Finance Minister Chrystia Freeland presented the 2021 Federal Budget on April 19, 2021. The following is a summary of some of the relevant tax measures proposed.

Income Tax Measures Affecting Individuals

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Disability Tax Credit (DTC)

The rules with respect to disability tax credits have been expanded in the following areas:

• Mental functions for everyday life; and
• Life-sustaining therapy.

Specifically, Budget 2021 proposes to add, for the purposes of the DTC, the following mental functions necessary for everyday life include:

• attention;
• concentration;
• memory;
• judgement;
• perception of reality;
• problem-solving;
• goal-setting;
• regulation of behaviour and emotions;
• verbal and non-verbal comprehension; and
• adaptive functioning.

With respect to life-sustaining therapy, Budget 2021 proposes to add the following activities in determining time spent receiving therapy:

• allow reasonable time spent determining dietary intake and/or physical exertion to be considered part of the therapy, where this information is essential to, and is undertaken for the purpose of, determining the dosage of medication that must be adjusted on a daily basis;
• clarify that the exclusion of time for medical appointments does not apply to appointments to receive therapy or to determine the daily dosage of medication;
• provide that the exclusion of time for recuperation after therapy does not apply to medically required recuperation; and
• in the case of therapy that requires the daily consumption of a medical food or medical formula to limit intake of a particular compound to levels required for the proper development or functioning of the body, allow reasonable time spent on activities that are directly related to the determination of the amount of the compound that can be safely consumed to be considered part of the therapy.

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.

Increasing Old Age Security for Canadians 75 and Over

Budget 2021 announced an increase in Old Age Security (OAS) benefits for seniors age 75 and older.

The government plans to implement this commitment in two steps.

• Budget 2021 proposes to meet the immediate needs of this group of seniors by providing a one-time payment of $500 in August 2021 to OAS pensioners who will be 75 or over as of June 2022.
• Budget 2021 then proposes to introduce legislation to increase regular OAS payments for pensioners 75 and over by 10 per cent on an ongoing basis as of July 2022. This would increase the benefits for approximately 3.3 million seniors, providing additional benefits of $766 to full pensioners in the first year, and indexed to inflation going forward.

Changes to the Old Age Security Act would be made to implement the benefit increase as of July 2022, and to exempt the one-time payment from the definition of income for the Guaranteed Income Supplement.

Canada Workers Benefit (CWB)

The CWB is a non-taxable refundable tax credit that supplements the earnings of low- and modest-income workers and improves their work incentives.

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

• the phase-in rate from 26 per cent to 27 per cent for single individuals without dependents as well as families;
• the phase-out thresholds from $13,194 to $22,944 for single individuals without dependents and from $17,522 to $26,177 for families; and
• the phase-out rate from 12 per cent to 15 per cent.

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.

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

The Northern resident deduction applies to individuals who live in prescribed northern areas of Canada for at least six consecutive months beginning or ending in a taxation year. Budget 2021 expanded the deductions with respect to Northern residents. These expansions include both a residency component and a travel component.

Postdoctoral Fellowship Income

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 (“CRA”) for an adjustment to their RRSP room for the relevant years.

Tax Treatment of COVID-19 Benefit Amounts

Budget 2021 outlines the tax treatment with respect to certain COVID-19 benefit amounts. These measures will be discussed in a separate COVID-19 publication, to follow shortly.

Fixing Contribution Errors in Defined Contribution Pension Plans

Budget 2021 proposes to provide more flexibility to plan administrators of defined contribution pension plans to correct for both under-contributions and over-contributions.

Registration and Revocation Rules Applicable to Charities

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. These modifications extend to ineligible individuals acting as directors, trustees, officers or like officials who have connections with terrorist activities.

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 the abovementioned amendments would apply on Royal Assent.

Electronic Filing and Certification of Tax and Information Returns

Budget 2021 proposes various amendments to improve the administration of, and compliance with, the tax system. These are as follows:

Default Method of Correspondence 

Notices of Assessment

Budget 2021 proposes 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 CRA's My Business Account portal to electronic only. However, businesses could choose to also receive paper correspondence.

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

Information Returns

Budget 2021 proposes to allow issuers of T4A and T5 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

Filer of Information Returns

Budget 2021 proposes that the threshold for mandatory electronic filing of income tax information returns for a calendar year 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 clarifies 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:

• Forms prescribed under the Income Tax Act:
  • T183, Information Return for Electronic Filing of an Individual's Income Tax and Benefit Return;
  • T183CORP, Information Return for Corporations Filing Electronically; and
  • T2200, Declaration of Conditions of Employment.
• Forms prescribed under the Tax Rebate Discounting Act:
  • RC71, Statement of Discounting Transaction; and
  • RC72, Notice of the Actual Amount of the Refund of Tax.

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

Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners

Budget 2021 proposes to introduce a new national 1% tax on the value of non-resident, non-Canadian owned residential real estate considered to be vacant or underused. This tax would be levied annually beginning in 2022.

Beginning in 2023, all owners of residential property in Canada, other than Canadian citizens or permanent residents of Canada, would be required to file an annual declaration for the prior calendar year with the CRA in respect of each Canadian residential property they own, whether the owner is subject to tax in respect of the property for the year or not.

Income Tax Measures Affecting Businesses 

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Emergency Business Supports

Budget 2021 outlines certain emergency business supports pertaining to the COVID-19 situation. These measures will be discussed in a separate COVID-19 publication, to follow shortly.

Immediate Expensing (Capital Cost Allowance (“CCA”))

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.

Restrictions

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:

• neither the taxpayer nor a non-arm's length person previously owned the property; and
• the property has not been transferred to the taxpayer on a tax-deferred "rollover" basis.

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

Income Tax 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:

• 7.5 per cent, where that income would otherwise be taxed at the 15 per cent general corporate tax rate; and
• 4.5 per cent, where that income would otherwise be taxed at the 9 per cent small business tax rate.

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:

• manufacturing of solar energy conversion equipment, such as solar thermal collectors, photovoltaic solar arrays and bespoke supporting structures or frames, but excluding passive solar heating equipment (e.g., a masonry wall installed to absorb solar energy);
• manufacturing of wind energy conversion equipment, such as wind turbine towers, nacelles and rotor blades;
• manufacturing of water energy conversion equipment, such as hydroelectric, water current, tidal and wave energy conversion equipment;
• manufacturing of geothermal energy equipment;
• manufacturing of equipment for a ground source heat pump system;
• manufacturing of electrical energy storage equipment used for storage of renewable energy or for providing grid-scale storage or other ancillary services (e.g., voltage regulation), including battery, compressed air and flywheel storage systems;
• manufacturing of zero-emission vehicles (i.e., plug-in hybrid vehicles with a battery capacity of at least seven kilowatt-hours, electric vehicles and hydrogen-powered vehicles) and the conversion of vehicles into zero-emission vehicles;
• manufacturing of batteries and fuel cells for zero-emission vehicles;
• manufacturing of electric vehicle charging systems and hydrogen refuelling stations for vehicles;
• manufacturing of equipment used for the production of hydrogen by electrolysis of water;
• production of hydrogen by electrolysis of water; and
• production of solid, liquid or gaseous fuel (e.g., wood pellets, renewable diesel and biogas) from either carbon dioxide or specified waste material (i.e., 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), but excluding the production of by-products which is a standard part of another industrial or manufacturing process (e.g., the production of wood chips, black liquor or hog fuel as part of another wood transformation process).

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.

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

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.

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.

Capital Cost Allowance for Clean Energy Equipment

Budget 2021 is expanding Classes 43.1 and 43.2 of Schedule II to the Income Tax Regulations to include the following:

• pumped hydroelectric storage equipment;
• electricity generation equipment that uses physical barriers or dam-like structures to harness the kinetic energy of flowing water or wave or tidal energy;
• active solar heating systems, ground source heat pump systems, and geothermal energy systems that are used to heat water for a swimming pool;
• equipment used to produce solid and liquid fuels (e.g., wood pellets and renewable diesel) from specified waste material or carbon dioxide;
• a broader range of equipment used for the production of hydrogen by electrolysis of water; and
• equipment used to dispense hydrogen for use in hydrogen-powered automotive equipment and vehicles.

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.

Budget 2021 proposes changes in the eligibility criteria for the following types of equipment:

• fossil-fuelled cogeneration systems;
• fossil-fuelled enhanced combined cycle systems;
• specified waste-fuelled electrical generation systems with an electrical capacity greater than 3 megawatts;
• specified waste-fuelled heat production equipment for which more than one quarter of the total fuel energy input is from fossil fuels; and
• producer gas generating equipment for which more than one quarter of the total fuel energy input is from fossil fuels.

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.

Film or Video Production Tax Credits

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% 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% refundable credit on qualified Canadian labour expenditures and is available to foreign films and videos produced in Canada.

Extending Timelines for the CPTC

Generally, Budget 2021 proposes to extend by 12 months the timelines which apply for the CPTC purposes.

Extending Timelines for the PSTC

Budget 2021 also proposes to extend by 12 months the 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 CRA 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 government is consulting on proposals to enhance Canada's mandatory disclosure rules to the CRA with respect to certain transactions or aggressive tax planning strategies.

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.

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 three generic hallmarks.

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 (e.g. entitlement to “contingent fees”) 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:

• The day the taxpayer becomes contractually obligated to enter into the transaction or a person who entered into the transaction for the benefit of the taxpayer becomes contractually obligated to enter into the transaction; and
• The day the taxpayer enters into the transaction or a person who entered into the transaction for the benefit of the taxpayer enters into the transaction.

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

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.

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.

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:

• The day the taxpayer becomes contractually obligated to enter into the transaction or series or a person who entered into the transaction or series for the benefit of the taxpayer becomes contractually obligated to enter into the transaction or series; and
• The day the taxpayer enters into the transaction or series or a person who entered into the transaction or series for the benefit of the taxpayer enters into the transaction or series.

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.

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.

In other jurisdictions, when there are uncertain tax positions, a corporation meeting an asset threshold and certain other conditions must report when it has taken a tax position on an 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, a corporation meeting a revenue threshold and certain other conditions must report when it has taken a tax position on an 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.

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 corporation is required to file a Canadian return of income for the taxation year. That is, the corporation is a resident of Canada or is a non-resident corporation with a taxable presence in Canada.
• The corporation has at least $50 million in assets at the end of the financial year that coincides with the taxation year (or the last financial year that ends before the end of the taxation year). This threshold would apply to each individual corporation.
• The corporation, or a related corporation, has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies (e.g., U.S. GAAP).
• Uncertainty in respect of the corporation's Canadian income tax for the taxation year is reflected in those audited financial statements (i.e., the entity concluded it is not probable that the taxation authority will accept an 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).

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.

Penalties

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,

• Up to the greater of $25,000 and 25% of the tax benefit; or
• For corporations that have assets that have a total carrying value of $50 million or more, a penalty of $2,000 per week, up to the greater of $100,000 and 25% of the tax benefit.

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:

• 100% of the fees charged by that person to a person for whom a tax benefit results;
• $10,000; and
• $1,000 for each day during which the failure to report continues, up to a maximum of $100,000.

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 that is intended to prevent taxpayers from avoiding their tax liabilities by transferring their assets to non-arm's length persons for insufficient consideration. This 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. Additionally, 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 CRA 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.

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:

• The transferor (or a person that does not deal at arm's length with the transferor) had knowledge (or would have knowledge if they had made reasonable inquiries) that there would be a tax amount owing by the transferor (or there would be a tax amount owing if not for additional tax planning done as part of the series of transactions that includes the transfer) that would arise after the end of the taxation year; and
• One of the purposes for the transfer of property was to avoid the payment of the future tax debt.

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:

• At any time within a series of transactions or events that includes the transfer, the transferor and transferee do not deal at arm's length; and
• It is reasonable to conclude that one of the purposes of a transaction or event (or a series of transactions or events) within that series was to cause the transferor and transferee to deal at arm's length at the time of transfer.

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:

• 50% of the tax that is attempted to be avoided; and
• $100,000 plus the promoter's or planner's compensation for the scheme.

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

To ensure that the CRA has the authority it needs to conduct audits and undertake other compliance activities, Budget 2021 proposes amendments notably to the Income Tax Act and the Excise Tax 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 measures would come into force on Royal Assent.

International Tax Measures

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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.

Interest Deductibility Limits

Budget 2021 proposes to introduce an earnings-stripping rule consistent with the recommendations in the Action 4 Report.

Exemptions from the new rule would be available for:

• Canadian-controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million (i.e., the top end of the phase-out range for the small business deduction); and
• groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.

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) 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

Budget 2021 addressed 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 proposed rules 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

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Application of the GST/HST to E-commerce

In the Fall Economic Statement 2020 (please refer to the following link https://www.crowe.com/ca/crowebgk/insights/federal-economic-update---summary), the government of Canada proposed a number of changes to the Goods and Services Tax/Harmonized Sales Tax (GST/HST) system with respect to non-residents, namely:

• Non-resident vendors supplying digital products or services to consumers in Canada would be required to register for the GST/HST and to collect and remit the tax on their taxable supplies to Canadian consumers. Distribution platform operators would also be required to register for the GST/HST and to collect and remit the tax on the supplies to Canadian consumers that they facilitate.
• Distribution platform operators would be required to register for the GST/HST and to collect and remit GST/HST in respect of sales of goods shipped from a fulfillment warehouse or another place in Canada, when those sales are made by non-registered vendors through distribution platforms. Non-resident vendors that make sales on their own would also be required to register for the GST/HST and to collect and remit GST/HST in respect of sales of goods shipped from a fulfillment warehouse or another place in Canada.
• The GST/HST would be required to be collected and remitted on short-term accommodations supplied in Canada through an accommodation platform by either the property owner or the accommodation platform operator.

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

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. As such, platform operators will likely rely on information provided by third parties on the transactions they undertake in order to determine whether the platform operator is required to collect and remit tax.

Budget 2021 proposes additional rules to 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. Accordingly, the platform operator would be relieved from liability to the extent that it did not collect and remit tax 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 (available with respect to non-resident vendors, non-resident distribution platform operators and non-resident accommodation platform operators that are not carrying on business in Canada) 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.

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.

Budget 2021 proposes an amendment to the proposals to clarify that supplies of digital products or services that are zero-rated are not included in the calculation of the threshold of $30,000.

Authority for the Minister of National Revenue to Register a Person

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.

Information Requirements to Support Input Tax Credits (ITC) Claims

Businesses must obtain and retain certain information contained in documents such as invoices from their suppliers, in order to support their ITC claims.

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 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.

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, i.e. on April 20, 2021.

GST New Housing Rebate Conditions

With respect to the new housing rebate which entitles homebuyers to a rebate on the GST paid on the purchase of a new home, 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.

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, i.e. on or after April 20, 2021. 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.

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 Rate

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

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

Treatment under the GST/HST

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