2021 Federal Budget – Spend, Spend, Spend (Part Deux) With Some Interesting Tax Measures

On April 19, 2021, the Federal Government released its long-awaited budget.

With a record 25 months between budgets, there was no shortage of predictions about the content. However, the night before, news services Reuters and the Globe and Mail released very detailed content about what to expect and such predictions from “sources” largely turned out to be correct. (Whatever happened to the sacrosanct concept of budget secrecy and who was the source(s) of these inappropriate leaks? Will this be investigated?). 

The last time our firm wrote about a federal budget was March 19, 2019 and the title of our budget blog was 2019 Federal Budget – Spend, Spend, Spend, With No Real Competitiveness Measures. The 2021 budget turned out – again – to be a massive spending budget. Somehow the federal government is happy that its deficit for last year is less than $400B while the projected deficit for 2021-2022 will continue to be high at $154.7B – a staggering number. Clearly, this is a pre-election budget. Tax measures in the budget are, overall, rather benign to the average person notwithstanding there are some interesting proposals that we discuss below. Accordingly, when choosing the title of our firm’s 2021 budget blog, we decided to mostly recycle our 2019 title with a slight modification. 

Effectively what we got on April 19, 2021 seems to be a work-in-progress with Part 1 of what will effectively be a two- part budget. Part 1 is a pre-election announcement of large spending initiatives and a lot of consultations. It appears that the tax hikes that we know must inevitably follow a budget so full of election goodies will effectively be Part 2 of a budget to be released after the expected upcoming election. Items that we expect to be included in Part 2 of this budget may include an increase in the capital gains inclusion rate, changes to the principal residence exemption, increases to personal and corporate tax rates, restrictions to planning measures commonly used by Canadians, as well as the introduction a wealth tax.

While we are grateful that all tax planning opportunities continue to apply for now, and we would most certainly not welcome these potential Part 2 budget changes, clearly something will need to be done to support the spending spree announced yesterday. In our view, Part 2 should include an announcement of long overdue comprehensive tax review and reforms; however, we are not optimistic on this front.

The Liberals have again styled the 2021 budget for “middle class” Canadians, a term which has notoriously gone undefined in years past. This time around it seems that, as discussed further below, if your new yacht costs less than $250,000 or your new car less than $100,000, well, then you are clearly middle class as you will not be affected by the new so-called luxury tax which will otherwise apply to these goods. And while these measures seem generous, they will undoubtedly be distortive to the luxury goods market.

EXECUTIVE SUMMARY

For those that are not interested in reading the entire blog, below is an executive summary of the tax measures relevant to our clients:

  1. There are no personal tax or corporate tax rate increases or reductions with the exception of proposed 50% corporate tax rate reductions for certain “green businesses”. More details below.
  2. Although widely speculated, there were no increases to the capital gains inclusion rate from its current 50% inclusion rate, no introduction of a wealth tax and no changes to the current principal residence exemption.
  3. The CEWS and CERS programs have been extended to September 2021. In addition, the Budget proposes to introduce a new hiring credit for employers – the Canada Recovery Hiring Program. These amendments are explained in our Firm’s separate blog on this and can be accessed here
  4. As already mentioned in the introduction, a new luxury tax is proposed for the purchase of cars and personal aircraft with a retail sales price over $100,000 and boats, for personal use, over $250,000. The tax will be calculated at the lesser of 20% of the value above the threshold or 10% of the full value of the purchase. The new luxury tax would come into force on January 1, 2022. This is a clear attack on the so-called “wealthy”.
  5. Budget 2021 proposes to enable a Canadian Controlled Private Corporation to immediately expense certain property acquired by that corporation. This would allow Canadian Controlled Private Corporations to immediately expense “eligible property” that becomes available for use prior to January 1, 2024, up to a maximum of $1.5 million per taxation year.
  6. The government is consulting on an expanded set of reporting rules that will expand Canada’s existing “reportable transaction” rules that are in the Income Tax Act; implement a new requirement to report “notifiable transactions”; introduce a new requirement for specified corporations to report “uncertain tax treatments”; and introduce related rules providing for, in certain circumstances, the extension of the applicable reassessment period and the introduction of penalties.
  7. Introduction of a 3% Digital Services Tax that will apply to certain large technology companies that derive business from Canadians.
  8. The government will engage in a consultation regarding the effectiveness of Canada’s existing transfer pricing rules in light of a recent court case – Cameco – that the government was not successful in.
  9. Effective January 1, 2022, a proposed 1% tax will be imposed on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused. All owners of property, other than Canadian citizens or permanent residents of Canada, will be required to file a declaration as to the current use of their property, with significant penalties for failure to file. Further consultations with stakeholders will take place on this proposal.
  10. Significant new monies were announced for the funding of the Canada Revenue Agency (“CRA”) for various initiatives.
  11. The Government reiterated its previous announcement from its 2020 Fall Economic Statement that it will take steps to “strengthen and modernize Canada’s general anti-avoidance rule (GAAR) rules”.
  12. The Budget proposes rules to allow the Government to fast track the revocation of charitable status for an organization that is listed as a terrorist entity under the Criminal Code, or organizations with terrorists as a director or other official. 
  13. The Budget proposes to restrict interest deductions for certain taxpayers. The proposal applies to corporations, trusts, partnerships, and Canadian branches of non-resident taxpayers, and limits interest deductions to 40% of a taxpayer’s “tax EBITDA” starting in 2023, and 30% in subsequent years. A general exclusion is proposed for Canadian-controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million and groups with net interest expenses of $250,000 or less. The Department of Finance will consult further with stakeholders on this proposal.
  14. The government has promised to initiate a consultation with stakeholders to examine the benefits and barriers to the creation of employee ownership trusts.
  15. The government will enable repayment of certain COVID supports reports received by taxpayers to be deducted in the year the supports were received rather than in the year of repayment.
  16. Certain targeted changes to the disability tax credit are being proposed.
  17. The government is introducing targeted new rules that will eliminate abusive tax avoidance collection strategies.
  18. The federal government has clearly expressed its desire is to have a publicly accessible “beneficial ownership” registry. The 2021 Budget proposes to provide $2.1 million to Innovation, Science and Economic Development Canada to implement such a registry by 2025.
  19. There are proposals to expand the audit powers of the Canada Revenue Agency.
  20. The Budget proposes to amend the Act to target “hybrid mismatch arrangements”.
  21. New rules would force many taxpayers and tax preparers to deal exclusively on an electronic basis with the Canada Revenue Agency.
  22. There are some interesting disclosures in the Budget expenditures relating to changes to the Elections Act. There is sparse detail other than “temporary amendments to the Canada Elections Act to ensure the health and safety of electors and election workers during a general election if it takes place during the pandemic, including introducing a 3-day polling period.” A second Elections Act related amendment is to “introduce amendments to the Canada Elections Act to specify that making or publishing a false statement in relation to a candidate, prospective candidate, or party leader would be an offence only if the person or entity knows that the statement is false.” These proposals need further explanation because, at face value, they appear unacceptable. Update – May 5, 2021 – This proposal appears to emanate from Bill C-19, first proposed in December 2020. See below for further details.
  23. The Government proposes to introduce significant federal corporate income tax reductions for qualifying “zero-emission” technology manufacturers. 

 

ANALYSIS

  1. Extension of CEWS and CERS to Period 20 (September 25, 2021) 

The Budget extended the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”) programs from its current end date of June 5, 2021 to September 25, 2021, while keeping the mechanics of the program substantially the same. The proposed legislation will provide the Government to add additional Claim Periods by regulations through to November 20, 2021. The announced Claim Periods are:

  • Claim Period 17: June 6 to July 3, 2021, maximum CEWS 75%, maximum CERS 65%
  • Claim Period 18: July 4 to July 31, 2021, maximum CEWS 60%, maximum CERS 60%
  • Claim Period 19: August 1 to August 28, 2021, maximum CEWS 40%, maximum CERS 40%
  • Claim Period 20: August 29 to September 25, 2021, maximum CEWS 20%, maximum CERS 20%.

There are also new elective baseline remuneration comparative periods announced for these additional Claim Periods. Please see our separate blog for details about the announced changes.

The Budget also announced a new CEWS clawback where a claimant’s top executives had increased remuneration in 2021 compared to 2019, but this clawback applies only to publicly traded companies.

  1. New Canada Recovery Hiring Program

The Budget proposes a new Canada Recovery Hiring Program (“CRHP”) to encourage private corporations, sole proprietors, non-profit organizations, and registered charities to expand their workforce after June 6, 2021. To qualify, a claimant must have at least 0% revenue decline for Claim Period 17 and >10% revenue decline for Claim Periods 18 to 21. If qualified and the claimant has paid more wages in periods after June 6, 2021 compared to Claim Period 14 (March 14, 2021 to April 10, 2021), the claimant can receive CRHP equal to 50% of the incremental wages, calculated based on a maximum of $1,129 per employee per week, with baseline remuneration restrictions for non-arm’s length employees. Please see our separate blog for more details about the CRHP.

  1. Introduction of a Luxury Tax for Luxury Cars, Personal Aircraft and Boats For Personal Use

The Budget stated the following:

Budget 2021 proposes to introduce a tax on the sales, for personal use, of luxury cars and personal aircraft with a retail sales price over $100,000, and boats, for personal use, over $250,000. The tax would be calculated at the lesser of 20 per cent of the value above the threshold ($100,000 for cars and personal aircraft, $250,000 for boats) or 10 per cent of the full value of the luxury car, boat, or personal aircraft. This measure would come into force on January 1, 2022.

            …

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:

  • Motorcycles and certain off-road vehicles, such as all-terrain vehicles and snowmobiles;
  • Racing cars (i.e., vehicles that are not street legal and are owned solely for on-track or off-road racing); and
  • Motor homes (commonly known as recreational vehicles, or RVs) that are designed to provide temporary living, sleeping, or eating accommodation for travel, vacation, seasonal camping, or recreational use. 

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.

The above is all the information we have. If implemented, there is no doubt this will have a negative impact on many car, plane and boat dealerships as potential buyers may think twice about completing their purchase if they need to pay an additional “luxury tax”. This measure is estimated to raise approximately $600M over a 5-year period…a paltry sum. However, this type of political measure certainly speaks well to a voter base that may be inclined to have the “rich” pay “just a little bit more”.  Disappointing measure. 

  1. Immediate Expenses of CCA Claims

Budget 2021 proposes to enable a company to immediately expense certain property acquired by a Canadian Controlled Private Corporation (“CCPC”). This would allow a CCPC to immediately expense “eligible property” that becomes available for use prior to January 1, 2024, up to a maximum of $1.5 million per taxation year (the “Maximum Amount”), with the expense only permitted if the property becomes available for use in that year (the limit is shared amongst associated members of a group of CCPCs). No carry-forward for the excess capacity of the expense limit is available.

“Eligible Property” includes any capital property subject to the CCA rules, other than property included in Class 1-6 (buildings etc), 14.1 (goodwill etc), 17, 47, 49, and 51. If a CCPC has a capital cost of eligible property that exceeds the Maximum Amount, it can decide which class the expensing would be attributed to. Restrictions will apply on property that has been used, or acquired for use in non-arm’s length scenarios.

This proposal should be welcome news to many CCPCs who can now make immediate capital expenditures and allow them to immediately expense, rather than depreciate the cost over time. This should allow businesses to invest in new capital property due to the tax incentive. The budget also announced that Class 43.1 to 43.2 would be expanded to include more “green” capital projects that allow for accelerated amortization.

  1. New Mandatory Disclosure Rules

Around the world, there has been a push to disclose to government authorities certain transactions or beneficial ownership arrangements. Many countries, like the US and the UK, have existing rules and/or are proposing new expanded disclosures.  Recently, Canada has introduced federal corporate beneficial ownership requirements and some provinces have followed suit.  The federal budget proposes to introduce even further rules for taxpayers to disclose certain information.

From the Budget:

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

  • changes to the Income Tax Act’s reportable transaction rules;
  • a new requirement to report notifiable transactions;
  • a new requirement for specified corporations to report uncertain tax treatments; and
  • related rules providing for, in certain circumstances, the extension of the applicable reassessment period and the introduction of penalties.

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.

A. Expanding the Reportable Transaction Regime

Presently, section 237.3 of the Income Tax Act – introduced into law a little more than 10 years ago – requires mandatory disclosure of certain tax avoidance plans (even if the plan is not a “tax shelter”) and the plan has two of three hallmarks: contingent fees for the promoter; “confidential protection” that prohibits the disclosure to any person of the details or structure of the transaction; and “contractual protection” which is any form of insurance or other protection, indemnity, or guarantee – and other assistance that protects a person against a failure of the plan. If such a transaction meets the conditions of section 237.3, a prescribed information return is required to be filed. However, the Budget documents indicate that the Canada Revenue Agency believes that the rules are not sufficiently robust to deal with concerns about aggressive tax avoidance. 

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:

  • 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.

If implemented, this would greatly expand the mandatory disclosure rules.  Taxpayers and their advisors will need to watch this space closely.

B. Introducing “Notifiable Transactions”

In addition, the Budget documents propose a new category of reportable transactions referred to as Notifiable Transactions.  The Budget describes this as follows:

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.

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.

The United States has similar rules with their “listed transaction” (and other thresholds) regime which requires mandatory disclosure of certain types of common transactions that are considered to be aggressive avoidance.  By introducing similar rules, the Budget documents disclose the government’s view that such timely disclosures would enable the Canada Revenue Agency to timely audit such transactions to prevent such transactions and taxpayers from not being subject to reassessment if the transactions are otherwise “statute barred”. 

C. Disclosing “Uncertain Tax Treatment”

From the Budget documents:

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.

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.

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).

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.

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. 

 

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. 

The new rules would also be accompanied by significant penalties for non-compliance and a new rule that the normal reassessment period would not commence until the reporting requirements are complied with.  This might greatly extend the normal reassessment period if the rules are not complied with. 

The above new disclosure pillars / requirements will greatly expand the amount of information that will now be required to be disclosed to the Canada Revenue Agency. If passed, taxpayers can expect a greatly expanded overall disclosure regime and will likely discourage many taxpayers from entering into aggressive tax avoidance transactions. 

  1. Digital Tax

Currently, many digital companies selling goods and services into Canada pay no income tax, but make money both from their direct sales to Canadians, and also from the collection and use of information from individual Canadians. Adjustments to the GST/HST rules as they apply to e-commerce businesses were previously announced in the 2020 Fall Economic Update as measures which would require non-resident corporations supplying digital services and products to Canadian consumers to collect and remit GST with respect to taxable supplies made. This measure would target, for example, the digital provision of short-term housing arrangements and goods supplied through fulfillment warehouses. This is an issue that the OECD has spent literally years studying with the hopes of arriving at an agreement for a multilateral methodology that can be widely agreed to by most member countries. This has proven to be a difficult task given the zero-sum nature of such a tax in as much what one tax jurisdiction taxes reduces the amounts remaining to be taxed by other jurisdictions.

The Canadian government has indicated they remain committed to an eventual multilateral agreement, and will continue to engage with the OECD process, but similar to the proposal included in the Liberal’s 2019 election platform, will move ahead unilaterally in the interim with a 3% digital sales tax (“DST”) to come into effect January 1, 2022 with application to revenue earned by large digital service providers with gross revenue in excess of 750 million EUR. This tax follows on the heels of announcements, and in some cases implementation, of similar unilateral measures imposing some form of DST by a number of European OECD countries. This federal initiative lags a Quebec DST which came into effect a few years ago. 

  1. Transfer Pricing Consultation

The budget includes a promise for consultation in respect of Canada’s transfer pricing rules, likely in response to the CRA’s recent loss to Saskatoon based uranium producer Cameco Corp. in a billion dollar plus court case which tested the application of Canada’s Transfer Pricing rules as applied to the corporation’s tax motivated, but within the “arm’s length range” prices for sale of uranium to a foreign subsidiary. The CRA not only lost the case but was then required to reimburse Cameco for a substantial portion of their legal costs, and then had the Supreme Court of Canada decline CRA’s request for the court to hear an appeal of the case. At issue was the interpretation of paragraphs 247(2)(b) and (d) of the Income Tax Act, and their potential use of these provisions to reallocate the profit of a foreign subsidiary to its Canadian parent.

  1. A National Housing Vacancy Tax

Following the lead of Vancouver, Toronto, and B.C., the Budget proposes a new national “tax on unproductive use of Canadian housing by foreign non-resident owners”.  Effective January 1, 2022, a proposed 1% tax will be imposed on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused. All owners of property, other than Canadian citizens or permanent residents of Canada, will be required to file a declaration as to the current use of their property, with significant penalties for failure to file.

There are no further details released of what residential real estate is covered or what is considered to be vacant or underused. The Government will release a consultation paper to allow stakeholders to comment on the parameters of this proposed tax. According to the Government, the goal of this new tax is to ensure that foreign owners who uses Canadian housing to “passively store their wealth” pay their “fair share” (whatever that phrase means). While many foreign owners of Canadian housing certainly use them for exactly this purpose, there are many other reasons why a non-Canadian may desire a property in Canada available to their use at any time (e.g. foreign grandparent visiting Canadian grandkids several times a year). Also, not all real estate markets across Canada are equally ‘hot’, so a uniform national vacancy tax that does not take into account local market conditions may negatively impact housing prices in an already-‘cool’ market.

To be fair, many jurisdictions around the world do have restrictions on foreign ownership of real estate. What will be really interesting will be how the Government drafts the rules to prevent foreign owners from using different types of artificial ownership or accommodation arrangements to circumvent this new tax.

  1. More Money for the CRA

Consistent with many of the last budgets, additional funding for the CRA was announced:

  • $230 million over five years to help the CRA improve its collection function.
  • $304 million over five years to fund new initiatives and extend existing programs, such as:
    • Increasing GST/HST audits of large businesses;
    • Modernizing risk assessment process to prevent unwarranted GST/HST refund and rebate claims, and improve the CRA’s ability to issue GST/HST refunds quickly;
    • Enhancing capacity to identify tax evasion involving trusts, and provide better service to executors and trustees.

We do not doubt this money will help the Government collect additional tax revenues at multiples of what is being invested. However, we think what Canadian taxpayers really want to see is an improvement in the CRA’s service level. Even before COVID, the CRA had many areas it could improve on. Since COVID, we and many taxpayers can attest that the CRA’s response time and call centre hold times have become horrendous. We are somewhat sympathetic with respect to the difficulties the CRA faces with maintaining service during the COVID crisis – but we hope there will be a marked improvement going forward especially with the additional funding.

  1. “Modernizing” the GAAR

In the Budget documents, the Government reiterated its previous announcement from its 2020 Fall Economic Statement that it will take steps to “strengthen and modernize Canada’s general anti-avoidance rule (GAAR) rules”. As it is currently drafted, the GAAR is already very broad and in our view, has lately been generously applied by the courts to deal with tax planning arrangements. It is unclear to us what particular aspect the Government thinks the GAAR is lacking.  One likely target is probably international treaty-shopping, but given the Canadian government’s track record with tinkering anti-avoidance rules, we are likely to end up with an overly broad GAAR that becomes an albatross to ordinary commercial transactions.

  1. Tightening Charity Registration and Revocation Rules for Terrorist Entities

The Budget proposes rules to allow the Government to fast track the revocation of charity status for an organization that is listed as a terrorist entity under the Criminal Code, or organizations with terrorists as a director or other official. 

Additionally, the Budget proposes to allow the CRA to suspend or revoke the charitable status of an organization where a false statement amounting to culpable conduct is made for purpose of maintaining its registration (whereas the current rules only cover false statement made for purpose of obtaining registration).

  1. Limitations on Excessive Interest Deductions

This budget proposal stems from Action Item 4 of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project and follows a 2019 Liberal election campaign promise to “crack down on corporate tax loopholes that allow companies to excessively deduct debt to artificially reduce the tax they pay.” The Budget notes that all other G7 countries have taken action to limit excessive interest deductions of large corporations.

The purpose of this proposal is to prevent Canadian businesses from reducing their tax payable by claiming large interest deductions.

The proposal applies to corporations, trusts, partnerships, and Canadian branches of non-resident taxpayers, and limits interest deductions to 40% of a taxpayer’s “tax EBITDA” starting in 2023, and 30% in subsequent years. Tax EBIDTA includes a taxpayer’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. Dividends received that qualify for a deduction would be excluded from tax EBITDA. Interest expense and interest income would not only include legally obligated interest payments, but also economically equivalent expenses and income. Since the rules are based on taxable income, interest denied under the thin capitalization rules would be excluded as an interest expense.

The proposal excludes debt between Canadian members of a corporate group, although certain anti-abuse provisions are proposed to prevent loss generation. A general exclusion is proposed for Canadian-controlled private corporations that, together with any associated corporations, have taxable capital employed in Canada of less than $15 million and groups with net interest expenses of $250,000 or less.

A denied interest deduction would be able to be carried forward for up to twenty years or back for up to three years (including to taxation years before this proposal is effective).

As with many of the other budget proposals, further stakeholder consultation will be sought. The government expects draft legislation by this summer. The government expects this measure will provide savings of $5B over five years, which is lower than the 2019 PBO estimate, likely due to the current low interest rates.

Overall, the merits of this proposal are highly debatable notwithstanding the adoption by some countries of this type of interest restriction.  The pending consultation will be interesting and there will no doubt be many submissions made by interested stakeholders.

  1. Employee Ownership Trusts

The government has promised to initiate a consultation with stakeholders to examine the benefits and barriers to the creation of employee ownership trusts.

The purpose of these trusts is to facilitate the transition of privately owned businesses to employees. Models of employee ownership trusts are currently used in the U.S. and U.K. Typically, a trust will be settled with employees and former employees as beneficiaries. The trust borrows to purchase the business and repays the loan over time from profits. The beneficiaries are able to participate in the success of the business, with distributions (in the U.K.) generally taxed as employment income. The employees are able to defer that employment income until payments are made, and the business receives a deduction on account of the distribution being characterized as employment income.

Employee ownership trusts are not a new idea but it is interesting that the government will be consulting on this topic and possibly using the taxation system to encourage the proliferation of these types of vehicles to help facilitate business succession to a logical group of successors – employees.

  1. Taxation of COVID-19 Benefits

A number of COVID-19 benefits have been made available to qualified Canadians since the onset of the pandemic in March of 2020.  The list includes:

  • Canada Emergency Response Benefit;
  • Employment Insurance Emergency Response Benefits;
  • Canada Emergency Student Benefits;
  • Canada Recovery Benefits;
  • Canada Recovery Sickness Benefits; and,
  • Canada Recovery Caregiving Benefits.

So many benefits….all of which reflected the receipt of taxable income by the claimant and, ultimately, a liability for tax on their personal income tax return for the year received.  But what happens when it is determined that the recipient was not, in fact, eligible to receive the benefit in question and then repays the portion that they were not entitled to?  For income tax purposes, this results in a deduction of the repaid amount against the taxable income reported by the recipient in the year it is repaid.  Practically speaking, this can result in a mis-match of the tax that is owing by the recipient on the benefit received and the deduction received by the taxpayer – tax in year one that must be paid and a deduction to follow in year two.

To address this timing inequity, Budget 2021 proposes to amend the legislation in the Income Tax Act to allow taxpayers who must repay benefits the option to claim the deduction for repayment in the year the benefit was received by them rather than the year that the repayment was actually made.  This matches up the repayment with the income inclusion to mitigate the impact of the taxation of the benefits received.  If a taxpayer has already filed their tax return for the year that the benefit was received they can request an adjustment to their tax return to ensure that the repayment is applied to the year the benefit was received.  Keep in mind that the deduction is available ONLY once the benefits have actually been repaid. 

All things considered, this budget proposal implements a change that addresses a timing difference that could be financially painful for those who were and continue to be required to repay benefits received in error.  This is a welcome proposal.

  1. Improving Access to the Disability Tax Credit

Following on from the recommendations of the Canada Revenue Agency’s Disability Advisory Committee, the Department of Finance has introduced changes to provide taxpayers with expanded access to the Disability Tax Credit (“DTC”). The proposed changes are targeted at expanding the list of mental functions that are used to assess whether or not a taxpayer is eligible to receive the DTC and also addresses broadening of the list of activities that are considered to be “life-sustaining therapy” and reducing the minimum requirement for the amount of time spent on these life-sustaining activities.

With respect to creating a more representative list of mental functions necessary for everyday life, the proposed legislation seeks to include an assessment of impairment in attention, concentration, memory, judgement, perception of reality, problem-solving, goal-setting, regulation of behavior and emotions, verbal and non-verbal comprehension and adaptive functioning.  For those Canadians who have previously suffered the debilitating effects of mental illness or post-COVID affliction, expanded access to the DTC will be a welcome change.

Taxpayers who are required to undertake life-sustaining therapies that are necessary to sustain vital functions of life and do so at least three times per week for a minimum of 14 hours in a week are generally able to access the DTC.  Often, the time required to complete these therapies in the view of the CRA excludes the time necessary to consider and calculate dosages, account for recovery from the therapy or the precise recording of dietary intake (in particular for insulin-dependent patients).  This may result in the individual not meeting the minimum time requirements to access the DTC. 

For the 2021 and subsequent taxation years in respect of DTC certificates (form T2201) filed after April 19, 2021, the frequency of treatment is reduced from 3 times to 2 times per week while the 14-hour threshold remains unchanged.  What is certainly of benefit to those seeking to access the DTC is the expansion of the discretionary activities that can make up the 14-hour minimum to include the time required to calculate dietary intake and/or physical exertion as part of the therapy; the time associated with medical appointments to administer the therapy; the time required for medically-required recuperation after administration of a therapy and the time spent on determining and calculating and preparing specific life-sustaining medical compounds or formulae.

  1. Combatting Abusive Tax Collection Avoidance Schemes

Under the broad heading of “A Tax System that Promotes Fairness”, the Department of Finance has taken first steps to amend the Income Tax Act to address a problem that relates to the avoidance of the collection of income tax debts incurred by certain taxpayers.  The current legislation in the Income Tax Act provides an “anti-avoidance” provision that is intended to prevent the taxpayer who has incurred the debt from transferring assets to a “non-arm’s-length” person.[1]  Someone who is considered not to be at “arm’s-length is generally someone who is related or closely connected to the taxpayer and would also include a corporation under the control of the taxpayer or a corporation controlled by someone they are related to.  As the legislation currently reads, joint and several liability will attach to the non-arm’s-length recipient of the assets where the transferor either has incurred a tax debt in the year of transfer or any preceding year or incurs a tax debt by way of the application of the attribution rules after the transfer of the assets.  In short, if you try to leave an empty hole for CRA to dig around in for assets to satisfy what you owe them, they will follow the assets to the related party you transferred them to and deliver the tax bill to them.

Apparently, certain individuals have taken extreme steps to circumnavigate the existing anti-avoidance rules to structure transactions that would see them transfer assets to “arm’s-length” parties with the sole purpose being to leave the “empty hole” for CRA without any further recourse.  The Department of Finance suggested in the Budget 2021 documents that much of their experience with these avoidance transactions center around the timing of the recognition of the tax debt in relation to the transfer of the assets; the structuring of an arm’s-length relationship at the time of transfer and engaging in the manipulation of asset valuations and “asset-stripping”.  These are all transactions that the department views as highly aggressive leading to either the elimination of the tax liability in the hands of the transferor, or failing that, the creation of the “empty hole”, leaving nothing for CRA to attach to collect the debt.

Budget 2021 proposes to implement legislation that will be released in a future Notice of Ways and Means to address these avoidance transactions that are currently being undertaken.  Specifically, the future legislation will address the deferral of tax debts by deeming a tax debt to have arisen before the end of the tax year that the property transfer occurs if reasonably it could be concluded that the parties to the transaction knew (or should have known) that there would be a tax debt owing and one of purposes for the transaction was to avoid the tax debt.

The future legislation will also re-characterize the “arm’s-length” status at the time of the transaction to be “non-arm’s-length” if the transferor and transferee were factually not at arm’s length at any time during the series of avoidance transactions and one could reasonably conclude that the steps taken were to purposely change the nature of the relationship to fall out of the current anti-avoidance legislation.

There will also be new legislation that will capture the effect of all of the transactions in a series to determine the value of the property transferred rather than the value used at the time of the transfer.

Planners and promoters of tax debt avoidance schemes will be assessed a penalty for facilitating the transactions that will closely follow the “third-party civil penalty” rules that are currently in place in the Income Tax Act.  The penalty will be calculated as the lesser of 50% of the tax the transferor is attempting to avoid and $100,000 plus the planner/promoter’s compensation received.

Similar amendments will also be made to the anti-avoidance rules related to the avoidance of tax debts in other federal statutes including the Excise Tax Act, the Excise Act, 2001 and the Greenhouse Gas Pollution Pricing Act.

We have referenced it as “future legislation” as the Notice of Ways and Means does not provide any draft legislation and simply states that “The Act is modified to give effect to the proposals relating to Avoidance of Tax Debts as described in the budget documents tabled by the Minister of Finance in the House of Commons on Budget Day”.  At some point we will see the legislative details, notwithstanding the rules are to apply in respect to transfers of property that occur on or after April 19th, 2021.

  1. Beneficial Ownership Registry

As we have previously blogged about, the federal government has made it clear that it desires a publicly accessible “beneficial ownership” registry. The 2021 Budget proposes to provide $2.1 million to Innovation, Science and Economic Development Canada to implement such a registry by 2025. Some provinces have already started implementing a beneficial ownership registry, such as BC, and we expect this to happen in other provinces.

    18. CRA Audit Authority

In Minister of National Revenue v. Cameco Corporation, the CRA sought to obtain an order compelling employees of Cameco to attend oral interviews for the purpose of an audit. The CRA had requested oral interviews of around 25 employees of Cameco, including employees of non-Canadian subsidiaries.

The CRA stated that the power in paragraph 231.1(1)(a) of the Income Tax Act, which allowed the CRA to “inspect, audit or examine” the books and records of a taxpayer, includes the ability to compel oral responses to questions. However, the Federal Court of Appeal held that this power did not include the right to compel a person to answer oral questions. In the decision, the FCA noted that other statutes expressly permitted a power to compel, and the Income Tax Act did not. Budget 2021 contains language addressing this exact issue, where the Act will be amended to compel such oral answers.

This amendment seems to give more sweeping information gathering abilities to the CRA, where they can now seemingly request information from anyone (an owner or manager of a property, business or commercial activity), who may not fully understand what they are speaking about. This will seemingly be a slippery slope as CRA will rely on this information obtained in audit activity.  Overall, we have concerns about this proposal.

    19. Hybrid Mismatch Arrangements

Budget 2021 proposes to amend the Act to target “hybrid mismatch arrangements”. The stated goal of this proposal is to target multinational enterprises over Canadian businesses, however, absent draft legislation, we cannot determine if this rule would catch small and medium sized businesses. The “hybrid mismatches” typically arise when either a tax deduction is available in two or more countries on a single expense, or where a country permits a deduction on one amount, and such amount is not included in ordinary income in the other country.

The OECD Base Erosion and Profit Shifting (“BEPS”) initiative called for provisions combatting the mismatches that arise in international tax planning.  Budget 2021 intends to follow the BEPS report on hybrid mismatches, which include rules to address mismatches on branches.

The Budget states that the legislation would be mechanical in nature, and not conditioned on a “purpose test”, and would apply in respect of payments between related parties and made under certain arrangements between unrelated parties that are designed to produce a mismatch. The rules are to be implemented in two separate legislative packages, with the first package being released for stakeholder comment in 2021, with legislation applying as of July 1, 2022. The second package would be released for stakeholder comment after 2021, and applying no earlier than 2023.

   20. Electronic Filing and Certification of Tax and Information Returns

If there is one thing that has become abundantly clear in our COVID-19 world it is that we have become dramatically more dependent upon the “online world”.  When we look at the statistics associated with the filing of personal tax returns in 2019, this becomes very apparent as the CRA received only 9% of all returns filed in paper format.  This trend continues as currently only 6.7% of all returns received for the 2020 taxation year are in paper format.  The proposals in Budget 2021 recognize CRA’s desire to move away from a paper-based world and the fact that Canadians are embracing a digital relationship with the CRA.  The view of the department is that a digital world is a faster, safer and more accurate world for taxpayers….but there can also be traps for the inattentive or the unwary.

Budget 2021 proposes to eliminate the paper Notice of Assessment (and, presumably, Notice of Reassessment) for taxpayers who choose to file their tax returns electronically on their own or who engage a tax preparer to file electronically on their behalf.  This would take place without the express authorization by the taxpayer to do so, which may pose some interesting and challenging issues for taxpayers who might be unaware of the date of their receipt. Presumably, electronic filing will require the filer to provide an electronic address for correspondence, as currently this remains an option for filers to opt in or out of electronic communication with the CRA.

The proposed amendments also seek to default correspondence from the CRA to businesses to electronic only where the business maintains a My Business Account portal.  The business still has the option to receive paper copies of correspondence, but where this option is not selected, a business my only receive correspondence electronically.  Again, the date of receipt of correspondence and timelines provided by the CRA to respond are critical information contained within this correspondence and inattention to the online account could be fatal (from a tax perspective).

How should we view this gravitation toward a wholly digital interaction with CRA?  There are certainly critical issues to consider especially with respect to preserving appeal rights in respect of an assessment or reassessment or even an appeal from an assessment.

Subsection 244(14) of the Income Tax Act provides a rebuttable presumption that notices of assessment and certain other documents from CRA were mailed on the date stated on the document (usually the date the document was generated or printed rather than actually mailed).  This is important for the purposes of certain time limitations within the Act itself and also for those time imitations imposed by CRA to respond to the correspondence.

A similar provision for electronic documents is in subsection 244(14.1), which presumes that an electronic document was sent and received on the date that a notice was sent to the electronic address last provided by the person, and the notice states that the person’s immediate attention is required. Therefore, a notice of assessment added to a person’s CRA account will be presumed to be sent and received on the date that CRA sends an e-mail to the person, stating that immediate attention is required.

An objection to a notice of assessment must be made within 90 days from the date it was sent (notably, not the date it was received), pursuant to subsection 165(1) of the Income Tax Act. Extensions up to a year after expiry of the 90-day deadline may also be available under subsection 166.1. 

Subsection 244(15) of the Income Tax Act, deems a notice of assessment to be sent on the day the notice was sent. Therefore, unless the presumptions in subsection 244(14) or (14.1) are rebutted, the time limit to file an objection will start on the date stated in the assessment.

While mail delivery is not perfectly reliable, we have concerns that CRA’s proposed move toward only providing electronic notices to taxpayers (at least the vast majority, which are electronic filers) will lead to taxpayers not being aware the notices were sent. Aside from the potential for CRA’s e-mail being sent to junk mail, many recipients will likely suspect that correspondence from CRA is part of a phishing scam. This is especially so, with CRA’s many recent disclosures of security breaches and the ongoing phone scams purporting to be from CRA.

If taxpayers do not realize that CRA has determined that additional taxes, penalties, and interest are owed, because they are not aware that an assessment has been made, then taxpayers may unfairly run out of time to object to that assessment. Little recourse is available to a taxpayer if the assessment was sent electronically in accordance with subsection 244(14.1).

We understand why CRA wants to move toward more electronic communication, however a longer transition period is warranted with taxpayers having the option to receive either paper or electronic assessments. 

For those taxpayers out there who continue to toil over the T1-Personal paper package they picked up from their local post office, fear not….you will still maintain your presence in the “paper world” of CRA and will continue to receive a paper copy of your correspondence and NOA’s by snail-mail.

To give you a sense of the elevated attempt to drag taxpayers and tax preparers into the digital world with Budget 2021, long-standing existing rules regarding the thresholds for the mandatory use of electronic filing means have been amended to lower the thresholds significantly. For tax preparers, Budget 2021 proposes to reduce the threshold for mandatory use of electronic filing from 10 income tax returns for individuals or corporations to 5.  It is also proposed that tax preparers are only allowed to file a maximum of 5 paper personal or corporate income tax returns in a calendar year.  The mandatory threshold is also reduced dramatically for filers of information returns (T4, T5, etc.) from 50 returns to 5. These changes would apply for calendar years after 2021. 

When it comes to filing corporate income tax returns and GST/HST returns for registrants, Budget 2021 eliminates the threshold entirely and imposes the expectation that all corporate returns and GST/HST returns be filed electronically.  These proposed measures are targeted for implementation for year-ends that begin after 2021 for corporate returns and for GST/HST reporting periods that begin after 2021.

Finally, Budget 2021 addresses thresholds for electronic payments and the inclusion of payments made via “online banking” in the requirement to make certain payments at a “financial Institution” and elimination of the requirement for taxpayer signatures on EFile authorization forms (T183 and T183CORP) be handwritten.  Along with the measures related to electronic correspondence, these measures will come into force on Royal Assent. 

   21. Changes to the Elections Act

The budget is not only about tax – we noticed some interesting expenditures relating to changes to the Elections Act. There is sparse detail other than “temporary amendments to the Canada Elections Act to ensure the health and safety of electors and election workers during a general election if it takes place during the pandemic, including introducing a 3-day polling period.”

A second Elections Act related amendment is to “introduce amendments to the Canada Elections Act to specify that making or publishing a false statement in relation to a candidate, prospective candidate, or party leader would be an offence only if the person or entity knows that the statement is false.”

These “slip ins” follow what looks to be a budget that is designed for an election year- with the current government clearly thinking ahead in how they want to manage an election. Other countries have not to introduced these measures (with much larger populations), especially when advance polling is increasingly common.  This appears to be purely a political move – and an unacceptable one that should not be hidden inside a 700+ page federal budget with little detail. To propose a 3 day polling period is problematic and littered with influence issues that should be furiously debated.  In our opinion, this is not an acceptable proposal.

Update – May 5, 2021

So, after a little digging, it turns out that this part of the Budget is likely as a result of the proposals contained in Bill C-19An Act to amend the Canada Elections Act (COVID-19 response).

The Bill summarizes the proposals as follows:

SUMMARY

This enactment adds a new Part to the Canada Elections Act that provides for temporary rules to ensure the safe administration of an election in the context of the coronavirus disease 2019 (COVID-19) pandemic. The new Part, among other things,

(a) extends the Chief Electoral Officer’s power to adapt the provisions of that Act to ensure the health or safety of electors or election officers;

(b) authorizes a returning officer to constitute polling divisions that consist of a single institution where seniors or persons with a disability reside, or a part of such an institution, and to set the days and hours that a polling station established there will be open;

(c) provides for a polling period of three consecutive days consisting of a Saturday, Sunday and Monday;

(d) provides for the hours of voting during the polling period;

(e) provides for the opening and closing measures at polling stations;

(f) sets the days for voting at advance polling stations;

(g) authorizes the Chief Electoral Officer to modify the day on which certain things are authorized or required to be done before the polling period by moving that day backward or forward by up to two days or the starting date or ending date of a period in which certain things are authorized or required to be done by up to two days;

(h) provides that an elector may submit an application for registration and special ballot under Division 4 of Part 11 in writing or in electronic form;

(i) provides that an elector whose application for registration and special ballot was accepted by the returning officer in their electoral district may deposit the outer envelope containing their special ballot in a secure reception box or ballot box for the deposit of outer envelopes; and

(j) prohibits installing a secure reception box for the deposit of outer envelopes unless by or under the authority of the Chief Electoral Officer or a returning officer and prohibits destroying, taking, opening or otherwise interfering with a secure reception box installed by a returning officer.

The enactment also provides for the repeal of the new Part six months after the publication of a notice confirming that the temporary rules in that Part are no longer required to ensure the safe administration of an election in the context of the COVID-19 pandemic.

As of today’s date, Bill C-10 has only received First Reading in the House of Commons and according to this news article, the Bill has a slight chance of passing before the House adjourns for the summer.  We’ll be watching for further developments. 

   22. Rate Reduction for Zero-Emission Technology Manufacturers

As part of the over-arching “green” theme of Budget 2021, the Department of Finance proposes to introduce significant federal corporate income tax reductions for qualifying “zero-emission” technology manufacturers.  The qualifying zero-emission technology manufacturing or processing activities have been laid out in the budget documents as:

  • manufacturing of solar energy conversion equipment, such as solarthermal 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).

There is a cost of labour and capital calculation that will determine the proportion of eligible income for a qualifying corporation, provided the corporation meets a de minimus test of at least 10% of eligible activity.

Corporations that qualify under the proposed rate reduction will be subject to taxation rates on qualifying income of:

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

Where a corporation has income above the $500,000 small business deduction limit, it would have the option of having the qualifying income taxed at the preferred 4.5% rate, provided that, in aggregate, the amount taxed at the general small business rate of 9% plus the eligible income taxed at 4.5% does not exceed $500,000.

The Budget proposes to phase in the program for taxation years beginning after 2021 and gradually phase out the reduced rates with the program being completely phased out by 2031.