In Budget 2021, the Federal Government proposes a wide array of spending programs and few material tax increases for Canadians. While Budget 2021 may not appear to impose significant direct tax increases, in this article we highlight some of the indirect tax measures that could affect Canadians or even non-Canadians who own Canadian real estate.
Unproductive Use of Canadian Housing
Budget 2021 proposes a new 1% tax on the gross value of Canadian housing owned by non-Canadians considered to be “vacant” or “underused”. This tax will be imposed annually starting in 2022. More details on this new tax will come in the months ahead.
Starting in 2023, non- citizens or non-residents of Canada who own residential property in Canada will be required to file an annual declaration with the CRA for each Canadian property owned. This declaration will outline the address of the property, the gross market value of the owner’s interest in the property and if applicable, any exemptions being claimed from the 1% tax based on the individual’s use of the property. Failing to file this declaration may result in the loss of available tax exemptions with respect to the property, such as that which is available if it is being leased to qualified tenants, and penalties and interest may also apply. In cases of non-compliance the assessment period would be unlimited.
Digital Services Tax
Budget 2021 proposes a “digital services tax” (the “DST“) on the revenues of digital services “reliant on the engagement, data and content contributions of Canadian users.” The DST represents the government’s impatience with the slow progress of global multilateral efforts to tax global technology companies and their ongoing monetization of user data. Accordingly, the DST is an interim measure that will remain in force until the OECD and G20 countries can agree upon a coordinated approach.
The DST will be a 3% tax on large digital service companies with annual global revenues exceeding €750M and in-scope Canadian revenues of $20M. The DST will apply to:
- Online marketplaces that coordinate sales transactions (such as eBay and Amazon) and any premium services offered by these marketplaces (such as Amazon Prime);
- Social media companies, unless the sole purpose of the business is communication services;
- Online advertising, both on revenue earned by the online interface operator for displaying advertising, and on revenue earned for facilitating the placement of advertising; and
- The sale or licencing of data gathered from users of an online interface.
The DST does not apply to:
- Revenue earned from storage and shipping if such revenue is reasonable;
- The sale, licencing, or streaming of goods and services by a seller on its own account; and
- Online trading of financial instruments and commodities.
The DST is presumed to create an increase in the consumer cost of online activities. Given the application of the DST only to large corporations, it is unlikely that there is any significant impact on Canadian-based content producers or other corporations.
Budget 2021 confirmed and clarified proposals from the Federal Government’s Fall Economic Statement last November that propose to broaden the GST registration requirements for non-residents involved in e-commerce. These requirements are intended to ensure resident and non-resident vendors are subjected equally to GST registration rules.
Presently, non-resident vendors that do not have a permanent establishment in Canada are not required to register, collect, or remit GST. As a result, GST is often not collected on online purchases made through non-resident vendors.
Under these new proposals, which are scheduled come into force on July 1, 2021, non-resident vendors with revenues from Canadians exceeding $30,000 in a 12-month period must register, collect, and remit GST on their taxable digital products or services provided to Canadians. Distribution platform operators must also follow these requirements for the supplies that they facilitate to Canadian consumers, and for the sale of goods shipped from a warehouse in Canada if the vendor is not registered. These requirements also apply to short-term accommodations facilitated through an online platform.
Budget 2021 proposes to limit the amount of net interest expense that a corporation may deduct in computing its taxable income to no more than a fixed ratio of 30% of its “tax EBITDA” (and 40% for the transition year). “Tax EBITDA” is defined as taxable income before taking into account interest expense, interest income, income tax, and deductions for depreciation and amortization. The rule is intended to apply in circumstances where excessive interest deductions are created through interest payments to related non-residents in low-tax jurisdictions, the use of debt to finance investments that earn non-taxable income, or having Canadian businesses bear a disproportionate burden of a multinational group’s third-party borrowings. Interest denied under this rule would be able to be carried forward for up to twenty years and back for up to three years, starting with taxation years that began before the effective date of the rule.
If enacted, the proposed measures would apply to trusts, partnerships and Canadian branches of non-resident taxpayers. The rule would not apply to CCPCs that are eligible for the small business deduction and groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $250,000 or less.
This proposal would apply to taxation years that begin on or after January 1, 2023 and would apply with respect to existing as well as new borrowings.
Vaping and Tobacco
Budget 2021 proposes to increase the tobacco excise duty rate by $4 per carton of 200 cigarettes, amounting to an increase of $.02 per cigarette, along with corresponding increases of the excise duty rates on other tobacco products. These increases came into effect on April 20, 2021.
Budget 2021 also proposed a new flat rate duty on vaping products of $1 per milliliter of vaping liquid. This new framework excludes any cannabis products and comes into effect in 2022.
For more information, please contact a member of our Tax Law group at nerlandlindsey.com/services/tax-law