Winter 2021 Canadian Income Tax Highlights

Tax law in Canada was fairly stable in 2021 but Tax Brackets continue to creep up since they are indexed to inflation.  The inflation factor was actually only 1% for 2021, so the changes to the brackets were minimal.  The federal tax rates themselves did not change substantially.

The federal personal amount increased to $14,398 for 2022 from $13,808 in 2021.

Keep in mind that the provincial brackets are independent from the federal brackets and also changed.  For 2021, PEI’s top marginal tax rate of 16.7% kicks in at $63,971 while the Yukon’s top marginal rate of 15% doesn’t apply until income exceeds $500,000.

The Canada Revenue Agency continues to have very slow response times due to lower staffing levels and the proliferation of pandemic-related support programs.  Trying to reach an agent by phone to resolve problems and check on the status of your filings is a test of patience for even the most Zen taxpayer or tax practitioner.  We highly recommend that you sign up for a CRA MyAccount and then allow your tax professional access through Authorize a Representative.  Not everything can be solved online, but many routine tasks can be accomplished, and common documents can be submitted – leaving the 2+ hours on hold for the trickier matters.

Coast to Coast to Coast Roundup for notable provincial tax updates.

• Nova Scotia and Alberta only have minor changes for 2021 and 2022.
• Yukon, Nunavut, and the Northwest Territories had no personal tax rate or credit changes in their 2021 budgets.
• Newfoundland & Labrador has additional, progressive tax brackets and higher rates effective for 2022.
• PEI made small increases to the basic personal amount and the low-income tax reduction threshold effective for 2022.
• QC made changes effective for 2022 to the Home Support Services for Seniors tax credit.
• NB reduced the lowest tax rate to 9.4% from 9.68% for 2021.
• ON allowed a one-time 20% bump to The Ontario CARE tax credit for 2021.  There is also a new temporary Ontario Jobs Training tax credit for 2021.
• MB provided more support for teachers purchasing supplies is provided with a non-refundable tax credit effective for 2022.
• SK was busy – get moving Saskatchewan!  The Active Families Benefit is back.   Also look for the Sask Home Renovation Credit, the 0% corporate tax rate and an extended Saskatchewan Technology Start-up Incentive.
• BC made changes to the Emergency Benefits for Workers to include self-employed individuals.

Federal changes affecting individuals from the 2021 Federal Budget

• The Disability Tax Credit has been made more accessible by adding more mental functions necessary for everyday live and making the life-sustaining therapy rules more flexible.
• The income ranges for the phase out of the Canada Workers Benefit are raised to $22,944 – $32,244 for single people without children and $26,177 – $56,197 for double-earner families.
• Are you doing a green renovation to your home?  You may be eligible for an interest-free CMHC loan of up to $40,000.
• Old Age Security recipients over 74 years of age should have received a $500 one-time payment in August 2021.  Those over 74 years of age next year should also see a 10% increase in their monthly benefit starting with July 2022.
• Canada Child Benefits (CCB) for those who qualify, are increased to a maximum of $1,200 per child for families whose income is $120,000 or less and to a maximum of $600 per child for families with income above that threshold.  This remains a tax-free benefit.

The rules for Stock Options received by virtue of an employment relationship have changed for options granted on or after July 1, 2021. These changes do not apply to Canadian-controlled private corporations (CCPCs) or non-CCPC employers with group revenue of $500 million or less.

Old Rules
Generally, employees who receive stock options will receive benefits that are classified as employment income and as capital gains.  The employment income inclusion for non-CCPC shares is generally the difference between the FMV of the shares at the time the options are exercised and the option price paid.  Capital gains are realized if the shares are later sold at proceeds in excess of their FMV at time of exercise.

The employee who reportable employment income from the exercise stock options that meet certain conditions, including that the options were not ‘in the money’ at the time they were granted, was previously allowed a deduction for 50% of the amount of employment income reported.  There was no limit to the size of the stock option deduction.

New Rules
The stock option deduction can only be applied to $200,000 of vested stock options per year if the employer corporation is not a CCPC and has annual gross group revenue of over $500,000.  In certain circumstances, the employer is given a deduction for the stock option benefit denied to the employee.  Since the $200,000 is determined by the vesting date, large grants of stock options should have staggered vesting dates or should not mention a vesting date to allow for the assumed default pro-rata 60 month vesting to provide the maximum benefit to the employee.

The rules are a bit more complicated than laid out above, but this should give you the gist of it.  Similar new rules were implemented for stock options in an employee cash-out.  Talk to us if you have non-CCPC employment stock options granted on or after July 1, 2021.

Federal and provincial changes affecting businesses from the 2021 budget
There were no changes to federal corporate tax rates or the $500,000 small business limit of a CCPC.  All provinces and territories except Saskatchewan also have a $500,000 business limit at this time.  There were changes to tax rates and/or credit programs for PEI, Quebec, Ontario, Manitoba, Saskatchewan, and Alberta but these changes are beyond the scope of this newsletter.

Expansion of Immediate Expensing (CCA) for businesses
Eligible assets acquired after April 19, 2021, and available for use prior to January 1, 2024, may be expensed in full in the year of acquisition.  Associated companies must share an annual expensing limit of $1.5 million per year and can still take regular Capital Cost Allowance for the remaining assets.  Eligible assets must be new to you and related parties, and must not be property in Classes 1 to 6, 14.1, 17, 47, 49 or 51.

Speaking of Capital Cost Allowance – even used zero-emission vehicles now qualify for 100% CCA in Class 56 if acquired before 2024.

There are a number of tax incentives for Clean Energy, Green Economy and Film Production, but we won’t go into detail. If you think any of these apply to you, please reach out to your Cardinal Point advisor.

If you are contemplating an intergenerational transfer of your Qualifying Small Business, take a look at provisions in Bill C-208 that came into force on June 29, 2021.  This bill made changes to section 84.1 of the Income Tax Act, which may allow the related-party transfer to be treated as a capital gain instead of as a deemed dividend.  Capital gain treatment would allow the seller to monetize their Lifetime Capital Gains Exemption.

Not new, but still notable – Keep in mind some relatively recent tax changes.

Tax on Split Income (TOSI) – This is the anti-income-sprinkling rule that has been in force since the beginning of 2018.  TOSI can cause some income to be taxed at the highest marginal rate and continues to be a consideration as you arrange your investments, trusts, and business affairs.

Digital News Subscription  – 2021 will be the second year that you can claim a non-refundable tax credit for up to $500 that you paid for qualifying subscription expenses.  Small potatoes but who doesn’t love potatoes?

Pandemic Related

• Repayments of COVID-19 benefits can be claimed on an amended return for the year in which the original benefit was received OR in the year of repayment.  Your choice.
• What do the Canada Emergency Response Benefits (CERB), Canada Emergency Student Benefits (CESB), Canada Recovery Benefits (CRB), Canada Recovery Sickness Benefits (CRSB) and Canada Recovery Caregiving Benefits (CRCB) have in common?  There are all temporary benefits paid to individuals with most already phasing out, and they are all taxable income.  Don’t forget to factor these into you estimated payments plan.  They all may also be repaid in and deducted from taxable income in the year originally received or in the year repaid as stated above.
• Working from home due to COVID-19? For 2020, there was express guidance that allowed employees to deduct either a $2 flat rate/day or a reasonable portion of eligible home office expenses.  Given that the pandemic did not end early in the year, we expect that work from home expenses for employees will be allowable again for some or all of 2021.  Keep your receipts and keep checking the CRA website.
• COVID-19 testing, vaccinations and personal protective equipment (PPE) are eligible for the Medical Expense Tax Credit if the vaccinations are prescribed by a medical practitioner and the PPE are medical quality, prescribed and used to help with a severe condition.
• An employee who is required to use PPE and sanitizing liquid in the course of their employment and who is required by their employer to bear the cost of these supplies – may deduct them as an employment expense.
• After progressively reducing over 20 four-week periods, the Canada Emergency Wage Subsidy (CEWS) terminated on October 23, 2021.  Claims, including amended claims, must be filed within 180 days and this deadline is firm.
• The Canada Recovery Hiring Program (CRHP) provides a subsidy to CCPC employers of up to 50% of ‘incremental remuneration’ paid to employees between June 6^th and November 20^th, 2021.  This is to encourage workers to rejoin the workforce.
• The Canada Emergency Business Account (CEBA) was expanded to allow interest-free loans of up to $60,000 and up to $20,000 of those loans to be completely forgiven (but taxable income). The interest-free loans must be repaid in full by December 31, 2022 in order to receive the $20,000 forgiven amount.

Were you a foreign taxpayer stuck in Canada because of travel restrictions imposed as a result of the pandemic?  The Canada Revenue Agency extended its relief from the 183-day residency rule that would make you a tax resident of Canada until the earlier of December 31^st 2021 and the date on which travel restrictions are lifted.  That will be a different date depending on the country you call your tax home.  For Americans, that date was November 8^th.

Proposed changes to keep in mind.

Expanded Reporting for Trusts
Current rules do not require a trust to file a return unless the trust received income or made distributions in the year, and it is not necessary to disclose the beneficial ownership and beneficiaries of the trust.  It has been proposed to expand those reporting and filing requirements to allow the Canada Revenue Agency to collect information on the identity of trustees, settlors, and beneficiaries of most Canadian trusts.  This requirement to file a T3 – Trust Income Tax Return, and to disclose additional information was to be effective for trusts with fiscal periods ending after December 30, 2021, which for the vast majority of trusts means ‘this year’.   We have been preparing you for the expanded reporting requirement and while this hasn’t passed into law yet, we fully expect that it will.

Certain types of trusts, such as graduated rate trusts and trusts that are wound up before December 30^th, 2021, should not be subject to this expanded reporting.  If you were planning to wind up a trust to avoid being subject to the Tax On Split Income (TOSI) rules or as a part of a 21-year deemed disposition, then now might be the time to do so.

Capital Gains Inclusion Rate
Capital Gains escaped a higher inclusion rate for 2021.  Even though only 50% of capital gains have been taxable since 2000, we need to remember that the inclusion rate has been as high as 75%.  When governments need to raise funds, capital gains are an easy target.  We know that the Canadian government needs to increase revenues, partly to cover the cost of the COVID-19 response, so the inclusion rate may very well rise again.  Does is make sense to dispose of highly appreciated assets while you know the inclusion rate is only 50%?  If you want to continue to hold the asset, is there any way to crystallize the gain to this point?   If the asset is a Qualified Small Business Corporation or qualified farm property, is there an opportunity to utilize your Lifetime Capital Gains Exemption?  Let’s talk about your options.

Proposed anti-flipping rule tightened for the Principal Residence Exemption
The Principal Residence Exemption in Canada does not have an upper dollar limit like it does in the U.S. ($250k USD per person). The amount of gain is the total gross proceeds received less the adjusted cost basis of the property and the cost of selling it (commissions and fees).  The portion of this gain that can be exempted is generally:

The resulting gain exempted from taxation can be a very large number.  There has always been guidance that the CRA can ask for evidence that the principal residence use was bona fide and that the taxpayer wasn’t simply flipping properties for profit.  Now there is chatter that there will be a minimum period of time that the property must be used as your principal residence to qualify the gain for exemption, further tightening the anti-flipping rules.  This is not law yet but be aware that it could soon be.

Tax on Non-resident, non-Canadian owners of vacant/under-used housing
A proposed 1% national tax is slated to come into force on January 1, 2022, but the bill has not yet received royal assent.  There is talk of a carve-out for small tourism and resort communities.  This is still not a done deal.

Items mentioned in the November 23, 2021 Speech From the Throne
You might see these in future newsletters:

• Extension of some of the pandemic response programs to support Canada’s economic recovery.
• First time home buyer programs may become more flexible.
• New rent to own program for residences.

During the election, the NDP proposed a wealth tax on the ultra-rich – individuals and corporations.  Whether or not that idea has enough support to become law is yet to be seen.  We expect this topic will continue to come up for discussion as Parliament tackles the nation’s balance sheet.  We will see…

If you have any questions regarding any of the topics that we have covered in this newsletter please reach out to us!  The Private Wealth Manager