This article was authored by Beard Winter LLP corporate lawyers Brandon Tigchelaar, Partner, Business and Financial Services Group, Lucinda Main, Partner, Trusts and Estates Group, and Andrea Tratnik, Associate, Trusts and Estates Group.
As many commentators noted upon the release of the budget on April 19, 2021 (“Budget 2021”), this is the Liberal government’s first budget since the last election and is likely to be the last budget before the next election. As such, not unlike the March 2019 budget released in anticipation of a fall election, Budget 2021 had “something for everyone”.
Of course, the situation on the ground is radically different today than it was two years ago. Two years ago, some commenters were decrying the roughly $20 billion proposed deficit. Today, many are relieved that the 2020-2021 deficit will only be $350 billion, and are seemingly sanguine about a projected deficit for 2021-2022 of a further $150 billion. This difference in attitude has allowed the government to make many bold spending proposals that may have lasting effects on the Canadian landscape.
Below is a summary of items in Budget 2021 that are most likely to be significant to clients, but first:
What Wasn’t Included in the Budget
The government had indicated in the fall that the deficits being projected could be supported without meaningful changes to marginal tax rates. Notwithstanding this, budget watchers will be familiar with the annual concerns around changes to the capital gains inclusion rate, i.e., worries that instead of capital gains being taxable only as to one half, that the government will increase the taxable portion to two thirds, or even three quarters, which reared its head again this year. No such changes occurred on this front, though we will eat our collective hats if similar concerns are not circulated ahead of budget 2022.
Likewise, there were no changes to the marginal tax rates on personal or corporate income tax.
In addition, there was recent speculation that the budget would review and possibly eliminate the principal residence exemption, impose a wealth tax and/or address other loopholes perceived to benefit wealthy individuals. Such measures were not included in the budget. Concerns around the creation of a federal estate tax were also unfounded.
Measures Affecting Corporate Clients
Continuation of the CEWS and CERS Regimes into the Fall
The current iteration of the Canada Emergency Wage Subsidy (CEWS) runs through June 2021 and rather than cut the subsidy off in June Budget 2021 proposes to gradually reduce the benefit into the fall. Currently, the maximum benefit under the CEWS is 75%: this will fall to 60% for July, 40% for August, and 20% for September. Additionally, while the current iteration provides a subsidy for any decline in revenue, starting in the July period declines below 10% will no longer warrant a subsidy; benefits will likewise be declining as all levels of revenue decline.
Similar declines are contemplated for the Canada Emergency Rent Subsidy.
New Canada Recovery Hiring Program
This is a new program for eligible employers who increase the wages paid to employees in the June through November period, as against the four week period from March 14 to April 10 (or as against the same periods in 2019) and who simultaneously qualify for the CEWS during such period.
The subsidy will be in an amount equal to 50% of the incremental wage increase for the first three periods, declining on a straight line to 20% for the last period (October 24 to November 20, 2021). Employers may not simultaneously avail themselves of this new program and the CEWS in the same period.
Immediate Expensing of “Eligible Property”
Budget 2019 included measures for enhancing capital cost allowance to encourage investment in capital intensive businesses. Budget 2021 follows this trend, allowing businesses to immediately expense capital expenditures of up to $1.5 million per year on “eligible property” acquired after April 19, 2021, and coming into use on or before January 1, 2024. “Eligible property” will be most property under the capital cost allowance regime with allowance rates over 10%.
Denial of “Excess” Interest Deductions
Budget 2021 provides for a limitation on claiming interest expense to a percentage of “tax EBITDA” (40% in 2023, being the transition year, and 30% thereafter), such that a corporate taxpayer will not be able to claim interest expenses in excess of this amount. The provision will not apply to interest expenses less than $250,000, or to CCPCs with less than $15 million in capital. For corporate groups, the determination of excess interest could be made on a consolidated basis (within the Canadian members of the group).
This provision is clearly meant to address base erosion – where multi-nationals might attempt to move corporate earnings to low tax jurisdictions – but appears to apply even to companies (or corporate groups) that are purely Canadian.
Further, while there was some hope that these rules – which were expected given that they are consistent with the OECD BEPS Action Plan recommendations – would supplant the existing “thin capitalization” rules (where foreign funding of debt capital cannot exceed 60% of the enterprise’s equity), the two regimes will instead run in parallel.
Mandatory Disclosure Regime (MDR) Expanded
The largest negative change for some clients, and certainly for many tax planning professionals, is the expansion of the mandatory disclosure rules to require more reporting on more transactions.
Readers may recall that some years ago the federal government began requiring taxpayers to report certain “reportable transactions” undertaken. The definition of a “reportable transaction” is, prior to Budget 2021, one where the primary purpose was minimizing taxes, and where two of three benchmarks were met: (i) the promoter or advisor in entitled to a fee based on the amount the tax benefit, the availability of the benefit, or the number of people participating; (ii) the promoter or advisor obtains “confidential protection” from the participant (i.e., the participant can’t “tell his friends” what he’s doing); and (iii) the taxpayer or the promoter has contractual protection against the planning failing (i.e., protection against the planning being disallowed by CRA).
The new regime broadens the scope to capture any transaction that satisfied one of the three above criteria, and additionally reduces the threshold from a requirement that the primary purpose was tax minimization, to one where “one of the main purposes” is tax minimization – a nuanced difference, the importance of which will likely be determined by the courts.
Additionally, Budget 2021 creates a “notifiable transaction” regime, which is expected to look like what is in place in Quebec. The idea being that the Minister will list types of transactions that it views as suspect, and require both taxpayers and their advisors/promoters to report on such transactions, either with their tax returns, or within some period of the transaction being undertaken. The importance of this provision will be largely driven by what the Minister decides to put on the list of “notifiable transactions” in the coming years.
- Budget 2021 pledges to introduce a federal learning and child care system modelled on the Quebec system, with a view to bringing child care costs down to $10 per day within five years, and halving child care costs by the end of 2022;
- The introduction of a $15 minimum wage, while on its face meaningful, will not impact most clients, even those with minimum wage workers. The reason being that this minimum wage applies only to “federal works and undertakings” – think federal Crown corporations, banks, airlines, railroads, radio and television stations, port services, etc., as established in sections 91 and 92 of the Constitution;
- Starting in 2022, a luxury tax on automobiles and planes costing more than $100,000, and boats costing more than $250,000, of the lesser of 10% of the cost of the vehicle, or 20% of the cost in excess of the threshold amount – i.e., a car that costs $140,000 would attract tax equal to 20% of the $40,000 excess, or $8,000;
- In an attempt to cool a hot housing market, a tax equal to 1% of the value of the home on foreign owners of vacant (or “underused”) real estate – it is not yet clear what “underused” means in this context;
- To improve access to the Disability Tax Credit (DTC), Budget 2021 proposes (i) to update the list of functions of everyday life that is used for assessment for the DTC; and (ii) to recognize more activities in determining time spent on life-sustaining therapy and to reduce the minimum required frequency of therapy to qualify for the DTC;
- The previously announced digital services tax was contemplated in the Fall Economic Statement last November and will apply HST to foreign digital services, and a corporate tax of 3% of Canadian source revenue for large businesses from engagement with online users in Canada (mainly social media companies). This tax is expected to be replaced by a multilateral approach which has been in negotiations with international partners for some years;
- As similarly contemplated in the Fall Economic Statement, Canada is looking at “strengthening and modernizing” the general anti-avoidance rule;
- Plans to update Canada’s transfer pricing regime, to further protect the tax base from offshoring of corporate profit, in response to the Cameco court decision;
- Targeting of so-called hybrid mismatching rules, which take advantage of differences between tax regimes of various countries, allowing mainly corporations to take advantage of these differences to create unintended results. For instance, being allowed to deduct one expense in two separate jurisdictions, or making a payment from a group entity in one jurisdiction (for which the group gets a deduction), but not having to book corresponding revenue in the other jurisdiction; and
- Funding to allow CRA to uncover the use of trusts to evade Canadian tax and provide better service to executors and trustees.
Brandon Tigchelaar focuses on private mergers and acquisitions, general commercial matters, and assisting with planning and implementation of tax-efficient reorganizations of private entities.
Lucinda Main practises estate and trust planning and administration, acting for domestic and international companies, small businesses, and individuals.
Andrea Tratnik practises estate and trust planning and administration, acting for domestic and international companies, small businesses, and individuals.
Do you have questions about this topic? Email Brandon at firstname.lastname@example.org or call him at 416-306-1742. You can email Lucinda Main at email@example.com or call her at 416-306-1802. You can email Andrea at firstname.lastname@example.org or call her at 416-306-1815.