Budget 2021: The Missing Piece of the PuzzleTuesday, April 20, 2021
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Putting aside the billions of dollars earmarked in the Federal Government’s budget released on April 19, 2021 (“Budget 2021”) for various programs and groups from all walks of life, what is most notable in Budget 2021 is what it is missing. The rumours that swirled for months leading up to Budget 2021, the first federal budget since 2019, were that in order to pay for the stimulus provided during the COVID-19 pandemic, the Federal Government would need to raise money and fast. Although Budget 2021 proposes to close some tax loopholes, any significant proposals to raise revenues by raising taxes are notably absent. Here are three things everyone needs to know about Budget 2021:
1. No New Wealth Taxes (Unless You Want to Buy a Yacht)
Budget 2021 is most notable for no changes to general tax rates. A client asked me on the night of the release of Budget 2021, “how does this directly affect me?” I replied, “Not at all.” Budget 2021 provides no increases to the general tax rates, no change to the capital gains inclusion rates, no change to how a principal residence is taxed, and no changes to the taxation of Canadian-controlled private corporations. Currently, capital gains are taxed at 50% (when they once were taxed at 75%), the sale of a principal residence is exempt from tax and the highest tax bracket starts at around $220,000. Budget 2021 does not change these rates. However, if a wealthy Canadian wants to buy a high-cost item like an expensive car or a boat, Budget 2021 will impose a luxury tax on such purchase. Presumably, at some point following the resolution of the COVID-19 pandemic, when small businesses in all industries are back up and running and there is no federal election in sight, the Federal Government will need to make some significant tax decisions to raise revenue to pay for the amounts spent on COVID-19 pandemic relief. Stay tuned for those changes.
2. Extending COVID-19 Emergency Benefits (with Some Notable Changes)
Speaking of COVID-19 pandemic relief, Budget 2021 continues to extend emergency benefits for businesses. Specifically, the Canada Emergency Wage Subsidy (“CEWS”), the Canada Emergency Rent Subsidy and the Lockdown Support will continue in 2021. These programs were set to expire in June 2021, so Budget 2021 proposes to extend these programs through the fall with some notable changes. In respect of the CEWS, Budget 2021 proposes that such subsidy rates will begin to be gradually phased out by July 2021. More notably, publicly listed corporations will be required to repay the CEWS amounts received after June 2021 if aggregate compensation for certain employees in 2021 exceeds the aggregate compensation for such employees during 2019.
Another change which looks to the post-pandemic future is the introduction of the Canada Recovery Hiring Program which will provide eligible employers with a subsidy of up to 50% on the incremental salaries paid to eligible employees between June and November 2021. However, a business cannot receive subsidies under both the CEWS and the Canada Recovery Hiring Program.
3. Changes to the Amount of Interest That Can Be Deducted by a Corporation
The biggest actual tax change in Budget 2021, consistent with the recommendations of the Organization for Economic Co-operation and Development, is a proposal which limits the amount of interest payments certain Canadian businesses can deduct on their taxes to 40% of their earnings starting in 2023 and to 30% of their earnings in the following years. This “earning-stripping” approach to limiting interest deductibility is similar to rules in other countries and seeks to limit the potential for excessive debt placed in Canadian businesses in a way that erodes the Canadian tax base. These new rules will apply to corporations, partnerships and trusts and Canadian branches of non-resident taxpayers. The rules will not apply to Canadian-controlled private corporations that have taxable capital employed in Canada of less than $15 million and groups of corporations and trusts whose aggregate net interest expense amount among their Canadian members is $250,000 or less. Draft legislation on the proposal is to be released for comment later this year.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.