UPDATE: Due to the dissolution of Parliament for the upcoming general election to be held on September 20, 2021, the objectives in the previous budget as summarized in this article are no longer applicable. However, depending upon the results of the election and specifically whether the Liberals obtain a majority of the seats, the previous budget may be a foreshadowing of the financial measures to be taken by the new government.
After the 2020 budget was delayed due to the coronavirus pandemic, the federal government delivered its budget on April 19, 2021 (“Budget Day”). Highlights on proposed business income tax measures and disclosure requirements contemplated under the budget (“Budget 2021”) are summarized below. Please keep in mind that the following is only an overview of the proposals to date and the final measures solidified via legislation may be different.
Immediate Expensing under Capital Cost Allowance
Budget 2021 proposes that under the capital cost allowance system (“CCA”), Canadian controlled private corporations (“CCPCs”) will be able to immediately expense capital costs of certain property if the following conditions are met:
(a) the subject property is acquired on or after Budget Day and becomes available for use before January 1, 2024;
(b) the subject property is capital property currently subject to CCA rules excluding property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51, which are generally long lived assets;
(c) neither the taxpayer nor a non-arm’s length person previously owned the subject property; and
(d) the subject property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.
The immediate expensing option will only be available in the year in which the property becomes available for use and there will be a limit of $1.5 million per year, such limit to be shared amongst associated CCPCs (per Canada Revenue Agency (“CRA”) rules which are based on control) and such limit not to be reduced by current enhanced deductions under the CCA rules.
CCPCs with eligible capital costs of less than $1.5 million in any taxation year will not be able to carry forward any unused amount of the $1.5 Million limit. CCPCs with eligible capital costs of more than $1.5 million in any taxation year can choose which CCA class would be subject to the immediate expensing rules and any excess capital cost will be subject to the normal CCA rules.
CCA for Clean Energy Equipment
Budget 2021 proposes to change CCA classes 43.1 and 43.2 (which are eligible for accelerated CCA rates) as follows:
(a) clean energy or energy conversation equipment, which are acquired and that become available for use on or after Budget Day, will fall under CCA classes 43.1 and 43.2; and
(b) equipment that burn fossil fuels/and or waste fuels that become available for use after January 1, 2024 will no longer fall under classes 43.1 and 43.2.
Interest Deductibility Limits
Budget 2021 proposes to limit the amount of interest expenses a corporation, trust, partnership, or a Canadian branch can deduct in computing its taxable income to a faxed ratio of tax EBITDA. Tax EBITDA is the entity’s taxable income before taking into account interest expense, interest income, income tax and deductions for depreciation and amortization.
For taxation years beginning on or after January 1, 2023 but before January 1, 2024, the limit will be 40% of tax EBITDA and thereafter, 30% of tax EBITDA.
Exemptions are available for CCPCs/associated CCPCs that have taxable capital in Canada of less than $15 million and corporation and trust groups whose total net interest expense among the Canadian members is $250,000 or less.
Canadian members of a group (to be defined in legislation) will be able to transfer any unused capacity of the limit amongst themselves. Carry-backs of denied interest deductions will also be available.
Avoidance of Tax Debts
Currently, under the Income Tax Act (“ITA”), if a taxpayer transfers property to a transferee for consideration that is less than the value of the property, the transferee is jointly and severally liable with the transferor for the transferor’s tax debts that arise before the end of the taxation year in which the property transfer occurred, to the extent of the difference.
Budget 2021 proposes new rules to address aggressive tax planning that attempt to circumvent the above tax debt anti-avoidance rule. Such rules include:
1. Deeming a tax debt to have arisen before the end of taxation year in which the property transfer occurs if:
(a) the transferor or a non-arm’s length person of the transferor had knowledge of a tax amount owing by the transferor or a tax amount owing if additional tax planning is not done); and
(b) one of the purposes for the transfer is to avoid payment of the future tax debt.
2. Deeming a transferee and transferee who would otherwise be considered dealing at arm’s length at time of property transfer, to be dealing at non-arm’s length if
(a) at any time within the series of transactions that includes the transfer, they do not deal at arm’s length; and
(b) one of the purposes of a transaction or event within the series was to cause the parties to deal at arm’s length.
3. A valuation rule where the overall result of the series of transactions would be considered in determining the value of the property transferred and the consideration exchanged rather than just using the values at the time of the transfer.
Such rules would apply for transfers that occur on or after Budget Day.
Mandatory Disclosure to the Canada Revenue Agency
Budget 2021 proposes to enhance mandatory disclosure rules by engaging in further consultations with respect to the ITA’s reportable transaction rules, a new requirement to report notifiable transactions and a new requirement for certain corporations to report uncertain tax treatments.
Currently, the ITA requires certain transactions entered into by or for the benefit of a taxpayer be reported to the CRA. A transaction will only have to be reported if it meets the ITA’s definition of “avoidance transaction” and at least two of the three hallmarks. Budget 2021 proposes that only one hallmark is needed and “avoidance transaction” be redefined to include transactions where it can be reasonably concluded that the main purpose of entering into the transaction was to obtain a tax benefit.
Budget 2021 also proposes to introduce a new category of transactions which will be subject to mandatory reporting to the CRA known as “notifiable transactions”. These transactions will be generally those that the CRA has found to be abusive and those identified as transactions of interest. The notifiable transactions will be described with a fact pattern, outcomes and examples in appropriate circumstances. A taxpayer who enters into a notifiable transaction or series of transactions will have to report the transaction to the CRA within a prescribed time.
An uncertain tax treatment is a tax treatment used, or planned to be used, in a taxpayer’s income tax filings for which it is uncertain whether such tax treatment will be accepted as being in accordance with tax law. Budget 2021 proposes to require corporate taxpayers to report such uncertain tax treatments to the CRA where the following conditions are met:
(a) the corporation is Canadian resident or non-resident corporation with a taxable presence in Canada;
(b) the corporation has at least $50 million in assets at the end of the financial year that coincides with the taxation year (or the last financial year that ends before the end of the taxation year);
(c) 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 (e.g., U.S. GAAP); and
(d) the calculations in the Corporation’s audited financial statements reflect uncertainty regarding a tax position taken or planned to be taken.
In light of the proposed Budget 2021 changes to business income taxes and reporting requirements to the CRA, it is important to receive professional legal and accounting advice on how you may want to structure/restructure your business and investments.
The information contained in this article is for general information only and is not intended as legal advice or opinion. Should you require any advice or assistance with this or any other issue affecting your business, then please do not hesitate to contact us.
For further information, please contact Marisa Lau by phone at (416) 368-7814 or by email at firstname.lastname@example.org