Canada’s 2021 Economic & Fiscal Update: Tax Highlights

 In Budget 2021, the Government announced its intention to implement a national, annual 1% tax on the value of non-resident, non-Canadian owned residential real estate in Canada that is considered to be vacant or underused (the “Underused Housing Tax”). After consultations, the following revisions have been proposed:

• An owner’s interest in a residential property would be exempt from the tax if the residence in question is the primary place of residence of:

• the owner;

• the owner’s spouse or common-law partner; or

• a child of the owner or of the owner’s spouse or common-law partner, but only if the child is in Canada for the purposes of authorized study and the occupancy relates to that purpose.

• Additional exemptions being proposed for vacation/recreational properties would apply to an owner’s interest in such a property that is:

• located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents; and

• personally used by the owner (or the owner’s spouse or common-law partner) for at least four weeks in the calendar year. 

An owner eligible for either of the above exemptions would claim the exemption in the annual return that they would be required to file with the Canada Revenue Agency in respect of the residential property.

The Underused Housing Tax be effective for the 2022 calendar year with the first filing required on or before April 30, 2023. 

Currently, teachers are eligible to claim a refundable tax credit of 15% on up to $1,000 in expenditures made in a taxation year for eligible supplies. Eligible supplies must be purchased for use in a school or in a regulated child care facility for the purpose of teaching or facilitating students’ learning. Eligible supplies include books; games and puzzles; flashcards; containers; and educational support software.

The 2021 Fall Economic Statement proposes to increase the tax credit to 25%.

In addition, the definition of eligible supplies would broaden to remove the requirement that teaching supplies must be used in a school or regulated child care facility to be eligible. This measure would also expand the list of eligible durable goods to include certain electronic devices. The following items would be added to the list of prescribed durable goods:

• calculators (including graphing calculators)

• external data storage devices

• web cams, microphones, and headphones

• wireless pointer devices

• electronic educational toys

• digital timers

• speakers

• video streaming devices

• multimedia projectors

• printers

• laptop, desktop and tablet computers provided that none of these items are made available to the eligible educator by their employer for use outside of the classroom

Implementation

For an eligible educator to make a successful claim, they must provide a certificate from their employer attesting to the eligible supplies, including the additional conditions with respect to laptop, desktop and tablet computers. This measure would apply to the 2021 and subsequent taxation years.

The Government proposes to introduce a temporary Small Businesses Air Quality Improvement Tax Credit to encourage small businesses to invest in upgrading ventilation and air filtration systems to improve indoor air quality. The refundable tax credit would apply to eligible entities’ incurred expenditures dedicated to improving air quality in qualifying locations between September 1, 2021 and December 31, 2022. The tax credit rate will be 25%.

An eligible entity would receive a maximum credit of $10,000 per qualifying location and a maximum of $50,000 across all qualifying locations. The limits on qualifying expenditures would need to be shared among affiliated businesses. Credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed.

The tax credit is available to Canadian-controlled private corporations and individuals (but not trusts), and members of a partnership that are qualifying corporations or individuals (other than trusts). Specific eligibility requirements will apply to each of these groups.

Qualifying Expenditures

Qualifying expenditures would include expenses directly attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation and air conditioning (HVAC) systems, as well as the purchase of devices designed to filter air using high efficiency particulate air (HEPA) filters.

Expenses attributable to an HVAC system would only be considered qualifying expenditures if the system is:

• Designed to filter air at a rate in excess of a minimum efficiency reporting value (MERV) of 8; or

• Designed to filter air at a rate equal to MERV 8 and to achieve an outdoor air supply rate in excess of what is required for the space by relevant building codes. For a system that is upgraded or converted, prior to the improvement the system must have been designed to filter air at a rate equal to MERV 8.

Qualifying expenditures for an eligible entity would exclude an expense:

• Made or incurred under the terms of an agreement entered into before September 1, 2021;

• Related to recurring or routine repair and maintenance;

• For financing costs in respect of a qualifying expenditure;

• That is paid to a party with which the eligible entity does not deal at arm’s length;

• That is salary or wages paid to an employee of the eligible entity; or

• That can reasonably be expected to be paid or returned to the eligible entity, or to a person or partnership either not dealing at arm’s length with the eligible entity or at the direction of the eligible entity.

Eligible entities who receive government financial assistance will have their qualifying expenditures reduced by the amount of aid received.

Qualifying Locations

Qualifying locations would include properties used by an eligible entity primarily in the course of its ordinary commercial activities in Canada (including rental activities), excluding self-contained domestic establishments (i.e., a place of residence in which a person generally sleeps or eats).

Timing

The tax credit would be available in respect of qualifying expenditures incurred between September 1, 2021 and December 31, 2022.

The taxation year for which an eligible entity would claim the tax credit would depend on when the qualifying expenditure was incurred.

• Qualifying expenditures incurred before January 1, 2022 would be claimed by an eligible entity for its first taxation year that ends on or after January 1, 2022.

• Qualifying expenditures incurred on or after January 1, 2022 would be claimed by an eligible entity for the taxation year in which the expenditure was incurred.

As an interim measure, Budget 2021 proposed to implement a Digital Services Tax (DST). The DST would apply at a rate of 3% on revenue earned by large businesses from certain digital services that rely on data and content contributions from Canadian users.

Canada is working with its international partners to bring a multilateral agreement into effect that includes a two-pillar plan for international tax reform.

In the meantime, the Government is proposing that the DST will be imposed as of January 1, 2024, but only if the multinational agreement has not come into force by that time. In that event, the DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022.