Tax Highlights from Canada’s Economic and Fiscal Update 2021

Silvia Jacinto
Article
| 12/14/2021
Fall Economic and Fiscal Update

On Tuesday, December 14, 2021, Deputy Prime Minister and Minister of Finance Chrystia Freeland released Economic and Fiscal Update 2021. Following the Federal Budget announcement from earlier this year, the economic and fiscal update aims to provide information on the current state of the economy and the government’s plans to continue supporting Canadian individuals and businesses during the COVID-19 pandemic. The Minister spoke about the challenges ahead for Canada, including global inflation, supply chain disruptions, COVID-19 variants, extreme weather events, and other uncertainties. The projected deficit for the 2021-2022 fiscal year is $144.5 billion, down from $327.7 billion for the 2020-2021 fiscal year. This projected improvement is due in large part to increased tax revenues as a result of a strong economy, as well as a decrease in program spending in connection with pandemic assistance.

This article will provide a summary of the tax highlights announced in the federal economic and fiscal update. This update did not propose any tax rate increases, despite some speculation in the tax community leading up to today’s release. And now we await Budget 2022...

Enhanced Support for Teachers

Teacher SupportUnder the current tax rules, teachers are eligible to claim a refundable tax credit of 15 per cent on an amount of up to $1,000 in expenditures made in a taxation year for eligible supplies. To qualify, eligible supplies must be purchased for use in a school or other regulated child care facility for the purpose of teaching or facilitating learning. Eligible supplies include books, construction paper, flash cards, games and puzzles, containers, and educational support software. Under the current rules, electronic devices are not included in the list of eligible supplies.

The 2021 Economic and Fiscal Update proposes to enhance this tax credit by:

  • Increasing the refundable credit to 25 per cent;
  • Broadening the rules regarding the locations where teaching supplies are permitted to be used by removing the requirement that teaching supplies must be used in a school or regulated child care facility to be eligible; and
  • Expanding the list of eligible supplies to include certain electronic devices, including:
    • calculators (including graphing calculators);
    • external data storage devices;
    • web cams, microphones and headphones;
    • wireless pointer devices;
    • electronic educational toys;
    • digital timers;
    • speakers;
    • video streaming devices;
    • multimedia projectors;
    • printers; and
    • laptop, desktop and tablet computers, provided that none of these items are made available to the eligible educator by their employer for use outside of the classroom.

Small Businesses Air Quality Improvement Tax Credit

Air QualityThe government is proposing to introduce a temporary Small Business Air Quality Improvement Tax Credit (“SBAQITC”). This would be a refundable tax credit that would be available to eligible entities in connection with qualifying expenditures that improve air quality in qualifying locations. To qualify, the expenditures must be made between September 1, 2021 and December 31, 2022. This measure is intended to encourage small businesses to invest in better ventilation and air filtration for overall better indoor air quality.

The tax credit would be computed as 25 per cent of an eligible entity’s qualifying expenditures up to a maximum of $10,000 per qualifying location, and up to a maximum of $50,000 across all qualifying locations. These limits would need to be shared among affiliated businesses. An entity would be required to include the tax credit in its taxable income for the year the credit is claimed.

Both corporate and individual (but not trusts) members of a partnership that incurs qualifying expenditures will also be eligible to claim this tax credit.

Qualifying Expenditures

Qualifying expenditures would include outlays attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation and air conditioning (“HVAC”) systems, as well as the purchase of devices designed to filter air using high efficiency particulate (“HEPA”) filters.

HVAC expenses would only be considered qualifying expenditures if the system is:

  • Designed to filter air at a rate in excess of a minimum efficiency reporting value (“MERV”) of 8; or
  • Designed to filter air at a rate equal to MERV 8 and to achieve an outdoor air supply rate in excess of what is required for the space by relevant building codes. For a system that is upgraded or converted, prior to the improvement the system must have been designed to filter air at a rate equal to MERV 8.

Qualifying expenditures for an eligible entity would exclude an expense:

  • Made or incurred under the terms of an agreement entered into before September 1, 2021;
  • Related to recurring or routine repair and maintenance;
  • For financing costs in respect of a qualifying expenditure;
  • That is paid to a party with which the eligible entity does not deal at arm’s length;
  • That is salary or wages paid to an employee of the eligible entity; or
  • That can reasonably be expected to be paid or returned to the eligible entity, or to a person or partnership either not dealing at arm’s length with the eligible entity or at the direction of the eligible entity.

To the extent government assistance is available to assist in the funding of a qualifying expenditure, the assistance will reduce the amount eligible for the SBAQITC.

Qualifying Locations

Qualifying locations would include properties used by an eligible entity primarily in the course of its ordinary commercial activities in Canada (including rental activities), excluding self-contained domestic establishments (i.e., a place of residence in which a person generally sleeps or eats).

Timing

The SBAQITC would be available in respect of qualifying expenditures incurred between September 1, 2021 and December 31, 2022.

The taxation year for which an eligible entity would claim the tax credit would depend on when the qualifying expenditure was incurred.

  • Qualifying expenditures incurred before January 1, 2022 would be claimed by an eligible entity for its first taxation year that ends on or after January 1, 2022.
  • Qualifying expenditures incurred on or after January 1, 2022 would be claimed by an eligible entity for the taxation year in which the expenditure was incurred.

Returning the Proceeds from the Price on Pollution Directly to Farmers

FarmersConsistent with the 2021 Federal Budget, the government is proposing to return fuel charge proceeds directly to farming businesses in backstop jurisdictions (I.e., provinces that do not meet the federal stringency requirements – currently Ontario, Manitoba, Saskatchewan and Alberta) through a refundable tax credit, starting with the 2021-2022 fuel charge year. This measure recognizes that many farmers use natural gas and propane in their operations.

Eligible Farming Businesses

The return of fuel charge proceeds would be available to corporations, individuals and trusts that:

  • Are actively engaged in either the management or day-to-day activities or earning income from farming (e.g., raising animals and harvesting plants in a controlled environment); and
  • Incur farming expenses of $25,000 or more that are attributable to backstop jurisdictions.

Businesses carried on through a partnership would also qualify.

Credit Amount

The credit amount will be determined by multiplying a payment rate as specified by the Minister of Finance ($1.47 for 2021 and $1.73 for 2022, per $1,000 in eligible farming expenses) for the fuel charge year by the eligible farming expenses attributable to backstop jurisdictions. Any credit claimed would be required to be included in taxable income for the year of claim.

Eligible Farming Expenses

Eligible farming expenses for this credit are those amounts deducted in computing income from farming for income tax purposes, excluding any deductions arising from mandatory and optional inventory adjustments and transactions with non-arm’s length parties.

Expenses must also be attributable to one or more backstop jurisdictions. For businesses operating in multiple jurisdictions, eligible farming expenses would be apportioned by jurisdiction.  

Underused Housing Tax

Housing TaxIn the 2021 Federal Budget, the government announced the intention to implement a national one per cent tax on the value of non-resident, non-Canadian owned residential real estate in Canada that is considered to be vacant or underused (referred to as the “Underused Housing Tax”). Following consultations through the Department of Finance, various tweaks are now proposed to the Underused Housing Tax, including:

  • An owner’s interest in residential property will be exempt from this tax if a residence that is part of the residential property is the primary place of residence of:

(1) the owner;

(2) the owner’s spouse or common-law partner; or

(3) a child of the owner or the owner’s spouse or common-law partner but only if the child is completing authorized studies in Canada and the residence is used for that purpose.

  • An exemption would be introduced for vacation/recreational property if the property is:

(1) located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents; and

(2) personally used by the owner (or their spouse or common-law partner) for at least four weeks in the calendar year.

An annual return would be required to be filed with the Canada Revenue Agency in respect of the residential property.

The Underused Housing Tax is proposed to be effective for the 2022 calendar year, with the first annual return required to be filed on or before April 30, 2023.

This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.

Photo Credit: Minister of Finance Chrystia Freeland speaks during question period in the House of Commons on Parliament Hill in Ottawa on Tuesday, Nov. 30, 2021. THE CANADIAN PRESS/Sean Kilpatrick

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Silvia Jacinto
Silvia Jacinto
Partner, Tax