Chrystia Freeland, Deputy Prime Minister and Minister of Finance, introduced the federal budget on Monday, April 19, 2021. The budget focuses on finishing the fight against COVID-19 and economic recovery. In this article, we will discuss budget announcements with respect to pandemic supports, as well as other tax and benefit highlights including increases to Old Age Security (OAS) for those age 75 or older and the implementation of a Canada-Wide Early Learning and Child Care System.

Canada Emergency Wage Subsidy (CEWS)

Throughout the COVID-19 pandemic, the CEWS has provided a wage subsidy to Canadian employers that experienced a drop in revenue. The program was previously scheduled to end on June 5.

The federal budget announced an extension of the CEWS until September 25, 2021. The applicable subsidy rates are proposed to decrease starting on July 4. At that time, a wage subsidy will only be available to employers with a drop in revenue of more than 10%. The program may be further extended to November 20, 2021.

Canada Emergency Rent Subsidy (CERS) and Lockdown Support

Beginning on September 27, 2020, the CERS has provided a rent subsidy to eligible businesses, charities, and non-profit organizations. Similar to CEWS, the federal budget announced an extension of the CERS until September 25, 2021. From July 4 onwards, the subsidy rate will decrease over time and will be available only to organizations with a decline in revenue of more than 10%. 

The Lockdown Support program has also been extended to September 25, 2021.

Canada Recovery Hiring Program (CRHP)

The CRHP is a new pandemic support program introduced by the budget. The CRHP will be available beginning June 6, 2021. Eligible employers will have the option of utilizing either the CEWS or the new CRHP for a given period. 

The CRHP will provide a wage subsidy for incremental remuneration paid to eligible employees. Incremental remuneration refers to the increase in total remuneration of all eligible employees compared to a baseline period (March 14 to April 10, 2021). Similar to the CEWS, maximum remuneration per employee is $1,129 per week, for the purposes of the CRHP (for both current remuneration and the baseline period).

Whereas CEWS was designed to prevent job losses that may have otherwise resulted from the pandemic, CRHP is designed to promote hiring / re-hiring during a period of recovery. The CRHP will provide an initial subsidy of 50% of incremental remuneration paid to eligible employees (from June 6 - August 28). The subsidy rate will then decrease as follows: 40% (for August 29 - September 25), 30% (for September 26 - October 23) and 20% (for October 24 - November 20).

Similar to CEWS and CERS, the CRHP will only be available to employers with a drop in revenue of more than 10% beginning July 4.

The Canada Recovery Benefit (CRB) was introduced on September 27, 2020 along with the Canada Recovery Caregiving Benefit (CRCB) and Canada Recovery Sickness Benefit (CRSB). Previously, the maximum permitted eligibility was 38 weeks for the CRB and CRCB and 4 weeks for the CRSB. 

The budget proposes to increase the maximum permitted eligibility periods as follows:

• For the CRB, by 12 weeks to a maximum of 50 weeks. The benefit is currently $500 per week and will continue at this level for the first 4 additional weeks. The benefit will then decrease to an amount of $300 per week for the remaining 8 weeks.
• For the CRCB, by 4 weeks to a maximum of 42 weeks at the current level of $500 per week.

The government proposes to provide continued flexible access to EI benefits during the recovery as well as consultations on future long-term reforms to EI. As previously announced, the eligibility period for regular EI benefits has also been increased, by 24 weeks to a maximum of 50 weeks. These programs may be further extended to November 20, 2021.

Improving access to the Disability Tax Credit

The disability tax credit (DTC) is a non-refundable tax credit available to eligible individuals with disabilities. The DTC can only be claimed after the Canada Revenue Agency (CRA) has determined that an individual is eligible. The budget proposes to improve the DTC eligibility criteria for both mental functions and life-sustaining therapy. It is estimated that each year an additional 45,000 Canadians will qualify for the DTC and other benefit programs linked to its eligibility, including the Registered Disability Savings Plan.

New luxury tax

The budget announced a new luxury tax effective January 1, 2022 on the sales, for personal use, of new luxury cars and personal aircraft with a retail sales price over $100,000 and boats over $250,000. The tax will be calculated at the lesser of:

• 20% of the value exceeding the thresholds above; or
• 10% of the full value of the luxury car, aircraft or boat. 

This tax is not intended to apply to commercial-use vehicles. Exclusions will be available for farm vehicles, motorhomes and floating homes, among other things.

Canada workers benefit

The Canada Workers Benefit (formerly the Working Income Tax Benefit) was first introduced in 2005 to assist low-income individuals with working income in excess of $3,000. The maximum benefit remains unchanged at $1,395 for single individuals without dependants and $2,403 for families, however, the budget proposes changes that may increase the amount of the non-refundable tax credit for some low-income individuals and families that did not previously qualify for the maximum benefit. 

This is accomplished primarily by increasing the proposed income threshold at which the benefit is reduced as follows:

• For individuals without dependants, the threshold will increase to $22,944 (up from $13,194)
• For families, the threshold will increase to $26,177 (up from $17,522)

The budget also introduces a secondary earner exemption for families, allowing an eligible lower income-earning spouse to exclude up to $14,000 of working income for the purpose of these income thresholds, effective January 1, 2021.

Extending the Northern Residents Deduction

The Northern Residents Deduction is currently available for individuals who live in a prescribed zone and consists of both a residency deduction (for living costs) as well as a travel component (for both medical and non-medical reasons). The budget proposes to extend access to the non-medical travel component of the deduction.

New tax on vacant residential property owned by non-residents

Budget 2021 reinforces the Department of Finance’s previously declared commitment to tax vacant housing owned by non-residents of Canada. The budget proposes a tax on residential real estate owned by non-resident non-Canadians, if that real estate is considered to be vacant or underused, effective January 1, 2022. The tax is proposed to be 1% of the value of the real estate, annually.

This tax will be open to consultation in the coming months, with its full details to be confirmed thereafter.

To address both the immediate needs of seniors and provide additional financial security later in life, when seniors may face increased care expenses and greater risk of running out of savings, the budget proposes:

• To provide a one-time payment of $500 in August 2021 for OAS pensioners who will be age 75 or older as of June 2022; and 
• To increase regular OAS payments for pensioners age 75 or older by 10% on an ongoing basis beginning July 2022.

Budget 2021 announced an investment of up to $30 billion over the next five years and a provision for permanent ongoing funding to support a Canada-Wide Early Learning and Child Care System. The stated goal is to provide high-quality early learning and child care while also ensuring that child care costs are affordable for Canadian families. The government aims to reduce fees for regulated child care as follows:

• By the end of 2022, reduce fees by 50% on average; and
• Within the next 5 years, reduce fees down to $10 per day on average.

Extension of the GST/HST to digital goods and services

The 2020 Fall Economic Statement proposed to extend the GST/HST system to apply to e-commerce and the digital economy. The budget proposes to implement this change, effective July 1, 2021.

The proposed rules would require non-residents to register for the collection and remittance of GST/HST when supplying digital products or services. The rules can also apply to sales by a non-resident of Canada through digital means. For example, an online marketplace may facilitate the sale of goods by a non-resident and ship those goods from a fulfillment warehouse or other location within Canada. In that case, the online marketplace may be required to register for GST/HST. Similarly, the new rules are also expected to apply to short-term accommodation rentals booked through an online platform.

Businesses that supply less than $30,000 of goods or services to Canadians over a 12 month period will not generally be required to register for GST/HST solely due to the new rules.

Accelerated deductions for Canadian-owned businesses making capital investments 

Canadian businesses cannot typically deduct capital expenditures from income. Instead, businesses normally claim deductions for capital expenses slowly over time, through “capital cost allowance” deductions. Effective April 19, 2021, Canadian-controlled private corporations will temporarily be entitled to deduct the full value of new capital expenditures, in some cases.

Immediate expensing is only available for certain types of capital assets. Long-term property like buildings, parking lots and goodwill are not eligible for this tax treatment. Other depreciable properties may be eligible, provided that they are put into use in the business before January 1, 2024. Up to $1.5 million of eligible capital expenses across a group of associated companies can be deducted each year.

Limiting the deductibility of excessive interest expenses

Canada generally allows the deduction of interest expenses that arise from borrowed money that is used for the purpose of earning income. There have been limitations on claiming this expense in the past, like “thin capitalization” rules for international enterprises. Budget 2021 proposes a new limitation on interest expenses, to align with the tax systems of other countries.

Entities that are subject to these new rules will have an upper limit on the amount of interest that can be deducted across the enterprise. This limit will be based on the ratio of the entity’s net interest expense to its tax EBITDA (earnings before interest, taxes, depreciation and amortization) - a new metric introduced in this budget. Net interest expenses that exceed a prescribed ratio will not be deductible in that year. Denied interest deductions will be eligible to be carried forward for up to 20 years or carried back up to 3 years.

These rules are slated to come into effect in two phases. The first phase will take effect for tax years that begin on or after January 1, 2023, and will limit the net interest expense to 40% of tax EBITDA. The second phase begins on January 1, 2024, and will limit the net interest expense to 30% of tax EBITDA. These ratios can differ in some cases.

The new interest deductibility limits can apply to corporations, trusts, partnerships, and Canadian branches of non-resident entities. The rules will not apply to:

• Canadian-controlled private corporations (or corporate groups) that have taxable capital employed in Canada of less than $15 million; or
• Corporate groups (or groups of trusts) with a net interest expense among Canadian members of $250,000 or less.

The government intends to move ahead with previously tabled proposals including allowing additional annuity investments for registered plans. Individuals have historically been able to purchase annuities with the proceeds of certain registered plans. An annuity provides for a stream of periodic payments to an individual, generally for a fixed term, for the life of the individual, or for the joint lives of the individual and his or her spouse or common-law partner. When annuities are purchased with funds from a tax-sheltered retirement savings plan, the payments have historically been required to begin by age 72. 

The 2021 budget revives a proposal from the 2019 budget to permit advanced life deferred annuities (“ALDA”) as a qualifying annuity purchase, or a qualified investment for an RRSP or RRIF. An ALDA is a life annuity that permits payments to be deferred until the end of the year in which the individual turns 85. An individual will be subject to a lifetime limit on the amount that can be purchased or held in an ALDA. 

The above summary only highlights certain budget items. Please refer to the government of Canada budget webpage for further details regarding these and other budget initiatives.