2021 Federal Economic and Fiscal Update
The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, presented the Economic and Fiscal Update 2021 (the “Update”) on December 14, 2021. Two Notice of Ways and Means Motions were also tabled.
The Update reports a deficit of $327.7 billion for the last fiscal year and $144.5 billion for this fiscal year, down from Budget 2021’s forecasts of $354.2 billion and $154.7 billion, respectively. The Update included announcements of several new tax measures which are briefly summarized below.
Income Tax Measures
Extending the Home Office Deduction
In 2020, the government introduced a temporary flat rate method to calculate a deduction for home office expenses for Canadians who were required to work from home during the pandemic. The government announced that they will extend the simplified rules for deducting home office expenses and increase the temporary flat rate to $500 annually for the 2021 and 2022 tax years.
Expanding the Eligible Educator School Supply Tax Credit
Under current rules, teachers and early childhood educators may claim a 15% refundable tax credit based on an amount of up to $1,000 in expenditures made in a taxation year for eligible supplies. The 2021 Fall Economic Statement proposes to increase the rate of the refundable tax credit to 25%.
Additionally, this measure would clarify and broaden the rules regarding the locations where teaching supplies are permitted to be used by removing the requirement that teaching supplies must be used in a school or regulated child care facility to be eligible. This measure also expands 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;
- video streaming devices;
- multimedia projectors;
- printers; and
- 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.
These measures apply to the 2021 and subsequent taxation years. Proposed legislation that would implement these changes are included in a Notice of Ways and Means Motion released on December 14, 2021.
New Small Businesses Air Quality Improvement Tax Credit
The federal government is proposing a new temporary refundable Small Businesses Air Quality Improvement Tax Credit. Proposed legislation that would implement this credit is included in a Notice of Ways and Means Motion released on December 14, 2021. To access the credit, a taxpayer must be an eligible entity and incur qualifying expenditures attributable to air quality improvements in qualifying locations. The costs must be incurred between September 1, 2021 and December 31, 2022.
An eligible entity includes an individual (other than a trust), a partnership, or a qualifying corporation. A qualifying corporation means a Canadian-controlled private corporation (CCPC) with taxable capital employed in Canada of less than $15 million in the prior tax year.
Qualifying expenditures would be prescribed by regulation. They would include outlays and expenses that are directly attributable to the purchase, installation, conversion or upgrade of a new or retrofitted HVAC system placed in service at a qualifying location. They would also include outlays and expenses that are directly attributable to the purchase of a device that is placed in service at a qualifying location and designed to filter air using a HEPA filter. The expenses are prescribed only to the extent that they are reasonable and intended primarily to increase outdoor air intake or to improve air cleaning.
However, qualifying expenditures do not include 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 gin 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.
A qualifying location is real or immovable property in Canada used by the eligible entity primarily in the course of its ordinary commercial activities, which includes rental activities. However, it excludes a “self-contained domestic establishment” (i.e., a personal residence).
Calculating the Tax Credit
The refundable credit is equal to 25% of the qualifying expenditures. Total qualifying expenditures will be limited to $10,000 per qualifying location and $50,000 across all locations—these limits are shared among affiliated businesses.
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.
The amount of a claimable qualifying expenditure is reduced by the amount of any government assistance received in respect of that expense.
Also, the amount of the tax credit would be included in the taxable income of the business in the year the credit is claimed.
New Farmers Fuel Charge Refundable Tax Credit
Under the federal carbon pollution pricing system, the government applies a price on pollution in jurisdictions that do not have their own system. All direct fuel charge proceeds are returned to the province or territory of origin. In non-participating (“backstop”) jurisdictions, 90% of direct proceeds are returned to residents of those provinces through Climate Action Incentive payments (the other 10% is used to support small businesses, Indigenous groups, and other organizations).
Recognizing that many farmers use natural gas and propane in their operations, the government proposes to return fuel charge proceeds directly to farming businesses in backstop jurisdictions via a refundable tax credit starting for the 2021-2022 fuel charge year. This would be available to corporations, individuals, and trusts that are actively engaged in either the management or day-to-day activities of earning income from farming and incur total farming expenses of $25,000 or more, all or a portion of which are attributable to backstop jurisdictions. This would include where they carry on business through a partnership.
The credit amount would be equal to the eligible farming expenses attributable to backstop jurisdictions in the calendar year when the fuel charge year starts, multiplied by a payment rate specified by the Minister of Finance for the fuel charge year. The Minister has specified payment rates for eligible farming expenses of $1.47 per $1,000 in eligible farming expenses for 2021, and $1.73 per $1,000 in eligible farming expenses for 2022. Businesses can claim these refundable tax credits through their tax returns that include the 2021 and 2022 calendar years.
Where an eligible farming business is carried on through a partnership, the credit would be claimed by a corporation, individual, or trust that is a partner in the partnership at the end of the partnership’s fiscal period. The partnership would calculate the total amount of eligible farming expenses and each partner would then calculate their credit entitlement based on their proportionate interest in the partnership. Special rules would apply to calculate a partner’s credit entitlement where a partnership interest is held indirectly through one or more partnerships.
Eligible farming expenses are amounts deducted in computing income from farming for tax purposes, excluding any deductions arising from mandatory and optional inventory adjustments and transactions with non-arm’s length parties. Where taxation years do not align with the calendar year, eligible farming expenses would be allocated to each calendar year based on the number of days in each calendar year over the total days in the taxation year, and then subjected to the applicable payment rate for the calendar year. Expenses must also be attributable to one or more backstop jurisdictions. For businesses operating in multiple jurisdictions, eligible farming expenses would be apportioned by jurisdiction
Northern Residents Deduction
Legislation in the Notice of Ways and Means Motion proposes to implement changes to the Northern Residents Deduction that were initially proposed by Budget 2021. These amendments expand access to the travel component of the deduction. Accordingly, a taxpayer can claim, in respect of each of the taxpayer and each eligible family member, up to:
- the amount of employer-provided travel benefits the taxpayer received in respect of travel by that individual; or
- a $1,200 standard amount that may be allocated across eligible trips taken by that individual.
A maximum of two trips would be eligible for the deduction for non-medical personal travel; there is no trip limit for medical purposes.
Digital Service Tax
The December 14, 2021 Economic and Fiscal Update notably includes a Notice of Ways and Means Motion (“NWMM”) presenting the anticipated draft legislation for the Digital Service Tax (“DST”) which may or may not be implemented in January 2024 with retroactive application to January 2022.
The proposed Act would implement the Digital Services Tax (DST) announced in the 2020 Fall Economic Statement (the “Statement”), further details of which were presented in Budget 2021. The Digital Service Tax was discussed extensively in the December 2021 edition of the GST/HST Reporter.
The DST was proposed from the outset as an interim measure, to apply until an acceptable multilateral approach comes into effect. In international negotiations, 137 members of the OECD/G20 Inclusive Framework agreed to an October 8, 2021 Statement on a two-pillar plan for international tax reform. The Statement was subsequently endorsed by G20 Leaders and Finance Ministers. Canada is working with international partners to bring the multilateral agreement into effect.
In the interim, to protect the interests of Canadians, the government is moving forward with legislation for the DST. Consistent with the Statement, the DST would not be imposed earlier than January 1, 2024, and only if the treaty implementing the Pillar One tax regime under the multilateral approach has not come into force. In that event, the DST would be payable as of the year that it comes into force in respect of revenues earned as of January 1, 2022. The government hopes that the timely implementation of the new international system will make this unnecessary.
As a reminder, here is a summary of the main features of the DST:
The DST would apply at a rate of 3% on certain revenue earned by large businesses from certain digital services reliant on the engagement, data and content contributions of Canadian users, as well as on certain sales or licensing of Canadian user data.
The DST would apply to large businesses, both foreign and domestic, that meet both of two revenue thresholds. If a taxpayer is a member of a consolidated group, these thresholds would be calculated on a group basis.
- Total Revenue Threshold – If a taxpayer or, if applicable, its consolidated group, earns total revenue from all sources of €750,000,000 or more in a fiscal year of the taxpayer or group that ends in a particular calendar year, the taxpayer or group would meet this threshold for the subsequent calendar year. Additionally, if a taxpayer joins a group that meets the €750,000,000 threshold, the taxpayer would meet this threshold as of the date of joining the group.
- Canadian In-Scope Revenue Threshold - A taxpayer would meet this threshold for a calendar year if the taxpayer (or the taxpayer’s consolidated group, if applicable) earns greater than $20,000,000 of Canadian in-scope revenue in the calendar year.
Four categories of in-scope revenue are proposed:
- Online marketplace services revenue;
- Online advertising services revenue;
- Social media services revenue; and,
- User data revenue.
Sourcing to Canada
The DST would only apply to in-scope revenue associated with users in Canada. Revenue sourcing principles would vary according to the nature of the revenue.
Online marketplace services revenue would be sourced using one of three methods, depending on how the revenue is earned. First, if revenue is earned from facilitating the supply of a service delivered in physical form, such as the provision of transportation or accommodations, and the service is performed in Canada, the revenue from facilitating that specific transaction would be entirely sourced to Canada. Second, if revenue is associated with facilitating a particular transaction between users, other than a service delivered in physical form, sourcing to Canada would depend on where those users are located. If both users are located in Canada, all the revenue associated with facilitating that transaction would be sourced to Canada. If only one user is located in Canada, 50 percent of the revenue associated with facilitating that transaction would be sourced to Canada. Finally, if online marketplace services revenue cannot be traced to a specific transaction, the revenue would be sourced to Canada based on a formulaic approach that calculates the percentage of the marketplace’s transaction participants that are located in Canada.
Online advertising services revenue would be sourced based on one of two methods, depending on how the revenue is earned. If revenue can be traced to the display of an advertisement to a specific user, and that user is located in Canada, the revenue would be entirely sourced to Canada. If revenue cannot be traced to specific users, the revenue would be sourced to Canada based on a formulaic approach that calculates the percentage of users to which the advertisement was displayed that are located in Canada.
Social media services revenue would be sourced using only one method: a formulaic approach that calculates the percentage of the platform’s users that are located in Canada.
User data revenue would be sourced based on one of two methods. If revenue can be traced to the user data of a single user, and that user is located in Canada, the revenue would be entirely sourced to Canada. If revenue relates to a set of data that was collected from multiple users, revenue would be sourced to Canada based on the percentage of those users that are located in Canada.
Whether a user is located in Canada or outside Canada would be determined based on a taxpayer’s available data with respect to the user. This could include the billing, delivery or shipping address, or phone number area code, most recently provided by the user, global satellite positioning data, or Internet Protocol address data. If, based on this data, it is reasonable to conclude that the user is located in Canada, that user would be considered to be located in Canada.
The method of determining a user’s location is dependent on the kind of revenue for which the determination is made. In most cases, user location is where the user is normally located (i.e., their usual or ordinary location).
The DST would apply to in-scope revenue sourced to Canada only to the extent that it exceeds a $20,000,000 deduction. This deduction would be shared amongst members of a consolidated group based on a formula.
Given the group-level threshold calculations and group-wide sharing of the $20,000,000 deduction, certain administrative rules would be included in the Act to simplify compliance and enforcement.
Members of consolidated groups would be allowed to designate an entity in the group to fulfill their filing obligations, pay the DST liability, and otherwise comply with the administrative requirements of the Act.
The Act would include a joint liability provision whereby each entity in a consolidated group would be jointly and severally liable for DST payable by any other group member.
The Act would require registration by certain taxpayers that meet two thresholds. To assist enforcement, the Canadian in-scope revenue threshold for registration would be $10,000,000 rather than $20,000,000 (the threshold for tax liability) although the €750,000,000 total revenue threshold would be the same.
Interested parties are invited to provide comments on the proposed Act. Please send your comments to [email protected] by February 22, 2022.
Help for Guaranteed Income Supplement Recipients and Students Affected by CERB Payments
To compensate low-income individuals who have seen a decline in their Guaranteed Income Supplement (GIS) or Allowance payments in 2021 as a result of having received Canada Emergency Response Benefits (CERB) or Canada Recovery Benefits (CRB) in 2020, the government is proposing to pay a one-time payment to compensate them for their loss of all or a portion of their benefit.
The government is also proposing to provide debt relief to some students who received CERB payments in error and are now required to repay that amount, by allowing their CERB related debt to be applied to their entitlement under the Canada Emergency Student Benefit (CESB) for the same benefit period.
New Underused Housing Tax
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”). A consultation was held, through the Department of Finance, from August 6 to September 17, 2021, and, where appropriate, feedback received from stakeholders has been taken into consideration as part of the final design of the proposed taxation framework.
The introduction of this new tax was confirmed in the December 14, 2021 Economic and Fiscal Update which included, notably, a Notice of Ways and Means motion (“NWMM”) with the text of the proposed legislation.
It is proposed that the Underused Housing Tax be effective for the 2022 calendar year. The initial Underused Housing Tax returns, for the 2022 calendar year, would be required to be filed with the Canada Revenue Agency on or before April 30, 2023 and any tax payable would be required to be remitted on or before that date.
The Economic and Fiscal Update underlined that in addition to exemptions described in the consultation paper, it is proposed that an owner’s interest in a residential property would be exempt from the Underused Housing Tax for a calendar year if a residence that is part of the residential property is, in respect of the calendar year, the primary place of residence of: (1) the owner; (2) the owner’s spouse or common-law partner; or (3) an individual that is the 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.
Furthermore, the government plans to bring forward an exemption for vacation/recreational properties, which would apply to an owner’s interest in a residential property for a calendar year if the property: (1) 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 (2) is 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.
Luxury Tax Update
Budget 2021 proposed to implement a tax on the sale of luxury cars and aircraft over $100,000 and boats over $250,000, if acquired for personal use. The Economic and Fiscal Update provided a brief update on the status of this proposed tax. The Department of Finance is currently integrating feedback results from the recent stakeholder consultation into the proposed framework. Draft legislation, including the effective date, will be released in early 2022.
Update on Investment Tax Credit Carbon Capture, Utilization, and Storage
Budget 2021 proposed an investment tax credit for capital invested in carbon capture, utilization, and storage (CCUS) projects. The government has consulted with various stakeholders regarding the design of the incentive. The final design of the proposed credit will be provided in Budget 2022.