Approval of the federal finances, 2021 | Dickinson Wright

On Monday, April 19, 2021, Canadian Deputy Prime Minister and Treasury Secretary Chrystia Freeland released the first official budget in two years, entitled Federal Budget 2021: A Recovery Plan for Jobs, Growth and Resilience (the "Budget") Spending over $ 100 billion proposed. Among the more significant measures, the budget suggests extending the Canadian Emergency Wage Subsidy (CEWS) and Canadian Emergency Rent Subsidy (CERS) and lockdown support through September 2021. The budget is also being introduced a new Canada Recovery Hiring Program.

Noteworthy and a relief for many: the budget did not introduce any measures to increase the capital gains inclusion rate (currently 50%), to remove or change the main residence exemption, to restrict surplus reduction plans or to introduce a wealth tax.

In short, the budget:

  • Limits the interest deductibility of companies, trusts and partnerships to a percentage of tax EBITDA.
  • Improves Canada's Binding Rules on Disclosure of Reportable Transactions (subject to public consultation);
  • Suggests consulting on transfer pricing rules;
  • Impose new rules on hybrid mismatch agreements;
  • Reduces corporate tax rates on eligible income from manufacturing and processing zero-emission technologies.
  • Modified the cost of capital subsidy system to include temporary immediate charges of up to $ 1.5 million per tax year for the acquisition of capital real estate in Canadian Controlled Private Companies (CCPCs);
  • Provides more details on a proposed tax on digital services due to take effect in January 2022.
  • Proposes a new tax on luxury goods above a certain threshold: automobiles, planes and boats; and
  • Proposes a new tax on the inefficient use of foreign-owned Canadian housing.

International tax measures

In the budget, Canada reaffirmed its commitment to participate actively in the multilateral effort to combat soil erosion and profit shifting, or "BEPS". Canada proposes addressing BEPS with two new measures:

Interest deductibility

Given the concerns about BEPS that have been on the radar since the OECD published guidelines for such initiatives a few years ago, Canada intends to address several concerns, including the erosion of the Canadian tax base due to interest payments to related non-residents in low country tax jurisdictions using the debt to fund investments that generate non-taxable income; and circumstances in which a Canadian company bears a disproportionate amount of the borrowing of a multinational corporation.

To this end, the budget proposes increased restrictions on the deductibility of interest and other finance-related expenses, with certain exceptions for companies, partnerships and trusts. These limits would be in place to limit the amount of net interest expense that could be deducted in calculating taxable income to a maximum of a fixed ratio of "Tax EBITDA". "Tax EBITDA" is the company's taxable income before taking into account interest expenses, interest income, income taxes and deductions for depreciation, with each of these items being determined for tax purposes. Tax EBITDA would generally exclude dividends provided they qualify for cross-company dividend deduction / deduction for dividends and interest received from foreign affiliates that are not deductible under existing income tax rules (including the small capitalization rules).

These new rules will come into effect on January 1, 2023, with the proposed fixed ratio for 2023 being set at 40% for that tax year and 30% for subsequent tax years.

In particular, small businesses, CCPCs that (together with their associate group) employ less than $ 15 million in taxable capital in Canada will be excluded from the application of the rules, as will groups of corporations and trusts with a total net less than $ 250,000 Interest payments.

The budget is proposing rules for the carryover of interest denied under these new rules, as well as a "group rate" rule that would allow a taxpayer to deduct interest in excess of the fixed ratio of tax EBITDA if the taxpayer proves that the ratio of the net third The party's interest in posting the EBITDA of the consolidated group implies that a higher deduction limit would be appropriate.

Hybrid mismatching arrangements

Hybrid mismatch arrangements include companies or instruments that are treated differently under Canadian tax law and foreign tax law in order to achieve a particular tax outcome and aggregate benefits for a consolidated cross-border group.

The budget focuses on two types of hybrid mismatches: (1) a deduction-non-inclusion mismatch that occurs when a country allows a deduction for a cross-border payment but the receipt of which is not included in income and / or income, or within be fully included in income a reasonable time after receipt / payment in the other jurisdiction; and (2) a double deduction mismatch that occurs when a tax deduction is available in two or more countries for a single economy expense.

These hybrid mismatch concerns were addressed in a 2015 OECD report that recommended rules to limit tax benefits through the use of hybrid mismatches, many of which have already been effectively implemented in the US, UK and EU.

The budget proposes to withhold a deduction for a payment made by a Canada-based business under a hybrid non-compliance arrangement if that results in a further deduction in another country or is not included in the ordinary income of a non-Canadian recipient. Again, if a non-resident makes a payment under a hybrid non-compliance arrangement that is deductible under foreign tax law, the payment is not allowed to be deducted from a Canadian resident's income. In addition, a payment made by a non-resident to a Canadian resident under a hybrid non-compliance arrangement would be included in the ordinary income of the Canadian resident company if the amount is deductible under foreign law. If the payment is a dividend, the deduction may not be otherwise granted for certain dividends received from overseas affiliates.

These new rules aim to neutralize a mismatch by aligning Canadian income tax treatment with income tax treatment in foreign jurisdictions. Although no legislation has yet been drawn up, the budget contains some guidelines indicating that (i) the new rules would apply mechanically; In other words, no purpose test would need to be completed. (ii) The rules would apply to an inter-affiliate payment and to the extent that the payment is designed to create a hybrid mismatch between unaffiliated entities. and (iii) the ordering rules set out in the OECD report (e.g., a withdrawal refusal to take precedence over an inclusion rule) apply to ensure that the proposed rules are coordinated with similar rules in other countries.

The budget suggests introducing new legislation in two separate packages, the first of which will be available for stakeholder comments later this year. These rules apply to deductions and non-inclusion mismatches resulting from payments for financial instruments. These rules are expected to come into effect on July 1, 2022. The second legislative package would address the other hybrid mismatch concerns and be cleared for stakeholder comments after 2021, and those rules would apply in 2023 at the earliest.

Transfer pricing

The budget makes it clear that the government is concerned about perceived flaws in the current transfer pricing rules that it believes may encourage the improper relocation of corporate income out of Canada. This concern appears to stem from the decision of the Federal Court of Appeals in the Cameco case, in which the court disagreed with the government's full interpretation of the re-characterization rule and concluded that the government could not change the nature of a transaction if the agreements were objective are appropriate. even if the structure is tax-motivated.

The budget proposes to initiate a consultation process on Canada's transfer pricing rules in order to protect the integrity of Canada's tax system while maintaining Canada's attractiveness for foreign investment.

Trade tax measures

Immediate Spending (CCPCs)

The budget suggests adding temporary and immediate charges to certain properties acquired by a CCPC by amending the Cost of Capital Admission System (CCA). This applies to certain depreciable properties that are "Eligible Properties" acquired after April 18, 2021 and available for use before January 1, 2024, up to a maximum of 1.5 million. USD per tax year (subject to allocation among associate group members) and proration for short tax years). Eligible assets are capital assets that are subject to CCA rules, with the exception of certain long-lived assets.

Immediate expenses are only available for the year in which the Eligible Property is available for use, with no carry-forward of the excess allowance being allowed.

Real estate that was used or acquired for any purpose prior to the acquisition by the CCPC can only be recognized as an expense immediately if neither the CCPC nor a person who does not belong to the customary market conditions is the previous owner of the eligible property and of the eligible property were not acquired by the CCPC for tax purposes (rollover).

If a CCPC has a cost of capital greater than $ 1.5 million, a choice can be made as to which asset class is expensed immediately, with any excess being subject to the normal CCA regime. All other extended deductions available to CCPCs under normal CCA rules will continue to apply.

Rate reduction for emission-free technology

The budget proposes a temporary measure to lower the corporate tax rates that apply to qualifying revenues from manufacturing and processing zero-emission technologies. The general corporate tax rate on eligible income from the manufacture and processing of zero-emission technologies will be reduced from the general corporate tax rate from 15% to 7.5%, and the small business tax rate applicable to this eligible income will be reduced from 9% to 4.5% lowered. .

To qualify for the reduced tax rates, at least 10% of a taxpayer's gross income must come from all active business in Canada from eligible activities.

These reduced tax rates would apply to tax years that begin after 2021 and gradually expire from 2029 and expire completely after 2031.

Canada Recovery Hiring Program (CRHP)

In addition to the CEWS, the household is introducing a new program to help eligible employers negatively impacted by the Covid-19 pandemic. The CRHP grants eligible employees a grant of up to 50% of the “additional compensation” paid to eligible employees between June 6, 2021 and November 20, 2021. A qualifying employer can apply for either the CRHP or the CEWS for a specific qualification period, but not both.

Employers eligible for the CEWS would generally qualify for the CRHP. Such Eligible Employers would have to pass the test to be a “Qualified Recovery Body”, defined as an “Eligible Body” (as defined for the purposes of the CEWS) and meeting additional conditions, for a qualifying period of time. These additional conditions include that the eligible company has an existing payroll account on March 15, 2020. If it is a taxable corporation, it must be a CCPC and have a sales reduction percentage greater than 0% (for the waiting period between June 6 and July 3, 2021) and 10% (for the waiting period between June 6 and July 3, 2021) July 4th and November 20th, 2021).

A Qualifying Worker must be employed primarily in Canada by a Qualifying Employer for a Qualifying Period. The CRHP would not be available to employees on leave.

The types of allowance eligible for the CEWS would also qualify for the CRHP, and additional allowance for a qualifying period is the difference between the total eligible pay of an employer paid to eligible employees for the qualifying period and the total eligible employee Compensation paid to eligible employees for the CEWS Base Period (March 14 to April 10, 2021). In both the qualification and base periods, the eligible remuneration for each eligible employee is a maximum of USD 1,129 per week.

If the decline in turnover of an eligible employer exceeds the turnover decline threshold for a waiting period, his subsidy in this qualification period corresponds to his additional remuneration multiplied by the CRHP rate applicable for this qualification period.

The proposed CRHP subsidy rates are as follows:

  • 50% for waiting times between June 6th and August 28th 2021;
  • 40% for the waiting period between August 29 and September 25, 2021;
  • 30% for the waiting period between September 26 and October 23, 2021; and
  • 20% for the waiting period between October 24th and November 20th, 2021.

Reportable Transactions

The Canadian tax system requires certain individuals to file a statement of disclosure regarding "Reportable Transactions" which are generally considered to be "avoidance transactions" conducted primarily for tax purposes and defined for the purposes of the general anti-avoidance rule in Canadian tax laws. The hallmark of an "avoidance transaction" is that two of the following three criteria are met:

  • Contingent fees are paid to a promoter or tax advisor based on the tax benefit or benefit, or based on the number of participants participating in the transaction.
  • A promoter or tax advisor has "confidential protection" in relation to the avoidance transaction (i.e. anything that prohibits disclosure of the details or structure of the transaction to an individual or the Canadian tax authorities);
  • A promoter, tax advisor, participant or a specific person who does not operate on market terms has or has had contractual protection in relation to the avoidance business, e.g. B. an insurance that protects against failure to obtain a tax advantage.

The budget provides for a consultation to be carried out on a number of additional reporting requirements, including, among other things, that a notification requirement is required if only one of the three criteria above is met and that all participants must report, promoters and tax advisors within 45 Days after the transaction is completed. When these additional reporting requirements come into force, they will apply to tax years beginning on January 1, 2022. The new compliance and reporting requirements, if they come into force, will impose significant penalties for non-compliance. In some cases the penalties are more than 25% of the tax break.

Contributions to the proposed measures will be published in the coming weeks. Comments must be submitted by September 3, 2021.

Excise measures

Applying GST / HST to e-commerce

The budget proposes changes to the new measures announced in the Autumn 2020 Economic Declaration and due to come into force on July 1, 2021.

The 2020 proposals introduced changes to the GST / HST rules for e-commerce that require distribution platform operators to collect and transfer the GST / HST for sales from unregistered vendors to Canadian buyers.

Following the comments received on the 2020 proposals, the budget proposes various changes, including allowing deductions for bad debts. This new facilitation of changes was deemed appropriate as non-residents who are required to register under the 2020 Proposal Rules will have to register under a new modified system (not the normal GST / HST registration system) and collect and transfer taxes on taxable sales to Canadian consumers, however, are not allowed to claim pre-tax credits (ITCs). Therefore, the budget is introducing changes to the 2020 proposals that will allow non-residents to deduct bad debt amounts from the GST / HST that they are required to remit for a reporting period. If applicable, non-residents could instead consider registering under the standard GST / HST registration system to apply for ITCs.

The budget also proposes new rules to protect platform operators by (1) imposing joint and several liability on the third party operator and the non-resident provider for collecting and transferring the applicable GST / HST if the non-resident provider has provided false information Information and (2) limitation of the platform operator's liability if the platform operator relied appropriately on information from the non-resident provider.

The budget clarifies that: (1) Deliveries of digital products or services that are GST / HST-free (i.e. rated zero) will not be included in the calculation of the $ 30,000 threshold to determine whether a Person is obliged to register for the company GST / HST according to the new rules and the simplified framework, (2) the requirement to submit an annual information declaration only applies to platform operators who are or must be registered for GST / HST, and (3) the national minister Revenue has the power to register a person who, in the opinion of the minister, should be registered under the new (or simplified) framework.

The budget confirms the following in relation to the 2020 proposals:

  • Non-resident distribution platform providers and operators offering digital products or services to Canadian consumers must register and collect GST / HST for the taxable supplies they enable consumers in Canada.
  • Deliveries of short-term accommodation in Canada that are made possible through digital accommodation platforms are subject to GST / HST, with GST / HST being collected by either the owner or operator of the accommodation platform and remitted to these supplies.
  • Distribution platform operators must register under the normal GST / HST registration system to collect and remit applicable GST / HST for sales of goods delivered from fulfillment warehouses in Canada if those sales are from unregistered vendors be made via sales platforms.
  • Non-resident vendors who make sales themselves (not through a distribution platform) are also subject to the new registration and collection requirements for GST / HST in relation to goods delivered from a fulfillment warehouse.

A 12-month grace period after the new regulations come into force begins on July 1, 2021, within the framework of which a margin of discretion is implemented in the management of the new measures, provided that the non-resident or platform operator can prove this has taken appropriate measures to comply with the new regulations.

Tax on digital services

The budget proposes to introduce a digital services tax (DST) originally announced in the 2020 proposals, which will come into effect on January 1, 2022. This new DST would be a provisional measure pending a multilateral approach in relation to the companies concerned.

Daylight Saving Time aims to ensure that any major overseas or Canadian corporation's revenue from sales and interactions with Canadian online users, including the collection, processing, and monetization of data and content contributions from those users, is subject to Canadian tax.

Taxpayers subject to daylight saving time include companies, partnerships or trusts that meet (or are members of a group of companies that meet them): (1) global income from all sources of EUR 750 million or more in the previous calendar Year and (2) in-scope revenue with Canadian users greater than $ 20 million in any given calendar year.

Rate and Basis: Daylight Saving Time is applied at a 3% rate to revenue ("In-Scope Revenue") generated from certain digital services based on engagement, data, and content contributions from Canadian users.

In-scope sales: This is the sales of Canadian users from four online business models where user participation is a key value driver: (1) online marketplaces, (2) social media platforms, (3) online Advertising and (4) selling or licensing user data collected from users of an online interface.

Credit Deductibility: Daylight Saving Time would not be eligible for income tax, but may be deductible on income according to general principles (i.e., if it is incurred for the purpose of generating the company's income, which is subject to Canadian income tax).

In general, the proposed daylight saving time would apply to income from services provided by:

  1. In online marketplaces where sellers of goods and services are matched with potential buyers (it does not matter whether the platform facilitates the conclusion of the sale or not), their revenues are subject to the new summer time. Revenue related to optional “premium” services that improve basic functionality and / or affect the terms and conditions of a platform would also be included in the scope of daylight saving time. The budget suggests that daylight saving time only apply to income associated with Canadian users. Hence, there are revenue-raising rules that are used to determine whether the Canadian user connection is met. For example, the revenue associated with a particular transaction would be related to the location of the user interacting through the interface and considered 50/50 related to the location of the buyer and seller. Earnings from an online marketplace that are not associated with a single transaction, e.g. B. Subscription fees, are forwarded to the location of the user of the interface on a formulaic basis.
  2. Social media interfaces that facilitate interaction between users or between users and user-generated content are subject to daylight saving time for income from such services. The income from such an online interface would be generated on a formulaic basis. For example, the revenue associated with Canadian users would be equal to the sum of the relevant revenue times the ratio of the number of active Canadian users to all users (i.e., non-Canadian users) of the interface. However, daylight saving time would not apply to an interface the sole purpose of which is to provide communication services; H. Telephone services, to facilitate.
  3. Online advertising that generates revenue based on data collected from users of an online interface is subject to daylight saving time. This would include revenue from online interfaces such as online marketplaces and social media platforms, as well as internet search engines (including preferred search lists), digital content streaming services and online communication services. Daylight Saving Time would apply to both revenue generated by a user interface for displaying targeted ads and revenue generated by accepting third-party ad placement on their platform.
  4. User data from online interfaces that generate revenue through sales or licensing are subject to daylight saving time. The budget suggests that this revenue goes to the location of the user to whom the data relates. Similar to revenue calculated on a formula basis for social media interfaces, where this revenue is generated from data from both Canadians and non-Canadians, such a ratio would lead to the amount of taxable revenue in Canada that is the summer time subject.

The budget provides that daylight saving time is not intended to capture sales of goods and services by a seller on their own account (including sales, licensing or streaming of digital content), revenues related to the storage or shipping of tangible goods are sold online through an online marketplace or by trading in financial instruments and commodities.

Tax on certain luxury goods

Effective January 1, 2022, the budget is proposing a new luxury tax on retail sales of passenger cars and private aircraft priced above $ 100,000 and boats priced above $ 250,000. Certain exceptions, e.g. B. If the article is used for commercial or public purposes, apply. The proposed tax would apply at the final point of sale if the final price payable by the consumer (excluding GST / HST or provincial sales tax) exceeds the stated thresholds. The tax is calculated at less than 10% of the total value of the respective item or 20% of the value above the applicable threshold. GST / HST would apply to the price including the proposed tax.

Tax on unproductive use of Canadian housing

The budget confirms 2020 proposals to introduce a national tax targeting the unproductive use of Canadian real estate owned by non-Canadians. The annual tax is effective January 1, 2022 and is applied at 1% on the value of Canadian home ownership that is deemed empty or underused and owned by a non-Canadian non-resident.

Beginning in 2023, a Canadian residential property owner who is non-resident and non-Canadian (neither citizen nor permanent resident) must file an annual filing with CRA in relation to such property that was owned in the previous calendar year. Information such as the address, value, and interest of the owner is provided, as well as whether an exception is available. Significant penalties are imposed if no documents are submitted when necessary.

There was no draft law on this proposal in the budget and stakeholder comments will be requested in the coming months.