2023 Canada Federal Budget: Detailed commentary

March 29, 2023

TAX ALERT | March 29, 2023

Authored by RSM Canada

Federal budget commentary 2023

On March 28, 2023, Deputy Prime Minister and Minister of Finance Chrystia Freeland released Canada’s 2023 Budget (Budget 2023).

Budget 2023 prioritizes four key initiatives: (i) strengthening the middle class, (ii) making life more affordable, (iii) increasing accessibility to public health, and (iv) fostering a more environmentally sustainable economy.

From a tax perspective, Budget 2023 revealed a continued effort to fine-tune and implement previously announced measures. While there were no business or personal income tax rate increases, clean energy continues to be the focus and there is a clear directive to combat abusive tax avoidance schemes both domestically and internationally. Further, the proposed changes focus on supporting the middle class through inflationary times, namely by ensuring that the wealthiest Canadians pay their fair share of taxes.

This tax alert summarizes the personal and business income tax measures as well as indirect tax measures in Budget 2023 relevant to the middle market.

Personal tax measures

Budget 2023 proposes no changes to personal tax rates.

Employee ownership trusts

Employee ownership trusts (EOTs) were proposed as part of Budget 2022 as a vehicle to facilitate the purchase of a business by its employees without requiring them to pay directly to acquire shares of the business. EOTs will provide a valuable option for Canadian business owners interested in succession planning. These proposed changes will come into effect as of Jan. 1, 2024.

The rules proposed in Budget 2023 on EOTs provide qualifying conditions to establish an EOT and changes to existing rules in the Income Tax Act (ITA).

Budget 2023 proposes that an EOT must have only two purposes:

To hold shares of a qualifying business for the benefit of employees; and,
To make distributions to those employee beneficiaries based on a legislative formula.

An EOT would be required to hold a controlling interest in the shares of one or more qualifying businesses. All or substantially all of an EOT’s assets must also be shares of a qualifying business.

Budget 2023 also updates existing rules in the ITA to better accommodate the establishment and use of EOTs. This includes increasing the deferral of capital gains for the sale of a business to an EOT for up to ten years, providing for a minimum 10 per cent annual taxable inclusion of the gain. Ordinarily, a deferral of the recognition of a capital gain is allowed for a maximum of five years, providing for a minimum 20 per cent annual taxable inclusion of the gain.

Further, an EOT will be exempted from existing rules in the ITA that require an employee to include a loan from a business in their income if that loan is not repaid within one year. Instead, a corporation would be entitled to loan amounts to an EOT for up to fifteen years without income recognition at the employee level. Additionally, EOTs are exempt from the 21-year rule, which generally requires certain trusts to be deemed to have disposed of their property every 21 years.

Application to mergers and acquisitions (M&A)

The EOT proposals would be welcome news to many private Canadian business owners who wish to transition their businesses to employees on a tax-efficient basis. The proposed EOT framework addresses many of the historical challenges associated with transitioning a business to employees, including tax-efficient financing, managing the timing of cash flows to taxation, and permitting access to capital gains treatment.

Strengthening the intergenerational business transfer framework

Bill C-208 was intended to facilitate genuine intergenerational business transfers by providing an exception to the anti-surplus stripping rules contained in the ITA. However, after the bill received royal assent on June 29, 2021, the federal government realized that it permitted surplus-stripping transactions to occur where no legitimate transfer of a business to the next generation took place.

Budget 2023 proposes to amend the rules introduced by Bill C-208 to ensure that they apply only where a genuine intergenerational business transfer takes place, effective January 1, 2024.

A genuine intergenerational share transfer would be a transfer of shares of a corporation by a natural person to another corporation where a number of conditions are satisfied. For instance, each share transferred must be either a “qualified small business corporation share” or a “share of a family farm or fishing corporation” at the time of transfer. Further, taxpayers who wish to undertake a genuine intergenerational share transfer must rely on one of two transfer options:

An immediate intergenerational business transfer (a three-year test); or,
A gradual intergenerational business transfer (a five-to-ten-year test).

The immediate intergenerational business transfer approach would provide finality earlier in the process but with more stringent conditions. Both legal and factual control of a business must be immediately transferred to the next generation.

The gradual intergenerational business transfer approach would require the initial transfer of only legal control.

Both types of transfers have detailed nuances to account for. Regardless of the intergenerational transfer approach taken, both options are eligible for a graduated ten-year reserve on capital gains incurred on the transfer.

Application to M&A

Owner-managers looking to transition their business should consider either the immediate business transfer route or the gradual business transfer. The choice should be based on the complexity and the readiness of the next generation acquiring the business, so as to structure the transition to meet the above conditions. Notably, while the gradual business transfer has seemingly eased restrictions, having to meet certain those conditions for up to 13 years post-transfer can be difficult and could result in a reassessment back to the initial year of transfer.

Alternative minimum tax for high-income individuals

The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer deductions and tax credits than the usual progressive rate calculation. An individual pays the higher of the AMT and the regular progressive rate calculation. Proposed changes include broadening the AMT base, raising the AMT exemption, and increasing the AMT rate. The changes are intended to be effective for taxation years that begin after 2023.

The AMT base would be broadened by increasing the following inclusion rates:

Ordinary capital gains from 80 per cent to 100 per cent;
Employee stock option benefits from 0 per cent to 100 per cent; and,
Capital gains on donations of publicly listed securities to 30 per cent

The AMT base would also be broadened by disallowing 50 per cent of certain deductions, such as employment expenses, moving expenses, child-care expenses, limited partnership losses of other years, and noncapital loss carryovers. Additionally, only 50 per cent of nonrefundable tax credits would be allowed to reduce the AMT base, subject to certain exceptions.

Lastly, Budget 2023 proposes increasing the AMT rate from 15 per cent to 20.5 per cent and raising the AMT exemption from $40,000 to the start of the fourth federal tax bracket, currently estimated to be approximately $173,000 for 2024. This means that the basic AMT exemption will be indexed annually.

Application to M&A

Taxpayers should consider the impact of the revisions proposed by Budget 2023 in the context of a liquidity event where tax attributes are being utilized to reduce or eliminate an individual’s tax liability. Additionally, consideration should be given where that individual is not expected to have sufficient income to recover any AMT paid in the near future. The increase in the overall rate coupled with no changes to the carryforward period may result in a greater amount of AMT becoming in effect a permanent tax.

The higher inclusion rate for general capital gains realized in the year of a transaction may increase the AMT for high-income individuals under the revised formula. Taxpayers would be prudent to model the estimated impact of these adjustments on expected transactions for taxation years starting after 2023 and consider accelerating transactions where it is advantageous to do so.

Business tax measures

Budget 2023 proposes no changes to the federal corporate income tax rates or the $500,000 small business limit.

Changes to the general anti-avoidance rules (GAAR)

Budget 2023 proposes to amend the GAAR in multiple ways, namely:

By introducing a preamble;
Changing the avoidance transaction standard;
Introducing an economic substance rule;
Introducing a penalty; and,
Extending the reassessment period in certain circumstances.

The preamble would clarify the scope of the GAAR in its application with the intention for it to apply to every other provision of the ITA. The avoidance transaction standard is proposed to narrowed from a “primary purpose” test to a “one of the main purposes” test. Additionally, the proposed amendments would provide that economic substance is to be considered at the “misuse or abuse” stage of the GAAR analysis and that a lack of economic substance tends to indicate abusive tax avoidance. These indicators of a lack of economic substance, while not intending to be exhaustive, may include:

Whether there is a potential for pre-tax profit;
Whether the transaction has resulted in a change of economic position; or,
Whether the transaction is entirely (or almost entirely) tax-motivated.

A penalty of 25 per cent will also be introduced on the tax benefit if the transaction is subject to the GAAR. The penalty could be avoided if the taxpayer disclosed the transaction to the CRA voluntarily or under the mandatory disclosure rules. Budget 2023 also expands the normal reassessment period by three years for reassessments made under GAAR unless the transaction was already disclosed to the CRA.

Application to M&A

If enacted as proposed, commonplace M&A tax planning may fall within the expanded scope of the GAAR. In that instance, taxpayers should consider potential impacts on their acquisition or divestiture structures that may be caught by the revised GAAR. Taxpayers would also have to ensure that adequate documentation is maintained with respect to commercial considerations supporting the planning steps undertaken in order to meet the economic substance requirement under the proposed rules. The expansion of the GAAR will also be relevant to buyers as they seek to understand potential tax exposures, including any extended reassessment periods that may exist in a target company post-acquisition.

Clean hydrogen and technology manufacturing

Budget 2023 proposes to introduce two new environmental measures—the Clean Hydrogen Investment Tax Credit (CHITC) and Clean Technology Manufacturing Investment Tax Credit (CTMITC). Both credits will be subject to new labour requirements, and where a project is eligible for both of these credits, only one can be claimed.

The refundable CHITC will be available to projects that produce all, or substantially all, hydrogen through their production process and in respect of purchasing and installing eligible equipment. The credit will vary between 15% and 40% of the capital cost of eligible property. Those who claim the tax credit will need to meet certain environmental markers over a given period of time to continue to qualify for the credit. This credit will apply to property that is acquired and available for use on or after March 28, 2023, and will be phased out for property that becomes available for use after 2034.

The CTMITC is a refundable credit for clean technology manufacturing and processing, and critical mineral extraction and processing. It will be equal to 30% of the capital cost of eligible property. To qualify for the credit, the eligible property must be utilized in eligible activities, such as manufacturing of certain renewable energy equipment and manufacturing of nuclear fuel rods. The credit would apply to property that is acquired and available for use on or after Jan. 1, 2024, and be completely phased out for property that becomes available for use after 2034. The credit may also be recovered if eligible property is sold or if there is a change in use.

Tax credit for carbon capture, utilization, and storage

The Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS Tax Credit) was originally announced as part of Budget 2022. Following consultations, there are now proposed changes to these rules. In particular, Budget 2023 proposes that:

The credit will apply to dual use equipment;

British Columbia be added as an eligible jurisdiction for dedicated geological storage;
Qualified third parties be permitted to approve the process for using and storing CO₂ in concrete instead of requiring approval from Environment and Climate Change Canada; and,
There be additional rules for the treatment of refurbishment costs and the recovery of refurbishment credits.

Where a project qualifies for this credit and any of the Investment Tax Credit for Clean Technology (CTITC), the Investment Tax Credit for Clean Electricity (CEITC) or the CHITC, the claimant will only be permitted to claim one of these credits. This credit will apply to eligible expenses incurred after 2021 and before 2041.

Share buyback tax

A new tax equal to 2 per cent of the annual net value of repurchased equity is proposed for repurchases and issuances of equity that occur on or after Jan. 1, 2024. This measure will apply to Canadian-resident corporations whose shares are listed on a public stock exchange, real estate investment trusts (REITs), specified investment flow-through (SIFT) trusts and SIFT partnerships. Mutual fund corporations are excluded. A business would not be subject to the tax if its gross repurchases of equity were less than $1 million during that taxation year. Budget 2023 proposes to also exclude the following transactions from the application of these rules:

Issuance and cancellation of debt-like preferred shares; and,
Issuance and cancellation of shares in corporate reorganizations and acquisitions, amalgamations, liquidations, and share-for-share exchanges.

Even though the government hopes this measure will encourage companies to redirect profits to business growth and employees, this tax may have the unintended effect of increasing the cost of capital for public companies. It may also create market inefficiencies, disincentivize private companies from going public and discourage investment in Canadian public companies.

Financial institution dividends

Corporations, including financial institutions, are allowed a dividend-received deduction in respect of dividends received on shares of Canadian resident corporations. Budget 2023 proposes that financial institutions will no longer be able to claim the deduction in respect of dividends received on shares that are mark-to-market property because the deduction conflicts with the policy behind the mark-to-market rules. Under these rules, gains on the disposition of mark-to-market property are included in ordinary income, not capital gains; and unrealized gains are included in computing income annually (in addition to when the property is disposed of). This measure would apply to dividends received after 2023.

Credit unions

For income tax and GST/HST purposes, if a credit union earns more than 10% of its revenue from sources other than certain specified sources (such as revenues from lending activities), it would not meet the definition of a “credit union.” The definition of a credit union is proposed to be amended to remove this revenue test. The proposed amendment would apply to taxation years ending after 2016.

International tax measures

Pillar two – Global minimum tax

Consistent with the announcement in Budget 2022, Budget 2023 announces the federal government’s intention to introduce legislation implementing the Income Inclusion Rule (IIR) and a domestic minimum top-up tax. These rules would be applicable to Canadian entities of multinational enterprises (MNEs), which are within the scope of Pillar Two (MNE with annual revenues of €750 million or more) and the undertaxed profits rule (UTPR).

In general, the IIR would impose a top-up tax on the income of a foreign-controlled entity or a foreign branch if that income was otherwise subject to an effective tax rate that is below 15 per cent. The UTPR is a “backstop” rule that generally applies where neither the ultimate parent jurisdiction nor any intermediate parent jurisdiction of an MNE has implemented the IIR. In these cases, other jurisdictions in which the MNE operates that have implemented the UTPR would impose the top-up tax on the group entities located in their jurisdiction. The top-up tax would be allocated through a formula basis in those jurisdictions.

Budget 2023 proposes to implement the IIR effective for fiscal years of MNEs that begin on or after Dec. 31, 2023, and UTPR for fiscal years of MNEs that begin on or after Dec. 31, 2024.

Previously announced measures

Budget 2022 confirms the government’s intention to proceed with the following international tax measures previously announced:

Legislative proposals released on Nov. 3, 2022, with respect to Excessive Interest and Financing Expenses Limitations.
Legislative proposals released on April 29, 2022, with respect to Hybrid Mismatch Arrangements.

Transfer pricing (TP) measures

The transfer pricing consultation paper is still forthcoming

Budget 2023 confirms the government’s intention to proceed with the Transfer Pricing Consultation paper previously announced in Budget 2021. While the Transfer Pricing Consultation contents remain unknown, initial indications of its focus exist in the proposed GAAR amendments on economic substance.

Following prominent global guidance, the CRA auditors have more recently audited with economic substance in mind. This is generally inconsistent with Canadian law, which has predominantly focused on legal form. As a result of this and other factors, the Department of Finance has experienced adverse outcomes for prominent transfer pricing court cases.

It is possible that these amendments may serve as a precursor to the CRA adopting a more substance over form approach, which may be central to the forthcoming Transfer Pricing Consultation. This can only be confirmed once the Consultation paper is released to evaluate the potential implications of the amendment.

Adoption of pillar one – Reallocation of taxing rights

Budget 2023 confirms the intention to adopt Pillar One. Pillar One will reallocate taxing rights over the profits of the largest and most profitable multinational enterprises (MNEs) to align with the jurisdictions of their users and customers. Budget 2023 indicates Pillar One has an anticipated entry to force date during 2024.

To the extent Pillar One is not adopted by Jan. 1, 2024, the previously announced Digital Services Tax (DST) will enter force in respect of revenues earned as of Jan. 1, 2022.

Indirect tax measures

The grocery rebate

Budget 2023 introduces the Grocery Rebate, which will increase the maximum goods and services tax credit (GSTC) for January 2023 by twice the amount received for January 2023. This would result in an effectual tripling of what would have otherwise been received for the month of January 2023 for eligible GSTC recipients. The Grocery Rebate will be paid as soon as related legislation is passed through the GSTC system. Maximum amounts under the Grocery Rebate will be $153 per adult, $81 per child and $81 for the additional single supplement.

GST/HST treatment of payment card clearing services

Budget 2023 proposes to exclude payment card clearing services rendered by a payment card network operator from the GST/HST definition of “financial service”. Under the Excise Tax Act, supplies of financial services are generally “exempt” for GST/HST purposes. This amendment follows a recent court decision that found that the GST/HST does not apply to supplies of these services. As such, the amendment ensures that such services will generally continue to be subject to the GST/HST.

This measure will apply to a service rendered under an agreement for a supply if any consideration for the supply becomes due or is paid without becoming due after March 28, 2023. If the consideration for the supply became due or was paid on or before March 28, 2023, the measure will only not apply if the supplier did not charge, collect or remit any amount of GST/HST in respect of the supply. The measure will also not apply in respect of any other supply that is made under the agreement and that includes the provision of a payment card clearing service.

Cannabis taxation – Quarterly duty remittances

The excise duty on cannabis products is typically remitted on a monthly basis. However, previous changes introduced by the 2022 budget allowed smaller-licensed businesses to remit their excise duties quarterly. Budget 2023 proposes that starting April 1, 2023, all licensed cannabis producers will be permitted to remit excise duties quarterly.

Credits and incentives measures

Clean technology and innovation

These programs provide funding for large projects across sectors that include emissions reduction, biomanufacturing, and natural resources. Over the next 10 years, over $500 million will be allocated to support the development and application of clean technologies, critical minerals, and industrial transformation.

Canada innovation corporation

Budget 2023 proposes new measures to encourage business innovation by spurring business and research development through the creation of the new Canada Innovation Corporation (CIC) for both new and established industries. The CIC is a new Crown corporation with a mandate to increase Canadian business expenditure on research and development across all sectors and regions of Canada.

Student placement programs

Budget 2023 continues to support Canada’s student work placement programs by providing employers with subsidies to promote the hiring of students to gain experience in the workforce. The program proposes to provide $197.7 million in 2024-25 to continue creating quality work-integrated learning opportunities for students through partnerships between employers and post-secondary education institutions.

Scientific research and experimental development

Budget 2023 does not propose any change regarding the Scientific Research and Experimental Development (SR&ED) tax incentive program. However, in 2022, the federal government announced intentions to review the SR&ED program to safeguard and encourage research and development that benefits Canada as well as to investigate opportunities for modernization and simplification of the program, such as changes to eligibility criteria. In the coming months, the Department of Finance will continue to engage with stakeholders to ensure the SR&ED program is effectively supporting the development of intellectual property.

Audit and enforcement measures

Publicly accessible federal beneficial ownership registry

As part of the government’s commitment to corporate transparency, Budget 2023 proposes further amendments to the Canada Business Corporations Act, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, the ITA, and other statutes to implement a publicly accessible beneficial ownership registry. These amendments are in addition to the ones already implemented under the 2022 budget.

The changes will:

Introduce protections for whistleblowers;
Bolster the powers of Corporations Canada to make inquiries;
Introduce an exemption regime for certain individuals who may face harm from public disclosure, including minors;
Ensure compliance with the new regime through robust criminal and monetary penalties; and,
Facilitate information-sharing and data validation, including investigative bodies and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Automatic tax filing

To allow low-income Canadians to access valuable support, Budget 2023 provides that the federal government will increase the number of eligible Canadians for File My Return to two million by 2025. File My Return is a service that allows eligible simple tax-filing Canadians to auto-file their tax return over the phone after answering a series of short questions. Additionally, the CRA is piloting a new automatic tax filing service to assist vulnerable Canadians who do not file their taxes to receive their benefits starting in 2024.

COVID benefits

To ensure the integrity of Canada’s emergency benefit system post-COVID-19, Budget 2023 proposes to provide $53.8 million in 2022-23 to Employment and Social Development Canada to support integrity activities relating to overpayments of COVID-19 emergency income supports.

RSM contributors

Peter Ahn, Senior Director
Michael Bancroft, Partner
Sigita Bersenas, Senior Associate
Bob Boser, Partner
Ryan Boyd, Manager
Maria Bugescu, Senior Manager
Vanessa Chan, Partner
Yana Filipovich, Senior Manager
Vasie Hager, Income Partner
Marino Jeyarajah, Partner
Cassandra Knapman, Senior Associate
Nakul Kohli, Senior Manager
Martin Leung, Senior Manager
Sean Lovric, Manager
Daniel Mahne, Manager

Sean McNama, Partner
Jignesh Mehta, Manager
Michael Morrison, Partner
Echa Odeh, Senior Associate
Elizabeth Ojesekhoba, Associate
Clara Pham, Partner
Shannon Preitauer, Manager
Austen Ramsay, Partner
Melina Rocha, Senior Manager
Stephen Rupnarain, Partner
Gregory Synanidis, Senior Manager
Sam Tabrizi, Partner
Simon Townsend, Senior Associate
Silvia Wang, Senior Director
Jing Zhang, Senior Associate

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/budget-commentary/2023-canada-federal-budget-detailed-commentary.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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2023 Canada Federal Budget: Industry highlights

March 29, 2023

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TAX ALERT | March 29, 2023

Authored by RSM Canada

Key industry takeaways from the latest budget release

Finance Minister Chrystia Freeland on March 28, 2023, tabled the 2023 Canada Federal Budget. Here are the implications of Budget 2023 across major industries, including key takeaways for middle market companies.

Looking for more in-depth information? Read our 2023 Canada Federal Budget: Detailed Commentary.

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/budget-commentary/2023-canada-federal-budget-industry-highlights.html

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

Navigating workforce challenges: What drives employee satisfaction and retention?

November 29, 2022

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INFOGRAPHIC | November 29, 2022

Authored by RSM Canada

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/services/business-strategy-operations/navigating-workforce-challenges-employee-satisfaction-retention.html

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

Economic statement 2022

November 8, 2022

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TAX ALERT | November 08, 2022

Authored by RSM Canada

Executive Summary

On Nov. 3, 2022, Canada’s Minister of Finance, Chrystia Freeland, released Canada’s Fall Economic Statement; the government’s first update in the wake of high inflation, increasing interest rates and economic uncertainty. The 2022 Fall Economic Statement introduces several new tax measures and affirms the government’s intention to proceed with previously announced tax measures, although the implementation date of some key measures is being delayed (trust reporting rules, mandatory disclosure rules and excessive interest and financing expense limitation rules).

Along with the 2022 Fall Economic Statement, the government both (i) released draft legislation for public consultation in respect of some tax measures and (ii) introduced Bill C-32 into Parliament to implement many other tax measures. This alert summarizes the key measures from the government’s Fall Economic Statement, draft legislation, and the proposed legislation currently before Parliament.

New tax measures announced in the Economic Statement

The following is a list of the new tax measures announced in the Economic Statement. These are not yet in effect, as the government indicated that it will provide details in the 2023 Federal Budget or at a later date.

A tax on share buybacks. The government announced its intention to introduce a corporate-level 2% tax that would apply on the net value of all types of share buybacks by public corporations in Canada, similar to a recent measure introduced in the United States. The details of this new tax will be announced in Budget 2023, and the tax would come into force on January 1, 2024.
Revisions to the Alternative Minimum Tax. The Alternative Minimum Tax (AMT) has been in effect for more than 35 years and is intended to ensure that high-income individuals cannot lower their tax bill too much. The government intends to revise (read enhance) the AMT in the 2023 Federal Budget.
Investment tax credit for clean technologies. To attract investments in Canada’s clean technologies, the government proposes a refundable tax credit up to 30% of the capital cost of investments in eligible equipment for property available for use on or after the day that the 2023 Budget is released.
Residential property-flipping rule will apply to assignment sales. Starting on Jan. 1, 2023, profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months is deemed to be business income (subject to limited exceptions). The government proposes to extend this new deeming rule to profits arising from the disposition of the rights to purchase a residential property via an assignment sale.

Intention to proceed with previously-announced measures

The government reiterated its intention to proceed with previously-announced tax measures and introduced Bill C-32 to implement these measures. Below are some of the notable measures:

Introducing the Canada Recovery Dividend under which banks and life insurance companies pay a temporary one-time 15% tax on taxable income above $1 billion over five years;
Increasing the corporate income tax rate of banks and life insurance companies by 1.5% on taxable income above $100 million;
Raising the upper limit for the phase out of the small business tax rate from $15 million to $50 million;
Providing that a tax benefit as defined in the general anti-avoidance rule (GAAR) applies includes an increase in tax attributes that have not yet been used to reduce taxes;
Strengthening the rules on avoidance of tax debts (i.e., enhancing the government’s power to collect unpaid tax debts); and
Increasing reporting requirements for trusts, however, the Bill C-32 delays the implementation by one year: for taxation years that end after Dec. 30, 2023 (instead of after Dec. 30, 2022). Bare trusts are still included in the scope of the trust rules.

Notably absent from Bill C-32 are the new Mandatory Disclosure Rules (reportable transactions, notifiable transactions and uncertain tax treatments). The government still intends to proceed with these rules but confessed that it needs more time to consider the feedback it received from the tax community before it proceeds with legislation. As a result, the proposed implementation date of Jan. 1, 2023 for reportable transactions and notifiable transactions is being pushed back to an unspecified date (whenever the legislation for the mandatory disclosure rules receives Royal Assent). The government still intends to have the uncertain tax treatment rules apply for taxation years stating on or after Jan. 1, 2023 (but the penalties will not be applicable until the legislation receives Royal Assent).

Excessive interest and financing expense limitation rules

The excessive interest and financing expense limitation (EIFEL) rules – announced as part of Budget 2021 – were first released in draft form on Feb. 4, 2022. On Nov. 3, 2022, the Department of Finance released an updated package of the draft EIFEL legislation, which provides essential considerations to the middle market of Canada.

The EIFEL rules have not been enacted yet. However, it is not too early to consider their application.

What is EIFEL?

The EIFEL rules limit a taxpayer’s interest and financing deduction (i.e., interest and financing expenses (IFE) net of interest and financing revenues (IFR)) to a fixed ratio of earnings before interest, taxes, depreciation and amortization (EBITDA), referred to as adjusted taxable income (ATI). The EIFEL rules apply after the existing limitations on the deductibility of IFE including the thin-capitalization rules under the Income Tax Act (Act).

IFE includes, among other things: interest; financing expenses that are ‘capitalized’ and deducted as capital cost allowance or as amounts in respect of resource expenditure pools; an imputed amount of interest in respect of certain finance leases; certain amounts that are economically equivalent to interest or that can reasonably be considered part of the cost of funding; and various expenses incurred in obtaining financing. IFR includes the taxpayer’s interest income, as well as other income from the provision of financing.

The ratio of permissible IFE, or taxpayers’ deduction capacity, will be 40% for taxpayers with a taxation year beginning on or after Oct. 1, 2023 and before Jan. 1, 2024. This ratio will reduce to 30% for taxation years beginning on or after Jan. 1, 2024. The denied IFE will be carried forward indefinitely and may be deducted in a future tax year where the taxpayer has sufficient capacity. Where the taxpayer’s IFE is less than its deduction capacity, the taxpayer will be able to carry forward the deduction capacity to apply against its own IFE in the next three tax years. Alternatively, a taxpayer may transfer the excess deduction capacity to another group member, subject to certain conditions.

To whom does EIFEL apply?

The EIFEL rules apply to taxpayers that are corporations or trusts, including non-resident corporations or trusts that earn income in Canada. The rules also apply to members of a partnership who are corporations or trusts, with the IFE and IFR being attributed to them in proportion to their interest in the partnership.

The following entities are excluded from the EIFEL regime:

CCPCs, that together with any associated corporations have taxable capital employed in Canada of less than $50 million;
Groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $1 million or less;
Certain standalone Canadian resident corporations and trusts and groups consisting exclusively of Canadian resident corporations and trusts that carry on substantially all their business in Canada. This exception will not apply where a group member has a ‘material’ foreign affiliate, a non-resident holds a ‘significant’ interest in any group member, or a group member has any ‘significant’ amount of IFE paid to a non-arm’s length ‘tax-indifferent investor’ such as a non-resident or a person exempt from tax.

Excluded and exempt IFE

Subject to certain conditions, taxpayers (including corporations and partnerships) may file an election to exclude IFE and IFR from the application of the 30% or 40% fixed ratio of deductible IFE when they are members of the same corporate group. This election facilitates domestic loss-consolidation transactions, which allow the losses of one group member to offset against the income of another group member.

Further, IFE incurred in respect of certain public-private partnership infrastructure projects (P3 projects), e.g., to design, build, finance, maintain, and operate, real or immovable property owned by the public sector authority, will be exempt from the scope of the rules.

The group ratio method of calculating deduction capacity

Taxpayers who are members of an accounting consolidated group or would be if the group were required to prepare such statements under IFRS, can elect to deduct IFE based on a group ratio, which may be in excess of the fixed ratio.

The maximum amount of IFE the consolidated group members are collectively permitted to deduct is generally determined as the lowest of: (i) the total of each Canadian group member’s ATI multiplied by the group ratio; (ii) the consolidated group’s net interest expense; and (iii) the total amount of ATI of each group member. The group may apportion this maximum deductible amount among its Canadian group members in its group ratio election. This flexible allocation mechanism allows taxpayers to redistribute the group ratio deduction capacity where it is most needed.

What should corporations do?

Once enacted, these rules will have a significant impact on the tax obligations of resident and non-resident taxpayers having IFE from arm’s length or non-arm’s length sources. Further, IFE paid before the enactment of these rules (i.e., during “pre-regime” years), including the present tax year, will affect the taxpayer’s beginning balance of carryforward deduction capacity. Therefore, taxpayers should carefully analyze the application of these rules along with other provisions in the Act on the deductibility of IFE.

Rules for reporting income in the digital world and gig economy

The Department of Finance has released draft legislation to adapt the OECD’s “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy” for Canadian income tax purposes. The government sees these rules as necessary because the gig economy is causing a shift away from traditional employment relationships and, therefore, the traditional employer reporting obligations. Many of these gig economy businesses operate through online platforms – e.g., Airbnb and Uber – necessitating new reporting obligations.

These legislative changes will not create additional tax liability. Instead, the resulting reporting will provide the CRA with additional information to ensure tax compliance from those who use online platforms to provide goods or services. The draft legislation is slated to come into force on Jan. 1, 2024.

Reporting entities

The draft legislation introduces several new definitions and entities. For the purposes of this summary, the below is a high-level overview of “reporting platform operator” and “seller”. Sellers are platform users registered on the platform during the relevant period to provide goods or services. This group is further subdivided into three categories: active sellers, excluded sellers and reportable sellers. Reportable sellers are sellers that provide services or sell goods, receiving consideration for selling goods or provide relevant services during the period unless an exclusion applies.

Reportable sellers face a penalty if they fail to provide their tax identification number, such as a business number, to the reporting platform operator unless they are exempted from providing the number.

A reporting platform operator is any platform operator other than an excluded platform operator that is either resident in Canada or facilitates activities by sellers resident in Canada or related to immovable property located in Canada.

Reporting and record-keeping requirements

Reporting platform operators will need to file the prescribed form for the prior reporting period by Jan. 31 of each year unless another reporting platform operator satisfies the reporting requirement. The form will include information about the reporting platform operator, the reportable sellers and business operations conducted through the platform. The same information must be provided to each reporting seller by Jan. 31. Consequently, the reporting platform operator is required to obtain the identifying information from each seller except excluded sellers who use their platform and keep records according to the requirements in the legislation. The information must be collected and verified by Dec. 31 of each year.

This article was written by Yoni Moussadji, Nakul Kohli, Cassandra Knapman, Sigita Bersenas, Simon Townswend and originally appeared on 2022-11-08 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/economic-statement-2022.html.

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

Tax planning: 2022 year-end considerations for businesses and individuals

October 31, 2022

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E-BOOK | October 31, 2022

Authored by RSM Canada

RSM Canada’s 2022 year-end tax guide summarizes the key federal, provincial and territorial tax updates that may create risk or opportunity for middle market taxpayers in 2022 and beyond.

Tax trends and topics discussed as the Canadian economy moves into 2023 include:

The excessive interest and financing expenses limitation (EIFEL) regime
Substantive Canadian-controlled private corporations
Updated foreign affiliate reporting and other international tax considerations
New mandatory disclosure rules

As year-end approaches, companies and individuals alike must carefully consider tax planning opportunities in light of economic uncertainty and evolving tax legislation and regulations. Learn more in our year-end planner.

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/services/business-tax-insights/tax-planning-2022-year-end-considerations-for-businesses-and-individuals.html

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

Will you have to pay a new tax on your luxury items?

September 15, 2022

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TAX ALERT | September 15, 2022

Authored by RSM Canada

On Sept. 1, 2022, the Select Luxury Items Tax Act (the Luxury Tax Act), a part of Bill C-19, came into force. The Luxury Tax Act imposes a tax (the Luxury Tax) on the sale and import of certain vehicles, aircraft, and vessels (collectively referred to as subject items) exceeding a specified price threshold.

Application

The Luxury Tax applies to the supply and sale of subject items in Canada exceeding the threshold of $100,000 for vehicles and aircraft and $250,000 for vessels. However, not all vehicles, aircraft and vessels exceeding these thresholds are captured by the Luxury Tax. There is an exemption for subject aircraft and some subject vessels that are used at least 90% of the time for certain qualifying purposes, which are designed to encompass purposes other than leisure, recreation, sport or other enjoyment of the owner or their guests.

The amount of the Luxury Tax is the lesser of (i) 10% of the total “taxable amount” of a subject item, or (ii) 20% of the amount by which the taxable amount of a subject item exceeds the Luxury Tax threshold ($100,000 or $250,000). In the case of the sale of the subject item, the taxable amount generally consists of the consideration and any amount paid for the improvements. Similarly, when imported, the taxable amount is the sum of the value of the subject item as determined under the Customs Act and the amount of any duties and taxes (other than the GST/HST) that is payable upon importation. Any modifications made to the subject items within 12 months of purchase may also be subject to self-assessment of the tax where certain conditions are met. Accessibility modifications are generally excluded.

The Luxury Tax is generally payable by the vendor at the point of sale, except in situations where the vendor is a federal or provincial government or agency, an indigenous governing body or a diplomat, the purchaser must pay the tax.

Registered Vendors

Under the Luxury Tax Act, ‘registered vendors’ are those that, in the course of their business activities, manufacture, wholesale, retail or import subject items priced over the thresholds.

Specifically, a person that is required to register as a registered vendor of a luxury item must apply with the CRA by the earlier of:

The day the sale is completed, where a sale first triggers the requirement to register, and
The day the subject item is accounted for in accordance with the Customs Act, where an importation first triggers the requirement to register.

Hovever, a registered vendor can purchase subject item(s) from another registered vendor in regards to the same type of select good without any Luxury Tax obligation. To avail this exemption, the purchaser needs to provide an exemption certificate to the seller.

In contrast, non-registered persons, i.e., individual consumers, that acquire or import subject items for their personal use or enjoyment are also required to pay the Luxury Tax and should fulfill the reporting requirements stated below.

Reporting requirements

Under most circumstances, the reporting periods under the Luxury Tax are calendar quarters. Registered vendors are required to file a Luxury Tax return with the CRA for each reporting period. On the other hand, non-registered vendors are required to file the return only for the reporting period(s) where they have Luxury Tax payable. The Luxury Tax return must specify the total Luxury Tax payable for the particular reporting period. Returns are due at the end of the month following the quarterly reporting period. The first reporting period is Sept. 1, 2022, to Dec. 31, 2022, and hence, the first return is due Jan. 31, 2023.

If there is an amount of Luxury Tax owing for a particular reporting period, the taxpayer is required to pay that amount to the Receiver General on (or before) the same day that the related return is required to be filed with the CRA. The payment must be made electronically if the amount to be paid exceeds $10,000.

This article was written by Sigita Bersenas, Chetna Thapar, Clara Pham and originally appeared on 2022-09-15 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/will-you-have-to-pay-a-new-tax-on-your-luxury-items.html.

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

Tax considerations for Canadian snowbirds

July 28, 2022

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ARTICLE | July 28, 2022

Authored by RSM Canada

Canada is known for its long and frigid winters. Many Canadians, often referred to as snowbirds travel south to the United States to escape the freezing Canadian temperatures, taking extended vacations to enjoy the year-round warmth that parts of the United States have to offer. These so-called snowbirds should carefully plan their stays in the United States, however, since a stay exceeding a specific number of days might have unintended Canadian and U.S. income tax consequences.

Canadian income tax consequences for snowbirds

Snowbirds should continue to file their Canadian tax return, as usual, reporting any worldwide income earned in the year on their T1 income tax and benefit return, whether received from inside or outside of Canada. Similarly, they should claim all the applicable deductions and credits and pay the federal and provincial or territorial taxes based on their residential ties. This generally means that any income earned by the snowbirds from the United States should be reported in their T1 return. However, to avoid double taxation, they will be able to claim a credit for the amount of any U.S. tax paid by them, thereby reducing their Canadian tax liabilities.

U.S. income tax consequences for snowbirds

On spending a significant amount of time in the United States, snowbirds might not realize that they may be subject to U.S. income tax obligations by becoming, in effect, U.S. residents as per the U.S. tax residency rules. For U.S. tax purposes, the residential status of a snowbird is determined under either of the U.S. domestic tax rules for residency below. If they meet either of these tests, they will be considered a U.S. resident and will need to comply with U.S. income tax laws.

Physically present in the United States in the current calendar year for more than 183 days
Substantial presence test (SPT)

Snowbirds who are in the United States for less than 183 days in the current year can still be treated as U.S. residents for tax purposes if they meet the SPT.

The SPT would be met if they are physically present in the United States for at least:

31 days during the current year; and
A total of 183 days during the three-year period that includes the current and the immediately preceding two years, counting:
- All the days they were present in the United States in the current year, and
- One-third of the days they were present in the United States in the first year before the current year, and
- One-sixth of the days they were present in the United States in the second year before the current year.

It is worth noting that for the SPT, a day generally includes any part of the day spent in the United States unless the individual is in transit through the United States. Furthermore, the purpose of the stay in the United States does not affect the SPT.

There are certain exceptions from the tests above that exempt snowbirds from being treated as U.S. residents for tax purposes. These are discussed below.

1. Canada–U.S. income tax treaty “tie-breaker” provision – greater than 183 days

The tie-breaker rule in the income tax treaty between Canada and the United States allows a taxpayer treated as a tax resident of both the United States and Canada under their domestic tax rules to only be treated as a resident of the country to which they have stronger ties to. Essentially, this rule will allow the taxpayer to remain a resident of one country as opposed to two.

To be exempt under the treaty, snowbirds must demonstrate that they have stronger ties with Canada than the United States, including a permanent home, social/economic ties, habitual abode, and citizenship. In addition, they must file Form 1040NR along with a fully completed Form 8833 (treaty-based return position disclosure) explaining why they should be considered a resident of Canada and not a resident of the United States. The filing due date of both the forms—Form 1040NR and Form 8833—is June 15 of each year.

2. Closer connection exception—SPT

Even after meeting the requirements of the SPT in a given year, snowbirds may still be able to avoid being considered U.S. residents using the closer connection exception. Under this exception, snowbirds need to demonstrate:

A “closer connection” to Canada, and
That they were in the United States for less than 183 days in the year.

To claim this exception, snowbirds must first establish that they maintained more significant residential ties with Canada than with the United States. A closer connection generally exists if their social and economic ties (such as the location of a permanent home; family connections; personal belongings; business and banking ties; and social, political, cultural, or religious affiliations, etc.) remain closer to Canada. Secondly, they have to stay in the United States for less than 183 days during the year for which the exception is claimed. On satisfying both these conditions, snowbirds can fall under the closer connection exception.

In addition, they must file a U.S. Form 8840 (closer connection exception statement for aliens) for each year for which the SPT is met, and the closer connection exception is claimed. Similar to Forms 1040NR and 8833, the filing deadline for Form 8840 is June 15 of the year following the end of the relevant tax year unless the filing date falls on a weekend or a holiday. Filing the form will allow them to maintain their tax status as a non-resident of the United States under U.S. tax law.

Snowbirds owning U.S. real property

Snowbirds owning U.S. real estate property might be liable for U.S. income tax regardless of whether they are treated as a U.S. resident for tax purposes. While owning and using U.S. real estate property only for personal purposes might require them to report the property on their T1 return, they do not have any U.S. annual filing obligations with regard to that property. However, renting the U.S. property for more than 15 days during the year or the eventual sale of the property may trigger U.S. tax and filing obligations.

Snowbirds renting out their homes in the United States for more than 15 days during the year and earning rental income from investment properties are usually subject to a 30 per cent U.S. non-resident withholding rate which satisfies their U.S. tax requirements. However, snowbirds can make an election to be taxed on net rental income (after taking into consideration certain expenses related to the rental income) at graduated tax rates applicable to the individual which can be more beneficial and reduce the tax liability. However, to elect to file on a net rental basis, the taxpayer will need to complete Form W-8ECI to avoid the 30 per cent withholding tax. The form applies to a foreign national who is the beneficial owner of the U.S. source income that is (or is deemed to be) effectively connected with the conduct of a trade or business within the United States.

If the election is filed, the snowbird will be required to file a U.S. tax return (Form 1040NR) to report the net rental income.

The taxpayer will require a U.S. tax identification number to make this election and to file the U.S. return.

Similarly, the sale of a U.S. property would be subject to a 15 per cent U.S. non-resident withholding rate on the gross sale price at the closing date. However, the snowbird can file a waiver to have this withholding based on the net capital gain (if any) and/or claim a possible exemption. The snowbird would then report the net capital gain realized from the sale on a U.S. tax return and claim any withholding as an instalment toward their final liability.

Since U.S. net rental income or U.S. net capital gain would also have to be reported on their Canadian tax return, the snowbird can claim any U.S. tax paid on their U.S. return as a credit on their Canadian return to reduce their Canadian tax and avoid double taxation.

Key takeaways

While an extended vacation to warmer locales may be an excellent way to beat the Canadian winter blues, travellers must keep abreast of any U.S. tax reporting obligations they may be subject to. Keeping track of the number of days spent in the United States is an important first step for all snowbirds. Staying under the 183-day threshold may help snowbirds avoid any unintended tax consequences.

This article was written by Frank Casciaro, Chetna Thapar, Danielle Wallace and originally appeared on 2022-07-28 RSM Canada, and is available online at https://rsmcanada.com/insights/services/business-tax-insights/tax-considerations-for-canadian-snowbirds.html.

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

Bank of Canada raises its policy rate by 1% to tame inflation

July 13, 2022

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REAL ECONOMY BLOG | July 13, 2022

Authored by RSM Canada

The Bank of Canada announced a 100-basis-point rate hike on Wednesday, the largest increase since 1998, in an attempt to restore price stability amid rising inflation expectations and wage growth.

The announcement brought the policy rate to 2.5%. We now expect a 75 basis-point hike at the September meeting and a more moderate hike in December, which would raise the policy rate to between 3.5% and 4% by the end of the year.

With this latest hawkish move in a rate cycle that began in January, the Bank of Canada is in the midst of one of its fastest tightening cycles ever. The move is meant to induce a shock to the system, to tame long-run inflation expectations, which began to inch up this summer.

Broad-based inflation

Inflation has been rising and persistent for about a year, with price increases becoming broad-based across categories of goods and services. Inflation is now expected to stay near 8% for the coming months. All measures of core inflation are at or above 4%, well above the central bank’s 2% target, and increasing.

The Bank of Canada’s primary concern is that inflation becomes entrenched in wage setting and price expectations, which will be difficult to reduce in the long run.

It does not help that these expectations are rising. In addition, the Business Outlook Survey pointed to broad wage growth at a higher rate than cost-of-living adjustments.

With Canada’s unemployment rate at its lowest point since 1976, the year that the data collection began, the labour market is clearly tight. In addition, there is an enormous amount of excess demand in the economy, consumer spending remains strong and business investments are solid.

All these conditions set the stage for more forceful actions to cool the economy, and the central bank is acknowledging that need.

The housing sector will bear the brunt of the rate hike and be a drag on growth. Higher mortgage rates will deter many buyers. While the housing market was overheated, housing sales have been on the decline since the first rate hike in March.

In addition, construction projects might have to be delayed or canceled altogether because of higher rates, which pose other questions on the housing supply and affordability in Canada.

The dramatic hike follows the Federal Reserve’s move last month, as the United States faces even more out-of-control inflation, which reached 9.1% in June, as well as a loss of investor confidence.

The takeaway

As unsettling as this news is for consumers and businesses, an economy-wide recession is still unlikely this year. Certain industries, such as the housing market which has already slowed, will most likely go into decline. But overall, the indicators of the job market, businesses and consumers all point to a healthy economy. A slowdown, however, is a certain and a necessary tradeoff to restore price stability.

This article was written by Tu Nguyen and originally appeared on 2022-07-13 RSM Canada, and is available online at https://realeconomy.rsmus.com/bank-of-canada-raises-its-policy-rate-by-1-to-tame-inflation/.

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

2022 Canada Federal Budget: Detailed commentary

April 8, 2022

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BUDGET COMMENTARY | April 08, 2022

by RSM Canada

On April 7, 2022, Canada’s Minister of Finance, Chrystia Freeland, released Canada’s 2022 budget.

The budget is based on three pillars: (i) investing in people by increasing the housing supply and establishing affordable child care, (ii) facilitating a transition to a green economy to fight climate change, and (iii) incentivizing and supporting Canadian production and innovation.

The budget signals the end of COVID-19 subsidies and credits, and adopts a measure of fiscal restraint. From a tax perspective, the only tax rate increases are on banks and life insurers. However, there is a clear focus on strengthening anti-avoidance rules and eliminating other tax deferrals and benefits that could affect many middle market businesses. In this respect, Budget 2022 continues one of the themes from Budget 2021, which introduced the Luxury Tax, the Digital Services Tax, mandatory disclosure rules and enhanced collection measures to combat tax avoidance.

This tax alert summarizes the business and personal income and indirect tax measures in Budget 2022 relevant to the middle market.

Looking for industry-specific takeaways? View our 2022 Canada Federal Budget: Industry Highlights

Audit and enforcement

Budget 2022 reiterates the government’s intention to correct perceived inequalities in the tax system by bolstering anti-avoidance rules and enhancing audit and enforcement measures.

Expanding the application of the general anti-avoidance rule

The general anti-avoidance rule—or GAAR—is an anti-avoidance measure that the Canada Revenue Agency (CRA) uses to combat abusive tax avoidance strategies that are not subject to specific anti-avoidance rules in the Income Tax Act (ITA). In recent years, the courts have held that the GAAR does not apply to an increase to a tax attribute that has not yet been utilized to reduce taxes.

The government sees this line of decisions as running counter to the policy underlying the GAAR. As a result, Budget 2022 proposes to amend the GAAR so that it will apply to transactions that increase or preserve tax attributes even when the tax attributes have not yet become relevant to the computation of tax. This measure would apply to notices of determination (regarding the tax attribute) on or after April 7, 2022.

This change, once legislated, will significantly expand the scope of the GAAR.

Previously announced measures

Budget 2022 confirms the government’s intention to proceed with previously announced enhancements to audit powers, anti-avoidance rules and collection measures, including the following:

Enhanced reporting requirements for certain trusts
Mandatory disclosure rules
Bolstering collection measures to prevent tax avoidance
Requiring oral interviews and other reasonable cooperation practices during audits

Business tax

Aside from two new taxes on banks and life insurers, the budget proposes no changes to the federal corporate income tax rates or the $500,000 small business limit. However, the government proposes to expand eligibility for the small business deduction, allowing more midsize businesses to benefit from the lower rate.

Small business deduction

The small business deduction (SBD) provides eligible Canadian-controlled private corporations (CCPCs) with a reduced corporate income tax of 9%. Currently, the limit is reduced on a straight-line basis when:

The combined taxable capital employed in Canada of the CCPC and its associated corporations is between $10 million and $15 million; or
The combined adjusted aggregate investment income of the CCPC and its associated corporations is between $50,000 and $150,000

Budget 2022 proposes to extend the range over which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations: the taxable capital range is between $10 million and $50 million. Applying to taxation years that begin on or after April 7, 2022, this proposed change will allow more medium-sized CCPCs to benefit from the SBD.

Additional taxes on banks and life insurers

First, Budget 2022 proposes the Canada Recovery Dividend (CRD), which is a one-time 15% tax on banks and life insurers (as determined under Part VI of the ITA). The 15% tax would apply on an entity’s taxable income over $1 billion as determined for taxation years ending in 2021. The CRD liability would be imposed for the 2022 taxation year and is payable in equal amounts over a five-year period.

Second, the budget proposes a permanent increase to corporate tax rates for banks and life insurers (as determined in the same manner as the CRD) by introducing an additional tax of 1.5% on taxable income above $100 million. The proposed additional tax applies to taxation years that end after April 7, 2022.

Introduction of substantive CCPCs to counter deferral of tax

Some taxpayers interpose foreign entities into their corporate structure to avoid being designated as a CCPC. Although CCPCs enjoy beneficial tax treatment in some instances, they are subject to a temporary tax on investment income that, in effect, is double the tax rate that a non-CCPC pays on its investment income. Loss of CCPC status in many instances results in the elimination of an additional layer of refundable taxes that would otherwise apply on investment income. Notwithstanding that such taxes would eventually be payable upon a distribution of the investment income to individual shareholders, the elimination of CCPC status would provide for a deferral advantage until such time.

To curb such tax planning, the budget introduces the concept of “substantive CCPCs” to capture corporations that would otherwise not be CCPCs and subject them to CCPC taxation on investment income. However, the substantive CCPCs would continue to be treated as non-CCPCs for all other purposes of the ITA.

The budget defines substantive CCPCs as private corporations resident in Canada (other than CCPCs) that are ultimately controlled (in law or fact) by Canadian-resident individuals. Similar to the CCPC criteria, the test would contain an extended definition of control that would aggregate the shares owned, directly or indirectly, by Canadian resident individuals, and would therefore deem a corporation to be controlled by a Canadian resident individual where Canadian individuals own, in aggregate, sufficient shares to control the corporation.

The budget aligns the taxation rules of investment income earned and distributed by substantive CCPCs with the rules that apply to CCPCs. However, the budget provides an exception to genuine commercial transactions entered into before April 7, 2022, where the share sale occurs before the end of 2022.

The budget aims to ensure that the investment income earned and distributed by substantive CCPCs is taxed in the same manner as CCPCs. These rules are intended to ensure that private corporations cannot effectively avoid CCPC status and applicable anti-deferral rules. They also capture arm’s-length transactions where a non-resident buyer has a right to acquire shares of a CCPC.

Elimination of the flow-through share regime for oil, gas and coal activities

To phase out inefficient fossil fuel subsidies, the government proposes to eliminate the flow-through share regime for fossil fuel sector activities.

In general, flow-through shares provide certain companies with greater access to financing by forgoing the tax benefit of Canadian exploration expenses and Canadian development expenses to investors. The investors who hold the flow-through shares are permitted to deduct the expenses that the corporation has renounced to them in calculating their taxable income.

Budget 2022 proposes to eliminate the flow-through share regime for oil, gas and coal activities by no longer allowing oil, gas and coal exploration or development expenditures to be renounced to a flow-through share investor.

This measure will apply to flow-through share agreements entered into after March 31 2023.

Critical mineral exploration tax credit

Although the budget proposes to phase out flow-through shares for inefficient fossil fuel subsidies, it introduces a 30% tax credit for individuals who invest in specified minerals that are used in the production of zero-emission vehicles and other clean technologies.

Expansion of clean energy tax benefits

Building on previous measures introduced for investments in clean energy, Budget 2022 proposes to expand these benefits to include air-source heat pumps.

Immediate expensing

Under the CCA regime, Classes 43.1 and 43.2 provide accelerated CCA rates (30% and 50%, respectively) for investments in specified clean energy generation and energy conservation equipment. On Nov. 21, 2018, the government introduced immediate expensing for Class 43.1 and 43.2 assets. Budget 2022 proposes to expand the list for eligible property to include air-source heat pumps primarily used for space or water heating.

Corporate tax rate reduction for zero-emission technology manufacturers

In Budget 2021, the government reduced the corporate income tax rate on eligible zero-emission technology manufacturing and processing income as follows:

From 15% to 7.5%, where the income is subject to the general corporate tax rate; and
From 9% to 4.5%, where the income is subject to the small business tax rate.

Budget 2022 proposes to include the manufacturing of air-source heat pumps as an eligible activity for purposes of the temporary corporate tax rate reduction for qualifying zero-emission technology manufacturers.

International tax

Amendments to foreign accrual passive income rules for CCPCs and substantive CCPCs

Budget 2022 proposes targeted amendments to the foreign accrual passive income, or FAPI, rules to prevent taxpayers from gaining a tax deferral advantage by earning certain types of income (including investment income) through controlled foreign affiliates (CFAs) that are held by CCPCs and substantive CCPCs (as introduced in the budget and described above).

Unlike the domestic anti-deferral rules that tax investment income at a higher rate for CCPCs than for non-CCPCs to achieve tax neutrality, the FAPI rules tax all Canadian corporations at the same rate (whether CCPC or non-CCPC). This creates a deferral advantage for CCPCs and their individual shareholders.

The budget proposes to eliminate the tax deferral advantage to CCPCs (including substantive CCPCs) and their individual shareholders by adjusting the FAPI computation for CCPC for these types of entities. In tandem, the budget also proposes amendments so that integration (tax neutrality) will be achieved by adding amounts to the capital dividend account that can be distributed to a Canadian individual tax-free.

These measures would apply to taxation years that begin on or after April 7, 2022.

CCPCs and substantive CCPCs that earn FAPI (including investment income) through CFAs should revisit their international corporate structures as the proposed rules will eliminate the tax deferral previously available.

Interest coupon stripping

The budget proposes to apply the withholding tax rules on interest paid under an interest coupon stripping arrangement as though interest had been paid to the non-resident non-arm’s length lender.

Interest coupon stripping arrangements involve a non-resident lender selling its right to receive future interest payments (interest coupons) from a non-arm’s length Canadian-resident borrower to a party that is not subject to withholding tax (e.g., a person resident in Canada) or a person resident of a country with a lower treaty reduced withholding tax rate.

This measure is expected to apply on interest paid or payable by a Canadian-resident borrower to the interest coupon holder to the extent that such interest accrued on or after April 7, 2022, subject to certain exceptions for debt obligations entered into before April 7, 2022.

Exchange of tax information on digital economy platform sellers

Consistent with the Organisation for Economic Co-operation and Development’s rules for reporting by digital platform operators with respect to platform sellers, the budget has proposed to implement similar rules in Canada to ensure that revenue earned by taxpayers through those platforms can be properly taxed.

The proposed measure would require platform operators who provide support to reportable sellers for relevant activities (e.g., rental of immovable property or means of transportation or personal services) to complete due diligence procedures to identify reportable sellers and their jurisdiction of residence.

The proposed measures apply to a platform operator that is (i) resident in Canada or (ii) not resident in Canada but facilitates relevant activities of sellers resident in Canada, or with respect to rental of immovable property located in Canada. Certain platform operators would be excluded.

The CRA would automatically exchange information received from Canadian platform operators with partner jurisdictions under the exchange of information provision in tax treaties and similar international instruments. This measure will allow Canadian tax authorities to access information on platform sellers earning income in Canada which may result in additional tax obligations and compliance in Canada.

This measure would apply to calendar years beginning after 2023.

Transfer pricing

Budget 2022 focuses on the Inclusive Framework on Base Erosion and Profit Shifting, and largely reaffirms Canada’s positions. The government also commits to continue efforts around the transfer pricing consultation announced in Budget 2021.

Pillar One (reallocation of taxing rights)

Pillar One seeks to introduce profit allocation and update existing nexus rules for certain multinational enterprises. It is expected to initially target companies with revenues greater than 20 billion euros and profitability above 10%. The government has affirmed it is working with international partners to further develop the Pillar One framework and bring the rules into effect.

If Pillar One is not implemented in a timely fashion, the government will continue to advance the Digital Services Tax.

Pillar Two (global minimum tax)

Pillar Two seeks to introduce a minimum effective tax rate of 15% for large multinational enterprises (expected to be entities with revenue greater than 750 million euros).

Budget 2022 proposes to implement Pillar Two effective 2023, with public consultation being launched as part of Budget 2022.

Credits and incentives

The budget renews funding for many well-used credit and incentive programs for Canadian businesses. Specifically, existing programs designed to spur innovation investment and tourism, and to increase agricultural production output, have been bolstered in the budget. Many incentives have a clean technology component to help companies reduce greenhouse gas emissions while enhancing their operations.

Agricultural grants

Targeted agricultural grants will be dispersed through the country, to be administered by the provinces. These grants are designed to address regional issues and foster growth in the different agricultural subsectors across the country. Agricultural producers and processors will enjoy a range of grants for sustainable agriculture, potentially enhancing operational efficiency while reducing their farming/production emissions.

Innovation funding

Innovation funding targets programs that partner with organizations on large projects for industries ranging from manufacturing to life sciences. A particular area of focus is increasing the strength of specific innovative sectors such as carbon capture utilization and storage (CCUS) and the semiconductor industry.

The new CCUS refundable tax credit is between 37.5% and 60% of the costs associated with eligible projects and equipment.

Tourism

The government has announced significant investment to generate visits from foreign nationals to various destinations in Canada. These investments exceed $1 billion, plus additional funding to support the Indigenous tourism industry.

Scientific research and experimental development

No changes are proposed to the well-used scientific research and experimental development—SR&ED—program. Canadian businesses can continue to take advantage of these tax credits to help with costs incurred when undertaking advanced research and development.

Personal tax

With a focus on economic growth, inclusivity, and making life more affordable for Canadians, Budget 2022 includes several key measures targeted toward individuals.

Notably, there are no changes to personal tax rates.

Genuine intergenerational share transfers

Having received royal assent on June 29, 2021, Bill C-208 was intended to provide an exception to surplus stripping rules in order to facilitate genuine intergenerational business transfers. However, the government soon realized that the bill may have unintentionally permitted surplus stripping without requiring that a genuine transfer take place. As a result, the government previously indicated its intention to revise the legislation to limit its scope.

Budget 2022 announces a consultation process among stakeholders and key affected sectors such as the agriculture industry. This will allow Canadians to share their views as to how the existing rules could be modified. The Department of Finance has asked that all comments be submitted by June 17, 2022.

Taxpayers contemplating succession of business ownership to family members will need to carefully navigate the proposed rules and any required documentation to avoid any unexpected tax consequences. Taxpayers may benefit from expediting such transactions before additional measures come into effect.

Residential property flipping

As part of the government’s effort to make housing more affordable, Budget 2022 proposes a new rule that would deem proceeds earned on the sale of a residential property owned for less than 12 months to be business income.

This proposed measure targets individuals who purchase real estate with the intention of flipping the property within a short period of time. The deeming rule will not apply if the disposition of property is in relation to one of several life events, such as the death of a taxpayer, change in work location or the breakdown of a marriage.

The new deeming rule would apply to any residential properties sold on or after Jan. 1, 2023. An individual who is considering selling a house should ensure that the house is owned for more than one year.

Enhanced support for taxpayers looking to buy first homes

The budget includes several measures to assist first-time home buyers.

First, the budget proposes to create a Tax-Free First Home Savings Account (FHSA), a new registered account to assist individuals in saving for their first home. To qualify, individuals must be (i) resident in Canada, (ii) at least 18 years of age, and (iii) not have lived in a home they owned at any time in the year the account is opened or in the four preceding calendar years. Contributions to the FHSA are tax deductible but are not taxable when withdrawn for an eligible home purchase. The FHSA has an annual contribution limit of $8,000 and a lifetime limit of $40,000. Funds can be transferred from an existing registered retirement savings plan to an FHSA, subject to the annual and lifetime limits. Budget 2022 proposes that the FHSA will be introduced in 2023.

Second, the government will double the First-Time Home Buyer’s Tax Credit (HBTC) from $750 to $1,500. This measure will apply to acquisitions of a qualifying home made on or after Jan. 1, 2022.

Enhanced support for homeowners

The new Multigenerational Home Renovation Tax Credit is a refundable credit for eligible expenses incurred for a qualifying renovation, which is one that creates a secondary dwelling unit permitting an eligible person (including a senior or person with a disability) to live with a qualifying relation. The credit can be claimed by an individual who ordinarily resides in the eligible dwelling in the amount of 15% of the lesser of eligible expenses and $50,000 within 12 months after the end of the renovation period. This measure will apply for the 2023 and subsequent taxation years, in respect of work performed and paid for and/or goods acquired on or after Jan. 1, 2023.

The Home Accessibility Tax Credit (HATC) is a non-refundable tax credit for eligible home renovation or alteration expenses in respect of an eligible dwelling of a qualifying individual. Budget 2022 proposes to increase the annual expense limit of the HATC from 15% of $10,000 to 15% of $20,000. This will provide additional tax support for more significant renovations undertaken to improve accessibility. This measure will apply to expenses incurred in the 2022 and subsequent taxation years.

Indirect tax measures

Assignment sales

With a view to curbing speculative trading in the Canadian housing market, Budget 2022 proposes to make all assignment sales of newly constructed or substantially renovated residential housing taxable for Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes, effective May 7, 2022. An assignment sale is a transaction in which a purchaser of a new home from a builder sells the purchase rights and obligations under the agreement with the builder to another person.

The proposal may affect the amount of a GST new housing rebate or of a new housing rebate in respect of the provincial component of the HST, as the rebates are based on the total consideration payable for a taxable supply of a home, including the consideration for a taxable assignment sale.

Expanded hospital rebate

Budget 2022 proposes to amend the GST/HST eligibility rules for the expanded hospital rebate that covers charities and nonprofit organizations that provide health care services similar to those traditionally performed in hospitals.

Under the current GST/HST rules, hospitals can claim an 83% rebate and charities and non-profit organizations can claim a 50% rebate of the GST and the federal component of the HST. Currently, one of the conditions to be eligible for the expanded hospital rebate is that a charity or non-profit organization must deliver the health care service in a geographically remote community.

Budget 2022 proposes to extend the GST/HST rebate to health care services provided by charities or non-profit organizations irrespective of geographical location. This measure will generally apply to rebate claim periods ending after April 7, 2022, in respect of tax paid or payable after that date.

This measure will allow all charities and nonprofits that provide health care services to reduce their operating costs.

Excise Act 2001 measures

Taxation of vaping products

Following consultation, the government is proposing various changes to the rules originally proposed in Budget 2021. The new tax will apply to vaping products that include either liquid or solid vaping substances with an equivalency of 1 millilitre of liquid to 1 gram of solids. It will not apply to those vaping products subject to cannabis excise duties or those produced by individuals for personal consumption. Additionally, the government is prepared to collect provincial duties for coordinating provinces or territories. There will be a travel exemption for vaping products that are imported for personal use by travellers.

Cannabis framework

The government is proposing to streamline, strengthen and adapt the cannabis taxation framework. Quarterly remittances will be allowed for producers that were required to remit less than $1 million in excise duties during the four fiscal quarters immediately preceding the quarter ending April 1, 2022. Transfers of packaged and unstamped products will be allowed in certain contract-for-service situations upon royal assent. The penalty for lost stamps will be adjusted so that the penalty will be higher if the stamp is for a coordinating province or territory. This reflects the fact that the stamp for a coordinating jurisdiction has a higher value since it represents both the federal and coordinating province tax. The requirement to hold a cannabis excise licence will be removed for entities that hold a Health Canada-issued research licence or cannabis drug licence.

General administration

The budget proposes to match the cancellation conditions for an excise licence with the conditions required to suspend a licence. Applicants for a tobacco, spirits, wine and/or cannabis excise licence will now be required to comply with all federal and provincial legislation and regulations respecting the taxation and control of cannabis in addition to those respecting tobacco, spirts and wine. Acceptable security will no longer include cash and transferrable bonds from the government of Canada, but will now include bank drafts and Canada Post money orders. The CRA will now be able to carry out virtual audits and reviews where the agency deems it appropriate, even after the end of the pandemic.

Canadian wine

Canadian wine is currently exempt from excise duties if it is produced in Canada and is wholly composed of agricultural or plant products grown in Canada. However, this exemption will be repealed on June 20, 2022, in response to a settlement agreement to a World Trade Organization challenge.

Beer taxation under the Excise Act

The Excise Act will be amended to reduce the existing tax on beer having no more than 0.5% of alcohol by volume (ABV). This will bring this product in line with the existing exemption for wines and spirits containing no more than 0.5% ABV.

The measures are intended to ensure equity among products and to simplify administration.

RSM Contibutors

Peter Ahn, Sr. Director
Dan Beauchamp, Sr. Director
Allison Baum, Sr. Manager
Sigita Bersenas, Associate
Bob Boser, Partner
Adrian Jack, Manager
Marino Jeyarajah, Partner
Nakul Kohli, Manager
Danny Ladouceur, Partner
Bev Lucas-King, Sr. Manager
Sean McNama, Partner
Hayley Mercer, Manager
Yoni Moussadji, Sr. Manager
Clara Pham, Partner
Shannon Preitauer, Supervisor
Austen Ramsay, Partner
Melina Rocha, Manager
Stephen Rupnarain, Partner
Greg Synanidis, Sr. Manager
Sam Tabrizi, Partner
Enzo Testa, Partner
Chetna Thapar, Sr. Associate
Danielle Wallace, Manager

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance
https://rsmcanada.com/insights/budget-commentary/2022-canada-federal-budget-detailed-commentary.html

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.

Federal economic and fiscal update

December 15, 2021

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TAX ALERT | December 15, 2021

Authored by RSM Canada

On Dec. 14, 2021, Canada’s Minister of Finance, Chrystia Freeland, released Canada’s Economic and Fiscal Update (the Update), which provides an overview of Canada’s finances, identifies the government’s areas of focus and sets out several proposed new tax measures.

The theme of the Update is finishing the fight against COVID, which the government states is its “most important national project”. To fight COVID, the government targets its resources toward (i) providing medical support, including pediatric vaccines, boosters for adults, and investing in anti-viral drugs to prevent COVID hospitalizations; and (ii) delivering economic support in the form of subsidies and credits for businesses affected by COVID, benefit programs and paid sick leave for certain employees, and credits for businesses to improve indoor air quality.

The government’s other stated goals – fighting climate change, advancing reconciliation with Indigenous peoples, and building a stronger, fairer, and more competitive economy – are secondary. The government states it will turn to these goals as it finishes the fight against COVID, thereby remaining vague in the Update on the measures it will advance to achieve these goals.

There is no indication in the Update that the government will increase corporate tax rates, personal tax rates, or capital gains tax rates, or will further enhance audit and enforcement measures beyond the measures announced in the 2021 Budget. The government may still consider changes to the tax rates and to audit and enforcement measures in the 2022 Budget, which is expected to be released in the spring. However, there are updates on new taxes proposed in the 2021 Budget, specifically the Underused Housing Tax, the Digital Services Tax and the Luxury Tax.

The following summarizes the business and personal income tax measures in the Update relevant to the middle market.

Business income tax measures

The key business income tax measures focus on (i) continuing support for businesses through the pandemic, (ii) introducing a new support program for small businesses to improve indoor ventilation and (iii) helping small businesses and farmers afford the costs of fighting climate change.

No changes are proposed to the federal corporate income tax rates or the $500,000 small business limit.

COVID subsidies and loan programs for businesses: Extending existing programs and introducing new programs

As Canada faces another wave of COVID, the government proposes to extend the Highly Affected Sectors Credit Availability Program (HASCAP) to March 31, 2022. It had been set to expire on Dec. 31, 2021. The HASCAP provides government-guaranteed, low-interest loans of up to $1 million to organizations that have suffered significant revenue declines due to the pandemic. The Business Development Bank of Canada will continue to work with lenders to support access to capital for Canadian businesses of all sizes in all sectors and regions.

The Update also confirms the government’s proposals to extend the Canada Recovery Hiring Program (CRHP) wage subsidy until May 7, 2022. The CRHP is similar to the now-concluded Canada Emergency Wage Subsidy and applies to increases in salaries and to salaries paid to new hires. Eligible employers with revenue declines above 10% are potentially eligible for the CRHP, with the subsidy being as much as 50% of the increased salaries or new salaries, subject to the $1,129 maximum.

The government proposes to introduce three new subsidies for businesses that are hit especially hard by the pandemic:

The Tourism and Hospitality Recovery Program, which provides wage and rent subsidies of up to 75% to tourism and hospitality businesses, including hotels, tour operators, travel agencies, restaurants and organizations that plan and host festivals or live performances.
The Hardest-Hit Business Recovery Program, which provides wage and rent subsidies of up to 50% to organizations that have suffered “deep losses”.
The Local Lockdown Program for businesses affected by new COVID-related lockdowns, which will allow eligible businesses to receive up to the maximum benefit under the wage and rent subsidy programs.

These three programs will be available until March 12, 2022 at the rates set out above, and at half the rates from March 13 to May 7, 2022, as the government anticipates that COVID will be more firmly under control at that time.

Small businesses air quality improvement tax credit

To encourage small businesses to invest in improving indoor air quality, the government proposes to introduce a temporary Small Businesses Air Quality Improvement Tax Credit. The refundable tax credit would be available to eligible entities in respect of qualifying expenditures incurred between Sept. 1, 2021 and Dec. 31, 2022.

The tax credit is 25% on qualifying expenditures up to a maximum of $10,000 per qualifying location and a maximum of $50,000 in total across all qualifying locations. The limits on qualifying expenditures are to be shared among affiliated businesses.

Eligible entities include sole proprietors, Canadian-controlled private corporations with taxable capital employed in Canada of less than $15 million and partnerships through their shareholders.

Qualifying expenditures include expenses directly attributable to the purchase, installation, upgrade or conversion of mechanical heating, ventilation and air conditioning systems, and purchase of devices designed to filter air using high-efficiency particulate air filters. The payments related to these upgrades must be paid to arm’s-length entities.

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

Consistent with the general treatment of business tax credits, this credit should be included in the taxable income in the taxation year the business claims the credit.

Return of fuel charge proceeds and eligible farming expenses

The Update introduces a new credit available to eligible farming businesses. Under the federal carbon pollution pricing system, the government applies a price on pollution in jurisdictions that do not have their own system. 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 2021-22 fuel charge year.

The return of fuel charge proceeds would be available to corporations, individuals and trusts that (i) are actively engaged in the management or day-to-day activities of earning income from farming and (ii) incur total farming expenses of $25,000 or more, all or a portion of which are attributable to backstop jurisdictions (currently Alberta, Saskatchewan, Manitoba and Ontario).

The credit amount in respect of an eligible farm business for an applicable fuel charge year 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 prescribed payment rate.

Consistent with the general treatment of business tax credits, credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed.

A business can claim the refundable tax credits on its tax returns related to the 2021 and 2022 taxation years.

The government also intends to return a portion of the proceeds from the price on pollution to small and medium-sized enterprises in backstop jurisdictions through federal programming, beginning in 2022-2023. Further details will be announced in early 2022.

Update on business tax measures from the 2021 Budget

Digital Services Tax. The 2021 Budget proposed a temporary Digital Services Tax (DST) on large businesses (both foreign and domestic) at a rate of 3% of revenue generated from digital services that rely on data and content distributions from Canadian users. It is proposed as temporary because it is intended to serve as an interim measure until an acceptable common international approach – the multilateral tax regime – is developed and implemented. The Update confirms that, because the multilateral tax regime is not yet in force, the DST will be imposed on revenues earned by large businesses as of Jan. 1, 2022 at a rate of 3%, but that the tax will not be payable until 2024 and will only be payable if the new multilateral tax regime has not come into force by that time.

Investment tax credit for carbon capture, utilization and storage. The Update confirms the government’s commitment to the introduction of an investment tax credit for capital invested in carbon capture, utilization and storage projects with the goal of substantially reducing emissions. The government will outline the proposed investment tax credit in Budget 2022.

Personal income tax measures

The Update does not propose any changes to personal income tax rates, the capital gains inclusion rate or the principal residence rules. There are several new measures announced to help individuals, but the main personal tax measures are (i) extensions of current credit and benefit programs and (ii) clarity on the Underused Housing Tax, which goes into effect on Jan. 1, 2022.

Home office expenses

As many Canadians close in on a second year of working from home, the government confirmed that employees can use the simplified process for deducting home office expenses in 2021 and in 2022. The government previously introduced the simplified process in respect of the 2020 taxation year, allowing employees to deduct home office expenses without burdening the employer to complete for T2200. This simplified claim process allows employees to claim a flat rate deduction based on the amount of time spent working from home and eliminates the need to track specific costs or retain receipts. Employees will be able to deduct up to $500 of expenses on their 2021 personal tax return, an increase from last year’s maximum deduction of $400.

Employees that worked from home in 2021 should analyze whether the flat rate method is beneficial for their tax situation rather than obtaining a signed T2200 and deducting the home office expenses incurred.

Underused housing tax

In the 2021 Budget, the government proposed a tax on vacant and underused residential real estate owned by non-residents. After consulting with stakeholders in the summer, the Update provides details on the new Underused Housing Tax (UHT). The UHT is an annual tax equal to 1% of the value of the vacant and underused property owned by non-residents.

However, the Update provides for two exclusions from the UHT. A non-resident property owner would be exempt from the UHT for a calendar year if the property, or a residence that is part of the property, is:

The primary place of residence of (i) the owner, (ii) the owner’s spouse or common law partner or (iii) a child of the owner (or the owner’s spouse or common-law partner) provided the child is in Canada for the purposes of authorized study and the child’s occupancy relates to that purpose.
A vacation or recreation property that is (i) located in an area of Canada that is not an urban area within either a census metropolitan area or census agglomeration having 30,000 or more residents and (ii) is personally used by the owner (or the owner’s spouse or common-law partner) for at least four weeks in the calendar year.

The UHT goes into force in the 2022 calendar year, therefore, non-resident homeowners will be required to file a UHT return for the 2022 tax year and pay any tax owing on or before April 30, 2023. Non-resident homeowners who meet either of the exemptions must still file a UHT return to claim the appropriate exemption.

Extension of COVID benefit programs for individuals

The government proposes to extend the Canada Recovery Caregiving Benefit (CRCB) and the Canada Recovery Sickness Benefit (CRSB) until May 7, 2022. Each benefit provides recipients with $500 per week ($450 after taxes are withheld).

In addition to extending the programs to May 7, 2022, the government proposes to increase the maximum duration for which an individual can receive each benefit. For the CRCB, an individual will be able to receive the benefit for up to 44 weeks (up from 42 weeks). For the CRSB, an individual will be entitled to receive the benefit for up to six weeks (up from four weeks).

New economic support for individuals

Canada Worker Lockdown Benefit (CWLB). The government proposes to introduce the CWLB to provide $300 per week to workers who are unable to work due to government-imposed public health lockdowns at their place of employment. If the legislation is passed, this benefit is available to eligible workers from Oct. 24, 2021 to May 7, 2022.

Support for workers in the live performance sector. Despite gradually easing public health restrictions, the live performance sector has been slow to recover, with many individuals in the live performance sector struggling with reduced opportunities, hours and income. The government proposes to establish the Canada Performing Arts Workers Resilience Fund, a temporary program that will fund new or enhanced initiatives to improve the circumstances of workers in this sector. The government will fund this program, and Canadian Heritage will administer the fund.

Paid sick leave. Employees in federally-regulated industries can expect to receive 10 days of paid sick leave if the proposed legislation passes. One of the purposes of this proposal is to allow workers to stay home when sick, thereby reducing the likelihood of COVID outbreaks in the workplace.

Other measures

Other measures in the Update that relate to individuals are as follows:

Enhanced support for teachers and early childhood educators, allowing them to claim a refundable tax credit of 25% (increased from 15%) up to $1,000 on the purchase of school supplies.
The proposed Luxury Tax on luxury vehicles, boats and personal aircrafts, proposed in the 2021 Budget, is still in its early stages of development, with draft legislation to be released early in 2022.

This article was written by Clara Pham, Maria Severino and originally appeared on 2021-12-15 RSM Canada, and is available online at https://rsmcanada.com/our-insights/tax-alerts/federal-economic-and-fiscal-update.html.

For more information on how Fletcher Mudryk LLP can assist you, please call us at (780) 539-4110.