On November 30, 2020, the fall economic update was presented by Finance Minister Chrystia Freeland. Many new income tax and sales tax measures and updates to COVID-19 measures were announced, as detailed below.
Income Tax Measures
The Canada Child Benefit
The Canada Child Benefit (CCB) is a non-taxable benefit that is paid monthly and provides support for eligible families with children under the age of 18. In order to provide immediate support for families with young children, the Government proposes to amend the Income Tax Act to provide, in 2021, four payments of:
The first of these amounts would be payable after the enabling legislation is passed, with subsequent amounts payable in the first month of each remaining quarter (i.e., at the end of April, July and October 2021). These amounts would be payable to the individual who receives a CCB amount for a particular month, i.e., the primary caregiver of the child in January, April, July or October 2021.
If a family's adjusted net income is too high to receive the CCB in that month, they would not receive a quarterly amount. For the amounts that would be payable in the first quarter of 2021 and April, a family's adjusted net income is based on the family's net income in 2019. For the months of July and October, a family's adjusted net income is based on the family's net income in 2020. For example, if a family's net income is $130,000 for 2019 and $70,000 for 2020, the parent entitled to the CCB in respect of a child under the age of six would receive the additional quarterly amount of $150 once enabling legislation is passed and at the end of April and $300 at the end of July and October.
Note that these additional quarterly amounts are subject to the same rules as regular CCB payments.
Registered Disability Savings Plan
Budget 2019 proposed changes to the Registered Disability Savings Plan (RDSP) regime for beneficiaries with episodic disabilities, essentially to remove the time limitation on the period that an RDSP may remain open after a beneficiary becomes ineligible for the DTC and to eliminate the requirement for medical certification that the beneficiary is likely to again become eligible for the DTC in the future in order for the plan to remain open. Budget 2019 proposed that these changes would apply as of January 1, 2021. It also proposed that until the coming-into-force date of the measure, RDSP issuers would not be required to close an RDSP solely because the beneficiary is no longer eligible for the DTC.
In the economic update, the Government proposed to maintain the implementation timeline for this measure. Any excess repayments of Canada Disability Savings Grants and Canada Disability Savings Bonds in respect of withdrawals made after 2020 and before the measure is enacted would be returned to a beneficiary’s RDSP following enactment.
To ensure more equitable treatment, the Government proposes an additional modification to the formula put forward in Budget 2019 for determining the amount of grants and bonds held back from a withdrawal, in the following manner:
RDSP issuers will have the normal flexibilities with respect to time to implement these changes.
Employee Stock Options
Budget 2019 announced the Government’s intention to move forward with changes to limit the benefit of the employee stock option deduction for high-income individuals employed at large, long-established, mature firms. The Government released draft legislative proposals in June 2019 and consulted stakeholders on the characteristics of start-up, emerging and scale-up corporations for the purpose of exempting such corporations from the new employee stock option tax rules.
A $200,000 limit is proposed on the amount of employee stock options that may vest in an employee in a calendar year and continue to qualify for the stock option deduction. For the purpose of the $200,000 limit, the amount of employee stock options that may vest in any calendar year would be considered to be equal to the fair market value of the underlying shares at the time the options are granted. An option vests when it first becomes exercisable. The determination of when an option vests would be made at the time the option is granted. If the year in which the option vests is not clear, the option would be considered to vest on a pro-rata basis over the term of the agreement, up to a five-year period.
The $200,000 limit on the amount of employee stock options that may vest in any calendar year and qualify for the stock option deduction would generally apply to all stock option agreements between the employee and the employer or any corporation that does not deal at arm's length with the employer. If an individual has two or more employers that deal at arm's length with each other, the individual would have a separate $200,000 limit for each of those employers.
If the amount of stock options that may vest in a year exceeds $200,000, those employee stock options granted first would be the first to qualify for the stock option deduction. Where an employee has a number of identical stock options and some qualify for the existing tax treatment while others are subject to the new tax treatment, the employee would be considered to first exercise the stock options qualifying for the existing tax treatment.
Tax Treatment for Employees
Where an employee exercises an employee stock option that is in excess of the $200,000 limit, the difference between the fair market value of the share at the time the option is exercised and the amount paid by the employee to acquire the share would be treated as a taxable employment benefit. The full amount of the employment benefit would be included in the income of the employee for the year the option is exercised, consistent with the treatment of other forms of employment income. The employee would not be entitled to the stock option deduction in respect of this employment benefit.
Donations of Publicly Listed Shares Acquired Under an Employee Stock Option Agreement
Under the current tax rules, if an employee donates to a qualified donee, such as a registered charity, a publicly listed share (or the cash proceeds from the sale of a publicly listed share) acquired under an employee stock option agreement within 30 days of the exercise of the option, the employee may be eligible for an additional deduction equal to one-half of the employee stock option benefit. As a result, where both the stock option deduction and the additional deduction in respect of a qualifying donation are available, the entire employee stock option benefit is effectively excluded from income.
If an employee donates a publicly listed share acquired under a stock option that is in excess of the $200,000 limit, the employee could be eligible for the charitable donation tax credit but would not be eligible for any deduction on any associated employee stock option benefit. Any capital gain that has accrued since the share was acquired under the stock option agreement would continue to be eligible for the full exemption from capital gains tax, subject to the existing rules.
Tax Treatment for Employers
For employee stock options in excess of the $200,000 limit, the employer would be entitled to an income tax deduction in respect of the stock option benefit included in the employee’s income. The deduction may be claimed in the taxation year of the employer that includes the day on which the employee exercised the stock option.
There are currently a number of conditions that must be met for an employee to be eligible for the stock option deduction. These conditions would be required to be met for an employer to be entitled to a deduction under the new rules.
Employers subject to the new rules would be able to choose whether to grant employee stock options under the existing tax treatment, up to the $200,000 limit per employee, or whether to grant employee stock options under the new tax treatment (i.e., ineligible for the employee stock option deduction, and instead eligible for a deduction for corporate income tax purposes).
Employers subject to the new rules would need to ensure compliance with respect to the $200,000 limit. This would include a requirement that an employer notify its employees in writing whether options granted are subject to the new tax treatment. In addition, employers would be required to notify the Canada Revenue Agency if the options granted are subject to the new tax treatment.
Which Employers are Subject to the New Rules?
The new rules would apply to employers that are corporations or mutual fund trusts.
Employers that are Canadian-controlled private corporations (CCPCs) would generally not be subject to the new rules.
Further, in recognition of the fact that some non-CCPCs could be start-ups, emerging or scale-up companies, non-CCPC employers whose annual gross revenue does not exceed $500 million would generally not be subject to the new rules.
Where employee stock options to acquire shares or units of an entity that is not the employer are granted to an employee, the new rules would apply in respect of those options if that entity does not deal at arm’s length with the employer and either the entity or the employer is subject to the new rules.
Employers that are not subject to the new rules would not be permitted to opt in to the new employee stock option tax rules.
These new tax rules would apply to employee stock options granted after June 2021. The existing rules would continue to apply to options granted before July 2021 (including qualifying options granted after June 2021 that replace options granted before July 2021).
Simplifying the Home Office Expense Deduction
To simplify the process of claiming home office expense deductions for both taxpayers and businesses, the CRA will allow employees working from home in 2020 due to COVID-19 with modest expenses to claim up to $400, based on the amount of time working from home, without the need to track detailed expenses, and will generally not request that people provide a signed form from their employers. This measure will help taxpayers access deductions they are entitled to receive and simplify the tax filing process. Further detail will be communicated by the CRA in the coming weeks.
Sales Tax Measures
GST/HST Relief on Face Masks and Face Shields
The Government proposes to introduce a temporary GST/HST zero-rating applicable to the supply of certain face masks and face shield.
This measure would apply to supplies made after December 6, 2020 and is proposed to only be in effect until their use is no longer broadly recommended by public health officials for the COVID-19 pandemic.
Application of the GST/HST in Relation to E-commerce Supplies
The current sales tax system often results in the GST/HST not being collected on online purchases from non-resident vendors or made through digital platforms. The non-collection of the GST/HST presents equity, economic and fiscal concerns, and it places physical and online retailers operating in Canada at a competitive disadvantage in comparison to non-resident vendors.
The Government proposed a few changes (see below) to the GST/HST system in order to ensure that the GST/HST applies in a fair and effective manner to the growing digital economy.
GST/HST on Cross-Border Digital Products and Cross-Border Services
The Government proposes that non-resident vendors supplying services or digital products to consumers in Canada be required to register for GST/HST purposes and to collect and remit the tax to the CRA on their taxable supplies to Canadian consumers.
It is also proposed that distribution platform operators be generally required to register for the GST/HST and to collect and remit the tax on the supplies that these platforms facilitate of services or digital products of non-resident vendors to Canadians.
A simplified GST/HST registration and remittance framework would be available to non-resident vendors and non-resident distribution platform operators that are not carrying on business in Canada. This program would include the following key features:
Purchases by GST/HST Registered Businesses
A GST/HST registered business will continue to be required to self-assess and remit the GST/HST on its purchases of services and digital products from non-resident vendors and non-resident distribution platform operators, unless the purchase is for use exclusively in the business’s commercial activities.
A penalty would apply if a person provides a GST/HST registration number to a non-resident vendor or non-resident distribution platform operation to evade, or attempt to evade, tax on the purchase of services or digital products acquired for personal consumption.
If a GST/HST registered business provides its GST/HST registration number and is nevertheless charged the GST/HST, the business would be able to request a refund from the non-resident vendor and non-resident distribution platform operator. Any GST/HST paid by the registered business in such cases would not be recoverable by claiming an input tax credit or by filing a tax paid in error claim.
Coming into Force
The proposed new rules would apply to supplies of cross-border services or digital products to the extent that the consideration for the supply becomes due on or after July 1, 2021, or is paid on or after that day without having become due.
GST/HST on Goods Supplied through Fulfillment Warehouses
Non-resident vendors are increasingly selling goods to Canadians through digital platforms that facilitate sales of third-party vendors, which we will refer as “distribution platforms”. These distribution platforms may also store the goods of third-party vendors in fulfillment warehouses in Canada and ship these goods to purchaser in Canada after the goods have been sold to through the platforms. The GST/HST is not consistently charged on the final price for the goods when they are subsequently sold to Canadians through distributions platforms and fulfillment warehouses located in Canada.
Although these goods are situated in Canada at the time of sale, there is generally no requirement under the current rules for the non-resident vendor, or distribution platform facilitating the sale, to collect or remit the GST/HST when the goods are sold to a purchaser in Canada.
This situation creates a competitive inequity for resident vendors and represents a gap in the GST/HST rules.
Therefore, the Government proposes to:
The following framework outlines how the GST/HST would apply under this proposal:
The proposed new rules would apply to supplies made on or after July 1, 2021, and supplies made before July 1, 2021 if all of the consideration is payable on or after July 1, 2021.
GST/HST on Platform-based Short-Term Accommodation
The GST/HST applies to supplies of short-term accommodation (for instance, rental to a person for a period of less than one month).
The short-term accommodation sector increasingly includes individual property owners renting out their residences or other residential property they own, or rooms within their residences or other residential property they own. These types of rentals are often made through digital platforms. Under the current GST/HST rules, the property owner is generally considered to be making the supply of the short-term accommodation.
Persons that have annual taxable supplies of $30,000 or less are generally not required to register for and collect the GST/HST. However, other property owners that operate on a larger scale are required to register for and collect the GST/HST, but may not be aware of these requirements.
The digital platforms that facilitate these rentals are often not responsible for accounting for the supply of the short-term accommodation under the current GST/HST rules.
The Government proposes to apply the GST/HST on all supplies of short-term accommodation in Canada facilitated through a digital platform. The GST/HST would be required to be collected and remitted on short-term accommodations supplied in Canada through an accommodation platform by either the property owner or the accommodation platform operator as follows:
To facilitate compliance with these requirements, a simplified GST/HST registration and remittance framework would be available to non-resident accommodation platform operators that are not carrying on business in Canada.
The proposed new simplified system would include the following key features:
A GST/HST registered business will continue to be required to self-assess and remit the GST/HST on its purchases of short-term accommodation facilitated by a non-resident accommodation platform operator that is registered under the simplified GST/HST registration/remittance system, unless the purchase is for use exclusively in the business’s commercial activities.
A penalty would apply if a person provides a GST/HST registration number to a non-resident accommodation platform operator to evade, or attempt to evade, tax on the purchase of short-term accommodation in Canada acquired for personal consumption.
If a GST/HST registered business provides its GST/HST registration number to such a non-resident accommodation platform operator and is nevertheless charged the GST/HST on the supply of short-term accommodation, the business would be able to request a refund of the tax from the non-resident accommodation platform operator. Any GST/HST paid by the registered business in such cases would not be recoverable by claiming an input tax credit or by filing a tax paid in error claim.
The proposed new rules would apply to supplies of short-term accommodation in Canada to the extent that the consideration for the supply becomes due on or after July 1, 2021, or is paid on or after that day without having become due.
Canada Emergency Wage Subsidy (CEWS)
Details regarding the CEWS have been legislated through December 19, 2020. Today, the Federal Government provided details on the parameters of the CEWS that are proposed to apply for the following periods:
The CEWS legislation provides for a separate CEWS calculation for active employees and for furloughed employees.
For active employees, the CEWS legislation provides for two CEWS rates, the base CEWS and the top-up CEWS. The base CEWS is based on the reduction in revenue in the current month. The maximum rate for the base CEWS varies depending on the claim period the employer is applying for.
The top-up CEWS of up to 25% is also determined based the reduction in revenue in the current month, subject to a safe harbour rule applicable to periods 8, 9 and 10. An employer must experience a revenue drop in excess of 50% in order to claim the top-up CEWS.
The maximum combined base CEWS and top-up CEWS rate is set at 65% for the current claim period, which ends on December 19, 2020.
The Federal Government is proposing that the maximum base CEWS rate continues to be 40% for periods 11 to 13.
Regarding the top-up CEWS, it is proposed to increase the rate to 35% for periods 11 to 13. The combined maximum base CEWS and top-up CEWS could reach 75%. The table below illustrates the base and top-up CEWS for periods 11 to 13.
Canada Emergency Wage Subsidy
Rate Structure, Periods 11 to 13
(December 20, 2020 to March 13, 2021)
Top-up wage subsidy
70% and over
(Revenue decline – 50%) x 1.75
Revenue decline x 0.8
For periods 9 and 10, the CEWS legislation provides that the CEWS for furloughed employees is aligned with the benefits provided through Employment Insurance (EI). The Federal Government proposes that the CEWS for furloughed employees continues to be aligned with benefits available under EI. Therefore, the subsidy per week in respect of an arm’s length employee (or a non-arm’s length employee who received pre-crisis remuneration for the relevant period) would be the lesser of:
Employers will also continue to be entitled to claim under the wage subsidy their portion of contributions in respect of the Canada Pension Plan, EI, the Quebec Pension Plan and the Quebec Parental Insurance Plan in respect of furloughed employees.
Currently, the CEWS legislation provides that the decline revenue of an employer is determined either:
Also, a deeming rule provides that an employer’s decline in revenues for any particular qualifying period is the greater of its decline in revenues for the particular qualifying period and the immediately preceding qualifying period.
The Federal Government is proposing reference periods for determining an eligible employer’s decline in revenues for the qualifying periods 11 to 13, as per the below table:
Canada Emergency Wage Subsidy
Reference Periods, Periods 11 to 13
(December 20, 2020 to March 13, 2021)
December 20, 2020 – January 16, 2021
January 17, 2021 – February 13, 2021
February 14, 2021 – March 13, 2021
December 2020 over December
2019 or November 2020 over November 2019
January 2021 over January
2020 or December 2020 over December 2019
February 2021 over February
2020 or January 2021 over January 2020
December 2020 or November
2020 over average of January and February 2020
January 2021 or December
2020 over average of January and February 2020
February 2021 or January
2021 over average of January and February 2020
Employers that had chosen to use the general approach for prior periods would continue to use that approach. Similarly, employers that had chosen to use the alternative approach would continue to use the alternative approach.
All the other parameters of the CEWS program would remain unchanged.
Finally, the Federal Government mentioned that the details for the CEWS for any periods beyond March 13, 2021 will be proposed at a later date.
Canada Emergency Rent Subsidy
The rate structure for the Canada Emergency Rent Subsidy has been extended to March 13, 2021. The actual program goes until June 2021. However, rates and structures for post March 13, 2021 have not yet been announced.
If you have any questions with respect to the above, please contact your Crowe BGK advisor.