On Tuesday, December 14, 2021, the Deputy Prime Minister and Minister of Finance Chrystia Freeland released the Economic and Fiscal Update 2021…
The following provides a summary of the tax highlights and changes announced. Thankfully, this update did not propose any tax rate increases, despite some speculation in the tax community leading up to today’s release. And now we await Budget 2022…
Support Through COVID
The government proposes to extend the Highly Affected Sectors Credit Availability Program (HASCAP) to March 31, 2022. This program provides government-guaranteed, low-interest loans of up to $1 million to organizations that have suffered significant revenue declines due to the pandemic.
Also included in the update, was the proposal to extend the Canada Recovery Hiring Program (CRHP) 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 of more than 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 previously announced 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. Specific details on how to apply have yet to be released.
Business Related Measures
Small Businesses Air Quality Improvement Tax Credit
The government is proposing to introduce a temporary Small Business Air Quality Improvement Tax Credit (SBAQITC) – say that ten times fast! This is a refundable tax credit that would be available to eligible entities in connection with qualifying expenditures that improve air quality in qualifying locations. This measure is intended to encourage small businesses to invest in better ventilation and air filtration for overall better indoor air quality.
To qualify, the expenditures must be made between September 1, 2021, and December 31, 2022.
The tax credit would be calculated as 25% of an eligible entity’s qualifying expenditures up to a maximum of $10,000/qualifying location, and a maximum of $50,000 across all qualifying locations. These limits would need to be shared among affiliated businesses. An entity would be required to include the tax credit in its taxable income for the year the credit is claimed.
Qualifying expenditures would include outlays attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation, and air conditioning (HVAC) systems, as well as the purchase of devices designed to filter air using high-efficiency particulate (HEPA) filters. Routine maintenance is excluded from the list of qualifying expenditures.
To the extent government assistance is available to assist in the funding of qualifying expenditure, the assistance will reduce the amount eligible for the SBAQITC.
Qualifying locations would include properties used by an eligible entity primarily during its ordinary activities in Canada (this includes rental activities), however, it is excluding self-contained domestic establishments (i.e., a place of residence in which a person generally sleeps or eats).
Returning the Proceeds from the Price on Pollution Directly to Farmers
The government is proposing to return fuel charge proceeds directly to farming businesses in backstop jurisdictions (i.e., provinces that do not meet the federal stringency requirements – currently Ontario, Manitoba, Saskatchewan, and Alberta) through a refundable tax credit, starting with the 2021-2022 fuel charge year.
Eligible Farming Businesses
The return of fuel charge proceeds would be available to corporations, individuals, and trusts that:
- Are actively engaged in either the management or day-to-day activities or earning income from farming (e.g., raising animals and harvesting plants in a controlled environment); and
- Incur farming expenses of $25,000 or more that are attributable to backstop jurisdictions.
Businesses carried on through a partnership would also qualify.
The credit amount will be determined by multiplying a payment rate as specified by the Minister of Finance ($1.47 for 2021 and $1.73 for 2022, per $1,000 in eligible farming expenses) for the fuel charge year by the eligible farming expenses attributable to backstop jurisdictions.
Any credit claimed would be required to be included in taxable income for the year of claim.
Eligible Farming Expenses
Eligible farming expenses for this credit are those amounts deducted in computing income from farming for income tax purposes, excluding any deductions arising from mandatory and optional inventory adjustments and transactions with non-arm’s length parties.
Expenses must also be attributable to one or more backstop jurisdictions. For businesses operating in multiple jurisdictions, eligible farming expenses would be apportioned by jurisdiction.
Carbon-Price Rebates for Small- and Medium-Sized Businesses
The government announced $200 million for a new program to return a portion of the proceeds from the carbon price to small- and medium-sized businesses to backstop provinces without its own carbon price program.
Currently, rebates are sent to individual families in the provinces that pay the federal carbon price, while small businesses can apply to get some funding to help reduce their emissions.
The government expects to announce details in early 2022.
Digital Services Tax
Finance released draft legislation to implement a Digital Services Tax (DST). This interim measure, which was announced in the 2021 federal budget, enacts a 3% DST on revenue earned by large businesses from certain digital services that rely on data and content contributions from Canadian users.
The DST would be imposed as of January 1, 2024.
Personal Tax Measures
The Update does not propose any changes to personal income tax rates, the capital gains inclusion rate, or the principal residence rules.
Enhanced Support for Teachers
Under the current tax rules, teachers are eligible to claim a refundable tax credit of 15% on an amount of up to $1,000 on expenditures made in the tax year for eligible supplies. To qualify, eligible supplies must be purchased for use in a school or other regulated childcare facility for the purpose of teaching or facilitating learning. Eligible supplies include:
- construction paper,
- games and puzzles,
- containers, and
- educational support software.
The 2021 Economic and Fiscal Update proposes to enhance this tax credit by:
- Increasing the refundable credit to 25%.
- Broadening the rules regarding the locations where teaching supplies are permitted to be used by removing the requirement that teaching supplies must be used in a school or regulated childcare facility to be eligible, and expanding the list of eligible supplies to include electronic devices, and other supplies used in the classroom.
Home Office Expense Deduction
The Update enhances the temporary flat rate method that taxpayers may use to calculate home office expenses for the 2021 and 2022 tax years to $500 annually (from $400). Previously, this method was originally available only for the 2020 tax year.
Northern Residents Deduction
The government reiterated its intention to increase access to the Northern Residents Deduction. This was mentioned in Budget 2021.
Other Proposed Measures and Support for Individuals
Extension of COVID benefit programs
Canada Recovery Caregiving Benefit (CRCB) and the Canada Recovery Sickness Benefit (CRSB): The government proposes an extension for 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).
Canada Worker Lockdown Benefit (CWLB): The government proposes to introduce the CWLB to provide $300/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.
Canada Performing Arts Workers Resilience Fund: 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 a temporary program that will fund new/enhanced initiatives to improve the circumstances of workers in this sector. The government will fund this program, and Canadian Heritage will administer it.
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.
CEBA: This program is no longer open for application, with the repayment deadline being December 31, 2022. However, Freeland did mention extending the repayment deadline for small businesses, but no specifics were provided.
Underused Housing Tax
In the 2021 Federal Budget, the government announced the intention to implement a national 1% tax on the value of non-resident, non-Canadian owned residential real estate in Canada that is considered to be vacant or underused (referred to as the “Underused Housing Tax”). Following consultations through the Department of Finance, various tweaks are now proposed to the Underused Housing Tax, including:
- An owner’s interest in residential property will be exempt from this tax if a residence that is part of the residential property is the primary place of residence of:
(1) the owner;
(2) the owner’s spouse or common-law partner; or
(3) a child of the owner or the owner’s spouse or common-law partner but only if the child is completing authorized studies in Canada and the residence is used for that purpose.
- An exemption would be introduced for vacation/recreational property if the property is:
(1) located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents; and
(2) personally used by the owner (or their spouse or common-law partner) for at least four weeks in the calendar year.
An annual return would be required to be filed with the CRA in respect of the residential property.
The Underused Housing Tax is proposed to be effective for the 2022 calendar year, with the first annual return required to be filed on or before April 30, 2023.
Updates on Previously Announced Measures
Included in Budget 2021, a tax equal to the lesser of 10% of the value of a luxury car, boat, or aircraft and 20% over the threshold ($100,000 for cars and aircraft, $250,000 for boats) was proposed draft legislation will be released in early 2022.
Your trusted KBH business adviser can help you assess the effect of these tax changes in this year’s Fall Economic Update on your personal finances and business affairs. We also strive to keep you well-informed of the progress of these proposals as they make their way into law.