Valorem Insights’

2021 Federal Budget Overview

This afternoon Canada’s Finance Minister, The Honourable Christia Freeland, tabled the 2021 Federal Budget entitled A Recovery Plan for Jobs, Growth, and Resilience. 

This is Prime Minister’s first budget in over 2 years and Minister Freeland’s first budget as Canada’s Minister of Finance. Minister Freeland is Canada’s first female Minister of Finance. 

Overall, today’s budget outlines the federal government’s plan to continue investing in key pandemic relief support programs as well as outlining a plan for post pandemic recovery. 

This budget commits to $101.4b of new program spending over the next 3 years aimed at getting Canadians back to work. The budget focuses on five key themes:  job creation, small businesses and growth, women and early learning and childcare, climate action and a green economy, and young Canadians. 

There are no additional income tax rate changes (increases or decreases) for individuals in today’s budget however the government has introduced a series of additional tax measures such as a digital services tax, tax on the sale of luxury goods and an increase in excise duty on tobacco. We have detailed some of these measures below. 

This overview will focus on four specific areas;  a summary of new and renewed business support programs, a summary of the budget’s centrepiece items and overview of the Federal government’s fiscal plan and a summary of tax changes.  

Valorem Insights would be happy to offer further sector specific overviews at your request.

New and Renewed Business Supports

Budget 2021 proposes to extend the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy, and Lockdown Support. The program will be in effect until at least September 25, 2021 and phased out from July 4th  -- in order to make sure there is an orderly phase-out of the program. 

The government has also proposed a Canadian Recovery Hiring program. This program differs from the Wage subsidy in that the Wage subsidy is geared to current employees whereas the Canadian recovery hiring program is designed to support the rehiring of laid-off employees or the hiring of new ones. 

Program for eligible employers that continue to experience qualifying declines in revenues relative to before the pandemic. The proposed subsidy would offset a portion of the extra costs employers take on as they reopen, either by increasing wages or hours worked, or by hiring more staff. 

Small Businesses and Growth 

Budget 2021 proposes to improve the Canada Small Business Financing Program to increase annual financing by $560 million, supporting approximately 2,900 additional small businesses, alongside other enhancements that will increase the eligibility to this financing and permit lending against intellectual property and start-up assets and expenses. 

Federal Budget 2021 Centrepiece Items 

National Early Learning and Child Care Plan

The budget's largest centerpiece item is a commitment to create a Canada-wide early learning and childcare system. The government’s goal is to bring regulated childcare costs down to $10 per day on average over the next five years. 

To support this proposal, Budget 2021 is committing up to $30 billion over the next 5 years, and $8.3 billion ongoing. 

Climate Action and a Green Economy

Budget 2021 proposes to provide $4.4 billion to the Canada Mortgage and Housing Corporation (CMHC) to help homeowners complete deep home retrofits through interest-free loans worth up to $40,000. Loans would be available to homeowners and landlords who undertake retrofits identified through an authorized EnerGuide energy assessment. The program would be available by summer 2021 and support retrofits for up to 200,000 households.

It also proposes to introduce an investment tax credit for capital invested in carbon capture, utilization, and storage projects, beginning in 2022, with the goal of reducing emissions by at least 15 megatonnes of CO2 annually.. 

Other Notable Investments 

A total $2.2 billion over seven years towards growing a vibrant domestic life sciences sector. This support would provide foundational investments to help build Canada’s talent pipeline and research systems and support the growth of Canadian life sciences firms. 

$82.5 million in 2021-22 to Transport Canada to support major Canadian airports in making investments in COVID19 testing infrastructure. 

Understanding Canada’s Fiscal Plan  

Today’s Budget  commits up to $104.1 billion in new spending over the next three years. 

The government is projecting a deficit in this fiscal year of $354.2 billion for the fiscal year ended 2020-2021. This deficit is expected to improve in fiscal 2021-22 to $154.7 billion.  This is significantly higher than normal times but represents a large increase in pandemic spending. For context, the 2019/2020 pre-covid federal deficit was $39.4 billion. 

Canada joins governments across the world  in running higher deficits to cushion against the shock during the pandemic -- thus adding significantly to public debt. Canada’s public debt is expected to reach one trillion in 2021/2020

*Canada’s Fiscal year commences on April 1st and ends on March 31

Tax Changes 

Corporate/Small Business Tax Rate: The 2021 Federal Budget does not propose any tax rate changes to the corporate tax rate. 

Personal Income Tax Rates: The 2021 Federal Budget does not include any changes to personal income tax rates.

Digital Services Tax : Budget 2021 proposes to implement a Digital Services Tax at a rate of 3% on revenue from digital services that rely on data and content contributions from Canadian users. The tax would apply to large businesses with gross revenue of 750 million euros or more. It would apply as of January 1, 2022, until an acceptable multilateral approach comes into effect. This would help ensure that Canada’s tax rules capture new ways in which businesses carry out value-creating activities. The new tax is expected to raise $3.4 billion in revenue over five years beginning in 2021-22.

Tax on the sales of some luxury goods: Budget 2021 proposes to introduce a tax on the sales, for personal use, of luxury cars and personal aircraft with a retail sales price over $100,000, and boats, for personal use, over $250,000.  This is expected to increase revenues by $604 million over five years starting in 2021-22. 

Increase in tobacco excise Duty: Budget 2021 proposes to increase the tobacco excise duty by $4 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates for other tobacco products. This measure would take effect the day after Budget Day. This is expected to increase federal revenues by $2.1 billion over five years starting in 2021-22. 

Vacant home/land tax: Budget 2021 announces the government’s intention to implement a national, annual 1% tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused, effective January 1, 2022. This is estimated to $700 million over four years, starting in 2022-23. 

Interest deductions: Budget 2021 proposes that, starting in 2023, the amount of interest that certain businesses can deduct be limited to 40% of their earnings in the first year of the measure and 30% thereafter. This is expected to increase federal revenues by $5.3 billion over five years, starting in 2021-22. 

Amendments to the Income Tax Act: Budget 2021 proposes to amend the Income Tax Act to eliminate the tax benefits of hybrid mismatch arrangements. These proposals would be implemented in stages starting July 1, 2022. This is expected to increase federal revenues by $775 million over four years starting in 2022-23.