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  • Charles Rotenberg

FEDERAL BUDGET 2021


This afternoon, the Liberal Government tabled its first Budget since March 19th, 2019. This will be the first Budget for the new Finance Minister, Chrystia Freeland.


There has been a lot of speculation in recent weeks about an increase in the capital gains inclusion rate from 50% to 75%; some form of taxation on principal residences, and some form of wealth tax.


These may all be valid tax policies. BUT, there has to be an overall tax policy – not just a piecemeal “where can we find money and anger the fewest number of taxpayers”.


Canada needs a comprehensive review of its 50-year-old tax system and a complete, integrated, reform. But the Liberals don’t have the moral courage to do this. We saw the results of their attitude with Bill Morneau’s attack on small business in 2017.


To nobody’s surprise, this is a pre-election Budget. The Liberals have a history of promising benefits for everyone that will take effect after the next election, the implication being that we have to re-relect them, notwithstanding how badly they have handled the pandemic and the plethora of scandals in which they have been involved.


Tax Matters


A tax system in which everyone pays their fair share requires action on multiple fronts: addressing aggressive tax planning schemes; aligning our rules with evolving international norms; …and strengthening the government’s ability to crack down on tax evasion, money laundering, and terrorist financing.


This statement, or one very much like it will be found in every Budget speech, regardless of which Party is tabling the Budget.


What was not in the Budget


Despite all of the speculation and trial balloons, there has been no increase in the capital gains inclusion rate.


There has also been no proposal for the taxation of gains on principal residences.


And, finally, there has been no increase in tax rates.


Luxury Tax


All of the trial balloons about a wealth tax are in keeping with Liberal strategy over the decades – float a trial balloon and then, when taxpayers are getting resolved to the issue, introduce something that seems less onerous. Even as Canadians have sacrificed to keep our economy going through the pandemic, some of the wealthiest have done well.


In keeping with the thought processes in favour of higher HST, so that the burden of the tax falls on those spending money, the government is following through on its commitment to introduce a tax on select luxury goods. Budget 2021 proposes to introduce a tax on the sales, for personal use, of luxury cars, boats and personal aircraft with a retail sales price over $100,000, and boats, for personal use, over $250,000. The tax would be calculated at the lesser of 20 per cent of the value above the threshold ($100,000 for cars and personal aircraft, $250,000 for boats) or 10 per cent of the full value of the luxury car, boat, or personal aircraft. This measure would come into force on January 1, 2022. It is estimated that this measure will increase federal revenues by $604 million over five years, starting in 2021-22.


Similar to the provision introduced in the 1990’s to limit deduction of leasing payments or interest payments in respect to passenger vehicles, initially in excess of $20,000, this is likely to have very little effect on consumers’ actions, but can be put forward as part of the Liberal’s attack on the 1%.


Tax on Unproductive Use of Canadian Housing by Foreign Non-resident


Young Canadians who are starting to build their future are running up against sky-high housing prices. In the 2020 Fall Economic Statement, the government announced that it would take steps over the coming year to implement a national, tax-based measure targeting the unproductive use of domestic housing that is owned by nonresident, non-Canadians. This will help to ensure that foreign, non-resident owners, who simply use Canada as a place to passively store their wealth in housing, pay their fair share. Budget 2021 announces the government’s intention to implement a national, annual 1 per cent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused, effective January 1, 2022. The tax will require all owners, other than Canadian citizens or permanent residents of Canada, to file a declaration as to the current use of the property, with significant penalties for failure to file.


This is in keeping with increases in Land Transfer Taxes in various provinces which are imposed on non-resident investors.


It is interesting to note that when I started practice in 1980, Ontario had a land transfer tax of 2/5 of 1% on the first $45,000 and 4/5 of 1% on the excess. If the purchaser was a non-resident, the land transfer tax was 20%.


Ontario also introduced, in 1974, a 50% Land Speculation Tax for non-residents, in addition to any federal capital gains taxes, which effectively killed the real estate market.


Digital Services Tax


The government is committed to ensuring that corporations in all sectors, including digital corporations, pay their fair share of tax on the money they earn by doing business in Canada. Increasingly, many digital companies earn revenues from the active collection and use of Canadians’ data.


Budget 2021 proposes to implement a Digital Services Tax at a rate of 3 percent 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. It would apply as of January 1, 2022, until an acceptable multilateral approach comes into effect. This would help ensure that Canada’s tax rules capture new ways in which businesses carry out value-creating activities.


Canada has a strong preference for a multilateral approach to this issue. Work is underway to reach a multilateral agreement on cross-border digital taxation by mid-2021, and Canada is optimistic about the progress made this year. However, multilateral discussions have been going on since 2013. That is why, while Canada’s hope and preference is for a multilateral solution this summer, whether or not a deal is reached, Canada intends to take the action set out above.


Limitations on Excessive Interest Deductions


Many firms borrow in order to fund their operations. Generally, the interest charges on those borrowings are considered a cost of doing business and, therefore, are deductible from income for tax purposes. However, some large companies, typically multinationals, use excessive deductions of interest to reduce the taxes they pay in Canada. All G7 countries—except Canada—have taken action, as a result of the Base Erosion and Profit Shifting (BEPS) Project, to limit excessive interest deductions by large companies. Budget 2021 proposes that, starting in 2023, the amount of interest that certain businesses can deduct be limited to 40 per cent of their earnings in the first year of the measure and 30 per cent thereafter. Relief will be provided for small businesses and for other situations that do not represent significant tax base erosion risks. The government expects to release draft legislation this summer and will seek stakeholder input on the new rules. This strengthening of the rules on interest deductibility will ensure that large companies pay their fair share and bring Canada in line with other jurisdictions, including all our G7 peers. It is estimated that this measure will increase federal revenues by $5.3 billion over five years, starting in 2021-22.


One cannot help but be reminded of Allan MacEachen’s 1981 Budget wherein he proposed tracking interest expense and correlating it to investment income. That was one of the many provisions of that Budget that had to be repealed.


Personal Tax Provisions


Old Age Security


The government is proposing to increase Old Age Security (OAS) benefits for seniors age 75 and older. Budget 2021 proposes to provide a one-time payment of $500 in August 2021 to OAS pensioners who will be 75 or over as of June 2022. Budget 2021 then proposes to introduce legislation to increase regular OAS payments for pensioners 75 and over by 10 per cent on an ongoing basis as of July 2022.


Improving Access to the Disability Tax Credit

In 2017, the Government of Canada reinstated the Canada Revenue Agency’s Disability Advisory Committee to improve the way that tax measures for persons with disabilities are administered.


The government is proposing to take further steps to act on the guidance of the committee by improving the eligibility criteria for mental functions and life-sustaining therapy.


Budget 2021 proposes to update the list of mental “functions of everyday life” that is used for assessment for the Disability Tax Credit. Using terms that are more clinically relevant would make it easier to be assessed, reduce delays, and improve access to benefits. Budget 2021 also proposes to recognize more activities in determining time spent on life-sustaining therapy and to reduce the minimum required frequency of therapy required to qualify for the Disability Tax Credit. The government will undertake a review of these changes in 2023.


Veterans’ Affairs


Budget 2021 proposes to provide $140 million over five years starting in 2021-22, and $6 million ongoing, to Veterans Affairs Canada for a program that would cover the mental health care costs of veterans with PTSD, depressive, or anxiety disorders while their disability benefit application is being processed.


The Budget also proposes to provide an additional $15 million over three years, starting in 2021-22, to Veterans Affairs Canada to expand and enhance the Veteran and Family Well-Being Fund for projects that will support veterans during the post-COVID-19 recovery, including addressing homelessness, employment, retraining, and health challenges.


“Sin” Taxes


As have many governments before them, the Liberals propose to increase “Sin” taxes. Usually it has been tobacco and alcohol.


This time, in addition, the government intends to include vaping products, by introducing a new taxation framework for the imposition of excise duties on vaping products in 2022. The Government will also work with any provinces and territories that may be interested in a federally coordinated approach to taxing these products.


Tobacco has not escaped either. The Budget proposes to increase the tobacco excise duty by $4 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates for other tobacco products. This measure would take effect the day after Budget Day. It is estimated that this measure will increase federal revenues by $2.1 billion over five years starting in 2021-22.


Tax Administration


Like countless Budget’s before, there are the usual platitudes about beefing up CRA powers, cracking down on abusive tax planning and tax evasion, and against abusive tax collection avoidance. These provisions don’t even warrant any further discussion.


My Take


As my readers know, I have never hesitated to criticize any federal government on its Budget. But, in fairness, the Liberals were in a tough spot. They had to bring in a Budget that extended benefits as a result of the Covid Pandemic – whether these measures are right or wrong is for a different discussion. And they were limited in the areas in which they could realistically raise taxes, given the hard times that people are having.


Considering the potentially devastating effect of increasing the capital gains inclusion rate, taxing gains on principal residences, or across the board tax increases, all in all, this was not a bad effort.


- Chuck

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