For a fair tax system: here’s a summary of the important measures announced as part of the November 30, 2020 federal economic statement. However, the application of these measures remains subject to their adoption by the various government institutions.
Income tax measures
Simplifying the home office expense deduction
In recognition of the fact that COVID-19 forces millions of Canadians to work at home, that they incur additional expenses to perform their work at home, and that the process of claiming these expenses can be complex, the CRA will allow employees, who will have worked at home in 2020 as a result of COVID-19, to claim deductions of up to $400, based on hours worked at home, without having to track expenses in detail. The deduction of these expenses will not require a form signed by the employer, saving employers from having to prepare Form T2200 – Declaration of Working Conditions for each of their employees who have worked at home in recent months. The relief will also make it easier for eligible workers to prepare their tax returns, without having to keep track of the detailed expenses they incur to work from home.
The CRA will provide further details on this measure in the coming weeks. We don’t yet know whether Revenu Québec will harmonize with this announcement.
Employee stock options
Employee stock options, which allow employees to purchase their employer’s shares at a predetermined price (the “exercise price”), are a form of additional compensation used by some companies to attract and retain qualified employees.
When an employee acquires a share under an employee stock option agreement, the difference between the fair market value of the share at the time the option is exercised and the exercise price is considered a 100% taxable benefit. However, when certain conditions are met, a stock option deduction equivalent to half the taxable benefit is available to the employee (at the federal level). The net effect is that the benefit is taxed at only 50%, the same rate as the capital gain. For example, if an employee pays $30,000 to exercise his stock options, and at the time the option is exercised the underlying shares are worth $500,000, the employee will have a taxable benefit of $470,000 ($500,000 – $30,000) and a federal deduction of $235,000, for a net benefit of $235,000.
In the Economic Statement, the government clarified its proposal to introduce new provisions to limit the deduction on stock options for high-income individuals who are employees of large corporations.
Under the new rules, the employee stock option deduction applicable to the amount of the taxable benefit will be limited to an annual ceiling of $200,000. This $200,000 limit will be calculated on the fair market value (“FMV”) of the shares underlying the options, at the time the options are granted. An option is considered to have vested when it becomes exercisable for the first time. This means that when an employee exercises a stock option that exceeds the $200,000 limit, the difference between the FMV of the share at the time the option is exercised and the amount paid by the employee to acquire the share would be considered a taxable benefit not eligible for the stock option deduction. For example, if an employee exercises options and the FMV of the shares at the time of grant was $500,000 (see previous example), then 60% of the shares would not be eligible for the 50% deduction (($500,000 – $200,000)/$500,000). When the options are exercised, the employee would still have a taxable benefit of $470,000, but could only claim a deduction of $94,000 ($235,000 *40%). The employee would therefore have a net benefit of $376,000.
Nevertheless, the employer would be entitled to an income tax deduction for the non-deductible stock option benefit included in the employee’s income. The deduction can be claimed in the employer’s taxation year that includes the day the employee exercised the stock option.
The $200,000 limit on the amount of employee stock options that may vest in a calendar year and qualify for the stock option deduction would generally apply to all stock option agreements entered into between the employee and his or her employer, or between the employee and any corporation that does not deal at arm’s length with his or her employer.
To ensure that start-ups, emerging and expanding companies are not affected by this change, employers that are Canadian-controlled private corporations (“CCPCs”), as well as employers that are not CCPCs but have gross annual revenues not exceeding $500 million, will not be subject to the new cap.
Employers subject to the new rules will have to ensure compliance with the $200,000 cap. This includes the requirement for employers to notify employees in writing if 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.
These new rules will apply to employee stock options granted after June 30, 2021.
Agricultural cooperatives: rebates paid in the form of shares
Budget 2005 introduced a measure to provide a tax deferral applicable to patronage dividends paid by an eligible agricultural cooperative to its members in the form of eligible shares issued after 2005 and before 2016. The 2015 budget extended this tax deferral to units issued before 2021. As of November 30, 2020, the government proposes to extend this measure to apply to eligible units issued before 2026.
It will therefore still be possible for eligible members to defer the inclusion in their income of patronage dividends received in the form of shares until the shares are disposed of for shares issued before January1, 2026.
Immediate support for families with young children
The federal government will enhance the Canada Child Tax Benefit (“CCTB”) to provide up to four additional quarterly payments to families with children under the age of six by 2021.
To be eligible, the child must be under six years of age at the beginning of the month in which the bonus will be paid, and the parent (who assumes primary responsibility for the child’s care and upbringing) must also be entitled to an ACE payment for that month.
The first payment will be made as soon as the Act is amended, while the other three payments will be made in April, July and October 2021. The additional quarterly amounts paid to families entitled to ACE will be :
- 300 for each child under age six whose net family income is less than or equal to $120,000;
- 150 for each child under age six whose net family income exceeds $120,000.
For amounts payable in the first quarter of 2021 and for the month of April, net family income is based on net family income earned in 2019. For July and October 2021, it is based on net family income earned in 2020.
For information purposes, for allowances paid from July 1, 2020 to June 30, 2021, ACE becomes zero for a family with one child under age 6 when net family income is equal to or greater than $199,183, and for a family with two children under age 6 when net family income is greater than $218,452. This means that if you have a child under age 6 and a net family income of $199,183 or more, you won’t be entitled to the additional $150.
Measures targeting SALES TAXES
GST/QST on digital products and cross-border services
To improve GST/HST collection and level the playing field between domestic and non-resident vendors, the government is proposing that non-resident vendors who supply digital products or services (including traditional services) to consumers in Canada be required to register for, collect and remit GST/HST to the CRA on their taxable supplies to Canadian consumers. In many cases, digital products or services may also be provided to consumers in Canada through digital platforms that facilitate sales by third-party vendors (“distribution platform”). To ensure that GST/HST applies equally to these supplies, it is also proposed that distribution platform operators generally be required to register for GST/HST purposes and collect and remit tax on supplies by non-resident vendors to Canadians of digital products or services that these platforms facilitate. To facilitate compliance with these requirements, a simplified GST/HST registration and remittance framework would be available to non-resident vendors and distribution platform operators who do not carry on business in Canada (e.g., have no permanent establishment in Canada).
GST/QST on temporary housing offered via a platform
To ensure that the GST/HST applies consistently and effectively to platform-facilitated supplies of short-term accommodation in Canada, the government proposes to apply the GST/HST to all supplies of short-term accommodation in Canada facilitated by a digital platform (“housing platform”). Under the proposal, GST/HST will have to be collected and remitted on short-term accommodation supplied in Canada through a housing platform by either the owner or the housing platform operator as follows:
- The owner, when the owner (or responsible person) is registered for GST/HST purposes.
- The housing platform operator, when the owner (or responsible person) is not registered for GST/HST purposes. In these circumstances, the housing platform operator would be deemed to be the supplier of the temporary accommodation. This approach recognizes their necessary and fundamental role in making these supplies, and limits administrative and compliance costs for the parties involved.
For the purposes of this measure, taxable short-term accommodation will generally include the rental of a residential building or dwelling (or part thereof) to a person for a period of less than one month and at a cost of more than $20 per day.
The proposed new rules will apply to supplies of short-term accommodation in Canada to the extent that the consideration for the supply becomes due, or is paid without having become due, on or after July 1, 2021.
GST/QST relief on masks and face shields
Supplies of masks (medical and non-medical) and face shields designed for human use that meet certain specifications will be temporarily zero-rated for Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes.
This measure will apply to supplies of these items made after December 6, 2020, and will be in effect until their use is no longer widely recommended by public health officials for COVID-19 pandemic purposes.
In its information bulletin dated December 1, 2020, Revenu Québec confirmed that it will harmonize with this measure, meaning that masks and face shields will also be zero-rated from the Quebec sales tax (QST) for the same period.
A FAIR TAX SYSTEM
GST/QST relief on masks and face shields
Taxing the unproductive use of Canadian housing by non-resident foreign owners
This year, the federal government will introduce a new tax on non-residents who own Canadian homes for speculative purposes. The aim of this measure is to make the housing market more affordable for Canadians. More details to come.
For more details on all these measures, please consult your tax advisor.
