This year saw relatively few major tax changes. With vaccine rollout in full swing, many COVID-19 support programs still in place, and for many individuals a return to a semblance of pre-pandemic routines, the focus has shifted to what comes next.
Key Federal Tax Updates in 2021 and What Comes Next
The beginning of 2021 brought optimism for many people. Vaccines soon to be rolled out across the country along with the beginnings of economic recovery all pointed to a light at the end of the tunnel. A general sense that the veil of 2020 was lifting combined with significant ongoing government spending on COVID-19 relief programs all contributed towards a feeling of exuberance among the Federal officials that they had successfully led our country through an unprecedented event. Support for the Liberals had never been higher and 2021 would be the ideal time to call an election and gain a majority government. At least that is what their internal analysts seem to have told them.
With an election already in the back of their collective minds, the Liberals, not wanting to rock the voter opinion boat, tabled a relatively tame budget. The 2021 Budget and associated notable tax implications may be summarized as:
- COVID related measures – Updates, tweaks and changes to COVID-19 relief programs;
- Business tax related measures – Changes to business tax measures such as tax rate reductions for “green” technology, accelerated deductions on qualifying capital expenditures, and limitations on interest deductibility;
- Personal tax related measures – No personal tax rate changes, updates to the disability tax credit (DTC), and a new luxury tax; and
- Other tax related measures – Tax on non-resident owners of Canadian real estate, and a digital services tax (DST).
Another notable tax change in 2021 that was not a part of the Federal Budget came in the form of Bill C-208, which allows for capital gains treatment and access to the lifetime capital gains exemption for inter-generational transfers through a corporately leveraged purchase.
Finishing the fight against COVID-19
Notable changes in this area included the extension of certain COVID-19 benefit programs such as the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Rent Subsidy (CERS), and the Canada Recovery Benefit (CRB). The Canada Recovery Hiring Program (CRHP) was a newly implemented COVID-19 recovery benefit and other minor changes were made to most of the foregoing programs in respect of the underlying qualifications and calculation of the benefit amounts, with a directive of tapering down program spending towards the end of 2021.
Business tax changes
A significant focus of Budget 2021 was to incentivize green technology. This included the introduction of temporary immediate deduction for capital expenditures of a Canadian Controlled Private Corporation (CCPC). Specifically, and subject to an annual limitation, a CCPC may deduct 100% of capital expenditures incurred on eligible property acquire on or after Budget Day and becomes available for use before January 1, 2024.
Also introduced in Budget 2021 were reduced Federal business income tax rates for eligible zero-emission technology manufacturing and processing income. A related incentive also allowed for an expansion to the property eligible for accelerated tax write offs through capital cost allowance (CCA).
In a more internationally focused change, Budget 2021 implemented a new earnings-stripping rule to effectively limit the amount of net interest expense that a corporation may deduct in computing its taxable income to no more than a fixed ratio of “tax EBITDA”, which is that corporation’s taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization, where each of these items is as determined for tax purposes. The application is intended to target larger entities, as there is an exemption rule for smaller CCPC’s and associated entities.
One of the more notable tax changes of 2021 came in the form of Bill C-208, which was not a part of the 2021 Federal Budget, and was passed into law as a private members bill on June 22, 2021. Essentially, the Bill allows for more favourable tax treatment for corporately leveraged transitions of a family business to related individuals. However, the Department of Finance did not support the amendments contained in Bill C-208 and indicated they would be drafting legislative amendments to honour the spirit of the bill, while safeguarding against unintended tax “loopholes.” As it is currently written, Bill C-208 has a myriad of technical issues and as of November 12, 2021, further amendments from the Department of Finance have yet to be released.
2021 saw no changes to the Federal personal tax rates, and no change to the capital gains inclusion rate. Further, greater accessibility was implemented for the DTC by reducing therapy frequency requirements, while expanding the eligibility of qualifying impairment in recognition of mental health issues.
There will now be a tax on the retail sale of new luxury cars and personal aircraft priced over $100,000, and boats priced over $250,000, effective as of January 1, 2022. For vehicles, aircraft and boats sold in Canada, the tax will apply at the point of purchase if the final sale price paid by a consumer (not including the GST/HST or provincial sales tax) is above the $100,000 or $250,000 price threshold, as the case may be. Importations of vehicles, aircraft, and boats would also be subject to the tax. Some exclusions apply for certain recreational or business-related purchases.
Other notable changes
The DST is intended to ensure that revenue earned by large businesses, both foreign and domestic, from engagement with online users in Canada is subject to Canadian tax. The DST is intended to be interim in nature, and should apply as of January 1, 2022 until an acceptable multilateral approach comes into effect with respect to the implicated businesses.
Finally, Budget 2021 introduced a new national one-per-cent tax on the value of non-resident, non-Canadian owned residential real estate considered to be vacant or underused. This tax will be levied annually beginning in 2022, and beginning in 2023, all owners of residential property in Canada, other than Canadian citizens or permanent residents of Canada, will be required to file an annual declaration for the prior calendar year with the Canada Revenue Agency in respect of each Canadian residential property they own.
What Comes Next
As the end of 2021 nears, fresh concerns have been brought to the forefront. With inflation on the rise and massive amounts of government debt that accumulated over the last year and a half, how will the government generate new revenue to meet debt obligations while maintaining spending goals?
While purely speculative, possible tax changes that may have a significant impact for Canadians include:
- A change to the capital gains inclusion rate (currently set at 50%)
- More aggressive taxation of real estate, either in the form of limitations to the principal residence exemption, or how tax is applied to the sale of secondary homes or investment properties
- Wealth taxation (inter vivos taxation of the FMV of assets/holdings)
- Increased taxation of estates and generational wealth transfer
As our current Liberal government has shown through their historical policies and budgets, they tend towards a more targeted approach to taxation, in part evidenced by the 2018 Tax on Split Income (TOSI) regime that expanded the previous rules around “income sprinkling.” A change in the capital gain inclusion rate is a much less targeted approach, and while not out of the question, may come with some exemptions or qualifying conditions.
In terms of expanding the tax base, the new DST was implemented with the likely goal of accessing untapped tax revenue sources. However, it may be naïve to assume that such an added cost for businesses providing services to Canadian users through online or digital mediums would not be passed along in some form to the end consumer. Ultimately, Canadians may bear the brunt of this tax while still dealing with other ongoing economic issues the have been brought to the forefront over the last year and half.
Together, these examples paint a picture of current Federal policies that appear to be more consistent with a “tax and spend” mentality as opposed to an “open for investment” approach, the latter of which may drive additional tax revenue through new business and economic expansion. Coupled with recent inflation figures and comments from the Department of Finance that appear to be more focused on debt management as opposed to debt reduction, many individuals are rightfully concerned that the current tax rules cannot generate sufficient income to offset the combined burden of government spending and debt service.
In our opinion, with 2021 tax changes having effectively failed to expand the tax base beyond the Canadian consumer, and with no signs of reduced spending from our current government, the options for raising additional revenue continue to narrow. Further tax changes may be coming and unless historical policy is not indicative of changes to come, Canadians may be bearing the brunt of an increased tax burden.