The federal Liberal government unveiled its first budget in more than two years on April 19th, with a plan to continue supporting Canadians impacted by the COVID-19 pandemic in the short term and reducing the deficit long term. Budget 2021 also includes some incentives for businesses to recover and expand, as well as initiatives to help crack down on tax avoidance and create a fairer tax system.
The 724-page document proposes billions of dollars in federal subsidies targeting a broad range of Canadians. Some of the main spending initiatives include:
-A national childcare program: Based on the Quebec model, the government proposes spending about $30 billion over the next five years, and $8.3-billion each year after that, to bring childcare fees down to an average of $10 a day by 2026.
-Increasing Old Age Security (OAS): Seniors age 75 or older as of June 2022 will receive a one-time $500 special payment in August 2021. The budget also proposes to increase regular OAS payments for pensioners 75 and older by 10% on an ongoing basis beginning in July 2022.
-Disability Tax Credit (DTC) improvements: The budget proposes to update the list of mental functions of everyday life used for assessment for the DTC, such as attention, concentration, memory and perception of reality, among others. The government estimates the measures will cover an additional 45,000 people, representing $376 million in additional support over five years.
“It’s a very inclusive budget,” says Tiffany Harding, vice-president and head of wealth planning at Gluskin Sheff. “It applies to a range of groups including working parents, seniors, people with disabilities, marginalized Canadians and business owners.”
The government said the deficit is expected to be $354.2 billion for the 2020-21 fiscal year that just ended and is forecast to drop to $154.7 billion in the current fiscal year and fall to around $30.7 billion in 2025-26.
The federal debt is expected to peak at 51.2% of GDP in 2021-22 before declining to 49.2% of GDP in 2025-26.
Canadians may also be pleased about what isn’t in the budget, says Mark Skeggs, vice-president of wealth planning at Gluskin Sheff.
“Despite rampant speculation, at this time there were no changes to the federal personal or corporate tax rates in the budget, nor did it propose to increase the capital gains inclusion rate, eliminate the principal residence exemption or introduce a wealth tax,” Skeggs says.
Below are some budget highlights for Canadian investors and business owners:
More COVID-19 pandemic relief
The government states its budget is about “finishing the fight against COVID,” including “healing the economic wounds” caused by the economic fallout from the pandemic. To help Canadians most economically affected, particularly small business owners and those who have lost their jobs, the government is extending some of its key pandemic-relief programs.
Key proposals include:
-The Canada Emergency Wage Subsidy (CEWS), set to expire in June, will be extended to September but at a lower subsidy rate starting in July.
-Canada Emergency Rent Subsidy and lockdown support coverage extended until late September and to extend coverage for the underemployed in the Canada Recovery Benefit by 12 weeks to a total of 50 weeks, with a drop from $500 weekly before tax to $300 per week for the final eight weeks.
-A new Canada Recovery Hiring Program to run from June to November providing $595 million to make it easier for businesses to hire back laid-off workers or bring on new ones.
-Publicly-listed corporations would be required to repay wage subsidies received this summer if their executive compensation in 2021 is higher than in 2019.
Budget 2021 acknowledges some Canadians continued to prosper during the pandemic and the government believes those who can afford to buy luxury products “can afford to pay a bit more.” As a result, it has followed through with a plan to introduce a tax on select luxury goods starting on Jan. 1, 2022, regardless of whether the goods are purchased, financed or leased.
The luxury tax is on new passenger vehicles and personal use aircraft worth more than $100,000 and new personal use boats worth more than $250,000. The tax would be calculated at the lesser of 20% of the value above the threshold ($100,000 for cars and personal aircraft, $250,000 for boats) or 10% of the full value of the luxury car, boat or personal aircraft.
With the proposed new luxury tax starting next year, individuals thinking about purchasing a luxury good should consider doing it this year.
To help make housing more affordable to more Canadians, the budget proposes to impose a 1% tax on the value of non-resident, non-Canadian-owned residential real estate that is considered vacant or underused starting Jan. 1, 2022. In addition, beginning in 2023 all owners, other than Canadian citizens or permanent residents of Canada, will be required to file an annual declaration with the Canada Revenue Agency (CRA) for the prior year as to the current use of each Canadian residential property, even if the owner is not subject to the tax for the particular year, with significant penalties for failure to file.
The government will release a consultation paper in the coming months that will provide stakeholders with an opportunity to comment on the proposed tax, including on whether special rules should be established for small tourism and resort communities.
Digital services tax
The government wants digital corporations—Netflix, Spotify and Amazon—to “pay their fair share of tax on the money they earn by doing business in Canada.” As a result, the government is moving forward with plans to implement a tax on corporations providing digital services.
Budget 2021 proposes to implement a Digital Services Tax at a rate of 3% on revenue from digital services that rely on data and content contributions from Canadian users. The tax would apply to large businesses with gross revenue of 750 million euros or more as of Jan. 1, 2022.
The government said the tax would remain in place until “an acceptable multilateral approach comes into effect.” It notes work is underway to reach a multilateral agreement on cross-border digital taxation by mid-2021, but notes discussions have been ongoing since 2013.
Helping small businesses advance in the digital, knowledge-based and green economy
The budget has a few proposals to support small businesses shifting toward the digital, knowledge-based, low-carbon economy of the future.
On the digital side, the budget includes initiatives to help business owners adjust to the rapid move online amid the pandemic. The budget also proposes a temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers and are providing more incentives for business owners to invest in new technologies and move forward with capital projects.
Additional provisions include the immediate expensing of up to $1.5 million of eligible investments by Canadian-controlled private corporations (CCPCs) before 2024. Eligible investments will cover over 60% of capital investments typically made by CCPCs.
The budget also proposes to help start-ups access capital to expand their businesses by improving the Canada Small Business Financing Program and expanding borrower eligibility to include non-profit and charitable social enterprises; and introducing a new line of credit product to help with liquidity and cover short-term working capital needs.
More tax fairness
The government also announced a few measures to crack down on tax-avoidance schemes, including inappropriately shifting profits offshore. The government plans to launch public consultations on proposals to enhance Canada’s income tax mandatory disclosure rules, addressing changes to the Income Tax Act’s reportable transaction rules, a new requirement to report notifiable transactions, and a new requirement for specified corporations to report uncertain tax treatments. In addition, it is proposed that until a taxpayer complies with the mandatory disclosure reporting requirements for a taxation year in respect of a transaction, the normal reassessment period would not commence. The Department of Finance is seeking comments on the proposals, which would apply to transactions entered into on or after Jan. 1, 2022.
The government also plans to boost spending to allow the Canada Revenue Agency (CRA) to fund new initiatives and extend existing programs, including boosting GST/HST audits of large businesses where risk assessment models have found the greatest risk of non-compliance, improving its risk assessment process to prevent unwarranted and fraudulent GST/HST refund and rebate claims at the outset, and improve the ability to issue refunds for compliant businesses as quickly as possible. The spending will also enhance the CRA’s capacity to identify tax evasion involving trusts and provide better service to executors and trustees. The budget also increases spending for the CRA to improve its ability to collect outstanding taxes.
Time to review your tax/wealth plan
There is something for nearly every Canadian in the latest budget. Still, a concern many Canadians have is how it will all be paid for, Harding says.
Canadians may want to use this presumed election budget as an opportunity to review their personal finances and business matters to prepare for new tax measures that may be proposed in future budgets.
“Now is a great time to review and update your wealth and tax planning as existing strategies and opportunities may be fleeting to better position your family for what is presumably to come,” Skeggs says.
For more information, please contact your Client Wealth Management representative or a member of the Wealth Planning team.