therapy is therapy that:

These requirements are intended to allow individuals to qualify for the DTC where they are undergoing therapies that have a significant impact on everyday living, comparable to the impact of being directly restricted in basic activities of daily living.

Under the current rules, time spent on the following activities may be included in determining time spent receiving therapy:

Time spent on the following activities cannot be included in determining time spent receiving therapy: activities related to dietary or exercise restrictions or regimes (even if those restrictions or regimes are a factor in determining the daily dosage of medication), travel time, medical appointments, shopping for medication and recuperation after therapy.

These rules can result in important components of therapy being excluded from the calculation of therapy time. For example, the determination of the appropriate dosage of medicine for treating diabetes in individuals who are insulin-dependent may require precise recording of dietary intake. In a similar fashion, therapy that involves the consumption of medical food or medical formula (such as for treating certain inherited metabolic conditions) may require, as part of the treatment, the precise recording of the dietary intake of particular compounds.

To better recognize these aspects of therapy for the purposes of calculating time spent on therapy, while ensuring that everyday activities (such as normal management of a healthy diet) and discretionary activities are not taken into account for that purpose, Budget 2021 proposes to:

Budget 2021 also proposes that, where an individual is incapable of performing their therapy on their own due to the impacts of their disability, the time reasonably required by another person to assist the individual in performing and supervising the therapy would be allowed to be counted.

Budget 2021 further proposes that the requirement that therapy be administered at least three times each week be reduced to two times each week. The requirement that therapy be of a duration averaging not less than 14 hours a week would remain unchanged.

These proposed changes would apply to the 2021 and subsequent taxation years, in respect of DTC certificates filed with the Minister of National Revenue on or after Royal Assent.

Canada Workers Benefit

The Canada Workers Benefit (CWB) is a non-taxable refundable tax credit that supplements the earnings of low- and modest-income workers and improves their work incentives. Under current law, in 2021, the CWB grows by 26 cents for every dollar of "working income" (generally employment and business income) in excess of $3,000, up to a maximum entitlement of $1,395 for single individuals without dependants, or $2,403 for families (couples and single parents). The benefit is then reduced by 12 per cent of adjusted net income in excess of $13,194 for single individuals without dependants, or $17,522 for families.

Budget 2021 proposes to enhance the CWB starting in 2021. This enhancement would increase:

Chart 1 shows the proposed enhancement of the CWB in 2021 for a single individual without dependants and Chart 2 shows the same for families.

Chart 1
Enhanced Canada Workers Benefit—2021
(Single Individuals without Dependants)
Chart 1: Enhanced Canada Workers Benefit—2021 (Single Individuals without Dependants)

Note: It is assumed that adjusted net income is equal to working income.

Text version

The chart shows how entitlements under the proposed enhancement would be available over a wider income range than under the existing Canada Workers Benefit. The benefit is depicted in the chart before and after the proposed enhancement, with entitlements on the vertical axis, and working income and net income on the horizontal axis (these are assumed to be equal in the chart).

The chart, which is specific to single individuals without children, shows how entitlements in each case rise as an individual earns more (this is called the phase-in portion of the benefit schedule), up to a maximum entitlement. It further shows how benefits decline as net income rises above the phase-out threshold (this is called the phase-out portion of the benefit schedule). There is an income range over which the entitlements have reached their maximum, but are not yet being reduced; this is referred to as the plateau.

The phase-in portion is similar for the two benefit levels depicted. The phase-in thresholds are equal at $3,000, but the phase-in rates differ slightly. For the current Canada Workers Benefit, the phase-in rate is 26%; and for the proposed enhancement, the phase-in rate is 27%. This leads to a small but still visible divergence in the phase-in portion.

The maximum entitlements under the enhancement and the current Canada Workers Benefit would be equal at $1,395.

The phase-out threshold under the current Canada Workers Benefit is $13,194, meaning that at this point on the horizontal axis, entitlements start to decline. Under the enhancement, this would be increased to $22,944, as highlighted by a dashed vertical line in the chart. Looking at the phase-out portion, there is a visible difference in the phase-out rates. The proposed Canada Workers Benefit would decline at a rate of 15%, but under the current Canada Workers Benefit, the phase-out rate is 12% instead. Respectively, the current Canada Workers Benefit and proposed Canada Workers Benefit are shown to phase out completely by net incomes of $24,819 and $32,244.

Chart 2
Enhanced Canada Workers Benefit—2021
(Single Parents and Couples)
Chart 2: Enhanced Canada Workers Benefit—2021 (Single Parents and Couples)

Note: It is assumed that adjusted net income is equal to working income.

Text version

The chart shows how entitlements under the proposed enhancement would be available over a wider income range than under the existing Canada Workers Benefit. The benefit is depicted in the chart before and after the proposed enhancement, with entitlements on the vertical axis, and working income and net income on the horizontal axis (these are assumed to be equal in the chart).

The chart, which is specific to single parents and couples, shows how entitlements in each case rise as an individual earns more (this is called the phase-in portion of the benefit schedule), up to a maximum entitlement. It further shows how benefits decline as net income rises above the phase-out threshold (this is called the phase-out portion of the benefit schedule). There is an income range over which the entitlements have reached their maximum, but are not yet being reduced; this is referred to as the plateau.

The phase-in portion is similar for the two benefit levels depicted. The phase-in thresholds are equal at $3,000, but the phase-in rates differ slightly. For the current Canada Workers Benefit, the phase-in rate is 26%; and for the proposed enhancement, the phase-in rate is 27%. This leads to a small but still visible divergence in the phase-in portion.

The maximum entitlements under the enhancement and the current Canada Workers Benefit would be equal at $2,403.

The phase-out threshold under the current Canada Workers Benefit is $17,522, meaning that at this point on the horizontal axis, entitlements start to decline. Under the enhancement, this would be increased to $26,177, as highlighted by a dashed vertical line in the chart. Looking at the phase-out portion, there is a visible difference in the phase-out rates. The proposed Canada Workers Benefit would decline at a rate of 15%, but under the current Canada Workers Benefit, the phase-out rate is 12% instead. Respectively, the current Canada Workers Benefit and proposed Canada Workers Benefit are shown to phase out completely by net incomes of $37,547 and $42,197.

The CWB also features a supplement that is available to individuals who are eligible for the Disability Tax Credit. Corresponding changes would be made to the disability supplement's phase-in and reduction rates as well as the reduction threshold. Specifically, the supplement would phase out at a rate of 7.5 per cent for each individual in a couple where both individuals are in receipt of the supplement, and at a rate of 15 per cent otherwise. The reduction threshold would be increased to align with the point at which the base benefit is phased out completely (i.e., from $24,815 under current rules to $32,244, for single individuals without children, and from $37,548 under current rules to $42,197, for families).

To improve work incentives for secondary earners in a couple, Budget 2021 also proposes to introduce a "secondary earner exemption" to the CWB, a special rule for individuals with an eligible spouse. This would allow the spouse or common-law partner with the lower working income to exclude up to $14,000 of their working income in the computation of their adjusted net income, for the purpose of the CWB phase-out.

For example, in the absence of the secondary earner exemption, a dual-earner couple with adjusted family net income of $50,000 would receive no CWB in 2021. Suppose the secondary earner in this couple earned $20,000 of working income. With the introduction of the secondary earner exemption, the secondary earner's adjusted net income would be reduced by the lesser of their working income ($20,000) and $14,000. The resulting adjusted family net income of $36,000 would entitle the couple to a benefit of $930.

The government recognizes the efforts that provinces and territories have taken to improve work incentives for low- and modest-income individuals and families. To ensure that benefits are harmonized and that the CWB builds on these efforts, the government will continue to allow for province- or territory-specific changes to the design of the benefit through reconfiguration agreements, guided by the following principles:

These measures would apply to the 2021 and subsequent taxation years. Indexation of amounts relating to the CWB would continue to apply after the 2021 taxation year, including the secondary earner exemption.

Northern Residents Deductions

Individuals who live in prescribed northern areas of Canada for at least six consecutive months beginning or ending in a taxation year may claim the Northern Residents Deductions in computing their taxable income for that year. These include both a residency component and a travel component.

The travel component allows a taxpayer receiving employer-provided travel benefits to deduct, in respect of a trip taken by the taxpayer or a member of the taxpayer's household, up to the least of:

A taxpayer may deduct amounts in respect of travel for any number of trips made to obtain medical services not available locally and up to two trips per person per year for non-medical personal reasons. Residents of the prescribed Northern Zone may claim 100 per cent of the amounts described above, while residents of the prescribed Intermediate Zone may claim 50 per cent.

Budget 2021 proposes to expand access to the travel component of the Northern Residents Deductions. Under the new approach, subject to the other restrictions noted above, a taxpayer would have the option to claim, in respect of each of the taxpayer and each "eligible family member", up to:

After application of the 50-per-cent factor for residents of the Intermediate Zone, the second limit effectively becomes a $600 standard amount.

For these purposes, an eligible family member would be an individual living in the taxpayer's household who is:

If any taxpayer claims a deduction in respect of an employer-provided benefit for travel by the taxpayer or an eligible family member of the taxpayer in a year, no other taxpayer would be allowed to also claim all or part of the $1,200 standard amount in respect of travel by that first mentioned taxpayer or that eligible family member in that year. If any taxpayer claims all or part of the $1,200 standard amount in respect of travel by an individual, the maximum total amount that could be claimed in respect of that individual by all taxpayers would be $1,200.

Budget 2021 proposes that across all taxpayers in a given individual's household, a maximum of two trips taken by that individual would be allowed to be claimed in total for non-medical personal travel in a year. A taxpayer would continue to be able to claim any number of trips for medical purposes.

In light of the proposed changes described above, claims for a given trip would be limited to the least of:

Example:

This measure would apply to the 2021 and subsequent taxation years.

Strategic Environmental Assessment Statement

The proposal would effectively expand access to a rebate on the cost of travel, including carbon-intensive air travel. This may encourage additional travel among northern residents and result in associated greenhouse gas emissions. However, the rules of the deduction allow only two trips to be claimed in respect of any individual for non-medical personal reasons, and further limit the amount that may be claimed in respect of any trip. These rules constrain the circumstances in which an individual may receive a rebate in respect of additional travel taken in response to the proposal. Accordingly, any negative environmental impacts are expected to be negligible.

Postdoctoral Fellowship Income

For income tax purposes, postdoctoral fellows are generally not considered to be students. Thus, postdoctoral fellowship income generally does not qualify for the scholarship exemption from income tax. Although fully included in taxable income, and similar in nature to employment income, postdoctoral fellowship income does not currently qualify as "earned income" for the purpose of determining an individual's contribution limit for a registered retirement savings plan (RRSP).

Budget 2021 proposes to include postdoctoral fellowship income in "earned income" for RRSP purposes. This would provide postdoctoral fellows with additional RRSP room in order to make deductible RRSP contributions.

This measure would apply in respect of postdoctoral fellowship income received in the 2021 and subsequent taxation years. This measure would also apply in respect of postdoctoral fellowship income received in the 2011 to 2020 taxation years, where the taxpayer submits a request in writing to the Canada Revenue Agency for an adjustment to their RRSP room for the relevant years.

Tax Treatment of COVID-19 Benefit Amounts

A range of taxable benefits have been made available to qualified individuals in response to the COVID-19 pandemic. Generally, if a benefit amount is repaid (for example, where an individual determines that they were not eligible for the benefit in question), this amount can only be deducted for income tax purposes in the year the repayment takes place. Therefore, if the repayment does not occur in the same year as the year of receipt of the benefit, an individual may owe tax in respect of the benefit for the year of receipt, while obtaining a deduction for the repayment amount in a future tax year.

Budget 2021 proposes to amend the Income Tax Act to allow individuals the option to claim a deduction in respect of the repayment of a COVID‑19 benefit amount in computing their income for the year in which the benefit amount was received rather than the year in which the repayment was made. This option would be available for benefit amounts repaid at any time before 2023.

For these purposes, COVID-19 benefits would include:

Individuals may only deduct benefit amounts once they have been repaid. An individual who makes a repayment, but who has already filed their income tax return for the year in which the benefit was received, would be able to request an adjustment to the return for that year.

Budget 2021 also proposes to amend the Income Tax Act to ensure that the COVID-19 benefit amounts noted above, and similar provincial or territorial benefit amounts, are included in the taxable income of those individuals who reside in Canada but are considered non-resident persons for income tax purposes. As a result, COVID-19 benefits received by these non-resident persons would be taxable in Canada in a manner generally similar to employment and business income earned in Canada.

Fixing Contribution Errors in Defined Contribution Pension Plans

The rules in the Income Tax Act do not currently permit pension plan administrators to accept retroactive contributions to employee accounts under a defined contribution pension plan in order to correct under-contribution errors in respect of prior years. Although in some circumstances over-contribution errors may be corrected by refunding the excess to the contributor, these rules have been found to be cumbersome.

Budget 2021 proposes to provide more flexibility to plan administrators of defined contribution pension plans to correct for both under-contributions and over-contributions. The proposals would permit certain types of errors to be corrected via additional contributions to an employee's account under a defined contribution pension plan to compensate for an under-contribution error made in any of the preceding five years, subject to a dollar limit. The proposals would also permit plan administrators to correct for pension over-contribution errors in respect of an employee for any of the five years prior to the year in which the excess amount is refunded to the employee or employer, as the case may be, who made the contribution.

To simplify reporting requirements, the proposed rules would require the plan administrator to file a prescribed form in respect of each affected employee, rather than to amend T4 slips for prior years. Additional contributions to correct for under-contributions would reduce the employee's registered retirement savings plan (RRSP) contribution room for the taxation year following the year in which the retroactive contribution is made. To the extent this results in negative RRSP room, it would only impact the employee's contributions in future years. Refunds of over-contributions would generally restore the employee's RRSP contribution room for the taxation year in which the refund is made.

This measure would apply in respect of additional contributions made, and amounts of over-contributions refunded, in the 2021 and subsequent taxation years.

Taxes Applicable to Registered Investments

A trust or corporation that satisfies certain requirements can apply to the Canada Revenue Agency to be a registered investment for registered retirement savings plans (RRSPs), registered retirement income funds or deferred profit sharing plans. The units of a trust, or shares of a corporation, that is a registered investment are qualified investments for the types of plans for which it is registered.

Certain categories of registered investments (e.g., mutual fund trusts and mutual fund corporations) must have a minimum number of investors. A trust or corporation that is a registered investment and is not sufficiently widely held (e.g., a trust that does not have the 150 unit holders required to qualify as a mutual fund trust) is limited to holding investments that would be qualified investments for the types of registered plans for which it is registered. For example, if a trust or corporation is a registered investment for RRSPs, it can hold only investments that are qualified investments for an RRSP.

If a registered investment that is subject to this investment restriction holds property that is not a qualified investment for the type of registered plans for which it is registered, the registered investment is liable to pay a tax under Part X.2 of the Income Tax Act. This tax is equal to one per cent of the property's fair market value, at the time it was acquired, for each month that the registered investment holds the property. However, in some cases the effect of the tax can be disproportionate because the tax applies without regard to the proportion of the shares or units of the registered investment that are held by investors that are themselves subject to the qualified investment rules.

Budget 2021 proposes that the tax imposed under Part X.2 of the Income Tax Act be pro-rated based on the proportion of shares or units of the registered investment that are held by investors that are themselves subject to the qualified investment rules. For example, if a registered investment is registered for RRSPs and 20 per cent of its units are held by RRSPs while 80 per cent of its units are held by individuals via their non-registered accounts, the monthly tax imposed under Part X.2 would now be 20 per cent of 1 per cent of the fair market value of a non-qualified investment at the time it was acquired.

This measure would apply to taxes imposed under Part X.2 of the Income Tax Act in respect of months after 2020. However, the measure would also apply to taxpayers whose tax liability under Part X.2 in respect of months before 2021 has not been finally determined by the Canada Revenue Agency as of Budget Day.

Registration and Revocation Rules Applicable to Charities

In order to further strengthen Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime, Budget 2021 proposes a number of amendments to the Income Tax Act in order to limit opportunities for the abuse of charitable registration status for terrorist financing purposes. Budget 2021 also proposes changes to the rules applicable to all registered charities in respect of certain false statements.

Listed Terrorist Entities

Currently, under the Income Tax Act, the registration of a charity or other qualified donee may be revoked for non-compliance with the rules, but the Canada Revenue Agency must follow a series of steps in order to do so. In certain cases, a registered charity or other qualified donee may be listed as a terrorist entity under the Criminal Code by the Minister of Public Safety and Emergency Preparedness causing it to no longer qualify for registration. There is an administrative process that must be followed for an entity to be listed as a terrorist entity, with appeal rights to the courts.

Budget 2021 proposes to allow the Minister of National Revenue to immediately revoke the registration of a charity or other qualified donee upon its listing as a terrorist entity under the Criminal Code.

Ineligible Individuals

Where a charity or Canadian amateur athletic association has an "ineligible individual" as a director, trustee, officer or like official, or where such an individual controls or manages the charity or association, the Income Tax Act provides the Minister of National Revenue with the discretion to refuse or revoke its registration, or to suspend its authority to issue official donation receipts. Under current rules, an ineligible individual includes, in general terms:

Budget 2021 proposes to amend the "ineligible individual" definition so that it includes an individual who:

The existing rule that requires the Canada Revenue Agency to only consider circumstances occurring within the preceding five-year period would not apply in relation to this measure.

False Statements

The Income Tax Act currently allows for the revocation of the registration of a charity where a false statement amounting to culpable conduct is made for the purpose of obtaining registration.

Budget 2021 proposes to allow the Minister of National Revenue to suspend the authority of a registered charity to issue official donation receipts for one year or to revoke its registration where a false statement amounting to culpable conduct was made for the purpose of maintaining its registration.

All of these amendments would apply on Royal Assent.

Electronic Filing and Certification of Tax and Information Returns

To improve the administration of, and compliance with, the tax system, Budget 2021 proposes various amendments to the Income Tax Act, Income Tax Regulations, Excise Tax Act, Excise Act, 2001, Tax Rebate Discounting Act, Air Travellers Security Charge Act, Part 1 of the Greenhouse Gas Pollution Pricing Act, and Electronic Filing and Provision of Information (GST/HST) Regulations. These proposed measures would improve the Canada Revenue Agency's (CRA) ability to operate digitally, resulting in faster, more convenient and accurate service, while also enhancing security.

Default Method of Correspondence

Notices of Assessment

Budget 2021 proposes to amend the Income Tax Act to provide the CRA with the ability to send certain notices of assessment electronically without the taxpayer having to authorize the CRA to do so. This proposal would apply in respect of individuals who file their income tax return electronically and those who employ the services of a tax preparer that files their income tax return electronically. Taxpayers who continue to file their income tax returns with the CRA in paper format would continue to receive a paper notice of assessment from the CRA.

This measure would come into force on Royal Assent of the enacting legislation.

Correspondence with Businesses

Budget 2021 proposes to change the default method of correspondence for businesses that use the CRA's My Business Account portal to electronic only. However, businesses could still choose to also receive paper correspondence. This measure would apply in respect of the Income Tax Act, Excise Tax Act, Excise Act, 2001, Air Travellers Security Charge Act and Part 1 of theGreenhouse Gas Pollution Pricing Act.

This measure would come into force on Royal Assent of the enacting legislation.

Information Returns

Budget 2021 proposes to amend the Income Tax Regulations to allow issuers of T4A (Statement of Pension, Retirement, Annuity and Other Income) and T5 (Statement of Investment Income) information returns to provide them electronically without having to also issue a paper copy and without the taxpayer having to authorize the issuer to do so.

This measure would apply in respect of information returns sent after 2021.

Electronic Filing Thresholds

Tax Preparers

Budget 2021 proposes to amend the rule in the Income Tax Act that requires, subject to the exception below, professional preparers of income tax returns to file electronically where they prepare more than 10 income tax returns of corporations or 10 income tax returns of individuals (other than trusts) to apply instead where they file more than 5 of either type of return for a calendar year. Furthermore, the exception for trusts would be removed.

Budget 2021 also proposes to amend the exception in the Income Tax Act whereby a tax preparer is allowed to a file a maximum of 10 paper income tax returns of corporations and 10 paper income tax returns of individuals per calendar year to instead allow only a maximum of 5 paper returns of each type per calendar year.

These measures would apply in respect of calendar years after 2021.

Filer of Information Returns

Budget 2021 proposes that the threshold for mandatory electronic filing of income tax information returns for a calendar year under the Income Tax Act be lowered from 50 to 5 returns, in respect of a particular type of information return. As such, persons or partnerships that file more than 5 information returns of a particular type for a calendar year would be required to file them electronically.

This measure would apply in respect of calendar years after 2021.

Corporations and GST/HST Registrants

Budget 2021 proposes to eliminate the mandatory electronic filing thresholds for returns of corporations under the Income Tax Act, and of Goods and Services Tax/Harmonized Sales Tax (GST/HST) registrants (other than for charities or Selected Listed Financial Institutions) under the Excise Tax Act. As such, returns of most corporations and GST/HST registrants under these acts would be required to be filed electronically.

This measure would apply in respect of taxation years that begin after 2021 for the Income Tax Act amendments and in respect of reporting periods that begin after 2021 for the Excise Tax Act.

Electronic Payments

Budget 2021 proposes to clarify that payments required to be made at a financial institution under the Income Tax Act, the GST/HST portion of the Excise Tax Act, the Excise Act, 2001, the Air Travellers Security Charge Act and Part 1 of the Greenhouse Gas Pollution Pricing Act, include online payments made through such an institution. Budget 2021 also proposes that electronic payments be required for remittances over $10,000 under the Income Tax Act and that the threshold for mandatory remittances to be made at a financial institution under the GST/HST portion of the Excise Tax Act, the Excise Act, 2001, the Air Travellers Security Charge Act and Part 1 of the Greenhouse Gas Pollution Pricing Act be lowered from $50,000 to $10,000.

This measure would apply to payments made on or after January 1, 2022.

Handwritten Signatures

Budget 2021 proposes to eliminate the requirement that signatures be in writing on certain prescribed forms, as follows:

This measure would come into force on Royal Assent of the enacting legislation.

Business Income Tax Measures

Emergency Business Supports

The government has introduced a number of support measures to help businesses and other organizations affected by the COVID-19 pandemic, including the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy and the Lockdown Support.

Program details in respect of these three measures have been announced through June 5, 2021 and the application of these measures cannot be extended by regulation beyond June 2021.

Budget 2021 proposes to extend the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy and the Lockdown Support until September 2021. The subsidy rates would gradually decline over the July-to-September period. The proposed details of these programs from June 6, 2021 to September 25, 2021 are described below.

Budget 2021 also proposes to provide the government with the legislative authority to add additional qualifying periods for the wage subsidy, the rent subsidy and the Lockdown Support until November 20, 2021, should the economic and public health situation warrant it.

Canada Emergency Wage Subsidy

The government introduced the Canada Emergency Wage Subsidy to prevent further job losses and encourage employers to quickly rehire workers previously laid off as a result of COVID‑19. The measure provides eligible employers that have experienced a decline in revenues with a wage subsidy for eligible remuneration paid to their employees.

Support for Active Employees

The wage subsidy for active employees includes a base subsidy for employers that have experienced a decline in revenues as well as a top-up wage subsidy that is available to employers that have experienced a decline in revenues of at least 50 per cent. The maximum combined base subsidy and top-up wage subsidy rate is set at 75 per cent through the qualifying period ending on June 5, 2021.

Budget 2021 proposes the wage subsidy rate structures set out in Table 2 for June 6, 2021 to September 25, 2021. As illustrated in the table, the subsidy rates would be gradually phased out starting on July 4, 2021. Furthermore, only employers with a decline in revenues of more than 10 per cent would be eligible for the wage subsidy as of that date.

Table 2
Canada Emergency Wage Subsidy Base and Top-up Rate Structure, Periods 17 to 20
(June 6, 2021 to September 25, 2021)
  Period 17
June 6 – July 3
Period 18
July 4 – July 31
Period 19
August 1 – August 28
Period 20
August 29 – September 25
Maximum weekly benefit per employee* $847 $677 $452 $226
Revenue decline:        
70% and over 75%
(i.e., Base: 40% +
Top-up: 35%)
60%
(i.e., Base: 35% +
Top-up: 25%)
40%
(i.e., Base: 25% +
Top-up: 15%)
20% (i.e., Base: 10% +
Top-up: 10%)
50-69% Base: 40% +
Top-up: (revenue decline - 50%) x 1.75
(e.g., 40% + (60% revenue decline - 50%) x 1.75 = 57.5% subsidy rate)
Base: 35% +
Top-up: (revenue decline - 50%) x 1.25
(e.g., 35% + (60% revenue decline - 50%) x 1.25 = 47.5% subsidy rate)
Base: 25% +
Top-up: (revenue decline - 50%) x 0.75
(e.g., 25% + (60% revenue decline - 50%) x 0.75 = 32.5% subsidy rate)
Base: 10% +
Top-up: (revenue decline - 50%) x 0.5
(e.g., 10% + (60% revenue decline - 50%) x 0.5 = 15% subsidy rate)
>10-50% Base: revenue decline x 0.8
(e.g., 30% revenue decline x 0.8 = 24% subsidy rate)
Base: (revenue decline - 10%) x 0.875
(e.g., (30% revenue decline - 10%) x 0.875 = 17.5% subsidy rate)
Base: (revenue decline - 10%) x 0.625
(e.g., (30% revenue decline - 10%) x 0.625 = 12.5% subsidy rate)
Base: (revenue decline - 10%) x 0.25
(e.g., (30% revenue decline - 10%) x 0.25 = 5% subsidy rate)
0-10% Base: revenue decline x 0.8
(e.g., 5% revenue decline x 0.8 = 4% subsidy rate)
0% 0% 0%
* The maximum weekly benefit per employee is equal to the maximum combined base subsidy and top-up wage subsidy for the qualifying period applied to the amount of eligible remuneration paid to the employee for the qualifying period, on remuneration of up to $1,129 per week.
Requirement to Repay Wage Subsidy

Budget 2021 proposes to require a publicly listed corporation to repay wage subsidy amounts received for a qualifying period that begins after June 5, 2021 in the event that its aggregate compensation for specified executives during the 2021 calendar year exceeds its aggregate compensation for specified executives during the 2019 calendar year.

For the purpose of this proposed rule, a publicly listed corporation's specified executives will be its Named Executive Officers whose compensation is required to be disclosed under Canadian securities laws in its annual information circular provided to shareholders, or similar executives in the case of a corporation listed in another jurisdiction. This generally includes its chief executive officer, chief financial officer, and three other most highly compensated executives. A corporation's executive compensation for a calendar year will be calculated by prorating the aggregate compensation of its specified executives for each of its taxation years that overlap with the calendar year.

The amount of the wage subsidy required to be repaid would be equal to the lesser of:

This requirement to repay would be applied at the group level and would apply to wage subsidy amounts paid to any entity in the group.

Support for Furloughed Employees

A separate wage subsidy rate structure applies for furloughed employees. The wage subsidy for furloughed employees is aligned with the benefits provided through Employment Insurance (EI) through June 5, 2021 to ensure equitable treatment of such employees between the two programs.

To ensure that the wage subsidy for furloughed employees remains aligned with benefits available under EI, Budget 2021 proposes that the weekly wage subsidy for a furloughed employee from June 6, 2021 to August 28, 2021 be the lesser of:

The wage subsidy for furloughed employees would continue to be available to eligible employers that qualify for the wage subsidy for active employees for the relevant period until August 28, 2021. Employers will also continue to be entitled to claim under the wage subsidy their portion of contributions in respect of the Canada Pension Plan, EI, the Quebec Pension Plan and the Quebec Parental Insurance Plan in respect of furloughed employees.

Reference Periods

For the purposes of the wage subsidy, an employer's decline in revenues is generally determined by comparing the employer's revenues in a current calendar month with its revenues in the same calendar month, pre-pandemic. An employer may also elect to use an alternative approach, which compares the employer's monthly revenues relative to the average of its January 2020 and February 2020 revenues. A deeming rule provides that an employer's decline in revenues for any particular qualifying period is the greater of its decline in revenues for the particular qualifying period and the immediately preceding qualifying period.

Budget 2021 proposes the reference periods set out in Table 3 for determining an eligible employer's decline in revenues for the qualifying periods from June 6, 2021 to September 25, 2021.

Table 3
Canada Emergency Wage Subsidy Reference Periods, Periods 17 to 20
(June 6, 2021 to September 25, 2021)
Timing Period 17
June 6 – July 3
Period 18
July 4 – July 31
Period 19
August 1 – August 28
Period 20
August 29 – September 25
General approach June 2021 over June 2019 or May 2021 over May 2019 July 2021 over July 2019 or June 2021 over June 2019 August 2021 over August 2019 or July 2021 over July 2019 September 2021 over September 2019 or August 2021 over August 2019
Alternative approach June 2021 or May 2021 over average of January and February 2020 July 2021 or June 2021 over average of January and February 2020 August 2021 or July 2021 over average of January and February 2020 September 2021 or August 2021 over average of January and February 2020

Employers that had chosen to use the general approach for prior periods would be required to continue to use that approach. Similarly, employers that had chosen to use the alternative approach would be required to continue to use the alternative approach.

Baseline Remuneration

Under the general rules, an eligible employer's entitlement to the wage subsidy for a furloughed employee, as well as an active employee in certain circumstances, is determined through a calculation that takes into account both the employee's current and baseline (pre-crisis) remuneration.

Baseline remuneration means the average weekly eligible remuneration paid to an eligible employee by an eligible employer during the period beginning January 1, 2020 and ending March 15, 2020. Any period of seven or more consecutive days for which the employee was not remunerated is excluded from the calculation. However, the eligible employer may elect, for each qualifying period in respect of an employee, an alternative baseline period for calculating the average weekly eligible remuneration.

To ensure that the alternative baseline remuneration periods for a particular qualifying period continue to generally reflect the corresponding calendar months covered by the qualifying period, Budget 2021 proposes to allow an eligible employer to elect to use the following alternative baseline remuneration periods:

Canada Emergency Rent Subsidy

The government introduced the Canada Emergency Rent Subsidy to provide direct relief to organizations that continue to be economically impacted by the COVID‑19 pandemic. Under the rent subsidy, qualifying organizations that have experienced a decline in revenues are eligible for a subsidy on qualifying expenses.

Rate Structure

The maximum base rent subsidy rate is set at 65 per cent through the qualifying period ending on June 5, 2021.

Budget 2021 proposes the base rent subsidy rate structures set out in Table 4 for June 6, 2021 to September 25, 2021. As illustrated in the table, the subsidy rates would be gradually phased out starting on July 4, 2021. Furthermore, only organizations with a decline in revenues of more than 10 per cent would be eligible for the base rent subsidy and, as discussed below, the Lockdown Support.

Table 4
Canada Emergency Rent Subsidy Base Rate Structure*, Periods 17** to 20
(June 6, 2021 to September 25, 2021)
  Period 17
June 6 – July 3
Period 18
July 4 – July 31
Period 19
August 1 – August 28
Period 20
August 29 – September 25
Revenue decline:        
70% and over 65% 60% 40% 20%
50-69% 40% + (revenue decline - 50%) x 1.25
(e.g., 40% + (60% revenue decline - 50%) x 1.25 = 52.5% subsidy rate)
35% + (revenue decline - 50%) x 1.25
(e.g., 35% + (60% revenue decline - 50%) x 1.25 = 47.5% subsidy rate)
25% + (revenue decline - 50%) x 0.75
(e.g., 25% + (60% revenue decline - 50%) x 0.75 = 32.5% subsidy rate)
10% + (revenue decline - 50%) x 0.5
(e.g., 10% + (60% revenue decline - 50%) x 0.5 = 15% subsidy rate)
>10-50% Revenue decline x 0.8
(e.g., 30% revenue decline x 0.8 = 24% subsidy rate)
(Revenue decline - 10%) x 0.875
(e.g., (30% revenue decline - 10%) x 0.875 = 17.5% subsidy rate)
(Revenue decline - 10%) x 0.625
(e.g., (30% revenue decline - 10%) x 0.625 = 12.5% subsidy rate)
(Revenue decline - 10%) x 0.25
(e.g., (30% revenue decline - 10%) x 0.25 = 5% subsidy rate)
0-10% Revenue decline x 0.8
(e.g., 5% revenue decline x 0.8 = 4% subsidy rate)
0% 0% 0%
* Expenses for each qualifying period are capped at $75,000 per location and are subject to an overall cap of $300,000 that is shared among affiliated entities.
** Period 17 of the Canada Emergency Wage Subsidy would be the tenth period of the Canada Emergency Rent Subsidy. Period identifiers have been aligned for ease of reference.
Revenue-Decline Calculation

Both the rent subsidy and the wage subsidy use the same calculation to determine an organization's revenue decline. As a result, the same reference periods are used to calculate an organization's decline in revenues for the wage subsidy and the rent subsidy. Likewise, if an organization elects to use an alternative method for computing its revenue decline under the wage subsidy, it must use that alternative method for the rent subsidy.

Purchase of Business Assets

In order to qualify for the wage subsidy, an applicant must have had a payroll account with the Canada Revenue Agency (or engaged a qualifying payroll service provider). For the purpose of the rent subsidy, an applicant is required to have a business number with the CRA.

If certain conditions are met, the wage subsidy rules provide that an eligible entity that purchases the assets of a seller will be deemed to meet the payroll account requirement if the seller met the requirement.

Budget 2021 proposes to introduce a similar deeming rule that would apply in the context of the rent subsidy, where the seller met the business number requirement. This measure would apply as of the start of the rent subsidy.

Lockdown Support

For locations that must cease operations or significantly limit their activities under a public health order issued under the laws of Canada, a province or territory, the government introduced the Lockdown Support through the Canada Emergency Rent Subsidy program to provide additional help. In order to qualify for the Lockdown Support, an applicant must qualify for the base rent subsidy.

Budget 2021 proposes to extend, for the qualifying periods from June 6, 2021 to September 25, 2021, the current 25-per-cent rate for the Lockdown Support.

Canada Recovery Hiring Program

Budget 2021 proposes to introduce the new Canada Recovery Hiring Program to provide eligible employers with a subsidy of up to 50 per cent on the incremental remuneration paid to eligible employees between June 6, 2021 and November 20, 2021.

An eligible employer would be permitted to claim either the hiring subsidy or the Canada Emergency Wage Subsidy for a particular qualifying period, but not both.

The proposed details of the hiring subsidy are described below.

Eligible Employers

Employers eligible for the Canada Emergency Wage Subsidy would generally be eligible for the hiring subsidy. However, a for-profit corporation would be eligible for the hiring subsidy only if it is a Canadian-controlled private corporation (including a cooperative corporation that is eligible for the small business deduction). Other eligible employers would include individuals, non‑profit organizations, registered charities, and certain partnerships.

Corporations and trusts that are ineligible for the Canada Emergency Wage Subsidy because they are public institutions would not be eligible for the hiring subsidy. Public institutions generally include municipalities and local governments, Crown corporations, wholly owned municipal corporations, public universities, colleges, schools and hospitals.

Eligible employers (or their payroll service provider) would be required to have had a payroll account open with the Canada Revenue Agency on March 15, 2020.

Eligible Employees

An eligible employee must be employed primarily in Canada by an eligible employer throughout a qualifying period (or the portion of the qualifying period throughout which the individual was employed by the eligible employer).

The hiring subsidy would not be available for furloughed employees. A furloughed employee is an employee who is on leave with pay, meaning they are remunerated by the eligible employer but do not perform any work for the employer. An employee would not be considered to be on leave with pay for the purposes of the hiring subsidy if they are on a period of paid absence, such as vacation leave, sick leave, or a sabbatical.

Eligible Remuneration and Incremental Remuneration

The types of remuneration eligible for the Canada Emergency Wage Subsidy would also be eligible for the hiring subsidy. Eligible remuneration generally includes salary, wages, and other remuneration for which employers are required to withhold or deduct amounts on account of the employee's income tax obligations. However, it does not include severance pay, or items such as stock option benefits or the personal use of a corporate vehicle. The amount of remuneration for employees would be based solely on remuneration paid in respect of the qualifying period.

Incremental remuneration for a qualifying period means the difference between an employer's total eligible remuneration paid to eligible employees for the qualifying period and its total eligible remuneration paid to eligible employees for the baseline period. In both the qualifying period and the baseline period, eligible remuneration for each eligible employee would be subject to a maximum of $1,129 per week.

As is currently the case for the Canada Emergency Wage Subsidy, the eligible remuneration for a non-arm's length employee for a week could not exceed their baseline remuneration determined for that week. More information on baseline remuneration is available in the supplementary information on Emergency Business Supports.

The applicable dates for the calculation of the incremental remuneration are shown in Table 5.

Table 5
Canada Recovery Hiring Program Dates Used to Calculate Incremental Remuneration, Periods 17* to 22
(June 6, 2021 to November 20, 2021)
Qualifying period Period 17 Period 18 Period 19 Period 20 Period 21 Period 22
Qualifying period dates June 6 to July 3, 2021 July 4 to July 31, 2021 August 1 to August 28, 2021 August 29 to September 25, 2021 September 26 to October 23, 2021 October 24 to November 20, 2021
Baseline period March 14 to April 10, 2021
*Period 17 of the Canada Emergency Wage Subsidy would be the first period of the Canada Recovery Hiring Program. Period identifiers have been aligned for ease of reference.

Subsidy Amount

Provided that an eligible employer's decline in revenues exceeds the revenue-decline threshold for a qualifying period (see Revenue-Decline Threshold below), its subsidy in that qualifying period would be equal to its incremental remuneration multiplied by the applicable hiring subsidy rate for that qualifying period. These hiring subsidy rates are shown in Table 6.

Table 6
Canada Recovery Hiring Program Rates, Periods 17* to 22
(June 6, 2021 to November 20, 2021)
  Period 17
June 6 – July 3
Period 18
July 4 – July 31
Period 19
August 1 – August 28
Period 20
August 29 – September 25
Period 21
September 26 – October 23
Period 22
October 24 – November 20
Hiring subsidy rate 50% 50% 50% 40% 30% 20%
*Period 17 of the Canada Emergency Wage Subsidy would be the first period of the Canada Recovery Hiring Program. Period identifiers have been aligned for ease of reference.

Revenue-Decline Threshold

To qualify for a hiring subsidy in a qualifying period, an eligible employer would have to have experienced a decline in revenues sufficient to qualify for the Canada Emergency Wage Subsidy in that qualifying period. For qualifying periods where the Canada Emergency Wage Subsidy is no longer in effect, an eligible employer would have to have experienced a decline in revenues of more than 10 per cent. As such, an eligible employer's decline in revenues would have to be more than:

An employer's decline in revenues would be determined in the same manner as under the Canada Emergency Wage Subsidy. This method compares the employer's revenues in a current calendar month with its revenues in the same calendar month, pre-pandemic. An employer can also elect to use an alternative approach, which compares the employer's monthly revenues relative to the average of its January 2020 and February 2020 revenues. A deeming rule provides that an employer's decline in revenues for any particular qualifying period is the greater of its decline in revenues for the particular qualifying period and the immediately preceding qualifying period.

Employers that had chosen to use the general approach for prior periods of the Canada Emergency Wage Subsidy would be required to continue to use that approach for the hiring subsidy. Similarly, employers that had chosen to use the alternative approach would be required to continue to use the alternative approach.

The reference periods set out in Table 7 would be used to determine an eligible employer's decline in revenues for the qualifying periods from June 6, 2021 to November 20, 2021.

Table 7
Canada Recovery Hiring Program Reference Periods, Periods 17* to 22
(June 6, 2021 to November 20, 2021)
Timing Period 17
June 6 – July 3
Period 18
July 4 – July 31
Period 19
August 1 – August 28
Period 20
August 29 – September 25
Period 21
September 26 – October 23
Period 22
October 24 – November 20
General approach June 2021 over June 2019 or May 2021 over May 2019 July 2021 over July 2019 or June 2021 over June 2019 August 2021 over August 2019 or July 2021 over July 2019 September 2021 over September 2019 or August 2021 over August 2019 October 2021 over October 2019 or September 2021 over September 2019 November 2021 over November 2019 or October 2021 over October 2019
Alternative approach June 2021 or May 2021 over average of January and February 2020 July 2021 or June 2021 over average of January and February 2020 August 2021 or July 2021 over average of January and February 2020 September 2021 or August 2021 over average of January and February 2020 October 2021 or September 2021 over average of January and February 2020 November 2021 or October 2021 over average of January and February 2020
*Period 17 of the Canada Emergency Wage Subsidy would be the first period of the Canada Recovery Hiring Program. Period identifiers have been aligned for ease of reference.

An application for the hiring subsidy for a qualifying period would be required to be made no later than 180 days after the end of the qualifying period.

Immediate Expensing

The capital cost allowance (CCA) system determines the deductions that a business may claim each year for income tax purposes in respect of the capital cost of its depreciable property. With some exceptions, depreciable property is divided into CCA classes and a CCA rate for each class of property is prescribed in the Income Tax Regulations.

Prior to November 21, 2018, the CCA allowed in the first year that a property was available for use was generally limited to half the amount that would otherwise be available (the "half-year" rule). On November 21, 2018, the government announced a temporary enhanced first-year allowance, referred to as the Accelerated Investment Incentive, equal to up to three times the previously applicable first-year allowance. In addition, the government announced immediate expensing for investments in machinery and equipment used in manufacturing or processing, as well as for specified clean energy generation equipment.

Budget 2021 proposes to provide temporary immediate expensing in respect of certain property acquired by a Canadian-Controlled Private Corporation (CCPC). This immediate expensing would be available 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. The immediate expensing would only be available for the year in which the property becomes available for use. The $1.5 million limit would be shared among associated members of a group of CCPCs. The limit would be prorated for taxation years that are shorter than 365 days. The half-year rule would be suspended for property for which this measure is used. For those CCPCs with less than $1.5 million of eligible capital costs, no carry-forward of excess capacity would be allowed.

Eligible Property

Eligible property under this new measure would be capital property that is subject to the CCA rules, other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51, which are generally long lived assets.

Interactions of the Immediate Expensing with Other Provisions

CCPCs with capital costs of eligible property in a taxation year that exceed $1.5 million would be allowed to decide to which CCA class the immediate expensing would be attributed and any excess capital cost would be subject to the normal CCA rules. The availability of other enhanced deductions under existing rules – such as the full expensing for manufacturing and processing machinery and equipment and for clean energy equipment, introduced in the 2018 Fall Economic Statement – would not reduce the maximum amount available under this new measure. In other words, a CCPC may expense up to $1.5 million in addition to all other CCA claims under existing provisions of the Income Tax Act, provided the total CCA deduction does not exceed the capital cost of the property.

Immediate expensing under this new rule would not change the total amount that can be deducted over the life of a property – the larger deduction taken in the first year in respect of a property would eventually be offset by a smaller deduction, if any, in respect of the property in future years.

Example of Benefits of Immediate Expensing of $1.5 million

A CCPC invests $2,000,000 in equal amounts for two properties, one falling under CCA Class 7, and the other under Class 10. Under this scenario, the CCPC would be allowed a total first-year deduction of up to $1,725,000 versus $675,000 under the existing rules, as illustrated in the table below. This would represent an additional deduction of $1,050,000 in the first year.

CCA Class (rate) Cost of Acquisitions Immediate Expensing 1st Year Allowance on Remainder of Class* Total 1st Year Allowance Current 1st Year Allowance*
Class 7 (15%)
1,000,000 1,000,000 0 1,000,000 225,000
Class 10 (30%)
1,000,000 500,000 225,000 725,000 450,000
Total
2,000,000 1,500,000 225,000 1,725,00 675,000
*Assuming eligible for the triple first-year allowance under the Accelerated Investment Incentive

Restrictions

The Income Tax Act and the Income Tax Regulations include a series of rules designed to protect the integrity of the CCA regime and the tax system more broadly. These include rules related to limited partners, specified leasing properties, specified energy properties and rental properties. In certain circumstances, these rules can restrict a CCA deduction, or a loss in respect of such a deduction, that would otherwise be available. These integrity rules would continue to apply.

Certain additional restrictions would be placed on property eligible for this new measure. Property that has been used, or acquired for use, for any purpose before it was acquired by the taxpayer would be eligible for the immediate expensing only if both of the following conditions are met:

Coming Into Force

This measure would apply for eligible property that is acquired on or after Budget Day and that becomes available for use before 2024.

Strategic Environmental Assessment Statement

This temporary measure is expected to encourage capital investments across all sectors of the economy and in a variety of assets. It is unclear whether it would result in net positive or negative environmental effects.

The consumption, transportation and fabrication of capital assets can lead to various negative environmental effects. These effects would be unequal across sectors and types of investments. For example, investment in certain capital intensive industries is associated with higher greenhouse gas and air pollutant emissions, water and soil pollution, and faster depletion of natural resources. These activities are subject to applicable federal and provincial environmental regulations. There may be positive offsetting environmental impacts if the measure causes businesses to upgrade to the latest technology, as newer technologies are generally more efficient and greener than older technologies.

Overall, the measure could have both positive and negative impacts on the achievement of some of the Federal Sustainable Development Strategy goals, in particular those of Effective Action on Climate Change, Clean Growth, Pristine Lakes and Rivers, Sustainably Managed Lands and Forests, and Safe and Healthy Communities. Based on available data, it is not possible to assess whether the net environmental impact would be positive or negative in the short run. In the long run, the net environmental impact is not expected to be significant, given that the measure would be temporary.

Rate Reduction for Zero-Emission Technology Manufacturers

Budget 2021 proposes a temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers. Specifically, taxpayers would be able to apply reduced tax rates on eligible zero-emission technology manufacturing and processing income of:

Eligible Zero-Emission Technology Manufacturing or Processing Activities

This measure would apply in respect of income from the following zero-emission technology manufacturing or processing activities:

For each of the manufacturing activities described above, eligible activities would include the manufacturing of components or sub-assemblies only if such equipment is purpose-built or designed exclusively to form an integral part of the relevant system. For example, manufacturing of wind turbine rotor blades may be an eligible activity, but manufacturing of general use tires, fasteners, wiring, transformers, paint, piping or concrete would not.

Eligible activities would exclude all activities that do not qualify as manufacturing or processing for the purposes of the capital cost allowance rules.

Calculation of Eligible Income

It is proposed that a taxpayer's eligible income generally be equal to its "adjusted business income" multiplied by the proportion of its 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.

All of a taxpayer's labour and capital costs would be deemed to be labour and capital costs that are used in eligible activities if all or substantially all of its labour and capital costs are related to eligible activities.

The government welcomes feedback from stakeholders on the proposed allocation method for these purposes. Interested parties are invited to send written representations by June 18, 2021 to the Department of Finance Canada, Tax Policy Branch at: ZETM-FTZE@canada.ca.

Minimum Proportion of Eligible Activities

A taxpayer would qualify for the reduced tax rates on its eligible income only if at least 10 per cent of its gross revenue from all active businesses carried on in Canada is derived from eligible activities.

Reduced Rate for Small Businesses

Certain small businesses currently benefit from a reduced federal corporate income tax rate of 9 per cent – a preference relative to the general corporate income tax rate of 15 per cent. This rate reduction is provided through the "small business deduction" and applies on up to $500,000 per year of qualifying active business income (i.e., up to the business limit) of a Canadian-controlled private corporation (CCPC).

For taxpayers with income subject to both the general and the small business corporate tax rates, taxpayers would be able to choose to have their eligible income taxed at either the reduced rate of 4.5 per cent for small businesses or the general reduced rate of 7.5 per cent. The amount of income taxed at the 4.5 per cent rate plus the amount of income taxed at the small business rate of 9 per cent would not be allowed to exceed the business limit.

Treatment of Dividends

The tax system has two dividend tax credit (DTC) rates and gross-up factors to recognize the two different corporate income tax rates that generally apply to corporations. The enhanced DTC and gross-up are applied to dividends distributed to an individual from corporate income taxed at the general corporate tax rate ("eligible dividends"). The ordinary DTC and gross-up are applied to dividends distributed to an individual from corporate income not taxed at the general corporate tax rate ("non-eligible dividends"). At the federal level, the enhanced and ordinary dividend tax credit correspond to 15 per cent and 9 per cent of the grossed-up amount of the dividend, respectively.

Given the targeted application, temporary nature, and gradual phase-out of the proposed measure, no changes to the DTC rates or the allocation of corporate income for the purpose of dividend distributions are proposed. That is, income subject to the general reduced rate would continue to give rise to eligible dividends and the enhanced dividend tax credit, while income subject to the reduced rate for small businesses would continue to give rise to non-eligible dividends and the ordinary dividend tax credit.

Application and Phase-Out

The reduced tax rates would apply to taxation years that begin after 2021. The reduced rates would be gradually phased out starting in taxation years that begin in 2029 and fully phased out for taxation years that begin after 2031 (as shown in Table 8).

Table 8
Schedule of Reduced Tax Rates
Taxation years that begin in: 2022 to 2028 2029 2030 2031 2032 or later
Reduced Tax Rate on Income Eligible for the Small Business Deduction 4.5% 5.625% 6.75% 7.875% 9%
Reduced Tax Rate on Other Eligible Income 7.5% 9.375% 11.25% 13.125% 15%

Strategic Environmental Assessment Statement

Overall, the measure is expected to have positive environmental impacts by lowering emissions of greenhouse gases and air particulates.

The measure could indirectly lower the price of zero-emission technology equipment, which could lead to a greater adoption of zero-emission technology in Canada, helping to reduce emissions of greenhouse gases and air particulates. This would contribute to achieving the Federal Sustainable Development Strategy targets relating to increasing the percentage of Canadians living in areas where air quality standards are achieved to 85 per cent by 2030, and having 90 per cent of electricity generated from renewable and non-emitting sources by 2030. In addition, the proposal would help advance the government's commitment to exceed Canada's target of reducing total greenhouse gas emissions by 30 per cent relative to 2005 levels by 2030, and the government's commitment of net-zero greenhouse gas emissions by 2050.

However, increased manufacturing activities in Canada could directly increase emissions of greenhouse gases and air particulates, as well as increase production of industrial waste. This could partially offset some of the positive environmental impacts of the measure.

Capital Cost Allowance for Clean Energy Equipment

Under the Income Tax Act taxpayers are entitled to deduct a portion of the capital cost of a depreciable property, as capital cost allowance (CCA), in computing their income for each taxation year. With some exceptions, CCA deductions are claimed by class of property and are calculated on a declining-balance basis.

Under the CCA regime, Classes 43.1 and 43.2 of Schedule II to the Income Tax Regulations provide accelerated CCA rates (30 per cent and 50 per cent, respectively) for investments in specified clean energy generation and energy conservation equipment. Class 43.2 generally includes property that would otherwise be included in Class 43.1, except that in certain cases Class 43.2 imposes stricter eligibility criteria. In addition, property in these classes that is acquired after November 20, 2018 and that becomes available for use before 2024 is eligible for immediate expensing while property that becomes available for use after 2023 and before 2028 is subject to a phase-out from these immediate expensing rules.

Providing accelerated CCA is an exception to the general practice of setting CCA rates based on the useful life of assets. Accelerated CCA provides a financial benefit by deferring taxation.

In addition, if the majority of the tangible property in a project is eligible for inclusion in Class 43.1 or 43.2, certain intangible project start-up expenses (e.g., engineering and design work, and feasibility studies) are treated as Canadian Renewable and Conservation Expenses. These expenses can be deducted in full in the year incurred, carried forward indefinitely for use in future years, or transferred to investors using flow-through shares.

To support investment in clean technologies, Budget 2021 proposes to expand Classes 43.1 and 43.2 to include the following:

Accelerated CCA would be available in respect of these types of property only if, at the time the property becomes available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met.

Classes 43.1 and 43.2 currently include certain systems that burn fossil fuels and/or waste fuels to produce either electricity or heat, or both. The eligibility criteria for these systems have not been modified since they were first set approximately 25 and 15 years ago, for Classes 43.1 and 43.2 respectively. Additionally, Classes 43.1 and 43.2 include certain systems that derive up to one half of their fuel energy input from fossil fuels.

To ensure the incentive provided by Classes 43.1 and 43.2 is consistent with the government's current environmental objectives, Budget 2021 proposes changes in the eligibility criteria for the following types of equipment:

Each of these measures is discussed in more detail below.

Pumped Hydroelectric Energy Storage Equipment

Pumped hydroelectric storage is one type of electrical energy storage system that uses electricity to pump water uphill into a reservoir, where it can be held until needed and released for the generation of electricity. This form of storage can provide environmental benefits by displacing fossil-fuelled power generation when demand is highest and by facilitating the integration of electricity generated from intermittent renewable energy sources. A range of electrical energy storage equipment, other than pumped hydroelectric storage, is currently eligible under Classes 43.1 and 43.2.

Budget 2021 proposes to expand Class 43.1 and 43.2 eligibility for electrical energy storage property by removing the exclusion for pumped hydroelectric storage. Eligible pumped hydroelectric storage property would include reversing turbines, transmission equipment, dams, reservoirs and related structures, but not buildings or property used solely for backup electrical energy.

Water Current, Wave or Tidal Energy Technologies Using Physical Barriers

The current rules generally include in Class 43.1 and 43.2 equipment that generates electricity using kinetic energy of flowing water or wave or tidal energy. Equipment that generates electricity by diverting or impeding the natural flow of water, or by using physical barriers or dam-like structures, is currently ineligible.

Budget 2021 proposes to expand Class 43.1 and 43.2 eligibility by removing these restrictions.

Active Solar Heating, Ground Source Heat Pump and Geothermal Energy Systems Used to Heat a Swimming Pool

Ground source heat pump, active solar heating and geothermal energy systems can provide renewable energy for various residential, commercial and industrial applications, such as water or space heating. Active solar heating systems use a solar collector to heat an actively circulated liquid or gas medium. Ground source heat pump systems exchange heat with the earth at depths of tens of metres while geothermal energy systems extract steam or hot water directly from the earth through wells drilled to depths of up to several thousand metres. Most active solar heating, ground source heat pump and geothermal energy systems are eligible under Classes 43.1 and 43.2, other than systems used to heat water for use in a swimming pool.

Budget 2021 proposes to expand Class 43.1 and 43.2 eligibility by removing the exclusion of active solar heating and ground-source heat pump systems used to heat swimming pools. Similarly, it is proposed to remove the exclusion for geothermal energy systems used to heat swimming pools, except where geothermal water is used directly in a pool or spa.

Equipment Used to Produce Fuel from Specified Waste Material or Carbon Dioxide

Solid, liquid and gaseous renewable fuels may be derived from organic material through a broad range of mechanical, bio-chemical and thermo-chemical processes. It is also possible to produce liquid synthetic fuels from carbon dioxide. Depending on the type of fuels, different applications are possible, for example: direct combustion to generate electricity or heat; injection into natural gas distribution networks; and fuelling vehicles. Equipment used for the production of gaseous renewable fuels (e.g., biogas and producer gas) from certain waste material (e.g., wood, food and animal waste) is generally eligible under Class 43.1 and 43.2. Certain equipment used to produce liquid renewable fuels is eligible under Class 43.1 and 43.2 if it is used to convert wood waste or plant residue into bio-oil that is used primarily for the purpose of generating heat used directly in an industrial process or a greenhouse, generating electricity, or generating electricity and heat.

Budget 2021 proposes to expand eligibility under Class 43.1 and 43.2 to equipment used to convert specified waste material into bio-coal or pellets (including torrefied pellets), but excluding standard equipment used to make wood chips, hog fuel and black liquor. Eligible property would include equipment where all or substantially all of the use of the equipment is in a system that produces bio-coal or pellets (including torrefied pellets) from specified waste material, including storage equipment, materials handling equipment and ash-handling equipment. However, eligible property would not include the following:

Budget 2021 also proposes to expand eligibility under Class 43.1 and 43.2 to a broader range of equipment used to produce liquid biofuels (e.g., ethanol, biodiesel and renewable diesel) from specified waste material or carbon dioxide. Eligible property would include equipment where all or substantially all of the use of the equipment is to produce liquid fuels from specified waste material, including related piping, storage equipment, materials handling equipment, ash-handling equipment and equipment used to remove non-combustibles and contaminants from the fuels produced. However, eligible property would not include the following:

For all of these proposed changes, "specified waste material" would include wood waste, municipal waste, sludge from an eligible sewage treatment facility, plant residue, spent pulping liquor, food and animal waste, manure, pulp and paper by-product, and separated organics.

Hydrogen Production by Electrolysis of Water

Hydrogen can provide a clean source of energy with which to generate electricity or heat, or to fuel zero-emission vehicles, and it can also be used in a variety of industrial processes. Currently, hydrogen is mainly produced by steam methane reformation, but it can also be produced by electrolysis of water. When powered by renewable energy, hydrogen produced by electrolysis of water maximizes the environmental benefits of using hydrogen as an energy supply by minimizing its lifecycle carbon intensity. Equipment used to produce hydrogen by electrolysis of water is eligible under Classes 43.1 and 43.2 when it is ancillary to a fixed-location fuel cell and all or substantially all of the electricity used to power the production process is generated using specified renewable energy sources. These renewable energy sources include: the kinetic energy of flowing water; wave or tidal energy; geothermal, photovoltaic or wind energy conversion; and hydroelectric equipment.

Budget 2021 proposes to expand eligibility under Classes 43.1 and 43.2 to include a broader range of equipment used to produce hydrogen by electrolysis of water. Eligible property would include: equipment where all or substantially all of the use of the equipment is to produce hydrogen by electrolysis of water, including electrolysers, rectifiers and other ancillary electrical equipment; water treatment and conditioning equipment; and equipment used for hydrogen compression and storage. Eligible property would not include:

For greater certainty, eligible property would not be required to be powered by renewable energy sources eligible for inclusion in Class 43.1 or 43.2.

Hydrogen Refuelling Equipment

Hydrogen fuel cell electric vehicles are a nascent zero-emission mode of transportation in Canada that require specific refuelling infrastructure. In Budget 2016, the government announced support for business investments in electric vehicle charging infrastructure by expanding Class 43.1 to include electric vehicle charging stations capable of supplying more than 10 kilowatts of continuous power, and by expanding Class 43.2 to include such stations that are capable of supplying at least 90 kilowatts of continuous power.

To support greater use of hydrogen-powered vehicles, Budget 2021 proposes to expand eligibility under Classes 43.1 and 43.2 to include hydrogen refuelling equipment. Eligible property would include equipment used to dispense hydrogen for use in hydrogen-powered automotive equipment and vehicles, including vaporization, compression, storage and cooling equipment. Eligible property would not include:

Fossil-Fuelled Cogeneration Systems

Fossil-fuelled cogeneration systems generate both electricity and useful heat using fossil fuels as the energy source (typically natural gas). Due to the use of heat that would otherwise be wasted, these systems offer an efficient use of fossil fuels. However, they still produce greenhouse gas emissions and, as such, cannot achieve net-zero emissions on a lifecycle basis.

Budget 2021 proposes to remove these systems from Classes 43.1 and 43.2.

Fossil-Fuelled Enhanced Combined Cycle Systems

A combined cycle system uses two different heat engines simultaneously to produce electricity. It is usually composed of a gas turbine and a steam turbine, where the residual heat from the gas turbine is used to generate steam to drive the steam turbine, resulting in higher efficiency than using the gas turbine alone. An "enhanced combined cycle system" is a type of combined cycle system in which thermal waste from one or more natural gas compressor systems is recovered and used to contribute at least 20 per cent of the energy input of a combined cycle process in order to enhance the generation of electricity.

These systems burn natural gas as a fuel and must be located where there is no other viable host for the waste heat. Similar to fossil-fuelled cogeneration systems, enhanced combined cycle systems offer an efficient use of fossil fuels but cannot achieve net-zero emissions on a lifecycle basis.

Budget 2021 proposes to remove these systems from Classes 43.1 and 43.2.

Specified Waste-Fuelled Electrical Generation Systems

Specified waste-fuelled electrical generation systems generate electricity (and, in the case of cogeneration systems, electricity and useful heat) using certain specified waste fuels, or a mix of specified waste fuels and fossil fuels (co-fired systems). These specified waste fuels include "eligible waste fuel" (biogas, bio-oil, digester gas, landfill gas, municipal waste, plant residue, pulp and paper waste, and wood waste), producer gas and spent pulping liquor. The co-firing of specified waste fuels with fossil fuels may be done for technical, economic, or fuel availability reasons.

Budget 2021 proposes to remove from Classes 43.1 and 43.2 specified waste-fuelled electrical generation systems for which more than one quarter of their total fuel energy input is from fossil fuels, determined on an annualized basis.

Classes 43.1 and 43.2 apply energy efficiency requirements for specified waste-fuelled electrical generation systems that co-fire with fossil fuels. These energy efficiency requirements are expressed in the form of maximum heat rate thresholds, which are defined as the ratio of the fuel energy input over the electrical and heat energy output. In contrast, there are no heat rate thresholds for systems that burn only specified waste fuels.

To promote the efficient use of waste fuels, Budget 2021 proposes that eligibility for Classes 43.1 and 43.2 for all specified waste-fuelled electrical generation systems be subject to a heat rate threshold. Systems with an electrical output capacity of three megawatts or less will be exempt from this requirement.

Eligible specified waste-fuelled electrical generation systems would be those that do not exceed a heat rate threshold of 11,000 BTU per kilowatt-hour. The heat rate would be calculated as shown below:

Heat Rate= (2×Ffossil)+FwasteE+(H÷3412)

where:

Specified Waste-Fuelled Heat Production Equipment

Specified waste-fuelled heat production equipment produces heat primarily from eligible waste fuel or producer gas, meaning that more than half of the total fuel energy input must be eligible waste fuel or producer gas. The remaining fuel energy input may be from fossil fuels.

To align with the changes proposed to the eligibility requirements for specified waste-fuelled electrical generation systems, Budget 2021 proposes to remove from Classes 43.1 and 43.2 specified waste-fuelled heat production equipment for which more than one quarter of the total fuel energy input is from fossil fuels, determined on an annualized basis.

Producer Gas Generating Equipment

Producer gas generating equipment generates producer gas from eligible waste fuel using a thermo-chemical conversion process (generally referred to as "gasification"). More than half of the total fuel energy input must be eligible waste fuel, while the remaining fuel energy input may be from fossil fuels.

To align with the changes proposed to the eligibility requirements for specified waste-fuelled electrical generation systems and specified waste-fuelled heat production equipment, Budget 2021 proposes to exclude from Classes 43.1 and 43.2 producer gas generating equipment for which more than one quarter of the total fuel energy input is from fossil fuels, determined on an annualized basis.

Similarly, there is currently a requirement for producer gas to be generated primarily from eligible waste fuel for it to be an eligible fuel for specified waste-fuelled electrical generation systems and for specified waste-fuelled heat production equipment.

For specified waste-fuelled electrical generation systems and specified waste-fuelled heat production equipment, Budget 2021 proposes to remove from the eligible fuels producer gas generated from more than one-quarter fossil fuel energy input.

Timing of Changes

The expansion of Classes 43.1 and 43.2 would apply in respect of property that is acquired and that becomes available for use on or after Budget Day, where it has not been used or acquired for use for any purpose before Budget Day.

The removal of certain property from eligibility for Classes 43.1 and 43.2, as well as the application of the new heat rate threshold for specified waste-fuelled electrical generation systems, would apply in respect of property that becomes available for use after 2024.

Strategic Environmental Assessment Statement

These measures are expected to have a positive environmental impact by encouraging investment in technologies that would reduce emissions of greenhouse gases and air pollutants. This would help advance the government's commitments to exceed Canada's target of reducing total greenhouse gas emissions by 30 per cent relative to 2005 levels by 2030, and to achieve net-zero greenhouse gas emissions by 2050. These measures would also contribute to the Federal Sustainable Development Strategy goals of growing the clean technology industry in Canada, and ensuring all Canadians have access to affordable, reliable and sustainable energy.

Film or Video Production Tax Credits

In recognition of the disruptions caused by the COVID-19 pandemic on film and video productions, Budget 2021 proposes to temporarily extend certain timelines for the Canadian Film or Video Production Tax Credit (CPTC) and the Film or Video Production Services Tax Credit (PSTC).

The CPTC provides a 25-per-cent refundable tax credit on qualified labour expenditures and is available to productions certified to be Canadian film or video productions. The PSTC provides a 16-per-cent refundable credit on qualified Canadian labour expenditures and is available to foreign films and videos produced in Canada.

Extending Timelines for the CPTC

Budget 2021 proposes to extend by 12 months the following timelines with respect to the CPTC:

Extending Timelines for the PSTC

Budget 2021 also proposes to extend by 12 months the 24-month timelines in respect of when aggregate expenditure thresholds must be met for film or video productions for the purposes of the PSTC.

In respect of both the CPTC and the PSTC, taxpayers would be required to file a waiver with the Canada Revenue Agency and the Canadian Audiovisual Certification Office in order to extend the assessment limitation period in respect of the relevant years to take into account this 12-month extension.

These measures would be available in respect of productions for which eligible expenditures were incurred by taxpayers in their taxation years ending in 2020 or 2021.

Mandatory Disclosure Rules

The lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main challenges faced by tax authorities worldwide. Early access to such information provides the opportunity to respond quickly to tax risks through informed risk assessments, audits and changes to legislation.

The Income Tax Act contains rules requiring that certain transactions be reported to the Canada Revenue Agency (CRA). However, the CRA's experience with these rules since their introduction indicates that they are not sufficiently robust to address these concerns.

The Base Erosion and Profit Shifting Project, Action 12: Final Report (BEPS Action 12 Report) of the Organisation for Economic Co-operation and Development and the Group of 20 makes a number of recommendations relating to the enactment of mandatory disclosure rules. Many of the measures recommended in the BEPS Action 12 Report have been implemented in countries with comparable tax systems. In addition to measures recommended by the BEPS Action 12 Report, the United States and Australia both have reporting requirements for specified taxpayers that reflect uncertainty in relation to tax in their audited financial statements. The experience in these countries provides a useful model for developing similar rules in Canada.

The government is consulting on proposals to enhance Canada's mandatory disclosure rules. This consultation will address:

It is proposed that, to the extent the proposed measure applies to taxation years, amendments made as a result of this consultation would apply to taxation years that begin after 2021. To the extent the proposed measure applies to transactions, the amendments would apply to transactions entered into on or after January 1, 2022. However, the penalties would not apply to transactions that occur before the date on which the enacting legislation receives Royal Assent.

Stakeholders are invited to provide comments on the proposals set out below, as well as on draft legislation and sample notifiable transactions which are expected to be released in the coming weeks as part of the consultation. Comments should be directed to the Department of Finance by September 3, 2021. Please send your comments to fin.taxdisclosure-divulgationfiscale.fin@canada.ca.

Reportable Transactions

The Income Tax Act contains rules that require that certain transactions entered into by, or for the benefit of, a taxpayer be reported to the CRA. In order for a transaction to be reportable under those rules, it must be an "avoidance transaction", as that term is defined for the purposes of the general anti-avoidance rule in the Income Tax Act. As well, the transaction must bear at least two of the following three generic hallmarks:

A reportable transaction includes all the transactions in a series of transactions if at least one of the transactions in the series is an avoidance transaction. If more than one party is required to report the transaction, a report by any of the parties can satisfy the requirement. A reportable transaction must be reported to the CRA on or before June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction.

While the current rules are intended to provide the CRA with the information it needs, they currently result in only limited reporting by taxpayers.

The BEPS Action 12 Report recommends that countries introducing mandatory disclosure regimes include a mixture of generic and specific hallmarks, with the existence of each of them resulting in a requirement for disclosure. Generic hallmarks target features that are common to promoted schemes, such as the requirement for confidentiality or the payment of a contingent fee. Specific hallmarks target particular areas of concern, such as trading in losses.

The BEPS Action 12 Report notes that the purpose of a mandatory disclosure regime is to provide the relevant tax administration with information on a wider range of tax policy and revenue risks than those raised by transactions that would be classified as avoidance under a general anti-avoidance rule. A "reportable scheme" for disclosure purposes should generally be broader than the definition of tax avoidance schemes covered by a general anti-avoidance rule and should also cover transactions that are perceived to be aggressive or high-risk from a tax planning perspective.

The BEPS Action 12 Report also notes that Canada's current June 30 reporting deadline renders it less able than other countries to react quickly to tax avoidance planning. It also concludes that the advantage of requiring both promoters and taxpayers to report is that this may have a stronger deterrent effect on both the supply (promoter) and demand (taxpayer) side of avoidance schemes. A dual reporting approach can also reduce the risk of inadequate disclosure because, for example, a taxpayer's disclosure can be checked against the promoter's disclosure to assess whether the information provided is accurate and complete.

To improve the effectiveness of Canada's mandatory disclosure rules and to bring them in line with international best practices, amendments to the reportable transaction rules are proposed. In particular, it is proposed that only one generic hallmark need be present in order for a transaction to be reportable. It is also proposed that the definition of "avoidance transaction" for these purposes be amended so that a transaction be considered an avoidance transaction if it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit.

It is proposed that a taxpayer who enters into a reportable transaction, or another person who enters into such a transaction in order to procure a tax benefit for the taxpayer, would be required to report the transaction to the CRA within 45 days of the earlier of:

It is further proposed that reporting (as a reportable transaction) of a scheme that, if implemented, would be a reportable transaction be required to be made by a promoter or advisor (as well as by persons who do not deal at arm's length with the promoter or advisor and who are entitled to receive a fee with respect to the transaction) within the same time limits. In addition, it is proposed that an exception to the reporting requirement be available for advisors to the extent that solicitor-client privilege applies.

Notifiable Transactions

As noted above, the BEPS Action 12 Report recommends that an effective mandatory disclosure regime include a mixture of specific and generic hallmarks. Specific hallmarks target particular areas of concern. The report recommends the timely disclosure of specific tax schemes to allow governments to quickly develop targeted and appropriate responses to them.

The United States has mandatory disclosure regimes relating to "listed transactions" and "transactions of interest", which are noted in the BEPS Action 12 Report. A U.S. listed transaction is a transaction that is the same as, or substantially similar to, one that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and has identified by notice or other form of published guidance. A U.S. transaction of interest is a transaction that the IRS and the U.S. Treasury Department consider to be a transaction that has the potential for tax avoidance or evasion, but for which they lack sufficient information to make that determination.

Similar rules are also in force in the United Kingdom (disclosure of tax avoidance schemes or DOTAS), Australia (disclosed in the reportable tax position schedule, under category C), and the European Union. Quebec has also enacted a measure that requires taxpayers who have carried out certain transactions to file an information return with Revenu Québec.

To provide the CRA with pertinent information relating to tax avoidance transactions (including series of transactions) and other transactions of interest on a timely basis, it is proposed to introduce a category of specific hallmarks known as "notifiable transactions". Under this approach, the Minister of National Revenue would have the authority to designate, with the concurrence of the Minister of Finance, a transaction as a notifiable transaction.

Similar to the approach taken by the United States, notifiable transactions would include both transactions that the CRA has found to be abusive and transactions identified as transactions of interest. The description of a notifiable transaction would set out the fact patterns or outcomes that constitute that transaction in sufficient detail to enable taxpayers to comply with the disclosure rule. It would also include examples in appropriate circumstances. Sample descriptions of notifiable transactions will be issued as part of the consultation.

A taxpayer who enters into a notifiable transaction, or a transaction or series of transactions that is substantially similar to a notifiable transaction – or another person who enters into such a transaction or series in order to procure a tax benefit for the taxpayer – would be required to report the transaction or series in prescribed form to the CRA within 45 days of the earlier of:

A promoter or advisor who offers a scheme that, if implemented, would be a notifiable transaction, or a transaction or series of transactions that is substantially similar to a notifiable transaction – as well as a person who does not deal at arm's length with the promoter or advisor and who is entitled to receive a fee in respect of the transaction – would be required to report within the same time limits. In addition, it is proposed that an exception to the reporting requirement be available for advisors to the extent that solicitor-client privilege applies.

These proposed amendments are intended to provide information to the CRA and would not change the tax treatment of a transaction.

For example, in a recent decision of the Tax Court of Canada (Paletta v. The Queen) involving a taxpayer who entered into an aggressive series of transactions referred to as straddle planning, which was designed to defer indefinitely tax payable under the Income Tax Act, the CRA tried unsuccessfully to reassess the taxpayer for relevant taxation years outside the normal reassessment period. This series of transactions resulted in an immediate loss realization and an indefinite gain deferral for the taxpayer. Since the burden associated with the reassessment of a taxation year made after the normal reassessment period in a case such as Paletta requires the CRA to prove that the taxpayer made a misrepresentation on their tax return that was attributable to neglect, carelessness or wilful default, such a reassessment is challenging and time consuming for the CRA. If the transactions associated with this aggressive straddle planning had been designated as a notifiable transaction, the CRA would have been notified in time to be able to assess the taxpayer within the normal reassessment period. The proposed notifiable transaction regime would allow the CRA to challenge planning like this in a timely manner, based on their merits.

Uncertain Tax Treatments

An uncertain tax treatment is a tax treatment used, or planned to be used, in an entity's income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law. At present, there is no requirement in Canada to disclose uncertain tax treatments. However, both the United States and Australia have reporting requirements related to uncertain tax treatments. In addition, the United Kingdom recently conducted a public consultation with respect to the introduction of uncertain tax treatment reporting requirements and has announced its intention to enact the required legislation. In this regard, it was noted that large corporations are already familiar with the Australian and the U.S. reporting regimes, and that this would facilitate transitioning taxpayers into a similar regime in the United Kingdom. The same can be said for the introduction of a similar regime in Canada.

Under the U.S. uncertain tax positions rule, a corporation meeting an asset threshold, and certain other conditions, must report (under Schedule UTP) when it has taken a tax position on a U.S. income tax return and either the corporation or a related party has recorded a reserve with respect to that tax position in its audited financial statements. Similarly, under the Australian rules, a corporation meeting a revenue threshold, and certain other conditions, must report (under category B: Tax uncertainty in financial statements) when it has taken a tax position on an Australian income tax return for a year and either the corporation or a related party has recognized or disclosed uncertainty with respect to that tax position in its audited financial statements.

It is proposed that a similar reporting regime be implemented in Canada. As such, specified corporate taxpayers would be required to report particular uncertain tax treatments to the CRA.

Introducing such requirement in Canada would:

Accounting Rules Regarding Uncertain Tax Treatments

If a corporation's financial statements, or those of its corporate parent, are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and there is uncertainty regarding a tax position taken, or planned to be taken, in its tax return, the effect of that uncertainty might need to be reflected in those financial statements. Canadian GAAP provides that International Financial Reporting Standards (IFRS) are to be used by public corporations, and may be adopted by private corporations if they choose to do so. IFRS provide that an entity shall consider whether it is probable that a taxation authority will accept an uncertain tax treatment. "Taxation authority" in this context refers to the body or bodies that decide whether tax treatments are acceptable under tax law, and in the Canadian context ultimately means the courts. If an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, IFRS provide that the entity shall determine the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment used, or planned to be used, in its income tax filings.

However, if an entity concludes it is not probable that the taxation authority will accept a particular uncertain tax treatment (and thus, as described by the IFRS Interpretations Committee, it is probable that the entity will receive or pay amounts relating to the uncertain tax treatment), the entity shall reflect the effect of that uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates by using either the most likely amount or the expected value, depending on which method the entity expects to better predict the resolution of the uncertainty.

As such, Canadian public corporations, and those Canadian private corporations that choose to use IFRS, have an existing requirement to identify uncertain tax treatments for financial statement purposes. When such a corporation determines that it is not probable that the taxation authority will accept an uncertain tax treatment (including an uncertain tax treatment relating to an entity controlled by the corporation), the effect of that uncertainty is reflected in the corporation's financial statements (which would be presented on a consolidated basis with those entities it controls).

Requirement to Report Uncertain Tax Treatments

It is proposed that specified corporate taxpayers be required to report particular uncertain tax treatments to the CRA. A reporting corporation would generally be required to report an uncertain tax treatment in respect of a taxation year where the following conditions are met:

The determination of whether a corporation has $50 million in assets would be made using the carrying value of the assets on the corporation's balance sheet at the end of the financial year. If the corporation did not prepare a balance sheet, or did not prepare a balance sheet in accordance with Canadian GAAP (or other country-specific GAAP relevant for domestic public companies), the amounts used would be those that would have been reflected in a balance sheet prepared in accordance with GAAP. Banks and insurance corporations that are regulated by the Superintendent of Financial Institutions, or a similar provincial authority, would use the amounts in the statements accepted by that authority for regulatory purposes.

As noted above, Canadian GAAP require that the audited financial statements of public corporations be prepared in accordance with IFRS. As a result, the requirement to report particular uncertain tax treatments would apply to Canadian public corporations, subject to the asset threshold. Since IFRS require that a public corporation's financial statements be prepared on a consolidated basis with those corporations that it controls, the requirement to report particular uncertain tax treatments would also apply, subject to the asset threshold, to those corporations that are controlled by a Canadian public corporation.

The requirement to report particular uncertain tax treatments would apply to a private corporation that meets the asset threshold if it, or a related corporation, has audited financial statements prepared in accordance with IFRS. While normally a private corporation would not have audited financial statements prepared in accordance with IFRS, where it does, those statements would be presented on a consolidated basis with those corporations it controls and would, when appropriate, reflect uncertainty pertaining to uncertain tax treatments relating to those corporations.

The requirement to report particular uncertain tax treatments would also apply to a corporation if it meets the asset threshold and it, or a related corporation, has audited financial statements prepared in accordance with another country-specific GAAP relevant for domestic public corporations (e.g., U.S. GAAP). For example, the requirement to report would apply, subject to the asset threshold, if a U.S.-resident corporation had taken a tax position on its Canadian income tax return for a year and recorded a reserve with respect to that tax position in its audited financial statements prepared in accordance with U.S. GAAP. This part of the proposal is meant to ensure that the requirement to report particular uncertain tax treatments would apply appropriately where a corporation is a Canadian corporation controlled by a non-resident corporation or is a non-resident corporation with a taxable presence in Canada (e.g., carrying on business in Canada through a permanent establishment).

For each reportable uncertain tax treatment of a corporation, the corporation 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 the relevant sections of the Income Tax Act) and whether the uncertainty relates to a permanent or temporary difference in tax. It is expected that there would be a limited administrative burden for reporting corporations as the information to be reported would not be extensive and would be readily available given the need to analyze uncertain tax treatments as part of the preparation of financial statements.

It is proposed that uncertain tax treatments be required to be reported at the same time that the reporting corporation's Canadian income tax return is due. The introduction of a requirement to report particular uncertain tax treatments is intended to provide information to the CRA to allow it to more efficiently administer and enforce the Income Tax Act. It would not directly impact the income tax liabilities of corporate taxpayers.

Reassessment Period

When a taxpayer files an income tax return for a taxation year, the CRA is required to perform an initial examination of the return and to assess tax payable, if any, with all due dispatch. The CRA then normally has a fixed period, referred to as the "normal reassessment period", after its initial examination beyond which it is precluded from reassessing the taxpayer (i.e., reassessment of the taxation year becomes statute-barred). The normal reassessment period is generally three or four years, depending on the type of taxpayer.

In support of the new mandatory disclosure rules, it is proposed 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. As a result, if a taxpayer does not comply with a mandatory disclosure reporting requirement for a taxation year in respect of a transaction, a reassessment of the year in respect of the transaction would not become statute-barred.

Penalties

The BEPS Action 12 Report recommends that countries introduce financial penalties that apply when disclosure rules are not complied with and that consideration be given to percentage-based penalties based upon transaction size or the extent of any tax savings.

Taxpayer Penalty

To support the proposed reporting requirements, it is proposed that, with respect to persons who enter into reportable or notifiable transactions, or for whom a tax benefit results from a reportable or notifiable transaction, a penalty of $500 per week apply for each failure to report a reportable transaction or a notifiable transaction,

Promoter Penalty

It is also proposed that, with respect to advisors and promoters of reportable or notifiable transactions, as well as with respect to persons who do not deal at arm's length with them and who are entitled to a fee with respect to the transactions, a penalty be imposed for each failure to report equal to the total of:

In order to avoid imposing two sets of penalties upon a person who both 1) enters into a reportable or notifiable transaction for the benefit of another person, and 2) is a person who does not deal at arm's length with an advisor or promoter in respect of the reportable or notifiable transaction and is entitled to a fee, it is proposed that such a person be subject only to the greater of the penalties discussed above.

Uncertain Tax Treatment Penalty

For corporations subject to the requirement to report uncertain tax treatments, it is proposed that the penalty for failure to report each particular uncertain tax treatment be $2,000 per week, up to a maximum of $100,000.

Avoidance of Tax Debts

The Income Tax Act has an anti-avoidance rule (the "tax debt avoidance rule") that is intended to prevent taxpayers from avoiding their tax liabilities by transferring their assets to non-arm's length persons for insufficient consideration. In these circumstances, the rule causes the transferee to be jointly and severally liable with the transferor for tax debts of the transferor for the current or any prior taxation year, to the extent that the value of the property transferred exceeds the amount of consideration given for the property.

Some taxpayers are engaging in complex transactions that attempt to circumvent the tax debt avoidance rule. This planning seeks to avoid the technical application of the rule by:

This planning is often packaged with highly aggressive tax plans that attempt to eliminate the underlying tax liability of the transferor so that, if the latter planning fails, the Canada Revenue Agency would be unable to collect the tax debt because the indebted taxpayer has been stripped of their assets.

Budget 2021 proposes a number of measures to address this planning, as well as a penalty for those who devise and promote such schemes. The specific proposals are outlined below.

Deferral of Tax Debts

An anti-avoidance rule would be introduced that would provide that, for the purposes of the tax debt avoidance rule, a tax debt would be deemed to have arisen before the end of the taxation year in which a transfer of property occurs if it is reasonable to conclude that:

Avoidance of Non-Arm's Length Status

Budget 2021 proposes an anti-avoidance rule that would provide that, for the purposes of the tax debt avoidance rule, a transferor and transferee that, at the time of a transfer of property, would otherwise be considered to be dealing with each other at arm's length, would be deemed to have not been dealing with each other at arm's length at that time if:

Valuations

A rule would be introduced such that, for transfers of property that are part of a series of transactions or events, the overall result of the series would be considered in determining the values of the property transferred and the consideration given for the property, rather than simply using those values at the time of the transfer.

Penalty

A penalty would also be introduced for planners and promoters of tax debt avoidance schemes. The penalty would be equal to the lesser of:

This penalty would mirror an existing penalty in the so-called "third-party civil penalty" rules in the Income Tax Act in respect of certain false statements, including the standard for its application.

Application

The rules would apply in respect of transfers of property that occur on or after Budget Day.

Other Statutes

Similar amendments would be made to comparable provisions in other federal statutes (e.g., section 325 of the Excise Tax Act, section 297 of the Excise Act, 2001 and section 161 of the Greenhouse Gas Pollution Pricing Act).

Audit Authorities

The Income Tax Act provides the Canada Revenue Agency (CRA) with the authority to audit taxpayers and otherwise ensure compliance with the Income Tax Act. The scope of this authority was the subject of a recent court decision which called into question the extent to which CRA officials can require persons to answer all proper questions and to provide all reasonable assistance relating to the administration or enforcement of the Income Tax Act. The decision also called into question the extent to which CRA officials can require that questions be answered orally.

To ensure that the CRA has the authority it needs to conduct audits and undertake other compliance activities, Budget 2021 proposes amendments to the Income Tax Act, the Excise Tax Act, the Excise Act, 2001, the Air Travellers Security Charge Act and Part 1 of theGreenhouse Gas Pollution Pricing Act. These amendments would confirm that CRA officials have the authority to require persons to answer all proper questions, and to provide all reasonable assistance, for any purpose related to the administration or enforcement of the relevant statute. They would also provide 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. These amendments would allow the CRA to undertake audit and other compliance activities in the same manner as it did prior to the decision.

These measures would come into force on Royal Assent.

International Tax Measures

Base Erosion and Profit Shifting

The government is committed to safeguarding Canada's tax system and to that end continues to be an active participant in multilateral efforts to address base erosion and profit shifting (BEPS). BEPS primarily refers to international tax planning arrangements used by multinational enterprises to reduce their taxes by exploiting the interaction between domestic and international tax rules – for example, through shifting profits earned in Canada to other jurisdictions. (Some BEPS issues also have implications for domestic tax avoidance arrangements, and need not focus exclusively upon planning arrangements used by multinational enterprises.) The government has already implemented the measures agreed to as minimum standards under the action plan developed by the Organisation for Economic Co-operation and Development (OECD) and the Group of 20 (G20) to address BEPS (the BEPS Action Plan). These minimum standards address:

Canada has followed through on other BEPS recommendations by accepting the new transfer pricing guidance developed under the BEPS project, continuing to strengthen its robust foreign affiliate regime, and ratifying the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (which allows countries to modify the application of their existing tax treaties to put in place anti-BEPS measures without having to individually renegotiate those treaties).

Budget 2021 builds on this work by proposing to implement the best practices recommended by the BEPS Action Plan on interest deductibility and hybrid mismatch arrangements. More details on the interest deductibility and hybrid mismatch arrangements measures are set out below. In addition, the government is proposing consultations on enhancements to Canada's transfer pricing and mandatory disclosure rules. The transfer pricing and mandatory disclosure measures are discussed elsewhere in these budget documents.

Interest Deductibility Limits

In general, businesses obtain external funding for their operations through either debt or equity. In Canada, as in most jurisdictions, interest expenses in respect of such debt are generally deductible against the income of the borrower. However, the deductibility of interest raises the potential that excessive debt or interest expense can be placed in Canadian businesses in a way that erodes the tax base, for example, through:

A number of rules provide some measure of protection of the Canadian tax base from erosion due to excessive debt and interest expense. These include the thin capitalization rules, which limit the deductibility of interest expense where the amount of debt owing to specified non-residents exceeds a 1.5-to-1 debt-to-equity ratio. However, the scope of these rules is limited.

A number of countries – notably other members of the G7 and the European Union member states – have introduced, or are in the process of introducing, limitations on interest deductibility that are consistent with the recommendations in the Action 4 Report of the BEPS Action Plan. The recommended approach described in that report limits the amount of net interest expense (i.e., interest expense, including payments economically equivalent to interest, as well as other financing-related expenses, less interest and financing-related income) that may be deducted to a fixed share of earnings. This "earnings-stripping" approach to limiting interest deductibility provides broad protection against base erosion, while still allowing businesses to deduct reasonable amounts of interest.

Budget 2021 proposes to introduce an earnings-stripping rule consistent with the recommendations in the Action 4 Report. The new rule would limit the amount of net interest expense that a corporation may deduct in computing its taxable income to no more than a fixed ratio of "tax EBITDA", which is that corporation's taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization, where each of these items is as determined for tax purposes. For these purposes:

The new earnings-stripping rule would also apply to trusts, partnerships and Canadian branches of non-resident taxpayers.

Exemptions from the new rule would be available for:

Interest denied under the earnings-stripping rule would be able to be carried forward for up to twenty years or back for up to three years. Denied interest would be allowed to be carried back to taxation years that begin prior to the effective date of the rule, to the extent that the taxpayer would have had the capacity to absorb these denied expenses, had the proposed rule been in effect for those years. In determining whether the taxpayer would have had the capacity to absorb the denied expenses in those years, any such capacity would be reduced by overall net interest expense, in aggregate for all those years, of Canadian members of the taxpayer's group that exceeded the fixed ratio (or the group ratio, discussed below, if higher).

Canadian members of a group that have a ratio of net interest to tax EBITDA below the fixed ratio would generally be able to transfer the resultant unused capacity to deduct interest to other Canadian members of the group whose net interest expense deductions, including denied deductions carried over from another year, would otherwise be limited by the rule. The definition of a group for this purpose will be included in the draft legislative proposals.

The proposed measure also includes a "group ratio" rule that would allow a taxpayer to deduct interest 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 that a higher deduction limit would be appropriate. The determination of the amount of unused capacity to deduct interest, which can be transferred between the Canadian members of a group, would take into consideration the higher group ratio.

The consolidated group, for purposes of the group ratio rule, would comprise the parent company and all of its subsidiaries that are fully consolidated in the parent's audited consolidated financial statements. Measures of net third party interest expense and book EBITDA under this rule would be based on the group's audited consolidated financial statements with appropriate adjustments, including an exclusion for certain interest payments to creditors that are outside the consolidated group but are related to, or are significant shareholders of, Canadian group entities. As set out in the Action 4 report, adjustments would also be necessary to address the impact of entities with negative book EBITDA. These adjustments would ensure that, where a group has negative book EBITDA, such that it is not possible to calculate a meaningful group ratio, the group can nonetheless benefit from the group ratio rule. Adjustments would also be made to ensure that, where the group as a whole has positive book EBITDA but includes one or more entities with negative book EBITDA, the group does not benefit from an inappropriately high group ratio.

Consistent with the rationale of the group ratio rule, it is expected 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. Measures to reduce the compliance burden on these entities and groups will be explored.

While there are base erosion risks associated with interest deductions by financial institutions, there are challenges in applying an earnings-stripping rule to certain types of financial institutions, and there is no clear way to address these challenges. One reason is that many financial institutions earn substantial amounts of interest income as part of their regular business activity and these amounts may frequently exceed their interest expense. As the proposal is based on a concept of net interest expense, this could result in the proposed earnings-stripping rule having no impact on these financial institutions, and could provide significant capacity to shelter the interest expense of other members of the financial institution's group. It is therefore proposed to not allow banks and life insurance companies to transfer unused capacity to deduct interest to other members of their corporate groups that are not also regulated banking or insurance entities. Further consideration will be given to whether there are targeted measures that could address base erosion concerns associated with excessive interest deductions by regulated banks and life insurance companies, and comments are invited from stakeholders in this regard.

In order to facilitate transition to the new rule and in particular having regard to the impact of the pandemic on corporate earnings, it would be phased in, with a fixed ratio of 40 per cent for taxation years beginning on or after January 1, 2023 but before January 1, 2024 (the transition year), and 30 per cent for taxation years beginning on or after January 1, 2024. In addition, taxpayers that have interest deductions denied for the transition year would be able to carry back the denied interest and deduct it in any of the three preceding years, as discussed above, using the 40-per-cent fixed ratio (or the group ratio for that earlier year, if higher) to determine their capacity to absorb carried-back interest in those preceding years. Where interest deductions are denied for a year following the transition year, carrybacks of denied interest to the transition year or an earlier year would be allowed using the 30-per-cent fixed ratio (or the group ratio for the transition year or that earlier year, as the case may be, if higher) to determine their capacity to absorb carried-back interest in those preceding years. Carrybacks to the transition year would also be subject to the constraint, similar to the provision described above in relation to pre-transition years, that the taxpayer's capacity in the transition year to absorb carried-back denied interest would be reduced by the overall deductible net interest expense of Canadian members of the taxpayer's group that exceeded the 30-per-cent ratio (or the group ratio, if higher) in the transition year. For example, the unused capacity in the transition year of an entity with a tax-EBITDA ratio of 25 per cent (and ignoring the group ratio for purposes of this example) would be reduced to the extent another Canadian group entity incurred net interest expense in the transition year in excess of 30 per cent of its tax EBITDA and the deduction of this excess interest expense was not denied in the transition year by virtue of the 40-per-cent fixed ratio in that year.

This measure would apply to taxation years that begin 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-per-cent 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.

Hybrid Mismatch Arrangements

Hybrid mismatch arrangements are cross-border tax avoidance structures that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce mismatches in tax results.

The Action 2 report of the BEPS Action Plan recommends detailed rules for countries to adopt in their domestic legislation to ensure that multinational enterprises cannot derive tax benefits from the use of hybrid mismatch arrangements. The two main forms of hybrid mismatch addressed by the Action 2 recommendations are:

The Action 2 recommendations also address a form of hybrid mismatch known as imported mismatches. These generally arise where a payment is deductible by an entity resident in one country and included in the ordinary income of a recipient entity resident in a second country, but that ordinary income is set off against a deduction under a hybrid mismatch arrangement between the second entity and an entity resident in a third country.

A supplement to the Action 2 report recommends additional rules to address branch mismatch arrangements, which generally produce mismatches similar to hybrid mismatch arrangements. These mismatches occur where the residence country of a taxpayer takes a different view from that of the country where the taxpayer's branch is located as to the allocation of income and expenditures between the two countries.

The Action 2 recommendations reflect a broad international consensus that hybrid mismatch and branch mismatch arrangements (collectively, hybrid arrangements) significantly erode the tax bases of affected countries. Hybrid arrangements may also have other adverse effects, such as distorting investment decisions and providing an unfair competitive advantage to multinational enterprises over domestic businesses.

The Action 2 report recognizes that coordinated international action is required in order to address the negative impacts of hybrid arrangements, without giving rise to double taxation or other unintended consequences. Accordingly, the Action 2 recommendations outline a common approach that is intended to ensure countries have consistent rules that operate in a coordinated manner. A number of countries (including the United States, the United Kingdom, Australia and the European Union member states) have already implemented, or committed to implement, rules consistent with the Action 2 recommendations.

There are existing Canadian income tax rules that the government can use to challenge certain hybrid arrangements. However, further specific legislative measures would provide certainty and, as noted above, there are significant advantages to adopting the common approach in the Action 2 report.

Budget 2021 proposes to implement rules consistent with the Action 2 recommendations, with appropriate adaptations to the Canadian income tax context.

In general terms, under the main proposed rules, payments made by Canadian residents under hybrid mismatch arrangements would not be deductible for Canadian income tax purposes to the extent that they give rise to a further deduction in another country or are not included in the ordinary income of a non-resident recipient. Conversely, to the extent that a payment made under such an arrangement by an entity that is not resident in Canada is deductible for foreign income tax purposes, no deduction in respect of the payment would be permitted against the income of a Canadian resident. Any amount of the payment received by a Canadian resident would also be included in income, and, if the payment is a dividend, it would not be eligible for the deduction otherwise available for certain dividends received from foreign affiliates. In effect, these rules would neutralize a mismatch by aligning the Canadian income tax treatment with the income tax treatment in the foreign country.

Rules implementing other Action 2 recommendations – such as those on branch mismatch arrangements, imported mismatch arrangements and reverse hybrids (i.e., entities that are fiscally transparent under the laws of the country where they are formed, but are treated as a separate entity under the laws of an investor's country) – would be introduced to the extent relevant and appropriate in the Canadian context.

Consistent with the Action 2 recommendations:

The proposed rules to address hybrid arrangements would be implemented in two separate legislative packages. The first package would comprise rules implementing (with any modifications required for the Canadian income tax context) the recommendations in Chapters 1 and 2 of the Action 2 report. These would generally be intended to neutralize a deduction/non-inclusion mismatch arising from a payment in respect of a financial instrument.

The first legislative package would be released for stakeholder comment later in 2021, and those rules would apply as of July 1, 2022.

The second legislative package would be released for stakeholder comment after 2021, and those rules would apply no earlier than 2023. This package would comprise rules consistent with the Action 2 recommendations that were not addressed in the first package.

Sales and Excise Tax Measures

Application of the GST/HST to E-commerce

In the Fall Economic Statement 2020, the government of Canada proposed a number of changes to the Goods and Services Tax/Harmonized Sales Tax (GST/HST) system to ensure that the GST/HST applies in a fair and effective manner to the growing digital economy:

These measures would come into force on July 1, 2021.

The government also released draft legislative proposals in relation to the measures and invited interested parties to submit comments on these proposals and the associated draft legislation.

Budget 2021 proposes amendments to these proposals and the associated draft legislation, which take into consideration comments received from stakeholders. These amendments are intended to ensure that the proposals and draft legislation operate effectively and to clarify the application of certain provisions. The substantive proposed amendments are set out below.

Proposed Amendments

Safe Harbour Rules

Under the proposals, platform operators would be required to collect and remit the GST/HST on the supplies they facilitate by third parties that are not registered under the existing GST/HST framework. In many cases, platform operators may rely on information provided by third parties on the transactions they make for determining whether the platform operator is required to collect and remit tax.

Budget 2021 proposes additional rules that would:

These proposed rules would ensure that a platform operator is not held liable for failing to collect and remit tax as a result of having relied in good faith on information provided by a third-party supplier. Under the proposed rules, the platform operator would be relieved from liability to the extent that it did not collect and remit tax (i.e., where it partially collected tax, it would remain liable for those amounts) and the third-party supplier that provided false information would be liable for any amounts not collected.

Eligible Deductions

Budget 2021 proposes an amendment to clarify that suppliers registered for the GST/HST under the simplified framework are eligible to deduct amounts for bad debts and certain provincial HST point-of-sale rebates to purchasers (e.g., in respect of audio books) from the tax that they are required to remit, and that public libraries and similar institutions are eligible to claim a rebate for the GST paid on audio books acquired from those suppliers. For instance, a supplier that writes off a bad debt in respect of an amount of GST/HST that they had remitted but for which they are subsequently unable to collect from a purchaser, would be able to deduct the uncollectable bad debt amount from the GST/HST that they are required to remit for a reporting period.

Threshold Amount Determination

Under the proposal for cross-border digital products and services, a non-resident vendor or distribution platform operator with sales to consumers in Canada that exceed, or are expected to exceed, $30,000 over a 12-month period is required to register for the GST/HST under the simplified framework and charge the GST/HST on their sales. Budget 2021 proposes an amendment to the proposals to clarify that supplies of digital products or services that are GST/HST-free (i.e., zero-rated) are not included in the calculation of the threshold amount for determining if a person is required to be registered for the GST/HST under the simplified framework.

Platform Operator Information Return

Under the proposals, platform operators would be required to file an annual information return if they facilitate a supply of short-term accommodation situated in Canada or a sale by a non-registered vendor of goods that are located in a fulfillment warehouse in Canada. Budget 2021 proposes an amendment to clarify that the requirement to file an annual information return applies only to platform operators that are registered or are required to be registered for the GST/HST.

Authority for the Minister of National Revenue to Register a Person

The proposals describe the non-resident vendors and platform operators that are required to register under the simplified framework and obligations for these entities. Budget 2021 proposes an amendment to provide the Minister of National Revenue the authority to register a person that the Minister believes should be registered under the simplified framework. This authority already exists in respect of the existing GST/HST framework and in the rules of other jurisdictions that have adopted similar e-commerce measures.

Administration and Compliance Approach

The government expects that affected businesses and platform operators will comply with their obligations to register, collect and remit the GST/HST as set out under the new rules and legislative provisions to ensure that the GST/HST applies effectively and fairly to e-commerce transactions.

In line with the best practices of other jurisdictions that have adopted similar measures, the Canada Revenue Agency (CRA) will work closely with affected businesses and platform operators to assist them in meeting their obligations. Where the affected businesses and platform operators show that they have taken reasonable measures but are unable to meet their new obligations for operational reasons, the CRA will take a practical approach to compliance and exercise discretion in administering these measures during a 12-month transition period, starting from the July 1, 2021 coming into force date.

Additional Technical Information and Contact Information

Persons seeking additional technical information regarding the proposed measures may contact the CRA at 1-833-585-1463 (for calls from Canada and the United States – toll-free) or 1-613-221-3154 (for calls from elsewhere – collect calls accepted). Persons may also request a written technical explanation from the CRA.

Input Tax Credit Information Requirements

Under the GST/HST, businesses can claim input tax credits (ITCs) to recover the GST/HST that they pay for goods and services used as inputs in their commercial activities. Allowing businesses to recover the GST/HST in this manner helps ensure that the tax that they pay on their inputs does not become embedded in the final price of goods and services, and thereby makes Canadian businesses more competitive.

Information Requirements to Support ITC Claims

Businesses must obtain and retain certain information in order to support their ITC claims. The required information is contained in documents provided by their suppliers, such as invoices or receipts.

The information requirements for these documents are graduated, with progressively more information required when the amount paid or payable in respect of a supply equals or exceeds thresholds of $30 or $150.

In addition, under the ITC information rules, either the supplier or an intermediary (i.e., a person that causes or facilitates the making of a supply on behalf of the supplier) must provide its business name and, depending on the amount paid or payable in respect of the supply, its GST/HST registration number, on the supporting documents. However, for the purposes of these rules, an intermediary currently does not include a billing agent (i.e., an agent that collects consideration and tax on behalf of an underlying vendor but does not otherwise cause or facilitate a supply). Billing agents therefore currently cannot provide their GST/HST registration number and/or business name as part of the required ITC information. Instead, the recipient of the supply must obtain the business name and registration number of the underlying vendor.

To simplify tax compliance for businesses, Budget 2021 proposes to increase the current ITC information thresholds to $100 (from $30) and $500 (from $150), and to allow billing agents to be treated as intermediaries for purposes of the ITC information rules.

These measures would come into force on the day after Budget Day.

GST New Housing Rebate Conditions

The GST New Housing Rebate entitles homebuyers to recover 36 per cent of the GST (or the federal component of the HST) paid on the purchase of a new home priced up to $350,000. The maximum rebate is $6,300. The GST New Housing Rebate is phased out for new homes priced between $350,000 and $450,000. There is no GST New Housing Rebate for new homes priced at $450,000 or more.

In addition to the above price thresholds, several other conditions must be met in order for a purchaser to qualify for the GST New Housing Rebate. In particular, the purchaser must be acquiring the new home for use as their primary place of residence or as the primary place of residence of a relation (i.e., an individual related by blood, marriage, common-law partnership or adoption, or a former spouse or former common-law partner). Under the current rules, if two or more individuals who are not considered relations for GST New Housing Rebate purposes buy a new home together, all of those individuals must meet this condition – otherwise none of them will be eligible for the GST New Housing Rebate.

Budget 2021 proposes to remove the condition that where two or more individuals buy a new home together, each of them must be acquiring the home for use as their primary place of residence or the primary place of residence of a relation. Instead, the GST New Housing Rebate would be available as long as the new home is acquired for use as the primary place of residence of any one of the purchasers or a relation of any one of the purchasers.

In addition to new homes purchased from a builder, the GST New Housing Rebate is available in respect of owner-built homes, co-op housing shares and homes constructed on leased land. The proposed change to the rebate conditions would also be applicable in these circumstances. The proposed change would also apply to new housing rebates in respect of the provincial component of the HST.

This measure would apply to a supply made under an agreement of purchase and sale entered into after Budget Day. However, in the case of a rebate for owner-built homes, the measure would apply where construction or substantial renovation of the residential complex is substantially completed after Budget Day.

Rebate of Excise Tax for Goods Purchased by Provinces

Under the Excise Tax Act, provinces are provided relief from the federal excise tax embedded in the price of motive fuels, air conditioners in automobiles, and fuel inefficient vehicles (i.e., the "green levy"), which they purchase or import for the province's own use. In particular, when these goods are sold to a province, for the province's own use, either the province or the vendor is entitled to a rebate equal to the amount of the embedded tax (the "provincial-use rebate").

The provincial-use rebate applies only in a province that does not have an agreement with the federal government under which, in general terms, the province and the federal government mutually agree to pay each other's taxes. Where a province that does not have such an agreement with the federal government purchases these goods from a vendor, the provincial-use rebate can either be claimed by the province itself (in which case the province would be expected to have paid the embedded tax) or by the vendor (in which case the province would be expected not to have paid the embedded tax). Only one party (either the vendor or the province) is entitled to the rebate.

To clarify which party is eligible to claim the provincial-use rebate, Budget 2021 proposes to create a joint election mechanism to specify that the vendor alone would be eligible to apply for the rebate only if it jointly elects with the province to be the eligible party. If no joint election were made, then only the province would be eligible to apply for the rebate.

This measure would apply in relation to these goods purchased or imported by a province on or after January 1, 2022.

Excise Duty on Tobacco

Budget 2021 proposes to increase the tobacco excise duty rate by $4 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates for other tobacco products outlined in Table 9.

Inventories of cigarettes held by certain manufacturers, importers, wholesalers and retailers at the beginning of the day after Budget Day would be subject to an inventory tax of $0.02 per cigarette (subject to certain exemptions). Taxpayers would have until June 30, 2021 to file a return and pay the cigarette inventory tax.

Table 9
Tobacco Excise Duty Rate Structure
Products Current Excise Duty Rates (Effective April 1, 2021) Proposed Excise Duty Rates after Budget Day
Cigarettes (per five cigarettes or fraction thereof)
$0.62725 $0.72725
Tobacco Sticks (per stick)
$0.12545 $0.14545
Manufactured Tobacco (per 50 grams or fraction thereof)
$7.84062 $9.09062
Cigars
$27.30379 per 1,000 cigars plus the greater of $0.09814 per cigar and 88 per cent of the sale price or duty-paid value $31.65673 per 1,000 cigars plus the greater of $0.11379 per cigar and 88 per cent of the sale price or duty-paid value

This measure would come into force on the day after Budget Day.

Excise Duty on Vaping Products

Budget 2021 proposes to implement a tax on vaping products in 2022 through the introduction of a new excise duty framework.

The government invites input from industry and stakeholders on these proposals to help ensure the effective imposition and collection of excise duties on vaping products. Written comments should be sent by June 30, 2021 to: fin.vaping-taxation-vapotage.fin@canada.ca.

Tax Base

A new excise duty framework on vaping products is proposed to be introduced as part of the existing Excise Act, 2001 ("the Act"), which currently applies excise duties on tobacco, wine, spirits, and cannabis products. The new duty would apply solely to vaping liquids that are produced in Canada or imported and that are intended for use in a vaping device in Canada. These liquids generally contain vegetable glycerin, as well as any combination of propylene glycol, flavouring, nicotine, or other ingredients, all of which must comply with Health Canada regulations. The new duty would apply to these vaping liquids whether or not they contain nicotine. Cannabis-based vaping products would be explicitly exempt from this framework, as they are already subject to cannabis excise duties under the Act.

Duty Rate

The proposed framework would impose a single flat rate duty on every 10 millilitres (ml) of vaping liquid or fraction thereof, within an immediate container (i.e., the container holding the liquid itself). This rate could be in the order of $1.00 per 10 ml or fraction thereof, and the excise duty would be calculated and imposed based on the volume of the smallest immediate container holding the liquid.

Generally, the flat rate would be imposed and payable at the time of packaging or importation. The last federal licensee in the supply chain who packaged the vaping product for final retail sale, including vape shops holding an excise licence, as applicable, would be liable to pay the applicable excise duty.

Administration

The Canada Revenue Agency (CRA) would be responsible for administering and enforcing the new excise duty framework for vaping products, including ensuring compliance with the general application and administrative rules contained within the Act. The Canada Border Services Agency (CBSA) would be responsible for administering and enforcing the framework at the border. To promote compliance with the taxation of vaping products, penalty and offence provisions broadly similar to those applying to alcohol, tobacco and cannabis duties would apply.

Licensing and Registration Requirements

Manufacturers and importers of dutiable vaping products would be required to obtain a licence for their activities from the CRA. This would include any vape shops that would like to obtain and then use non-duty paid, bulk vaping products to mix or manufacture new vaping products on-site for immediate or subsequent sale to final customers, upon which duty would apply and need to be remitted.

Applicants who wished to obtain licences from the CRA would be expected to meet a number of criteria, similar to those for other excisable products already enumerated under the Act and its regulations, such as not having acted to defraud the government in the past five years. Licences for vaping product manufacturers and importers would be issued for a maximum of three years and would not be automatically renewed.

Excise Stamping Requirements

It is proposed that all dutiable vaping products removed from the premises of a federal licensee to enter the Canadian duty-paid market would be required to be packaged in a container intended for sale at the retail level (a "retail package"), and would be required to bear an excise stamp showing that duties have been paid. As with the current tobacco and cannabis stamping programs, a stamp would need to be affixed to a retail package:

The issuance of stamps would be administered by the CRA, and the stamps would be sold through an authorized provider.

The Act would also prohibit the possession or sale of any unstamped dutiable vaping products by a person unless otherwise allowed under the Act. These allowances would include those made for persons licensed or registered with the CRA, and could further include those for:

Reporting Requirements

All licensees would be required to submit to the CRA a monthly duty and information return. The return would include the following required information:

Imports and Exports

Importations of vaping products subject to the proposed taxation framework would be subject to excise duties, unless duty is not payable (e.g., if the product is not yet in a state where it could be entered into the retail market for sale to a final consumer). Exportations of vaping products would not be subject to excise duties. Stamps would also be made available to producers outside of Canada, as is the case for tobacco products.

Non-Dutiable Vaping Products

Aside from exports of non-duty paid vaping products, the Act could provide for certain circumstances in which vaping products would be non-dutiable. For example, duty would not be payable on vaping products taken for analysis or re-worked/destroyed (in a manner approved by the Minister) by a licensee or by the Minister. This would include vaping products delivered to a person prescribed by regulations for destruction by that person in circumstances prescribed by regulations.

Personal Use

Registration and licensing would not be required for individuals who mix vaping liquids strictly for their own personal consumption.

Federal-provincial-territorial Taxation Coordination

The government will also work collaboratively with any provinces and territories that may be interested in a federally coordinated approach to taxing these products, which could be achieved through the implementation of taxation on a common base of vaping products through federal legislation.

A coordinated framework for the taxation of vaping products could include an initial federal rate, with an additional rate to follow in respect of products intended for consumption in provinces and territories choosing to participate. Licensees would have to apply an excise stamp with an indicator (e.g., colour) of the intended provincial or territorial market.

Tax on Select Luxury Goods

Budget 2021 proposes to introduce a tax on the retail sale of new luxury cars and personal aircraft priced over $100,000, and boats priced over $250,000, effective as of January 1, 2022. For vehicles, aircraft and boats sold in Canada, the tax would apply at the point of purchase if the final sale price paid by a consumer (not including the GST/HST or provincial sales tax) is above the $100,000 or $250,000 price threshold, as the case may be. Importations of vehicles, aircraft and boats would also be subject to the tax.

Tax Base

Luxury Vehicles

It is proposed that all new passenger vehicles typically suitable for personal use be included in the base, including coupes, sedans, station wagons, sports cars, passenger vans and minivans equipped to accommodate less than 10 passengers, SUVs, and passenger pick-up trucks.

It is proposed that the following vehicles typically purchased for personal use be excluded from the base:

For greater certainty, off-road, construction, and farm vehicles would fall outside the scope of the tax. Similarly, certain commercial (e.g., heavy-duty vehicles such as some trucks and cargo vans) and public sector (such as buses, police cars and ambulances) vehicles, as well as hearses, would not be subject to the tax.

Aircraft

It is proposed that the tax apply to all new aircraft typically suitable for personal use, including aeroplanes, helicopters and gliders. As a general rule, it is proposed that large aircraft typically used in commercial activities, such as those equipped for the carriage of passengers and having a certified maximum carrying capacity of more than 39 passengers, be excluded from the base. Smaller aircraft used in certain commercial (such as public transportation) and public sector (police, military and rescue aircraft, air ambulances) activities would also be excluded from the base.

Boats

It is proposed that the tax apply to new boats such as yachts, recreational motorboats and sailboats, typically suitable for personal use. Smaller personal watercraft (e.g., water scooters) would be excluded from the base. For greater certainty, floating homes, commercial fishing vessels, ferries, and cruise ships would fall outside the scope of the tax.

Tax Rate

For vehicles and aircraft priced over $100,000, the amount of the tax would be the lesser of 10 per cent of the full value of the vehicle or the aircraft, or 20 per cent of the value above $100,000.

For boats priced over $250,000, the amount of the tax would be the lesser of 10 per cent of the full value of the boat or 20 per cent of the value above $250,000.

Point of Imposition

The tax would generally apply at the final point of purchase of new luxury vehicles, aircraft and boats in Canada. In the case of imports, application would generally be either at the time of importation (in cases where there will not be a further sale of the goods in Canada) or at the time of the final point of purchase in Canada following importation.

Upon purchase or lease, the seller or lessor would be responsible for remitting the full amount of the federal tax owing, regardless of whether the good was purchased outright, financed, or leased over a period of time.

Exports will not be subject to the tax, in line with their treatment under other taxation regimes.

Treatment under the GST/HST

The GST/HST would apply to the final sale price, inclusive of the proposed tax.

Next Steps

Further details will be announced in the coming months.

Customs Tariff and Tax Measures

Duty and Tax Collection on Imported Goods

Budget 2021 proposes amendments to the Customs Act to improve the collection of duties and taxes on imported goods.

Currently, some importers with foreign ties value their goods at a lower price than most Canadian importers by using a previous foreign sale price. This practice results in a lower value of duties and taxes paid when importing these goods into Canada. The amendments to the Customs Act and related regulations would ensure that all importers value their goods using the value of the last sale for export to a purchaser in Canada, ensuring fairness for all importers and enhancing consistency with international rules.

A second element to the proposal would support a broad modernization of payment processes for commercial importers in the Customs Act and regulations. These changes will support the implementation and enforcement of a streamlined and harmonized billing cycle for commercial importations that will include flexibility to make good-faith corrections without incurring penalties or interest. These changes would coincide with implementation of key functionalities of the CBSA Assessment and Revenue Management initiative that is set to serve as a single portal for commercial importers.

Previously Announced Measures

Budget 2021 confirms the government's intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

Budget 2021 also reaffirms the government's commitment to move forward as required with technical amendments to improve the certainty and integrity of the tax system.


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