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2021 Federal Budget – Selected Tax Measures

April 22, 2021

More than two years after the last federal budget, Canada’s Finance Minister presented the 2021 budget (Budget 2021) on April 19, 2021 (Budget Day). Some commentators speculated that Budget 2021 might include increases in the capital gains inclusion rate, restrictions on the principal residence exemption or a new wealth tax. While there were some important business tax changes, none of those measures was included in Budget 2021.

Consistent with the governing Liberals’ 2019 election platform, a new measure is proposed to restrict the deductibility of interest under an Organisation for Economic Co-Operation and Development (OECD) inspired “earnings-stripping” rule starting in 2023. Another new international tax measure targets so-called “hybrid mismatch arrangements” starting July 1, 2022. The government also provided more detail on the proposed digital services tax first announced in the November 30, 2020 Fall Economic Statement (FES) (see our Blakes Bulletin: Fall Economic Statement 2020 - Selected Tax Measures | Blakes).

On the domestic front, several environment-related tax measures are proposed to advance the government’s “green agenda”. To address rapidly increasing residential housing prices, the government proposes to introduce a new annual tax on foreign-owned vacant residential properties.

Further, significant changes were made to build on requirements for taxpayers and their advisors to report certain types of transactions to the Canada Revenue Agency (CRA). In keeping with this theme, and while not a tax specific measure, Budget 2021 proposed the implementation of a publicly accessible corporate beneficial ownership registry to be established by 2025.
Unlike many prior budgets, the details of most of Budget 2021’s ambitious tax proposals were not included in the Budget papers. These details will be released over the coming months in the form of draft legislative proposals. For the time being, only general descriptions of these proposed measures are available. 

Here is an overview of the key provisions in Budget 2021, which are discussed in further detail below:

Interest Deductibility
Hybrid Mismatch Arrangements
Transfer Pricing Consultations

Reportable Transactions
Notifiable Transactions
Uncertain Tax Treatment
Reassessment Period


Canada Emergency Wage Subsidy
Canada Emergency Rent Subsidy
Canada Recovery Hiring Program

Avoidance of Tax Debts
Immediate Expensing
Rate Reduction for Zero- Emission Technology Manufacturers
Capital Cost Allowance for Clean Energy Equipment
Tax Incentive for Carbon Capture, Utilization and Storage Technologies

Proposed Vacancy Tax
Audit Authorities
Tax on Registered Investments

Expanded Input Tax Credit Documentation
Previously Announced GST/HST Measures
Excise Duty on Vaping Products
Luxury Tax on Cars, Aircraft and Boats Purchased for Personal Use


Two of the significant changes proposed by Budget 2021, aimed at eliminating the benefits of certain hybrid arrangements and restricting interest deductions, are based on the output of the “base erosion and profit shifting” (BEPS) initiative undertaken by the OECD at the urging of the Group of 20. Canada has played an active role in the development of these measures so it is perhaps not surprising to see them now being adopted.

Draft legislation for these proposals is not yet available, but Budget 2021 describes the proposals as being very much in line with the recommendations of BEPS Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements) and BEPS Action 4 (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments). These two proposals are discussed below.

Interest Deductibility

Interest expense in respect of debt incurred to fund business operations is generally deductible against the income of the borrower. While Canadian law has always imposed some limits on interest deductibility, especially in the cross-border context, Canada has never adopted an earnings-stripping approach similar to that in the U.S. and other countries. Budget 2021 proposes a new earnings-stripping rule, to be layered on top of the existing labyrinth of regimes focused on interest deductions.

In Budget 2021, the government expresses a concern about erosion of the Canadian tax base through “excessive” interest deductions. The potential for interest deductions to erode the tax base is hardly a new issue. Indeed, the last 40 years of Canadian tax history reveal repeated failed attempts to restrict the deduction of interest. This includes the 1981 budget proposals, the never-implemented measures proposed after the 1987 Bronfman Trust decision, the never-enacted 2003 “reasonable expectation of profit” proposals and the highly controversial, and quickly withdrawn 2007 budget proposal to deny corporate interest deductions for debt associated with foreign affiliate investments. This last failed reform led to the 2008 report of the Advisory Panel on Canada’s System of International Taxation, which did not recommend an earnings-stripping rule but did recommend that the thin capitalization rules be strengthened, a recommendation that was subsequently implemented. The Advisory Panel also recommended that the government impose restrictions on multinationals “dumping” debt into their profitable Canadian subsidiaries. This led to the enactment of the complex “foreign affiliate dumping” rules, which effectively block most attempts by foreign-controlled multinationals to create interest deductions in their profitable Canadian subsidiaries by inserting foreign affiliates under those entities. Layered on top of these rules are Canada’s “thin capitalization” rules (limiting the ratio of related party debt-to-equity to 1.5:1 and backed by overly broad “back-to-back” rules) as well as transfer pricing rules and a general reasonableness limitation in the interest deduction rule itself.

Despite this chronology, the government has decided to implement a new earnings-stripping rule, alongside the existing limitations. The proposed rule essentially follows the recommendations in the Action 4 Report of the BEPS Action Plan. This is a significant change to the Income Tax Act (Canada) (ITA) that would affect the financing of many corporate groups. The new rule would limit the amount of net interest that a corporation may deduct to no more than a fixed percentage of “tax EBITDA”. The rule is proposed to be phased in with a fixed ratio of 40  per cent for taxation years beginning on or after January 1, 2023 but before January 1, 2024 and 30  per cent for taxation years beginning on or after January 1, 2024. In addition to corporations, this earnings-stripping rule would apply to trusts, partnerships and Canadian branches of non-resident taxpayers.

The existing rules in the ITA, including thin capitalization and transfer pricing rules, would continue to be applicable, with the new earnings-stripping rule applying only to interest that is deductible under those other rules. The proposed rule is based on the amount of interest expense, not the rate of interest associated with any particular obligation. No allowance seems to be made for arrangements, even those made with arm’s length third parties, involving market rates of floating interest that are originally “on side” this rule but, because of fluctuations in market rates, result in a taxpayer exceeding the applicable fixed  percentage in later years.

The new earnings-stripping rule will not apply to Canadian-controlled private corporations (CCPCs) that have, together with associated corporations, taxable capital employed in Canada of less than C$15-million or to groups of corporations or trusts whose aggregate net interest expense among Canadian members does not exceed C$250,000.

The proposed measures also include a “group ratio” rule that would allow a taxpayer (or a Canadian member of a group) to deduct interest in excess of the fixed percentage of tax EBITDA where the taxpayer can demonstrate that the consolidated group’s ratio of net third party interest expense to book EBITDA implies that a higher deduction limit would be appropriate for members of that group. In other words, if a multinational group is highly leveraged (consolidated leverage over 30  per cent), the Canadian member may elevate its applicable  percentage above 30  per cent to that extent. The statutory definition of a group will be interesting. The Budget documents merely state that the consolidated group will comprise the parent company and all subsidiaries that are fully consolidated in the parent’s audited consolidated financial statements.

Key to this new rule is the “tax EBITDA” concept which would generally be the corporation’s taxable income before interest expense, interest income and income taxes and depreciation, where each of these items is as determined for tax purposes. For these purposes:

  • As compared to taxable income, tax EBITDA would have certain exclusions such as dividends that qualify for the domestic dividends received deduction or the deduction for certain dividends received from foreign affiliates.

  • Interest expense and interest income would include amounts that are legally interest as well as economically equivalent amounts and other financing-related expenses. It will be interesting to see what items will be treated as being “economically equivalent” amounts and “financing-related” expenses.

  • Interest expense would exclude interest that is not otherwise deductible under existing rules (such as the thin capitalization rules), which continue to apply.

  • Interest expense and interest income related to debts owing between Canadian members of a corporate group would generally be excluded. This important exception ensures that the new rule will not upset conventional “loss consolidation” transactions.

Interest denied under the new rule can be carried forward for 20 years or back for three years (even to taxation years to which the new rule does not apply) to the extent there is capacity to absorb such denied expenses under the application of the new rule to those other years. This differs from interest denied under the thin capitalization rules, which cannot be carried forward or back. Furthermore, unlike the thin capitalization rules, there does not appear to be a provision that treats interest denied under the earnings-stripping rule as a dividend for withholding tax purposes or that otherwise interferes with any existing exemptions from withholding taxes that may be available.

A Canadian member of a group that has a ratio of net interest to tax EBITDA below the fixed ratio would generally be able to transfer any unused capacity to deduct interest to other Canadian members of the group whose ability to deduct interest would otherwise be restricted as a result of this rule. This important measure ensures that where a Canadian group has one particular member that incurs disproportionate interest expense, that member can take into account the earnings base of other group members.

The earnings-stripping rule will apply to financial institutions subject to one caveat. It is proposed that banks and life insurance companies, unlike other corporations, would not be allowed to transfer unused capacity to deduct interest to other members of their group that are not themselves regulated banks or insurance entities. Hinting at potential additional measures, the Department of Finance (Finance) states that further consideration will be given to whether there are targeted measures that could address base erosion concerns associated with large interest deductions by regulated banks and life insurance companies.

The earnings-stripping rule is proposed to apply to taxation years that begin on or after January 1, 2023 and will apply in respect of existing and new indebtedness. Anti-avoidance rules are expected to prevent taxpayers from deferring the application of the measure. Draft legislative proposals are expected to be released for comment in the summer. Any legislation to implement this new measure will surely be complex as it will have to contemplate many issues such as changes of ownership, and with complexity comes the prospect of collateral damage. As always, it will be important for stakeholders to provide technical and practical input on the draft legislation in due course.

One important take-away is that the new earnings-stripping rule will impose a considerable compliance burden on corporate taxpayers. New calculations of “tax EBITDA” will be required, as will computations of group-wide leverage ratios compliant with these new rules. In a tacit acknowledgement of this burden, Finance suggests that measures to reduce the compliance burden for stand-alone Canadian corporations and exclusively Canadian corporate groups might be explored.

Perhaps in view of the current low interest environment, and the existence of other interest deduction limitations, the government estimates that the earnings-stripping rule will increase federal revenues by a relatively small amount: about C$1-billion annually, or C$5.3-billion over five years, starting in 2021-22.

Hybrid Mismatch Arrangements

Action 2 of the BEPS action plan focused on so-called “hybrid mismatch arrangements”. These are generally cross-border transactions that involve an instrument or entity that is treated differently by one tax jurisdiction as compared to another and may include, for example, certain “cross-border repo” and “tower” financing structures. This hybridity leads to a mismatch in the tax treatment of payments made under the arrangement such as a payment being deductible to the payor in one jurisdiction while not being included in the recipient’s income under the tax laws of the other jurisdiction (“deduction/non-inclusion”) or a payment being deductible in two or more jurisdictions (“double deduction”). In the Canada-U.S. context, there are already limits on the ability of taxpayers to exploit hybrid entities as a result of treaty changes that generally took effect for years after 2008. However, there are no existing Canadian rules that specifically focus on hybrid instruments.

The proposed rules address inbound and outbound hybrid mismatch arrangements. Payments made by a Canadian resident entity under a hybrid mismatch arrangement would not be deductible to the extent that such payments give rise to a further deduction in another jurisdiction or are not included in the ordinary income of the non-resident recipient. A payment made by a non-resident entity to a Canadian recipient that is deductible to the payor for foreign income tax purposes would not be eligible for deduction by the Canadian recipient (including where such payment would otherwise be eligible for a dividends received deduction).

The Budget did not include draft legislative proposals which are to follow separately. The government stated that the proposals will have the following features:

  • the proposed rules would be mechanical in nature and would not be conditioned on a purpose test;

  • with limited exceptions, the proposals would apply in respect of payments between related parties and payments under certain arrangements between unrelated parties that are designed to produce a mismatch; and

  • ordering rules would apply to ensure that the proposed rules are coordinated with similar rules enacted by other countries.

In recognition of the complex nature of this proposal, Finance stated that the proposals will be introduced in two stages. The first stage will generally be designed only to neutralize “deduction/non-inclusion” mismatches arising from a payment in respect of a financial instrument. Legislative proposals are promised for later in 2021 with the new rules taking effect as of July 1, 2022. The second stage is slated for release after 2021 and will take effect no earlier than 2023.

The government estimates that these measures will raise relatively small amounts of incremental revenue: a total of C$775-million over four years (less than C$200-million per year) beginning in 2022-23.

The OECD’s BEPS Action 2 Report emphasizes the need for international coordination among jurisdictions when implementing rules such as those proposed in Budget 2021. Such coordination is critical to ensure that rules are effective and to minimise compliance burden and administrative costs. Budget 2021 does not identify any efforts to be made to coordinate these new rules with Canada’s key trading partners, raising the prospect of uncertainty and potentially double tax. Budget 2021 also does not address how these rules, which in some cases may run contrary to Canada’s tax treaty obligations, will be implemented into Canadian law, where tax treaties generally prevail over any conflicting provisions of the ITA.

Budget 2021 includes a vague reference to “existing Canadian income tax rules that the government can use to challenge certain hybrid arrangements.” This is presumably a reference to the audit focus of the CRA on certain hybrid arrangements. Recent and ongoing CRA audits have relied on concepts such as sham, the general anti-avoidance rule in the ITA (GAAR) and the traditional pricing and recharacterization provisions under Canada’s existing transfer pricing rules. We understand some taxpayers are contesting these positions asserted by the CRA and it remains to be seen how successful the CRA will be in sustaining these challenges.

Transfer Pricing Consultations

The Budget documents reflect the government’s view that the Federal Court of Appeal decision in The Queen v. Cameco Corporation, 2020 FCA 112 (leave to appeal to the SCC denied), dealing with the ability of CRA to recharacterize certain non-arm’s length transactions, demonstrates the shortcomings of the existing transfer pricing rules. Finance says that, if not addressed, these shortcomings pose a risk to the integrity of Canada’s corporate income tax system. Consequently, Finance intends to release a consultation paper in the coming months setting out possible changes to improve Canada’s transfer pricing rules. It will be important for the government to receive strong, practical feedback on these proposals, especially having regard to the aggressive positions that some CRA auditors take with respect to transfer pricing matters (which have led to the government’s losing record on transfer pricing matters before the courts).

In addition, as originally announced in the FES, Finance also intends to take next steps to “strengthen and modernize” the GAAR.


In recognition of the increasing needs of the CRA to obtain timely information in order to curtail tax evasion and aggressive tax avoidance in both the domestic and international context, Budget 2021 launches a public consultation (Consultation) on proposals to enhance the Canadian mandatory disclosure rules. The Consultation will address:

  • changes to the ITA’s reportable transaction rules,

  • a new requirement to report “notifiable transactions”,

  • a new requirement for specified corporations to report “uncertain tax treatments”, and

  • related rules providing for, in certain circumstances, the extension of the applicable reassessment period, as much as the introduction of penalties.

As part of the Consultation process, draft legislation and sample notifiable transactions are expected to be released in the coming weeks. Stakeholders are invited to provide their comments to Finance by email ([email protected]) by September 3, 2021.

Budget 2021 proposes that to the extent the proposed measure applies to taxation years (presumably, reporting of uncertain tax positions), amendments made as a result of the Consultation would apply to taxation years that begin after 2021. To the extent the proposed measure applies to transactions (presumably reportable transactions and notifiable transactions), the amendments would apply to transactions entered into on or after January 1, 2022. However, penalties would not apply to transactions that occur before the date on which the enacting legislation receives royal assent.
Reportable Transactions

In its March 2010 Budget, the Canadian government first announced its intention to introduce a new information-reporting regime for tax-avoidance transactions. The mandatory disclosure rules on the reportable transactions contained in section 237.3 were enacted in June 2013 with retroactive effect to 2011. Under the existing reportable transaction rules, a transaction is reportable if it constitutes an avoidance transaction (as such term is defined for the purposes of the GAAR) and has at least two out of three generic hallmarks. A particular taxpayer who enjoyed the “tax benefit” in respect of a particular reportable transaction, any person who entered into the avoidance transaction for the benefit of such particular taxpayer, as well as “promoters” and “advisors” participating in such reportable transaction are required to file a return with the CRA by June 30 following the calendar year during which the relevant transaction was entered into.

The BEPS Action 12 Report which concerned mandatory disclosure rules suggested that Canada’s reportable transaction regime resulted in only limited reporting by taxpayers and did not provide for timely notification.  Budget 2021 seeks to address these shortcomings by proposing a series of amendments to the reportable transaction rules. One proposed amendment would lower the threshold for a particular transaction to be a reportable transaction (requiring only one generic hallmark instead of two). Another proposal is that if it can reasonably be considered that one of the main purposes of entering into the transaction is to obtain a tax benefit, an avoidance transaction will be present for these purposes. Another proposed amendment would advance the reporting obligation much earlier than the reporting deadline in the existing rules.

Notifiable Transactions

In addition to the amendments proposed to the existing reportable transaction rules, Budget 2021 proposes to introduce a new category of “notifiable transactions”. Notifiable transactions would include both transactions that the CRA has found to be abusive and transactions identified as “transactions of interest” (transactions that have the potential for tax avoidance or evasion but that the CRA requires further information about in order to make that determination).

In support of the introduction of this new reporting requirement, the Canadian government refers to similar measures adopted in other jurisdictions such as the U.S., the UK, Australia, the European Union and the Province of Quebec, which allow the tax authorities timely access to relevant information said to be necessary to identify tax avoidance or evasion. Budget 2021 specifies that the notifiable transaction regime is intended to provide information to the CRA and would not itself change the tax treatment of a transaction.

Under the proposed notifiable transaction rules, the CRA would have the authority to designate, with the concurrence of Finance, a transaction as a notifiable transaction. Sample descriptions of notifiable transactions will be released in the coming weeks as part of the Consultation.

Failure to report a notifiable transaction will subject the taxpayers, promoters and advisors to similar penalties as under the reportable transaction rules.

Uncertain Tax Treatment

The 2021 Budget also introduces new mandatory disclosure of uncertain tax treatments for certain large corporate taxpayers. The proposed rules are modelled after the U.S. and the Australian uncertain tax positions rules and will be applicable to a corporation that has at least C$50-million in assets and is required to file a Canadian income tax return. Such a corporation would be required to report uncertain tax treatment to the CRA if the corporation or a related corporation has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies and such audited financial statements reflected uncertain tax treatment with respect to the corporation’s Canadian income tax liabilities.

These proposed rules would overrule the unanimous Federal Court of Appeal decision in BP Canada Energy Company v. Canada (National Revenue), 2017 FCA 61, which held that tax accrual working papers were not “compellable ‘without restriction’”. It is also a rejection of several arguments advanced in that case (not all of them accepted), including those put forward by the Chartered Professional Accountants of Canada as intervener. The Court's decision supports that automatic, ongoing access to tax accrual working papers (especially: lists of uncertain tax positions) amounts to an unfair requirement on certain taxpayers to “self-audit”. Under the proposed rules, such a requirement would be introduced based on the accounting standards that apply to a particular entity (or any related entity), with those accounting standards existing for important public policy reasons other than tax administration by the CRA. One hopes that if the government is determined to proceed with this proposal following the feedback to be provided in the Consultation, the new rules will be carefully tailored to both respect the constitutional protections of solicitor-client privilege and to otherwise minimize the disclosure of a taxpayer’s (and their advisors’) analysis of uncertain tax issues.

Where applicable, a taxpayer would be required to disclose uncertain tax treatments at the time its corporate income tax return is due. Failure to disclosure would subject the taxpayer to a penalty of C$2,000 per week, up to a maximum of C$100,000.

Reassessment Period

Budget 2021 proposes that, where a taxpayer has a reporting requirement in respect of a transaction relevant to the taxpayer’s income tax return in a particular taxation year, the normal reassessment period would not commence in respect of the transaction until the taxpayer has complied with the reporting requirement. As a consequence, the reassessment of taxation years in respect of a particular transaction would not become statute-barred if the taxpayer does not comply with the mandatory disclosure reporting obligations with respect to such transaction.


Following on similar measures in France, the UK and other countries, and as promised in the FES, the government reiterated its intention to introduce a new gross-revenue based Digital Services Tax (DST). The proposed tax will be imposed at a rate of three per cent on revenues from digital services that rely on data and content contributions from Canadian users. It is slated to take effect on January 1, 2022.

The impetus for this potentially provocative measure is the slow pace of international discussions to reform the tax treatment of multinational digital giants. Under the international consensus developed over 100 years ago in the era of “bricks and mortar”, the jurisdiction from which a multinational derives revenue generally has no claim to tax the related business profits in the absence of a physical presence in the jurisdiction. Businesses that derive profits without the need for a physical presence generally do not owe tax to the countries from which they derive their profits. Mounting political pressure in recent years precipitated ongoing international discussions aimed at reaching an agreement on a new taxing right for source countries. Progress has however been slow, and various countries – and now Canada – have grown impatient. That said, very recent developments suggest an international consensus may be reached this year. If this happens, this may obviate the need for the proposed DST.

In the meantime, Canada is proceeding with this measure. The DST would apply to revenues from digital services businesses including online marketplaces, social media, online advertising and the sale or licensing of user data. This tax would apply to foreign or domestic businesses with (i) consolidated annual global revenues of 750-million Euros or more and (ii) revenue associated with Canadian users of more than C$20-million. The DST is in addition to the extension of Goods and Services Tax/Harmonized Sales Tax to certain foreign digital services as originally proposed in the FES.

In an interesting move, likely designed to insulate the DST from potential claims for relief under an applicable tax treaty, the DST will not be implemented under the ITA, but instead under a separate statute. Under normal principles, the DST should usually be deductible, but it would not qualify for a credit against Canadian income tax otherwise payable. It is not clear why a credit against income taxes otherwise payable (or a grossed-up deduction) should not be available to Canadian residents or non-residents who are already subject to Canadian income tax on the income to which such revenues relate. Otherwise, it appears there is an element of double taxation for such taxpayers.

It is expected that the DST would raise C$3.4-billion in revenue over five years beginning in 2021-22.

It should be noted that on March 31, the U.S. Trade Representative indicated that it was considering implementing tariffs on six countries that have adopted digital service taxes, as the U.S. considers these taxes to be inconsistent with international trade agreements. It is not clear whether Canada can expect the same sort of reaction from the U.S. with respect to the DST.


Budget 2021 extends COVID-related relief measures such as the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Rent Subsidy to September 25, 2021.

Canada Emergency Wage Subsidy

The Budget confirms previously announced extensions of the Canada Emergency Wage Subsidy (CEWS), which ran through June 5, 2021, and proposes to further extend CEWS until at least September 25, 2021, with certain modifications.

For the first extension period, from June 6, 2021 to July 3, 2021 (the 17th CEWS period), the subsidy will be calculated on the same basis as has been in effect since the start of 2021. For the following 18th, 19th and 20th CEWS periods, the subsidy will be progressively decreased, as shown on the following chart (assuming constant percentage revenue reductions). The subsidy is currently scheduled to cease after the 20th period ending on September 25, 2021, although the proposed legislation allows the terms of the subsidy for two additional periods (the 21st and 22nd) to be defined by regulation. Starting with the 18th period, no subsidy will be available unless the employer has at least a 10 per cent revenue reduction, measured against the relevant reference period.

The subsidy available for furloughed employees, and where the employer has suffered a decline in revenue, will be extended until August 28, 2021, on terms that continue to parallel the benefits that would be available to the employees under Employment Insurance.

Starting with the 17th CEWS period, the subsidy received by publicly listed corporations (and their subsidiaries) will be subject to claw-back to the extent that the aggregate executive compensation of the publicly listed corporation for 2021 exceeds the aggregate executive compensation for 2019. For this purpose, the aggregate executive compensation would be determined based on the compensation disclosed for “named executive officers” under securities laws (or under securities law principles, where such public disclosure was not required). The claw-back mechanism appears to have been designed on the assumption that a publicly listed corporation will always have the same number of named executive officers, but this is not necessarily the case and may result in the application of the claw-back in some cases where the number of named executive officers has increased in 2021 as compared to 2019.

Additional details regarding the application of the CEWS are outlined in the following Blakes Bulletins:

Canada Emergency Rent Subsidy

The government likewise proposes to extend the Canada Emergency Rent Subsidy—a related program to subsidize the rent of businesses that have experienced a decline in revenue—to September 25, 2021, on generally similar terms to CEWS (though not subject to the claw-back based on executive compensation).

Canada Recovery Hiring Program

The Budget proposes a new subsidy, the Canada Recovery Hiring Program (CRHP), which is intended to encourage new hiring as Canada recovers from COVID-19. This program is based on the same periods as CEWS, and for each period an employer could receive a subsidy under only one of the two programs, but not both.

CRHP would be available to employers that:

  • have suffered a revenue reduction (determined on the same basis as under CEWS), or, for the 18th and following periods, have suffered a revenue reduction of more than 10 per cent (mirroring the minimum revenue reduction threshold to obtain a subsidy under the extended CEWS, as described above);

  • would be qualified for a subsidy under CEWS; and

  • satisfy certain other status conditions – including, where the employer is a corporation, it is a CCPC (or would be, if it were not a cooperative corporation) or, where the employer is a partnership, certain conditions on the composition of its partners.

The CRHP subsidy would be equal to a percentage of the amount by which the total employment compensation paid in the relevant period exceeds the total employment compensation paid in the 14th CEWS period (from March 14, 2021 to April 10, 2021). Employment compensation for this purpose would be calculated on the same basis as for CEWS, including being limited to employees employed primarily in Canada and being capped at C$1,129 per week for each employee. The percentage used for CRHP would be 50 per cent for each of the 17th, 18th and 19th CEWS periods, and then fall to 40 per cent, 30 per cent and 20 per cent for the 20th through 22nd CEWS periods, respectively.

The determination of whether CEWS or CRHP would be more favorable to an employer would depend on the particular circumstances, including the revenue loss suffered (which increases the subsidy under CEWS) and the degree to which compensation has increased since the 14th period (which increases the subsidy under CRHP). As a rough guide, the following chart shows the approximate “break-even” levels of revenue decline and compensation increase, where the two programs would yield equal subsidies in each of the periods where they overlap. For each period, CHRP would result in a larger subsidy in the region above the line, and the CEWS subsidy would be larger below the line.


Avoidance of Tax Debts

The ITA has an anti-avoidance rule in section 160 that is intended to prevent taxpayers from avoiding their tax liabilities by transferring their assets to non-arm’s length persons for insufficient consideration. Where applicable, the rule causes the transferee to be jointly and severally liable with the transferor for tax debts of the transferor, to the extent that the fair market value of the property transferred exceeds the consideration paid by the transferee for the property at the time of transfer. The government has been unsuccessful in recent challenges of complex plans designed to avoid the application of this rule (see Eyeball Networks Inc. v. Canada, 2021 FCA 17 and Damis Properties Inc. v. The Queen, 2021 TCC 24).

Budget 2021 suggests that certain taxpayers are engaging in complex transactions in order to circumvent the application of this rule using strategies that include:

  • arranging for a tax debt to crystallize after the end of the taxation year in which the property transfer occurs;

  • arranging for the transferor to be dealing at arm’s length with the transferee at the time of the property transfer; and

  • sequencing transactions such that they do not breach the point-in-time valuation test for the property transferred and consideration given.

Budget 2021 proposes to curtail this planning by introducing a number of measures including an anti-avoidance rule that would deem a tax debt to have “crystallized” before the end of the taxation year in which it arose in circumstances where the transferor had knowledge of such tax liability and one of the purposes of the transfer of property was to avoid the payment of the future tax debt.

Budget 2021 also provides for a penalty that would be applicable to planners and promoters of such tax debt avoidance plans. The penalty would be equal to the lesser of 50 per cent of the tax involved and C$100,000 plus the planner’s compensation for the scheme.

Although no draft legislation regarding this proposal accompanied the Budget documents, these rules apply to transfers of property that occur on or after Budget Day and similar amendments are expected to be made in other federal statutes (including the Excise Tax Act).

Immediate Expensing

The capital cost allowance (CCA) regime determines the deductions that a business may claim each year for income tax purposes in respect of the capital cost of depreciable property. Budget 2021 introduces a temporary measure allowing the immediate expensing in respect of certain “eligible property” acquired by CCPCs on or after Budget Day that becomes available for use before January 1, 2024. For these purposes “eligible property” generally includes all property that is subject to the CCA rules, other than property in certain specified classes which represent long lived assets. The immediate expensing is capped at a maximum of C$1.5-million per taxation year (no carryforward of “excess capacity” is permitted in a future year), is only available for the year in which property becomes available for use and is prorated for taxation years that are shorter than 365 days. The C$1.5-million limit is shared among associated members of a group of CCPCs.
The availability of enhanced deductions under existing CCA rules for property such as manufacturing and processing equipment and clean energy equipment would not reduce the maximum amount available under this measure. Taxpayers would be permitted to elect which CCA class the immediate expensing would be attributed to, with any excess capital cost subject to the normal CCA rules.

Rate Reduction for Zero- Emission Technology Manufacturers

Budget 2021 proposes a temporary reduction of the corporate income tax rates for certain technology manufacturing and processing activities (“eligible activities”) relating to zero-emission products. Taxpayers would be able to apply reduced rates on eligible zero-emission technology manufacturing and processing income of:

  • 7.5 per cent, where the general corporate tax rate would otherwise have been 15 per cent; and

  • 4.5 per cent, where the corporate tax rate would otherwise have been nine per cent (the rate otherwise applicable to small business deduction that may be claimed by a CCPC).

Taxpayers with income subject to both the general and small business corporate tax rates would be able to choose to have their eligible income taxed at either the rate of 4.5 per cent for small businesses or the general reduced rate of 7.5 per cent, thus allowing taxpayers to take advantage of an increased absolute rate reduction in respect of eligible income taxable at the general corporate rate. Reduced rates would only be available where at least 10 per cent of the taxpayer’s gross revenue from all active business carried on in Canada is derived from eligible activities. 

This measure applies in respect of income from a list of eligible activities associated with reduced emissions (including the manufacture of solar and wind energy, water conversion and geothermal energy, electrical energy storage equipment and batteries, zero-emission vehicles, charging stations and equipment used for hydrogen production).

The reduced tax rates would apply to taxation years beginning after 2021, would be gradually phased out starting in taxation years beginning in 2029 and fully phased out for taxation years beginning after 2031.

Capital Cost Allowance for Clean Energy Equipment

Budget 2021 provides for changes to the CCA regime, modifying exceptions to the general rule that CCA deductions are claimed by class of property on a declining-balance basis.

Generally, Classes 43.1 and 43.2 of Schedule II to the Income Tax Regulations provide accelerated CCA rates (30 per cent and 50 per cent, respectively) for investments in specified clean energy generation and energy conservation equipment. In addition, property in these classes that is acquired after November 20, 2018 and that becomes available for use before 2024 is eligible for immediate expensing, while property that becomes available for use after 2023 and before 2028 is subject to a phase-out from immediate expensing rules.

To support investments in clean technologies, Budget 2021 proposes to expand Classes 43.1 and 43.2 to include items relating to hydroelectric storage equipment, electricity generation equipment that uses physical barriers to harness the kinetic energy of water, solar and geothermal energy systems, equipment used to produce solid and liquid fuels from specified waste material or carbon dioxide, and equipment used in the production and distribution of hydrogen. In addition, Classes 43.1 and 43.2 currently include certain property or systems that burn fossil and other waste fuels to produce energy or heat.

To ensure the incentives provided by Classes 43.1 and 43.2 are consistent with the government’s current environmental objectives, Budget 2021 proposes to change the eligibility criteria for certain fossil fuel and waste fuel equipment.

The expansion of Classes 43.1 and 43.2 apply in respect of property that is acquired and that becomes available for use on or after Budget Day (which was not used or acquired for use for any purpose before Budget Day). The removal of certain property from these classes applies in respect of property that becomes available for use after 2024.

Tax Incentive for Carbon Capture, Utilization and Storage Technologies

Budget 2021 proposes to introduce an investment tax credit to support the adoption of carbon capture, utilization and storage technologies, which will be available for certain direct air capture projects and is not intended to be applicable to enhanced oil recovery projects. The government has announced a 90-day consultation period with stakeholders on the design of the investment tax credit, following which further details will be announced (including the rate of the incentive). The tax credit is also intended to support production green hydrogen. The measure will come into effect in 2022.


Proposed Vacancy Tax

In Budget 2021, the federal government has proposed an annual one 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. All owners other than Canadian citizens or permanent residents of Canada would be required to file an annual declaration beginning in 2023 as to their use of the property for the prior calendar year. Significant penalties would be payable if the declaration is not filed.

A backgrounder will be released in coming months to provide stakeholders with an opportunity to comment on the parameters of the proposed tax including with respect to possible exemptions and compliance and enforcement measures.

This type of tax is already in place in certain jurisdictions such as British Columbia where the experience has shown it to be a blunt instrument. The B.C. experience is that issues such as property classification, determining what constitutes a “vacant” or “underused” property, treatment of property during construction, valuation and the application to resort and tourism properties have proven challenging. It is hoped that the consultation process will lead to approaches that can adequately deal with these and other concerns surrounding this proposed tax.

For a discussion of the B.C. vacancy tax, see our Blakes Bulletin: What the New Speculation and Vacancy tax Act Means for B.C. Real Estate

Audit Authorities

In connection with a larger dispute regarding the application of the transfer pricing rules, the government recently lost a decision in Canada v. Cameco Corporation, 2019 FCA 67, which called into question the extent to which CRA officials can require a corporate taxpayer to make employees available to submit to oral interviews to respond to questions from CRA auditors.

As a result, Budget 2021 proposes amendments to the ITA and other federal statutes to reverse this decision and “confirm that CRA officials have the authority to require persons to answer all proper questions, and to provide all reasonable assistance, for any purposes related to the administration and enforcement of the relevant statute.”

Despite this innocuous wording, the proposed amendment would provide the CRA with significantly expanded audit powers including granting the CRA the authority to require persons to respond to questions orally or in writing “in any form specified by the relevant CRA official.” Those words have the potential to be interpreted very broadly, and in a manner that is fundamentally inconsistent with well-established jurisprudence and audit practices. At the extreme, such a rule could potentially require taxpayers to expend significant resources to produce documents and information that they do not otherwise maintain (and are not required to maintain) in their books and records. It remains to be seen how broadly the CRA, and the courts, will interpret such an expansion on the statutory audit powers.

These measures will come into force on Royal Assent.

Tax on Registered Investments

Certain investment funds which are registered as “registered investments” with the CRA are permitted to be held by registered plans such as registered retirement savings plans but must meet stipulated investment restrictions. If a registered investment (such as a trust or corporation that would otherwise be a mutual fund trust or mutual fund corporation but for failing to meet the minimum distribution requirements) acquires a property that does not meet those investment restrictions, the registered investment must pay a tax under Part X.2 of the ITA equal to one  per cent of the fair market value of the property at the time of acquisition for each month that the registered investment holds such property. This tax applies no matter what proportion of the holders of the registered investment are registered plans.

Budget 2021 includes a proposal that would provide some relief in that the Part X.2 tax would now only apply to the extent that the shares (or units) constituting the registered investment are held by investors that are registered plans. This proposal would apply in respect of months after 2020, however, it would also apply to taxpayers whose Part X.2 liability in respect of months before 2021 has not been finally determined by the CRA as of Budget Day.


The major amendments to the GST/HST regime had already been proposed in the November 30, 2020 FES, and are included in Budget 2021 with few changes. These include:

  • requirements for non-resident vendors supplying digital products or services (including traditional services) to consumers in Canada to be required to register for the GST/HST and to collect and remit the tax on their taxable supplies to Canadian consumers;

  • requirements for distribution platform operators to register for the GST/HST and to collect and remit the tax on the supplies by non-registered, non-resident vendors to Canadian consumers that they facilitate;

  • new simplified GST/HST registration and collection/remittance regime for non-residents;

  • requirements for non-resident vendors that make sales on their own (i.e., not made through a distribution platform) to register to collect and remit GST/HST in respect of sales of goods shipped to customers from within Canada; and

  • applying the GST/HST on all supplies of short-term accommodation in Canada facilitated through a digital accommodation platform, including where the property owners are small suppliers.

The details regarding these proposals are discussed in our publications regarding selected tax measures in the FES and specifically regarding online marketplaces and digital platforms:

The amendments proposed in Budget 2021 clarify that suppliers registered under the proposed simplified framework may deduct amounts related to GST/HST and bad debts, and certain provincial HST point-of-sale rebates from the tax that they are required to remit, but they will still not be able to claim input tax credits.

One significant addition contained in Budget 2021 (and a concession to the digital platforms) is that the government backed off from its “full liability” model for distribution platforms. Rather, the distribution platform operators and vendors are jointly and severally liable for any GST/HST collectable through the platform. Furthermore, in cases where a platform operator relied in good faith on inaccurate information provided by a vendor, the CRA is directed not to assess the platform operator for failing to collect and remit tax as a result. This form of direction not to assess a party that is legally liable under the law is untested, at least under the Excise Tax Act, and it will remain to be seen how the CRA and the courts interpret and implement that rule, specifically in cases where an auditor does in fact assess a person that the law directs them not to.

The CRA will have the authority to register a person that the CRA believes should be registered under the simplified framework for non-residents. This authority already exists for normal GST/HST registrations, so it remains to be seen how the CRA will determine whether a non-resident should be registered for normal or simplified GST/HST registrations going forward.

Finally, Budget 2021 provides that where businesses and platform operators have shown that they have taken reasonable measures, but are unable to meet their new obligations for operational reasons, the CRA will take a practical approach to compliance and exercise discretion in administering these measures during a 12-month transition period, starting from the July 1, 2021 coming into force date.

Expanded Input Tax Credit Documentation

Budget 2021 also introduces amendments to the existing GST/HST regulations relating to input tax credits to allow a “billing agent” for a supplier to issue invoices and documentation in its own name to support a recipient’s claims for input tax credits. The billing agent’s name and GST/HST registration number are only valid support in circumstances where the supplier and the billing agent have entered into an election under subsection 177(1.1). It is unclear from the legislation how a recipient would know whether such an election has been entered into, and to what extent it would be required to take steps to obtain evidence of such election, in order to support its own input tax credits.

Previously Announced GST/HST Measures

Budget 2021 proposes to implement certain previously announced GST/HST measures that have not yet been passed into law:

  • the measures first announced in February 2014 to expand the availability of the GST/HST joint venture election to all joint venture activities that are exclusively commercial, rather than certain prescribed activities;

  • legislative proposals released on July 27, 2018 relating to various GST/HST measures, including the technical amendments which clarify the preconditions to take advantage of the existing GST/HST holding corporation rules which allows holding corporations to register for and claim input tax credits for GST/HST purposes, among others;

  • legislative proposals released on May 17, 2019 relating to various GST/HST measures, including measures to treat virtual currency as a financial instrument for GST/HST purposes and measures to extend the existing GST/HST holding corporation rules to partnerships and trusts, among others; and

  • measures announced in the November 30, 2020 FES relating to zero-rating of face masks and face shields for GST/HST purposes.

Excise Duty on Vaping Products

Somewhat similar to the proposals in 2017 for cannabis products, Budget 2021 proposes to introduce an excise duty framework for vaping products under the Excise Act, 2001. The new duty would apply solely to vaping liquids that are produced in Canada or imported and that are intended for use in a vaping device in Canada. Currently, although such products contain nicotine that may be derived from tobacco, they are not being taxed as tobacco products. Budget 2021 does not propose specific legislation at this time, and the government is inviting input from industry and stakeholders on its proposals. The new measure is proposed to be implemented sometime in 2022.

The proposed framework would impose a single flat rate duty “in the order of C$1.00 per every 10 millilitres (ml) of vaping liquid or fraction thereof” within an immediate container (i.e., the container holding the liquid itself). The vaping products will also be subject to excise stamping requirements, similar to cannabis. Manufacturers, importers and even some vape shops (if they obtain and use non-duty-paid vaping products) would be required to register with the CRA and file regular excise duty returns. It will be illegal to possess unstamped vaping products, which effectively creates a new level of regulation for the importation and production of dutiable vaping products.

The federal government has indicated that it will work collaboratively with any provinces and territories that may be interested in a federally coordinated approach to taxing these products, which could be achieved through the implementation of additional taxes in respect of products intended for consumption in provinces and territories choosing to participate, similar to cannabis.
Luxury Tax on Cars, Aircraft and Boats Purchased for Personal Use

Effective January 1, 2022, Budget 2021 proposes to introduce a tax under new legislation, on the sale of new luxury cars and personal aircraft with a retail sales price over C$100,000 and boats with a retail sales price over C$250,000 that are purchased for personal use. The tax would apply at the lesser of 20 per cent of the value above the threshold retail sales price for such goods (e.g., 20 per cent of the value over C$100,000 for personal aircraft), or 10 per cent of the full value of such goods. The GST/HST would apply to the final sale price, inclusive of the proposed luxury tax. No draft legislation is available at this time.

A similar measure was previously introduced by British Columbia as an increased rate of provincial sales tax as of April 1, 2018. British Columbia imposes a graduated rate of provincial sales tax on passenger vehicles based on the value of a vehicle, from 7 per cent for passenger vehicles valued at less than C$55,000 up to 15 per cent for passenger vehicles valued at C$125,000 to (but not including) C$150,000 and 20 per cent for passenger vehicles valued at C$150,000 and over. Thus, a new luxury vehicle purchased for personal use in British Columbia would potentially be subject to the federal luxury tax, the increased PST and GST.

For further information, please contact any member of our Tax group.