Nov 30, 2020
Now available: Federal budget briefing 2021: Tax changes
The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, tabled the 2020 Fall Economic Statement (FES 2020) on November 30, 2020. FES 2020 represents the government’s first budget-like plan since the last full budget in March 2019. As expected, FES 2020 highlights the heavy economic impact of COVID-19 on the Canadian economy, with a forecasted federal deficit of over $380 billion for the 2020-2021 fiscal year.
FES 2020 contains significant pandemic-related spending measures that are intended to be temporary in nature, while also signalling significant new longer-term spending over the next three years designed to address the “COVID-19 recession” (with details still to be determined). Rather than focusing on traditional debt-to-GDP or deficit figures, the government intends to use figures like the employment rate, total hours worked and the level of unemployment in the economy to indicate when stimulus spending should be wound down.
FES 2020 also contains revenue raising tax measures, particularly proposals to limit stock option deductions and new rules to impose GST/HST obligations on non-residents providing digital services in Canada. FES 2020 also signals the prospect of a new digital services tax in 2022 which may be introduced if the OECD’s efforts at global tax reform do not result in a consensus-based solution in 2021. Further study is proposed to consider a potential expansion of Canada’s anti-avoidance rules. A one-time simplified home office expense deduction claim will be detailed shortly to assist the increased number of people working from home due to COVID-19.
FES 2020 projects a base case deficit of $381.6 billion in 2020-2021, decreasing to $33.4 billion by 2025-2026. The debt-to-GDP ratio is forecasted to rise to 51% in 2020-2021 and further to 56%-57% by 2025-2026.
In this Fall Economic Statement 2020 Briefing, we summarize the more significant tax proposals.
In this Briefing
The following areas will be covered in this Fall Economic Statement 2020 Briefing:
The tax measures in FES 2020 are forecasted to raise $7.2 billion in total net revenues over the next five years.
Income tax measures
Stock option deduction
Under the Income Tax Act (Canada) (ITA), the exercise by an employee of a stock option to acquire shares results in a taxable employment benefit to the employee equal to the excess of the value of the shares received upon exercise over the exercise price paid under the option. Where certain conditions are met, the employee may be entitled to claim a deduction equal to 50% of the taxable benefit (the Employee Deduction).
In Budget 2019, the federal government introduced its intention to limit the benefit of the Employee Deduction for high income individuals employed at large, long-established mature firms by proposing an annual cap of $200,000 on stock options that would be eligible for the Employee Deduction. For our commentary on the Budget 2019 proposal, see here.
The proposal was further detailed in a Notice of Ways and Means Motion (NWMM) tabled by the Government on June 17, 2019 (see our commentary on the NWMM here) which clarified that the proposed rules were not intended to apply to employee stock options granted by Canadian-controlled private corporations or certain non-CCPCs that are “start-ups, emerging or scale up companies.” On December 19, 2019, the Minister of Finance announced that the implementation of the proposed rules was being deferred to allow the government to consider responses received as a result of the public consultation process. The stock option rules proposed in FES 2020 maintain the $200,000 annual limit on the amount of employee stock options that may continue to qualify for the Employee Deduction. As previously announced, options are counted in the $200,000 annual limit in the year they become vested and exercisable.
FES 2020 also confirms that the employer would be entitled to an income tax deduction for the stock option benefit included in the employee’s income in respect of stock options in excess of the $200,000 limit. Employers subject to the new rules would have the choice to grant options either under the existing treatment up to the $200,000 limit per employee, or to grant options under the new rules which would not be eligible for the Employee Deductions but would instead be eligible for a corporate income tax deduction. The employer would be required to notify the employees and the Canada Revenue Agency (CRA) with respect to options that are granted subject to the new rules.
FES 2020 provides some welcome clarification on a number of important aspects of the 2019 draft legislation, which the government noted were in response to feedback received through the consultation period following the release of the NWMM. These clarifications are described in more detail below.
Under the NWMM, if the option grant agreement specified the calendar year in which the option becomes exercisable, the option would be regarded as becoming vested (and counted in the annual limit) in the specified year but if not specified or unclear, the options would be regarded as vested in the first calendar year in which the option could reasonably be expected to be exercised.
FES 2020 clarifies that an option will be considered vested for these purposes when it first becomes exercisable and this determination must be made at the time of the grant of the option. If the year in which the option becomes exercisable is not clear, the option will be considered to vest on a pro-rata basis over the term of the agreement, up to a 60-month period. This presumably replaces the proposal in the NWMM to treat such options as fully vested in the first year they can reasonably be expected to be exercised. The revised rule provides additional clarity on when options with vesting conditions that are not time-based will be included in the application of the $200,000 annual limit.
Start-up, emerging or scaled-up companies
As part of the NWMM, the federal government invited stakeholders to provide input on the characteristics that should be considered in determining whether a company would be a “start-up, emerging or scaled-up company” for these purposes. The consultation period closed on September 16, 2019.
FES 2020 has clarified that non-CCPC corporations with annual gross revenue not exceeding $500 million would fall into the categories of “start-up, emerging or scaled up companies” and would generally not be subject to these new rules.
Where an employer is a member of a corporate group that prepares consolidated financial statements, gross revenues are as reported in the most recent consolidated annual financial statements of the group, presented to shareholders prior to the date of grant of the stock options, at the highest level of consolidation. Where an employer is not a member of such a corporate group, gross revenues are as reported in the employer’s most recent annual financial statements prepared in accordance with generally accepted accounting principles and presented to shareholders prior to the date of the grant of the stock options.
Under the current rules, where an employee donates publicly listed shares acquired under a stock option (or the cash proceeds from the sale of such shares) within 30 days of exercise of the stock option, to a qualified donee (which generally includes a registered charity), the employee will be eligible for an additional deduction equal to one-half of the stock option benefit. As such, where the employee is entitled to both the Employee Deduction and the additional deduction resulting from the donation of the shares acquired under a stock option, the amount of any stock option benefit will be fully excluded from the employee’s income.
FES 2020 provides that if an employee donates publicly listed shares that have been acquired upon the exercise of a stock option that is in excess of the $200,000 limit, the employee would remain eligible for the charitable donation tax credit associated with the donation of the shares. While Budget 2019 did not contain any proposed changes to the rules relating to the donation of publicly listed shares, FES 2020 follows through on the proposal introduced in the tax Backgrounder that accompanied the NWMM to eliminate the additional deduction for the donation of publicly listed shares that are in excess of the $200,000 limit.
Coming into force
These new rules will apply to employee stock options that are granted after June 2021. The existing rules will continue to apply to options granted before July 2021, including qualifying options granted after June 2021 that replace options granted before July 2021. The legislative proposals included with FES 2020 provide that options granted after June 2021 will not be considered to have been issued after June 2021 (and therefore not subject to the new rules) if they are granted in exchange for options issued prior to July 2021 under a tax-deferred option exchange governed by section 7(1.4) of the ITA.
Digital services tax failing OECD consensus-based solution
The OECD has been working with Canada and over 135 other countries on a co-ordinated approach to global tax reform, including a potential new taxing right for countries where multinational corporations are providing digital (and certain other consumer facing) services to consumers. While the end of 2020 was targeted for a consensus-based solution, there have been numerous setbacks (including political differences, technical design considerations and the COVID-19 pandemic). FES 2020 affirms that Canada remains committed to finding a multilateral solution; however, the government is concerned about further delay. As a result, FES 2020 indicates an intention to implement a “tax on corporations providing digital services” with effect from January 1, 2022 until the implementation of an acceptable multilateral approach.
FES 2020 forecasts that this new measure would increase federal revenues by $3.4 billion over five years. Representatives from the Department of Finance indicated that no tax rate has been decided upon yet, but their modelling was based on various measures implemented in other jurisdictions. Based on the Liberal government’s 2019 campaign platform, we would expect this to be a gross-based tax of around 3%, likely with a minimum revenue threshold. Further details will be announced in Budget 2021.
For more details on the current status of the OECD’s work on the digital economy and proposed international tax reform, please see our Osler Update.
Other measures relating to tax avoidance
The government indicated it will launch a public consultation process in the upcoming months on the modernization of Canada’s anti-avoidance rules, including the general anti-avoidance rule.
FES 2020 also proposes to provide increased resources ($606 million over five years) to help the CRA limit offshore tax avoidance by hiring additional offshore-focused auditors. This follows upon resources announced in prior budgets, viewed as successful by the government in being able to reassess $3 billion in additional tax revenues. With the continued dedication of more resources to the CRA’s audit division, we expect this environment of heightened audit and assessment activity to persist.
Osler’s Private Client Group is particularly well-positioned to assist in navigating such audits.
Simplified claim for home office expense deduction
In recognition of the millions of Canadians working from home because of COVID-19, in the coming weeks the CRA will detail a simplified procedure for employees working from home in 2020 to claim expenses of up to $400 without the need to track detailed expenses or obtain a signed form from an employer.
FES 2020 announces several measures expanding the scope of GST/HST registration requirements for non-residents. While there have always been Canadian sales taxes on foreign digital content services and intangibles supplied in Canada, these taxes have historically required self-assessment by consumers (resulting in low compliance rates). In recent years, three provinces (Québec, Saskatchewan, and British Columbia) have all taken measures to require non-residents of the province to register for, and collect, sales tax in certain circumstances. To a significant extent, the proposed federal legislation follows the approach taken by these provinces.
Cross-border digital products and services
The proposed legislation included in FES 2020 would require non-resident vendors making supplies of digital products and services (including digital and traditional services) to Canadian consumers to register for GST/HST and collect and remit tax on such supplies. Similar to the approach implemented last year by Québec, the proposed legislation would create a simplified registration regime for non-resident vendors and distribution platform operators that are not carrying on business in Canada and do not have a permanent establishment in Canada.
A distribution platform operator is generally a person (other than the supplier or an excluded operator in respect of the supply) that, in respect of a supply of property or a service made through a specified distribution platform, either controls or sets the essential elements of the transaction or if no such person exists, the person who collects, receives or charges the consideration.
For these rules, a specified distribution platform is essentially a digital platform (such as a website, electronic portal, gateway, store, or distribution platform or similar electronic interface other than an electronic interface used solely to process payments) through which a person facilitates: (a) the making of supplies of intangible personal property or certain services by another person that is an unregistered non-resident that does not make supplies in the course of a business carried on in Canada; or (b) the making of certain supplies of tangible personal property that are to be delivered or made available to the recipient in Canada (other than supplies from outside of Canada that are delivered by mail or courier) by another person that is not registered for GST (the supplies in (b) being a “Qualifying Supply”).
Under the simplified registration framework:
- Registration and Remittances would be facilitated through an online portal;
- Vendors and distribution platform operators would only be required to collect and remit tax on supplies made to Canadian consumers, with “consumer” in this context meaning any person whose usual place of residence is in Canada and who is not registered for GST/HST; and
- Usual place of residence for these purposes would be determined based on whether two or more of the following indicators identify the consumer’s normal residence as Canada: home address, billing address, Internet Protocol address of the device used, bank or payment information, and subscriber identification module (SIM) card. Where two or more indicators are not available, the Minister of National Revenue may authorize an alternative method of determining the consumer’s usual place of residence. Special rules apply where a supply of digital products or services is linked or restricted to a specific location outside Canada, in which case vendors and platform operators would not be required to collect and remit tax notwithstanding the consumer’s residence.
Similar to the Québec regime, registrants under this simplified framework would not be able to claim input tax credits (ITCs). As with the GST/HST generally, a $30,000 annual threshold would apply before any non-resident would be required to register under the proposed legislation.
The new rules applying to supplies of cross-border digital products or services become effective July 1, 2021.
Under the proposed legislation included in FES 2020, distribution platform operators will generally be required to register for GST/HST and to collect and remit tax where they make Qualifying Supplies of tangible personal property (including sales of goods made by non-registered vendors over a distribution platform where the goods are delivered from a location in Canada to a purchaser in Canada). Where a sale of goods is made by a non-resident vendor and the goods are delivered to a purchaser in Canada (other than by mail or courier from outside of Canada), but the sale is not made over a distribution platform, it is the non-resident vendor that will generally be required to register. The proposed legislation will also require fulfillment businesses to notify the CRA that they are carrying on a fulfillment business and to maintain certain records.
Registration for distribution platform operators will be a “normal” GST/HST registration, such that registrants will be able to claim ITCs. In particular, registered platform operators will be able to claim ITCs for tax paid at the border by non-registered third-party vendors on importation of their products. Given that it is not the platform operator, but rather the third-party vendor, that has actually paid the tax in such a case, the digital platforms will have to work with their unregistered customers to determine how to get the credits back to the appropriate party.
Distribution platform operators will be deemed to be the supplier with respect to Qualifying Supplies, and as the regular registration regime will apply (not the simplified registration regime for digital supplies mentioned above), the distribution platform will generally be responsible for collecting and remitting GST/HST on such supplies even where the purchaser is a GST/HST registrant. Where the vendor is registered, the distribution platform operator will not be deemed to be the supplier and the vendor will remain responsible for collecting and remitting the GST/HST.
The proposed legislation also imposes record-keeping and reporting requirements on both platform operators and non-resident vendors.
As with the GST/HST generally, a $30,000 annual threshold will apply before any a non-resident will be required to register under the proposed legislation. The proposed new rules will generally apply after July 1, 2021.
Similar to changes made in British Columbia, the proposed legislation will apply GST/HST to supplies of short-term accommodation in Canada facilitated through a digital platform. Generally, where the property owner is registered for GST/HST, it is the property owner that will be required to collect and remit. Where property owners are not registered, the accommodation platform operator will be deemed to be the supplier (and therefore responsible for registering, collecting and remitting tax). Tax will not apply on service fees charged by accommodation platform operators to non-registered third-party property owners but will apply to guest fees charged by accommodation platform operators to guests.
The proposed legislation will impose additional record-keeping requirements on accommodation platform operators. An accommodation platform operator will generally be a person that:
- Controls or sets the essential elements of the transaction between the vendor and the customer; or
- If no person controls or sets the essential elements of the transaction between the vendor and the customer, a person that is involved, directly or through arrangements with third parties, in collecting, receiving or charging payment in respect of supplies of short-term accommodation in Canada and transmitting payment to the third-party vendor.
As with the new rules for cross-border digital products and services, a simplified registration framework will apply for short-term accommodation using an online portal. Accommodation platform operators will only be required to collect and remit tax on supplies of short-term accommodation made in Canada to consumers, with “consumer” in this context meaning any person not registered for GST/HST. Registrants under this simplified framework would not be able to claim ITCs.
As with the GST/HST generally, a $30,000 annual threshold will apply before an accommodation platform operator will be required to register under the proposed legislation. The proposed new rules will generally apply after July 1, 2021.
Zero-rating for face masks and face shields
The proposed legislation will also zero-rate supplies of certain face masks and face shields after December 6, 2020.
Extension of COVID-19 relief measures
FES 2020 announced extensions and modifications to the relief programs in place to support businesses and individuals through the COVID-19 crisis. Below we summarize the changes to three key programs impacting businesses.
Canada Emergency Wage Subsidy
FES 2020 confirms the previously announced extension of the Canada Emergency Wage Subsidy (CEWS) to June 2021 from the current expiry date of December 20, 2020. The maximum available subsidy rate will be increased from the current 65% to 75%, depending on the severity of the employer’s revenue decline, for the December 20, 2020 to March 13, 2021 period.
Since its announcement, the CRA has set up a “Frequently Asked Questions” page to set out its guidance on certain technical questions they have addressed with respect to the application of the CEWS. A link to the page can be found here.
Canada Emergency Rent Subsidy
FES 2020 also proposes to extend the Canada Emergency Rent Subsidy (CERS) to June 2021. CERS is available to certain commercial and non-profit renters without requiring the involvement of their landlords. The current subsidy rate of up to 65% (depending on the severity of the renter’s revenue decline) will be extended to March 13, 2021. The government also announced the extension of the additional subsidy under the Lockdown Support program to March 13, 2021. Under this program, organizations that are subject to a lockdown and must shut their doors or significantly restrict their activities under a public health order are eligible for an additional 25% top-up, in addition to the 65% base CERS.
Canada Emergency Business Account
Finally, FES 2020 proposes to increase the interest-free loans available to certain small businesses and non-profits through the Canada Emergency Business Account (CEBA) program. CEBA previously provided loans of $40,000, 25% of which ($10,000) was forgivable. FES 2020 proposes that qualifying entities can access an additional loan of $20,000, half of which ($10,000) is forgivable if the loan is repaid by December 31, 2022.
If you have any questions or require additional analysis on Fall Economic Statement 2020, please contact any member of our National Tax Department
Let us help you stay informed
Subscribe now to stay up to date on the latest changes in taxation and other areas of relevance to your business.