Fall Economic Statement 2020 – New Tax Measures

Dentons

Introduction

Minister of Finance Chrystia Freeland presented the Government’s long-awaited Fall Economic Statement 2020 (the Economic Update) to the House of Commons on November 30, 2020. The Economic Update outlined the Government’s fiscal policies for dealing with the ongoing COVID-19 pandemic as well as plans for restructuring and rebuilding the economy. The Economic Update was accompanied by a 237-page report that can be accessed here.

The deficit is projected to reach a staggering $381.6 billion by March 2021, with the possibility that it could be as high as $400 billion. Notwithstanding, the Government said that it is prepared to spend another $100 billion over the next three years to help rebuild the economy.

Many of the proposals in the Economic Update are effective July 1, 2021, and several will not be disclosed in detail until the Government releases its next budget, expected sometime in 2021.

Some interesting takeaways include the Government’s commitment to increase funding for tax audits by $606 million over the next five years and to implement a national, tax-based measure, targeting the unproductive use of domestic housing that is owned by non-resident, non-Canadians. The most significant fiscal measures will see the Government collect Goods and Services Tax (GST) or the Harmonized Sales Tax (HST) from digital giants on taxable sales and certain digital short-term accommodation providers.

Enhancements to the Canada Emergency Wage Subsidy and the Canada Emergency Rent Subsidy were also contained in the Economic Update.

A brief summary of some of the more significant measures affecting Canadian businesses is contained below. A Dentons tax lawyer would be pleased to provide additional information to our clients who have questions regarding these measures. 

Stock option deduction

Amendments are proposed that will limit, in certain circumstances, the favourable tax treatment that may be available to certain recipients of employee stock options (Options) under the current rules of the Income Tax Act (Canada) (the Tax Act).

Current rules

Options are governed under section 7 of the Tax Act. Generally, Options are taxable when they are exercised by the employee, other than certain Options granted by Canadian-controlled private corporations (CCPC) which are generally taxable when the underlying shares are sold. The taxable benefit is calculated as the excess of the fair market value of the securities issued over the exercise price paid for such securities (and any amount paid for the Option). The taxable benefit may be reduced by 50% (the 50% Deduction) where the issued securities are plain vanilla common shares, the Options were not “in-the-money” on the grant date and the issuing corporation and employee deal with each other at “arm’s length” for tax purposes. The issuer is not entitled to deduct any amount in respect of the Options.

Proposed amendments

The 50% Deduction will not be available to an employee in respect of Options to acquire “non-qualified securities”. Where non-qualified securities are acquired, the employer may be entitled to deduct an amount equal to the denied 50% Deduction.

Non-qualified securities are securities that may be acquired under an Option in the same vesting year and whose aggregate FMV exceeded $200,000 at the time the Option was granted. A vesting year is the calendar year that the Option first becomes exercisable. If no vesting year is specified, the Option is considered to vest evenly over the term of the agreement, not exceeding 60 months. Non-qualified securities will also include securities designated by the employer as non-qualified securities when the Option is granted. The employer is required to notify the employee and the Minister of National Revenue in the year the Option is granted if the underlying securities include non-qualified securities.

The $200,000 limit will apply to all Options granted to the employee by his or her employer (or a qualifying person that does not deal at arm’s length with the employer). If an employee has Options that may vest in a year that include non-qualified securities, the Options granted first will be the first to qualify for the 50% Deduction. If the Options have identical rights and some qualify for the 50% Deduction and others do not, the employee will be considered to have exercised the Options that qualify for the 50% Deduction first. An employee with two or more arm’s length employers will have separate $200,000 limits for each of those employers.

The existing Option rules will continue to apply to all Options granted before July 1, 2021. For Options granted on or after July 1, 2021, the existing Option rules will only apply to Options granted by a CCPC or by a non-CCPC who, alone or together with a group that prepares consolidated financial statements, has annual gross revenue or consolidated group revenue not exceeding $500 million, as the case may be. In other words, Options granted on or after July 1, 2021 by a non-CCPC whose annual gross revenue is $500 million or more, are subject to the $200,000 limit.

The digital economy

The COVID-19 pandemic has accelerated the shift toward the online economy, making it increasingly easier for businesses to sell their goods and services from anywhere in the world. Under the current rules, foreign-based companies can generally sell their goods and services to Canadians without charging GST/HST, putting Canadian-based vendors at a competitive disadvantage.

In response, the Government has introduced new GST/HST rules to target three areas of the online economy.

GST/HST

Cross-Border Digital Products and Services

Pursuant to the proposed changes, vendors of taxable digital products and services (i.e., apps, streaming services, online video games, etc.) that do not carry on a business in Canada, as well as the operators of digital platforms (also known as online marketplaces) through which such vendors sell their digital products and services to Canadian consumers, will generally be required to register under a simplified GST/HST registration system and to collect and remit the GST/HST on sales to Canadian consumers.

Fulfillment Warehouses

Foreign-based vendors and/or online marketplaces through which foreign-based vendors sell goods to Canadian purchasers, that use distribution centers or fulfillment warehouses in Canada to store the goods sold before shipping such goods to the Canadian purchasers will generally be required to register under the normal GST/HST rules and to collect and remit the GST/HST on the sale of goods located in distribution centers or fulfillments warehouses in Canada.

In addition, fulfillment businesses will be required to notify the Canada Revenue Agency (CRA) that they carry on a fulfillment business and to keep records of their non-resident clients and the goods stored on their behalf.

Platform-based Short-Term Accommodations

Proposed GST/HST changes will target all short-term accommodations facilitated through a digital accommodation platforms, by requiring GST/HST to be collected and remitted by either the property owner if a GST/HST registrant or the digital accommodation platform operator that facilitates the transaction, which will generally be required to register under the normal GST/HST rules or the simplified GST/HST registration system, as the case may be.

Application

The GST/HST rules proposed above are expected to be effective starting July 1, 2021.

Other tax measures

The Government expressed the need for tax rules to account for the continuing digitalization of businesses and to combat tax avoidance in the form of international profit shifting. While the Government believes in a multilateral approach to achieve these objectives, it is concerned about the delay in arriving at consensus. Therefore, the Government proposes to implement a tax on corporations providing digital services, to be effective January 1, 2022, which would apply until such time as an acceptable common approach comes into effect. Further details are to be announced in the next budget.

GST/HST relief on face masks and face shields

In order to support public health during the COVID-19 pandemic, the Government proposes to temporarily relieve from GST/HST (i.e., zero rate) supplies of face masks and face shields (medical and non-medical) that meet certain specifications. This proposed rules would apply to supplies made after December 6, 2020, and until the use of such masks is no longer largely recommended by public health officials for the COVID-19 pandemic. It should be noted that the Québec Ministry of Finance announced on December 1, 2020, that the Québec Sales Tax (QST) legislation should be harmonized to this new GST/HST rules.

Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy

The Government extended the Canada Emergency Wage Subsidy through to June 2021. The maximum subsidy rate will increase from 65% to 75% of eligible wages for the period starting December 20, 2020, and continuing until March 13, 2021. It is projected that this extension will cost $14.79 billion with the total cost of this subsidy estimated to be $83.54 billion. Details regarding subsequent periods have not been released.

The Canada Emergency Rent Subsidy was also extended. The period covered is now September 27, 2020, to March 13, 2021. The subsidy rate is 65% of eligible expenses. Additionally, the Lockdown Support top-up of 25% will be extended until March 13, 2021. This means that businesses subject to lockdowns or similar significant restrictions may qualify for a subsidy of up to 90% of eligible expenses. The extension to these subsidies is expected to cost $2.18 billion with a total cost of $4.36 billion.

Simplifying the home office expense deduction

A simplified process for deducting home office expenses for both employees and their employers is proposed in the Economic Update. Under this initiative, the CRA will allow employees who are working from home in 2020 due to the COVID-19 pandemic to claim up to $400 of home office expenses using a simplified flat rate. The amount of the deduction will be calculated based on the amount of time spent working from home, so employees will not need to track detailed expenses. Additionally, CRA Form T2200 Declaration of Conditions of Employment, normally required to be completed by the employer, will generally not be requested for these employees, thereby reducing the administrative burden on employers. The CRA will release further details in the coming weeks. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:

Dentons
Contact
more
less

Dentons on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.