November 2020 Federal Fall Economic Statement

Federal 2020 Fall Economic Update: Taxing the digital economy

On November 30, 2020, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, delivered the Federal Government of Canada’s Fall Economic Statement to address the ongoing effects and the Government response to the COVID-19 pandemic. The Government reported the total estimated spending on direct support measures with respect to the COVID-19 Economic Response Plan is $269.8 billion and the country’s projected deficit is now $382 billion for 2020-2021.

The Fall Economic Statement summarized the federal support measures previously introduced and delivered the following income and sales tax measures:

Emergency Business Supports

Canada Emergency Wage Subsidy Extension

Support for employees

The Government proposes to increase the maximum wage subsidy back to 75 percent (from the current 65 percent) for the 11^th to 13^th qualifying periods, which run from December 20, 2020 to March 13, 2021. The maximum base subsidy would remain at 40?percent and the maximum top-up wage subsidy rate would increase to 35 percent.

The wage subsidy for furloughed employees is aligned with the benefits provided through Employment Insurance (EI) through December 19, 2020. To ensure equitable treatment of such employees between both the EI and Wage Subsidy programs, the Government proposes the weekly wage subsidy for a furloughed employee be extended from December 20, 2020 to March 13, 2021.

Reference periods

For the purposes of the wage subsidy (and the rent subsidy), an employer’s decline in revenues is generally determined by comparing the change in the employer's monthly revenues, year-over-year. An employer may also elect to use an alternative approach, which compares the change in the employer's monthly revenues relative to the average of its January 2020 and February 2020 revenues. A deeming rule provides that a decline in revenues for any particular qualifying period is the greater of its decline in revenues for the particular qualifying period and the immediately preceding qualifying period. These rules continue to apply in determining an eligible employer’s decline in revenues from December 20, 2020 to March 13, 2021.

All the other parameters of the program would remain unchanged. Details for periods between March 14 and June 30, 2021 will be proposed at a later date.

Canada Emergency Rent Subsidy Extension

Similar to the wage subsidy, qualifying organizations that have experienced a decline in revenues are eligible for a rent subsidy on qualifying expenses. The Government proposes to extend the current rate structure for the base rent subsidy from December 19, 2020 until March 13, 2021.

To address cash flow concerns that tenants must pay rent to qualify for the subsidy, the Government confirmed its intention to proceed with the proposed change to the rent subsidy that would allow amounts to be considered paid when they become due, provided certain conditions are met.

Details for the rent subsidy for periods beyond March 13, 2021 are forthcoming.

Lockdown Support Extension

Further support is available for applicants who qualify for the base rent subsidy in locations that must cease operations or significantly limit their activities under a public health order issued under the laws of Canada, a province or territory.

The Government proposes to extend the current 25 percent rate for Lockdown Support until March 13, 2021.

Details for the Lockdown Support for periods beyond March 13, 2021 are forthcoming.

Income Tax Measures

Employee Stock Options

The Government confirmed employee stock options will be subject to greater restrictions, as first announced in Budget 2019. These limitations do not apply to options granted by a Canadian Controlled Private Corporation (CCPC). In recognition that some start-up and early stage companies are not CCPCs, those with gross revenues up to $500 million will also be excluded. The proposed changes allow the benefit to continue on the first $200,000 of fair market value of annual employee stock option grants.

These new rules will apply to stock options granted on or after July 1, 2021.

Home Office Expense Deduction

In recognition of the compliance burden on employers and the uncertainty for first-time claims, employees will be allowed to deduct up to $400, without the need to track detailed expenses or obtaining a form from their employer. Further details will be provided by the Canada Revenue Agency (CRA) in the weeks ahead,

Canada Child Benefit (CCB)

This measure will provide the following support to CCB entitled families:

This support will be delivered as four tax-free payments of $300 / $150, with the first payment being made shortly after the legislation is passed, and subsequent payments in the months of April, July and October 2021.

Sales Tax Measures

PPE (effective after December 6, 2020)

Face masks and shields that meet specific criteria will be zero rated (zero percent taxable). This measure will only be in effect during the pandemic.

E-commerce and Digital Supplies (effective July 1, 2021)

The Government is proposing significant changes to the application of GST / HST to digital supplies. Currently where a business only has a digital footprint in Canada, they are generally not required to register for the GST / HST. The Government is proposing a simplified registration for non-residents to bring them into the GST / HST system.

The proposed changes will include:

• An online portal to register to simplify the registration process, filing and remittance of tax.
• These rules apply to business-to-consumer transactions.
• A non-resident registered vendor will not be required to charge GST / HST if the business acquiring the supply provides its GST / HST number to the vendor.
• The place of supply rules will be simplified so the tax rate is based on where the consumer is located; however, there will be exceptions where this location is not appropriate to the supply.
• Under this new system, non-residents will not be eligible to claim input tax credits.
• Similar to all other businesses, the registration threshold will be $30,000.

Third Party Distribution and Fulfillment Warehouses in Canada (effective July 1, 2021)

To continue its focus on online businesses, the Government is proposing to require all fulfilment warehouses to be registered for the GST / HST and to collect tax on goods that are being shipped from a Canadian warehouse to the extent the vendor is not otherwise collecting the tax.

The proposed changes also specifically target platform operators (a person “that controls or sets the essential elements of the transaction between a third-party vendor and a purchaser”). This is not intended to include payment processors or vendors that have classified or advertising website.

GST / HST on Platform-based Short-Term Accommodation (effective July 1, 2021)

The Government proposes to apply GST / HST on all supplies of short-term accommodation in Canada facilitated through a digital platform.

A simplified GST / HST registration and remittance framework will be available to non-resident accommodation platform operators that are not otherwise carrying on business in Canada. In addition, there will be new penalties introduced for GST evasion.

Tax Compliances and Initiatives

The Government has outlined next steps in its ongoing effort to strengthen tax compliance in Canada.

Audit Activity

The Government announced an additional $606 million in funding over five years, starting in 2021-22, to allow the CRA to extend existing programs targeting international tax evasion, aggressive tax avoidance and high-net worth individuals.

Launching Consultations on Canada’s Anti-Avoidance Rules

The Government will launch consultations in the coming months on Canada’s anti-avoidance rules.

Tax on Canadian Housing Owned by Foreign Non-Residents

The Government will implement a national, tax-based measure targeting the unproductive use of domestic housing that is owned by non-residents.