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 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.