Canada Emergency Wage Subsidy (CEWS)

Extension and Phase-out for Active Employees

Budget 2021 proposes that CEWS will be extended to September 25, 2021, but will start phasing out after July 3, 2021. Only employers with more than a 10% decline in revenues will be eligible for the wage subsidy as of that date. The rates and limits are as follows

CEWS BASE AND TOP-UP RATES (PERIOD 17-20)

Furloughed Employees

CEWS for furloughed employees would continue to be available to eligible employers until August 28, 2021, ending four weeks earlier than CEWS for active employees. To maintain the alignment of CEWS for furloughed employees with benefits available under EI, Budget 2021 proposes to maintain their weekly wage subsidy at the lesser of:

the amount of eligible remuneration paid in respect of the week; and
the greater of:
$500; and
55% of pre-crisis remuneration for the employee, up to a maximum subsidy amount of $595.

The wage subsidy relating to the employer’s portion of CPP, EI, the Quebec Pension Plan and the Quebec Parental Insurance Plan in respect of furloughed employees will also remain available.

Reference Periods

The reference periods for determining the revenue decline are as follows:

The approach chosen in the prior periods must be maintained.

Baseline Remuneration

An employer’s entitlement to CEWS in respect of an employee may be affected by their baseline remuneration, also known as pre-crisis remuneration. Absent an election, baseline remuneration is calculated using the period beginning January 1, 2020, and ending March 15, 2020. Budget 2021 proposes to allow an eligible employer to elect to use the following alternative baseline remuneration periods:

March 1 to June 30, 2019 or July 1 to December 31, 2019, for the qualifying period between June 6, 2021 and July 3, 2021; and
July 1 to December 31, 2019, for qualifying periods beginning after July 3, 2021.

Requirement to Repay Wage Subsidy – Public Corporations

Budget 2021 proposes to require a publicly listed corporation to repay wage subsidy amounts received for a qualifying period that begins after June 5, 2021 in the event that its aggregate compensation for specified executives during the 2021 calendar year exceeds that of the 2019 calendar year.

Specified executives are the Named Executive Officers whose compensation is required to be disclosed under Canadian securities laws in the annual information circular provided to shareholders, or similar executives in the case of a corporation listed in another jurisdiction.

The amount of the wage subsidy required to be repaid would be equal to the lesser of:

the total of all wage subsidy amounts received in respect of active employees for qualifying periods that begin after June 5, 2021; and
the amount by which the corporation’s aggregate specified executives’ compensation for 2021 exceeds that of 2019.

This applies to wage subsidy amounts paid to any entity in the group.

Canada Emergency Rent Subsidy (CERS)

Extension and Phase-out

Budget 2021 proposes that CERS will be extended to September 25, 2021, but will start phasing out after July 3, 2021. Paralleling CEWS, only employers with more than a 10% decline in revenues will be eligible for CERS as of that date. The rates and limits are as follows:

CERS RATE STRUCTURE (Periods 10-13)

Purchase of Business Assets

An applicant must generally have had a payroll account with CRA to be eligible for CEWS. For CERS, a business number is required. For CEWS, a rule was introduced which provides that an eligible entity that purchases the assets of a seller will be deemed to meet the payroll account requirement if the seller met the requirement. Budget 2021 proposes a similar deeming rule that would apply in the context of the rent subsidy, where the seller met the business number requirement. This measure would be effective as of the start of CERS.

Lockdown Support

Budget 2021 proposes to extend lockdown support to September 25, 2021 at a 25% rate (unchanged).

Canada Recovery Hiring Program (CRHP)

Budget 2021 proposes the new CRHP to provide eligible employers with a subsidy of up to 50% of the incremental remuneration paid to eligible employees between June 6, 2021 and November 20, 2021. The higher of CEWS or CRHP could be claimed for a particular qualifying period, but not both.

Eligible Employers

Employers eligible for CEWS would generally be eligible for CRHP. However, a for-profit corporation would be eligible for the hiring subsidy only if it is a Canadian-controlled private corporation (CCPC). Eligible employers (or their payroll service provider) must have had a CRA payroll account open March 15, 2020.

Eligible Employees

An eligible employee must be employed primarily in Canada by an eligible employer throughout a qualifying period (or the portion of the qualifying period throughout which the individual was employed by the eligible employer). CRHP will not be available for furloughed employees. A furloughed employee is an employee who is on leave with pay, meaning they are remunerated by the eligible employer but do not perform any work for the employer. However, an individual would not be considered to be on leave with pay for the purposes of the hiring subsidy if they are on a period of paid absence, such as vacation leave, sick leave, or a sabbatical.

Eligible Remuneration and Incremental Remuneration

The same types of remuneration eligible for CEWS would also be eligible for CRHP (e.g., salary, wages, and other remuneration for which employers are required to withhold or deduct amounts). The amount of remuneration for employees would be based solely on remuneration paid in respect of the qualifying period.

Incremental remuneration for a qualifying period means the difference between:

an employer’s total eligible remuneration paid to eligible employees for the qualifying period, and
its total eligible remuneration paid to eligible employees for the base period.

Eligible remuneration for each eligible employee would be subject to a maximum of $1,129 per week, for both the qualifying period and the base period. Similar to CEWS, the eligible remuneration for a non-arm’s length employee for a week could not exceed their baseline remuneration determined for that week. The base period for all application periods is March 14 to April 10, 2021.

Required Revenue Decline

To qualify, the eligible employer would have to have experienced a decline in revenues. For the qualifying periods between June 6, 2021, and July 3, 2021, the decline would have to be greater than 0%. For later periods, the decline must be greater than 10%.

Similar to CEWS and CERS, an application for a qualifying period would be required to be made no later than 180 days after the end of the qualifying period.

IMMEDIATE EXPENSING

Budget 2021 proposes to permit the full cost of “eligible property” acquired by a CCPC on or after Budget Day to be deducted, provided the property becomes available for use before January 1, 2024.

Up to $1.5 million per taxation year is available for sharing among each associated group of CCPCs, with the limit being prorated for shorter taxation years. No carry-forward of excess capacity would be allowed.

Eligible Property

Eligible property includes capital property that is subject to the CCA rules, other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51. The excluded classes are generally those that have long lives, such as buildings, fences, and goodwill.

Interactions of the Immediate Expensing with Other Provisions

Where capital costs of eligible property exceed $1.5 million in a year, the taxpayer would be allowed to decide which assets would be deducted in full, with the remainder subject to the normal CCA rules.

Other enhanced deductions already available, such as the full expensing for manufacturing and processing machinery, would not reduce the maximum amount available ($1.5 million).

Restrictions

Generally, property acquired from a non-arm’s length person, or which was transferred to the taxpayer on a tax-deferred “rollover” basis, would not be eligible.

Also, there are several other rules that limit CCA claims that would continue to apply, such as limits to claims on rental losses.

Rate Reduction for Zero-Emission Technology Manufacturers

Budget 2021 proposes a temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers, halving the tax rate on eligible zero-emission technology manufacturing and processing income to 7.5% on income subject to the general corporate tax rate (normally 15%), and 4.5% where that income would otherwise be eligible for the small business deduction (normally 9%). Provincial taxes would still apply to this income.

For taxpayers with income subject to both the general and the small business corporate tax rates, taxpayers would be able to choose the income on which the rate would be halved.

No changes to the dividend tax credit rates or the allocation of corporate income for the purpose of dividend distributions are proposed. That is, income subject to the general reduced rate would continue to give rise to eligible dividends and the enhanced dividend tax credit, while income subject to the reduced rate for small businesses would continue to give rise to non-eligible dividends and the ordinary dividend tax credit.

This measure would apply in respect of income from numerous zero-emission technology manufacturing or processing activities listed in Budget 2021, including manufacturing or production of:

solar energy conversion equipment, excluding passive solar heating equipment;
wind energy conversion equipment;
water energy conversion equipment;
geothermal energy equipment;
equipment for a ground source heat pump system;
electrical energy storage equipment used for storage of renewable energy or for providing grid-scale storage or other ancillary services;
zero-emission vehicles (including conversion of vehicles into zero-emission vehicles);
batteries and fuel cells for zero-emission vehicles;
electric vehicle charging systems and hydrogen refuelling stations for vehicles;
equipment used for the production of hydrogen by electrolysis of water;
hydrogen by electrolysis of water; and
solid, liquid or gaseous fuel (e.g., wood pellets, renewable diesel and biogas) from either carbon dioxide or specified waste material, excluding the production of by-products which is a standard part of another industrial or manufacturing process.

Manufacturing of components or sub-assemblies will be eligible only if such equipment is purpose-built or designed exclusively to form an integral part of the relevant system.

Eligible income would be determined as a proportion of “adjusted business income” determined by reference to the corporation’s total labour and capital costs that are used for eligible activities.

Feedback on the proposed allocation method can be provided by sending written representations to the Department of Finance Canada, Tax Policy Branch at: ZETM-FTZE@canada.ca by June 18, 2021.

The reduced tax rates would require the corporation to derive at least 10% of its gross revenue from all active businesses carried on in Canada from eligible activities. The reduced tax rates would apply to taxation years that begin after 2021. The reduced rates would be gradually phased out starting in taxation years that begin in 2029 and fully phased out for taxation years that begin after 2031.

Capital Cost Allowance (CCA) for Clean Energy Equipment

Under the CCA regime, Classes 43.1 and 43.2 provide accelerated CCA rates (30% and 50%, respectively) for investments in specified clean energy generation and energy conservation equipment. Budget 2021 proposes to expand Classes 43.1 and 43.2 to include a variety of assets used to generate energy from water, solar or geothermal sources or waste material, or related to hydrogen production or utilization. Accelerated CCA would be available in respect of these types of property only if, at the time the property becomes available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met.

Classes 43.1 and 43.2 currently include certain systems that burn fossil fuels and/or waste fuels to produce either electricity or heat, or both. Budget 2021 notes that the eligibility criteria for these systems have not been modified since they were first set approximately 25 and 15 years ago, and proposes changes in the eligibility criteria for various assets having significant usage of fossil fuels.

The expansion of Classes 43.1 and 43.2 would apply in respect of property that is acquired and that becomes available for use on or after Budget Day, where it has not been used or acquired for use for any purpose before Budget Day.

The removal of certain property from eligibility for Classes 43.1 and 43.2, as well as the application of the new heat rate threshold for specified waste-fuelled electrical generation systems, would apply in respect of property that becomes available for use after 2024.

Film or Video Production Tax Credits

Budget 2021 proposes to temporarily extend certain timelines for the Canadian Film or Video Production Tax Credit and the Film or Video Production Services Tax Credit by 12 months (in addition to certain extensions previously announced). These measures would be available in respect of productions for which eligible expenditures were incurred by taxpayers in their taxation years ending in 2020 or 2021.

Mandatory Disclosure Rules

While past Budgets have proposed specific anti-avoidance provisions, Budget 2021 proposes broad-based disclosure requirements for tax strategies considered aggressive by the government. Certain transactions must presently be reported to CRA. The government is consulting on proposals to enhance Canada’s mandatory disclosure rules. This consultation will address:

changes to the 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 and the introduction of penalties.

Amendments made as a result of this consultation would not apply prior to January 1, 2022.

Stakeholders are invited to provide comments on the proposals set out below, as well as on draft legislation and sample notifiable transactions which are expected to be released in the coming weeks as part of the consultation, by September 3, 2021. Comments should be sent to fin.taxdisclosure-divulgationfiscale.fin@canada.ca.

Reportable Transactions

The Income Tax Act contains rules that require that certain transactions entered into by, or for the benefit of, a taxpayer be reported to CRA. Such transactions must meet the definition of an “avoidance transaction” – generally, undertaken for no bona fide purpose other than obtaining a tax benefit – and bear at least two of the following three generic hallmarks:

A promoter or tax advisor is entitled to fees attributable to the amount of the tax benefit; contingent upon the obtaining a tax benefit; or attributable to the number of taxpayers who participate in the transaction or receive advice from the promoter or advisor regarding the tax consequences of the transaction.
A promoter or tax advisor requires “confidential protection” with respect to the transaction.
The taxpayer, or the person who entered into the transaction for the benefit of the taxpayer, obtains “contractual protection” in respect of the transaction, such as:
insurance (other than standard professional liability insurance) or other protection (including an indemnity, compensation or a guarantee) that protects a person against a failure to achieve the expected tax benefit or reimburses any expense, costs (e.g. fees, taxes, penalties, interest) that may be incurred by a person in the course of a dispute in respect of the expected tax benefit from the transaction; or
any form of undertaking under which a promoter or advisor aids in the course of a dispute in respect of the expected tax benefits.

Budget 2021 proposes that only one such hallmark will be required to make a transaction reportable. It also proposes that the definition of “avoidance transaction” for these purposes be broadened to include any transaction where it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit (even if there are other bona fide non-tax purposes).

The reporting obligation would extend to the taxpayer, any other person involved in procuring a tax benefit for the taxpayer, and a promoter or advisor (as well as certain other persons who are entitled to receive a fee with respect to the transaction). An exception would apply where disclosure would violate solicitor-client privilege.

Notifiable Transactions

Budget 2021 proposes to introduce a category of specific hallmarks known as “notifiable transactions”. The Minister of National Revenue would have the authority to designate, with the concurrence of the Minister of Finance, a transaction as a notifiable transaction. A taxpayer who enters into a notifiable transaction would be required to report the transaction to CRA.

Notifiable transactions would include both transactions that CRA has found to be abusive and transactions identified as transactions of interest. The description of a notifiable transaction would set out the fact patterns or outcomes that constitute that transaction in sufficient detail to enable taxpayers to comply with the disclosure rule. It would also include examples in appropriate circumstances. Sample descriptions of notifiable transactions will be issued as part of the consultation.

Uncertain Tax Treatments

An uncertain tax treatment is a tax treatment used, or planned to be used, in income tax filings where there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law. At present, there is no requirement in Canada to disclose uncertain tax treatments.

Budget 2021 notes that several other countries (e.g. the U.S. and Australia) require disclosure of uncertain tax positions by corporations meeting an asset threshold, and certain other conditions, where either the corporation or a related party has recognized, disclosed or recorded a reserve with respect to that tax position in its audited financial statements. A similar reporting regime is proposed to be implemented in Canada. Canadian public corporations, and those Canadian private corporations that choose to use International Financial Reporting Standards (IFRS), have an existing requirement to identify uncertain tax treatments for financial statement purposes. When such a corporation determines that it is not probable that the taxation authority will accept an uncertain tax treatment, the effect of that uncertainty is reflected in the corporation’s financial statements. It is proposed that specified corporate taxpayers be required to report particular uncertain tax treatments to CRA where the following conditions are met:

The corporation is required to file a Canadian tax return for the taxation year.
The corporation has at least $50 million in assets. This threshold would apply to each individual corporation.
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.
Uncertainty in respect of the corporation’s Canadian income tax for the taxation year is reflected in those audited financial statements.

As public corporations are required to use IFRS, they would all be subject to these rules. Private corporations using Accounting Standards for Private Enterprise (ASPE) would not. The reporting requirement would also apply to a corporation that meets the asset threshold if it, or a related corporation, has audited financial statements prepared in accordance with another country-specific GAAP relevant for domestic public corporations.

Reassessment Period

In support of the new mandatory disclosure rules, Budget 2021 proposes that, where a taxpayer has a reporting requirement in respect of a transaction relevant to the taxpayer’s income tax return for a 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 result, if a taxpayer does not comply with a mandatory disclosure reporting requirement for a taxation year, a reassessment of that year in respect of the transaction would not become statute-barred.

Significant penalties would also apply to taxpayers and promoters who fail to file these required disclosures.

Avoidance of Tax Debts

The Income Tax Act has an anti-avoidance rule (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. In these circumstances, the rule causes the transferee to be jointly and severally liable with the transferor for tax debts of the transferor for the current or any prior taxation year, to the extent that the value of the property transferred exceeds the amount of consideration given for the property. Budget 2021 proposes a number of measures to address planning to circumvent this tracing of liability, as well as a penalty for those who devise and promote such schemes.

The specific proposals would apply to arrangements where:

a tax debt is deferred until after the year in which the assets are transferred;
parties cease to be non-arm’s length prior to assets being transferred; or
the overall result of a series of transactions are not consistent with the values at the time of the transfer.

A penalty would also be introduced for planners and promoters of tax debt avoidance schemes, mirroring an existing penalty in the so-called “third-party civil penalty” rules in the Income Tax Act in respect of certain false statements. The rules would apply in respect of transfers of property that occur on or after Budget Day. Similar amendments would be made to comparable provisions in other federal statutes (e.g., the Excise Tax Act for GST/HST).

Audit Authorities

CRA possesses the authority to audit taxpayers. Budget 2021 proposes amendments to confirm that CRA officials have the authority to require persons to answer all proper questions, and to provide all reasonable assistance, and to require persons to respond to questions orally or in writing, including in any form specified by the relevant CRA official. These measures would come into force on Royal Assent.

Other Measures

Budget 2021 also announced plans for a wide variety of other programs, including:

Employee Ownership Trusts – Engaging with stakeholders to examine what barriers exist to the creation of employee ownership trusts in Canada, and how workers and owners of private businesses in Canada could benefit from the use of employee ownership trusts.
Federal Minimum Wage – Establishing a federal minimum wage of $15 per hour, rising with inflation, for those workers in the federally regulated private sector.
Credit Card Transaction Fees – Stakeholder consultations will be undertaken with the expectation to outline detailed next steps in the 2021 Fall Economic Statement.
Support for Businesses to Adopt New Digital Technologies – Investing $1.4 billion over four years to assist small and medium business to access grants and technical support associated with adopting new technologies.
Regional Relief and Recovery Fund – Extending the application deadline for similar support to the Canada Emergency Business Account (CEBA) offered under the Regional Relief and Recovery Fund and the Indigenous Business Initiative until June 30, 2021. The CEBA application deadline was previously extended to June 30, 2021.
Additional Funding for CRA – Including $330.6 million over five years to invest in cybersecurity measures and $41.7 million over three years to reduce processing time for adjustments to personal tax returns.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

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Federal Budget 2021: Business Measures

Canada Emergency Wage Subsidy (CEWS)

CEWS BASE AND TOP-UP RATES (PERIOD 17-20)