Tax Alert - Canada fiscal update as of November 30, 2020

December 01, 2020

Deputy Prime Minister and Minister of Finance Chrystia Freeland provided a fiscal update to Parliament on November 30, 2020. This fiscal update is the second official update provided by the Federal government since the beginning of the pandemic. This update forecasts a deficit for the 2020-21 fiscal year of $381.6 billion, up from $343 billion forecast in July of this year, and a staggering increase in the deficit of $39.4 billion from the 2019-20 fiscal year. The previous largest deficit in Canadian history was $55 billion in 2009 that was a consequence of the response to the 2008 financial crisis.

This fiscal update contains industry-focused support, rather than new general business support offered in the form of initiatives such as the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Rent Subsidy (CERS), and the Canada Emergency Business Account (CEBA). The government did announce additional information regarding how the CEWS and CERS would operate into 2021.

The estimated COVID-19 costs contributing to the Federal deficit for 2020-21 are projected as follows:

  • Canadian Emergency Response Benefit and the Canada Recovery Benefits – $54.8 billion
  • Canada Emergency Wage Subsidy – $83.5 billion

The update estimates total Federal government debt to reach $1.204 trillion by the end of March 2021.

Our Tax Alert will summarize the following economic announcements:

COVID-19 support for businesses, charities, and not-for-profits

Canadian Emergency Wage Subsidy (CEWS) - The CEWS program details were previously legislated for consecutive qualifying periods that end on December 19, 2020. The fiscal update provides guidance on how CEWS support will be calculated in the three consecutive qualifying periods that start on December 20, 2020 and end on March 13, 2021. The maximum CEWS rate will increase to 75% for those businesses with a revenue decline of 70% or more. This is an increase from the maximum CEWS rate of 65% in the three consecutive periods ending December 19, 2020. For businesses experiencing a revenue decline of between 50% and 70% the CEWS rate will consist of a base subsidy rate of 40% and a top-up to a maximum of 35%. The top-up is calculated as the amount of the revenue decline in excess of 50%, multiplied by a factor of 1.75%.. For example, at a 60% revenue decline, the top-up rate would be 17.5 ((60% - 50%) x 1.75), for a CEWS rate of 57.5% (40 + 17.5). Businesses with a revenue decline below 50% will apply the CEWS rate that stays at 80% of the revenue decline, and there will be no top-up at this level of revenue decline.

Details for the CEWS program for qualifying periods that commence after March 13, 2021 will be released at a later date.

For more details on the CEWS program, please see our Alert Government extends and modifies the Canada Emergency Wage Subsidy program.

Canadian Emergency Rent Subsidy (CERS) - This fiscal update states that the CERS rate will be calculated in the same manner as the first three qualifying periods running from September 27, 2020 – December 19, 2020 for the three qualifying periods that follow December 19, 2020. More details on the CERS program can be found in our Alert Government introduces the new Canada Emergency Rent Subsidy program

Canadian Emergency Business Account (CEBA) - This fiscal update states that the deadline to apply for a CEBA loan was extended to March 31, 2021.

More details on the CEBA program can be found in our Alert Government increases loans available under the Canada Emergency Business Account.

Home office expenses for employees - Many Canadians are unexpectedly working from home due to the pandemic and there were many questions about whether they would be able to deduct expenses related to a home office. The rules outlined in the Income Tax Act (ITA) regarding home office expenses are quite stringent and can be complicated. The current rules impose an administrative burden on employers to provide a prescribed form to employees.

Claiming home office expenses can be simplified as the Canada Revenue Agency (CRA) will allow employees working from home in 2020 due to COVID-19 to claim up to $400. The claim will be based on the amount of time working from home and it will not be necessary to track detailed expenses. Employers will not generally need to prepare a signed form and provide it to their employees to allow them to claim home office expenses.

The CRA will provide further details of this simplified process in the coming weeks.

Tax measures

The following tax measures were included in the fiscal update:

Employee stock options – The government originally announced changes to the employee stock option rules in the 2019 Federal budget and they are now proceeding with the following changes:
  • 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 purposes of the $200,000 limit, the amount of employee stock options that may vest in any calendar year would be considered equal to the fair market value of the underlying shares at the time the options are granted.
  • 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.
  • Due to 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.
  • The new tax rules will apply to employee stock options granted after June 2021. The existing rules will continue to apply to options granted before July 2021, including qualifying options granted after June 2021 that replace options granted before July 2021.

GST/HST on cross-border digital products and services - The government proposed that non-resident vendors supplying digital products or services, including traditional services, to consumers in Canada be required to register for the GST/HST and to collect and remit the tax to the CRA on their taxable supplies to Canadian consumers. The government proposed measures to ensure that the GST/HST applies equally to these supplies such that distribution platform operators be generally required to register for the GST/HST and to collect and remit the tax on the supplies of digital products or services of non-resident vendors to Canadians that these platforms facilitate. The proposed new rules would apply to supplies of cross-border digital products or services 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 –A non-resident vendor who sells goods to Canadians may use a fulfillment warehouse in Canada to store and deliver goods to Canadian customers. The government proposed a number of changes in order to level the playing field between resident and non-resident vendors, help ensure that the GST/HST is collected in an effective manner, and protect the integrity of the GST/HST base. The proposed new rules would generally 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 government proposed that the GST/HST would be required to be collected and remitted on all short-term accommodations supplied in Canada through an accommodation platform. Either the property owner or the accommodation platform operator would be responsible as described below:

  • The property owner (or person responsible for providing the accommodation – responsible person), where the owner (or responsible person) is registered for the GST/HST.
  • The accommodation platform operator, where the property owner (or responsible person) is not registered for the GST/HST. The accommodation platform operator would then be deemed the supplier of the short-term accommodation.
  • The government also provided an extensive framework, outlining how the GST/HST would apply under this proposal.

GST/HST relief on face masks and face shields - The government proposed to temporarily relieve (i.e., zero rate) supplies of certain face masks and face shields from the GST/HST. This measure would apply to supplies of these items 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.

Canada Child Benefit (CCB) - The government proposes to amend the ITA in 2021 to provide the following support for families with young children:

  • $300 per child under the age of six to families entitled to the CCB with net family income equal to or less than $120,000, and
  • $150 per child under the age of six to families entitled to the CCB with family net income above $120,000.

These amounts would be payable quarterly after the enabling legislation is passed.

Registered Disability Savings Plan (RDSP) – The government proposes to remove the time limitation on the period for which an RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit effective January 1, 2021. The government also proposes to modify repayment obligations for RDSPs.

Agricultural cooperatives and patronage dividends paid in shares – The government proposes to extend the tax deferral available for any patronage dividend received as an eligible share until the disposition of the share. The extension will apply in respect of eligible shares issued before 2026.

Industry-focused support

The government announced the following support to industries hit hard by the pandemic:

  • Highly Affected Sectors Credit Availability Program – This new program will offer 100% government-guaranteed financing for hardest-hit businesses in sectors such as tourism and hospitality, arts, and entertainment. These loans will be low-interest for extended terms, up to 10 years.
  • Regional Relief and Recovery Fund – The government announced it would earmark a minimum of 25% of all the program’s resources, which were previously announced, to support local tourism businesses, providing $500 million in program support through June 2021.
  • Support for workers in the live event and arts sectors - $181.5 million will be provided in the 2021-22 fiscal year to the Department of Canadian Heritage and Canada Council for the Arts to expand their funding programs. Part II licences fees will also be waived for local television and radio stations in the 2020-21 fiscal year.
  • Support for the air sector – Financial support was announced to support regional transportation, small, regional, larger, and major airports, including rent relief to the 21 airport authorities that pay rent to the Federal government. Notably absent from this announcement was financial support for the large airlines.
  • Support for innovative businesses - $250 million of additional funding over five years was announced for the Strategic Innovation Fund.
  •  Large Employer Emergency Financing Facility – The government announced it is exploring options to enhance this program, originally launched in May 2020.

BDO can help

These are uncertain times. Our BDO Canada Tax professionals are here to help your business respond to COVID-19 and manage the challenges. Please visit our website and contact us for more information about any of the government programs introduced during the COVID-19 crisis.

Dave Walsh, National Tax Service Line Leader

Craig Mulcahy, SR&ED and Government Incentives Leader

Bruce Sprague, Western Canada Tax Leader

Greg London, Eastern Canada Tax Leader

Peter Routly, Southern Ontario Tax Leader

Rachel Gervais, GTA Tax Leader

The information in this publication is current as of November 30, 2020.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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