Canadian Finance Minister Chrystia Freeland delivered the Budget 2021 on 19 April 2021. With respect to businesses, some of the main measures of Budget 2021 include proposals to:
- Extend the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy, and the Lockdown Support until September 2021, with the subsidy rates gradually reduced over the July-to-September period, and introduce legislative authority for the government to provide a further extension to 20 November 2021 if needed;
- Introduce a new Canada Recovery Hiring Program to provide eligible employers with a subsidy of up to 50% on the incremental remuneration paid to eligible employees between 6 June 2021 and 20 November 2021 (employers could claim hiring subsidy or wage subsidy, but not both);
- Provide temporary immediate expensing in respect of certain property acquired by a Canadian-controlled private corporation (CCPC) that would be available for eligible property acquired by a CCPC on or after Budget Day (19 April) and that becomes available for use before 1 January 2024, up to a maximum amount of CAD 1.5 million per taxation year shared among associated members of a group of CCPCs, with the immediate expensing only available for the year in which the property becomes available for use (eligible property includes capital property that is subject to the capital cost allowance (CCA) rules, excluding certain generally long-lived assets);
- Introduce temporary reduced corporate income tax rates for qualifying zero-emission technology manufacturers on eligible zero-emission technology manufacturing and processing income in relation to solar, wind, water, and geothermal energy equipment, zero-emission vehicles and batteries, and others for taxation years that begin after 2021, with a gradual phase-out from 2029 to 2031:
- 7.5%, where that income would otherwise be taxed at the 15% general corporate tax rate; and
- 4.5%, where that income would otherwise be taxed at the 9% small business tax rate;
- Amend the CCA for clean energy equipment with the expansion of CCA classes 43.1 (30%) and 43.2 (50%) to include additional hydroelectric, solar, and hydrogen-power equipment and systems, while modifying requirements in relation to systems that burn fossil fuels and/or waste fuels to produce either electricity or heat, or both, to ensure consistency with the government's current environmental objectives;
- Temporarily extend certain timelines for the Canadian Film or Video Production Tax Credit (CPTC) and the Film or Video Production Services Tax Credit (PSTC) by 12 months, including in relation to the 24-month period to incur qualifying expenditures before the date that principal photography begins for the CPTC and the 24-month timeline in respect of when aggregate expenditure thresholds must be met for film or video productions for the PSTC;
- Introduce a tax on the retail sale of new luxury cars and personal aircraft priced over CAD100,000, and boats priced over CAD 250,000, effective from 1 January 2022, with the tax rate equal to the lesser of 10% of the full value of the vehicle or aircraft or 20% of the amount exceeding CAD 100,000 or CAD 250,000 for vehicles and boats, respectively;
- Introduce measures to address certain tax planning used to circumvent the tax debt avoidance rule and increase related penalties, including for planning that seeks to avoid the technical application of the rule by:
- arranging for a tax debt to crystallize after the end of the taxation year in which the property transfer occurs;
- arranging for the transferor to be dealing at arm's length with the transferee at the time of the property transfer; or
- stripping out net asset value of the transferor using a series of transactions that does not breach the point-in-time valuation test for the property transferred and consideration given therefor;
- Implement the best practices recommended by the BEPS Action Plan on interest deductibility and hybrid mismatch arrangements, including:
- an earnings-stripping rule consistent with the Action 4 recommendations that would limit the amount of net interest expense that a corporation may deduct in computing its taxable income to no more than a fixed ratio of tax EBITDA, including:
- an initial ratio of 40% for taxation years beginning on or after 1 January 2023 and a final ratio of 30% for taxation years beginning on or after 1 January 2024;
- rules allowing denied interest to be carried forward for up to 20 years or back for up to 3 years, including the carryback of denied interest in the initial years to the previous 3 years subject to the 40% or 30% ratio restriction;
- an exclusion for interest that is not deductible under existing income tax rules, including the thin capitalization rules, which would continue to apply; and
- exemptions from the earnings-stripping rule for (i) CCPCs that, together with any associated corporations, have taxable capital employed in Canada of less than CAD15 million and (ii) groups of corporations and trusts whose aggregate net interest expense among their Canadian members is CAD 250,000 or less;
- hybrid mismatch rules consistent with the Action 2 recommendations with a first package effective from 1 July 2022 and a possible second package from 2023, providing that:
- payments made by Canadian residents under hybrid mismatch arrangements would not be deductible for Canadian income tax purposes to the extent that they give rise to a further deduction in another country or are not included in the ordinary income of a non-resident recipient; and
- to the extent that a payment made under a hybrid mismatch arrangement by an entity that is not resident in Canada is deductible for foreign income tax purposes, no deduction in respect of the payment would be permitted against the income of a Canadian resident and any amount of the payment received by a Canadian resident would also be included in income, and, if the payment is a dividend, it would not be eligible for the deduction otherwise available for certain dividends received from foreign affiliates.
In addition to the above proposals, the Budget 2021 also includes the launch of a consultation on the implementation of new (enhanced) mandatory disclosure rules to strengthen existing reporting rules on avoidance transactions. 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 1 January 2022.
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.
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. It would also include examples in appropriate circumstances. Sample descriptions of notifiable transactions will be issued as part of the consultation.
A taxpayer who enters into a notifiable transaction, or a transaction or series of transactions that is substantially similar to a notifiable transaction – or another person who enters into such a transaction or series in order to procure a tax benefit for the taxpayer – would be required to report the transaction or series in a 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.
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, i.e., the corporation is a resident of Canada or is a non-resident corporation with a taxable presence in Canada;
- The corporation has at least CAD 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), with the threshold applied 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); and
- 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 CAD 50 million in assets would be made using the carrying value of the assets on the corporation's balance sheet at the end of the financial year. If the corporation did not prepare a balance sheet, or did not prepare a balance sheet in accordance with Canadian GAAP (or other country-specific GAAP relevant for domestic public companies), the amounts used would be those that would have been reflected in a balance sheet prepared in accordance with GAAP. Banks and insurance corporations that are regulated by the Superintendent of Financial Institutions, or a similar provincial authority, would use the amounts in the statements accepted by that authority for regulatory purposes.
The Budget 2021 also includes the launch of a consultation on the implementation of a Digital Services Tax (DST) as announced in the November 2020 Fall Economic Statement. The proposed tax is intended to ensure that revenue earned by large foreign or domestic businesses from engagement with online users in Canada, including through the collection, processing, and monetizing of data and content contributions from those users, is subject to Canadian tax. The DST is intended to be interim in nature and would apply until an acceptable multilateral approach comes into effect with respect to the implicated businesses. Key features of the proposed DST include the following:
- Rate and Base: The DST would apply at a rate of 3% on revenue from certain digital services reliant on the engagement, data, and content contributions of Canadian users.
- In-Scope Revenue: The DST would apply to revenue from online business models in which the participation of users, including by the provision of data and content contributions, is a key value driver, including revenue from:
- Online marketplaces: Services provided through an online marketplace that helps match sellers of goods and services with potential buyers, whether or not the platform facilitates completion of the sale. Included would be optional (e.g., "premium") services that enhance the basic intermediation function or affect its commercial terms;
- Social media: Services provided through an online interface to facilitate interaction between users or between users and user-generated content;
- Online advertising: Services aimed at the placing of online advertisements that are targeted based on data gathered from users of an online interface, including online interfaces such as online marketplaces, social media platforms, internet search engines, digital content streaming services, and online communications services; and
- User data: The sale or licensing of data gathered from users of an online interface, including anonymized and aggregated data;
- Taxpayer Thresholds: The DST would apply in a particular calendar year to an entity that meets, or is a member of a business group that meets, both of the following thresholds:
- global revenue from all sources of EUR 750 million or more (the threshold for country-by-country reporting under an OECD standard) in the previous calendar year; and
- in-scope revenue associated with Canadian users of more than CAD 20 million in the particular calendar year (DST would apply for in-scope revenue exceeding this threshold);
- Treatment for Income Tax Purposes: As with other non-income taxes, the deductibility of the DST liability of an entity in computing taxable income for Canadian income tax purposes would be determined based on general principles, e.g., whether it is incurred for the purpose of earning the entity's income subject to Canadian income tax, and further, DST liability would not be eligible for a credit against Canadian income tax payable;
- Administration: It is proposed that entities subject to DST will be required to file an annual return following the end of the reporting period, which is proposed to be the calendar year, including that:
- one annual payment would be required after the end of the reporting period;
- a group would be able to designate an entity to file the DST return and pay the DST liability on behalf of the group; and
- to facilitate enforcement, each entity in a group would be jointly and severally liable for DST payable by any other group member.
As proposed, the DST would apply from 1 January 2022.