On November 30, 2020, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, presented Supporting Canadians and Fighting COVID-19: Fall Economic Statement 2020. The federal government’s fiscal plan touts unprecedented support to help Canadians during the COVID-19 pandemic, stabilize the economy, and promote a strong recovery.
In addition to a staggering projected deficit approaching $382 billion for 2020-21, the proposed plan includes an eye-popping $70–100 billion stimulus package to rebuild a “greener, more inclusive, more innovative, and more competitive” Canadian economy after the pandemic. Reading more like a budget than an economic update, the full report contains a wide array of proposals, including money to battle the second wave of COVID-19, extend previously introduced emergency wage and rent subsidies, create a new loan program for sectors hit hard by the pandemic, and take the first steps toward a national child care system.
Somewhat surprisingly, the Fall Economic Statement includes several significant tax initiatives, as summarized below. While most of the proposed tax measures relate directly to the ongoing pandemic, a few of them address longstanding issues, including those stemming from the digitalization of the global economy.
Zero-rating for Face Masks and Face Shields
To further support efforts to combat COVID-19, the government is proposing to temporarily zero-rate qualifying face masks and face shields for GST/HST purposes.
This relief will be available for both medical and non-medical face masks and respirators that do not have a vent or exhalation valve, subject to the following conditions:
- The face mask or respirator is authorized for medical use in Canada (i.e., N95, KN95, or equivalent certification); or
- The non-medical face mask or respirator is:
- designed to prevent the transmission of infectious agents;
- made of multiple layers of dense material (with allowances for transparent material to facilitate lip reading);
- large enough to cover a person’s nose, mouth, and chin; and
- secured to the head with ear loops, ties, or straps.
Similarly, face shields with transparent and impermeable windows or visors that are not specifically designed or marketed for a use other than preventing the transmission of infectious agents (e.g., shields for sports) will qualify for zero-rating, provided that they cover a person’s entire face and contain straps or caps to hold them in place.
Vendors of personal protective equipment (PPE) will need to adjust the GST/HST status of qualifying face masks and shields relatively quickly as the temporary zero-rating provision is set to take effect for supplies made after December 6, 2020. This relief is expected to remain in place until the use of such items is no longer recommended to help prevent the spread of COVID-19 by most public health authorities. While Ryan had advocated for a broader, permanent zero-rating provision for certain types of PPE, the proposal is welcome relief. Indeed, Québec has already announced that it will adopt the same measure for QST purposes.
E-commerce Supplies to Consumers
When the GST was introduced in 1991, it did not specifically contemplate the level of e-commerce transactions in today’s economy. Under the current system, many non-resident suppliers are not required to register for GST/HST as they aren’t considered to be carrying on business in Canada because they don’t have a physical or other significant presence in the country. Further, digitalization of the economy has made it easier for Canadians to purchase taxable supplies from non-resident vendors that are not required to collect and remit GST/HST. This is particularly true for digital products and services. GST/HST is levied on physical goods at the time of import, but the current rules rely on Canadian consumers to self-assess tax on imports of intangibles and services, which seldom occurs. As a result, consumers can often make online purchases from non-resident suppliers or through digital platforms without paying GST/HST, whereas similar purchases from Canadian suppliers attract tax. This inequity gives unregistered non-resident suppliers a competitive advantage over suppliers operating in Canada.
Digital Products and Services
The government is proposing the introduction of a simplified GST/HST registration and remittance system under which non-resident vendors and distribution platform operators that supply digital products or services to Canadian consumers, but are not carrying on business in Canada, will be required to register with the Canada Revenue Agency (CRA). Simplified registration and remittance will be completed online and will only be provided for non-resident vendors and distribution platform operators making taxable supplies of digital products or services to Canadian consumers in excess, or expected to be in excess, of $30,000 over a 12-month period.
The proposed simplified registration system measures would apply to imports of digital products or services for which the consideration for the supply becomes due on or after July 1, 2021 (or is paid on or after that date without having become due).
The proposed simplified registration system for GST/HST purposes is remarkably similar to the QST specified registration system implemented by Québec in 2019. Determining whether an organization meets the $30,000 registration threshold may be problematic for businesses that do not know if their customers are consumers located in Canada. In that regard, a person registered for GST/HST will be considered a business and any other person will be considered a consumer. As a result, non-resident vendors and distribution platform operators will need to obtain the GST/HST registration number of their customers to confirm their status as businesses, which could prove burdensome.
In addition, non-resident vendors and distribution platform operators will be required to determine whether their customers reside in Canada. Furthermore, the GST/HST rate to be used will be based on the consumer’s province of residence (e.g., 13% HST for supplies to consumers residing in Ontario). This will require suppliers registered under the simplified system to determine a consumer’s usual place of residence based on various indicators, such as home address, billing address, internet protocol (IP) address, payment information, and subscriber identification module (SIM) card information, adding to the administrative burden. There are also exceptions to consider, such as where a supply is linked to a province other than the consumer’s province of residence. In such cases, the location associated with the service would guide the place of supply and applicable tax rate.
Suppliers registered under the simplified system will not be required to collect tax on taxable supplies made to GST/HST registrants. This will likely create an exposure for business customers involved in commercial activities that claim input tax credits (ITCs) for GST/HST paid in error to suppliers registered under the simplified system. In this situation, the purchaser may only recover the tax by requesting a refund from the supplier.
A drawback for non-resident vendors and platform operators that register under the simplified system is that they will not be entitled to ITCs for any GST/HST paid on their own expenses in Canada. Organizations with significant expenditures in Canada are advised to consider a traditional GST/HST registration.
Goods Supplied Through Fulfillment Warehouses
With the steady growth of e-commerce, especially in the context of a pandemic with customers increasingly shopping online, many non-resident vendors have experienced a surge in sales courtesy of popular digital distribution platforms. The operators of these distribution platforms tend to store the products of their non-resident vendors in Canadian fulfillment warehouses to reduce delivery times.
Under the current rules, where a non-resident vendor is not considered to be carrying on business in Canada, there is no requirement to collect GST/HST on the sale of taxable products through a distribution platform operator, even though the goods in question might be shipped from a Canadian fulfillment warehouse to another place in Canada. This gives unregistered non-residents a competitive advantage over registered resident vendors and causes tax leakage equal to the GST/HST on the difference between the final selling price of the product and the value at the time of import or last purchase price in Canada.
To “level the playing field,” new rules have been proposed for supplies made on or after July 1, 2021 (as well as for supplies made before July 1, 2021, where all the consideration is payable on or after that date).
The measures proposed to address this inequity are extensive, but can be summarized as follows:
- Distribution platform operators (resident or not) will be required to register for GST/HST under the normal provisions and collect tax on sales of goods in Canada made through their platforms by unregistered vendors (resident or not) where the products are located in a fulfillment warehouse in Canada or shipped from a Canadian location.
- The distribution platform operator will be deemed to be the supplier when the platform’s involvement in a sale by an unregistered vendor exceeds simple advertising or payment processing.
- Distribution platform operators will be required to inform the CRA about third-party vendors selling products through their platform.
- Non-resident vendors will be required to register for and collect GST/HST (under the normal rules) on taxable sales of goods made on their own, where the products are stored in a fulfillment warehouse in Canada or shipped from a Canadian location.
- Fulfillment businesses will also be required to inform the CRA about their activities and keep records regarding any non-residents engaging their services and the goods stored on behalf of such clients.
The registration requirement will be triggered for a distribution platform operator or non-resident vendor once qualifying supplies to unregistered customers exceed, or are expected to exceed, $30,000 over a 12-month period. Once registered, these organizations will be eligible to claim ITCs for any GST paid at the border on imported goods or GST/HST paid on expenses related to their commercial activities. In addition, non-resident vendors will be required to collect GST/HST on all Canadian sales, regardless of the registration status of the purchaser.
Short-term Accommodations Provided Through Platforms
Taxable short-term accommodations (i.e., for a period of less than one month) in Canada are frequently supplied by unregistered vendors, and such supplies are increasingly being made through digital platforms (e.g., Airbnb and VRBO). To ensure GST/HST is applied consistently and eliminate any competitive advantage for unregistered suppliers of short-term rentals over registered accommodation providers, such as hotels, the government is proposing to require digital accommodation platform operators to register for and collect GST/HST on nearly all supplies of short-term rentals made through their platforms.
Under a framework similar to the one proposed for supplies through fulfillment warehouses (discussed above), accommodation platform operators will be deemed to be the supplier of short-term rentals facilitated by their platforms where a property owner or person responsible for making the rental available is not registered for GST/HST. For these purposes, persons providing only advertising or payment processing services through a website will not be considered accommodation platform operators. Registered suppliers of short-term accommodation will continue to account for the GST/HST on their taxable supplies, regardless of whether such supplies are facilitated by a digital platform.
A digital accommodation platform operator will be required to register for GST/HST if it facilitates, or expects to facilitate, the supply of more than $30,000 in taxable short-term accommodations in Canada on behalf of unregistered suppliers over a 12-month period. A simplified registration system will be made available online to non-resident accommodation platform operators that do not carry on business in Canada. Again, under the simplified registration system, non-resident accommodation platform operators would only collect GST/HST on supplies made to consumers (i.e., persons not registered for GST/HST), and no ITCs would be available.
The applicable GST/HST rate to be charged on short-term accommodations facilitated by digital accommodation platforms will be determined by the location of the rented property. GST/HST will apply to any guest fees charged by a platform operator in respect of taxable short-term accommodations. However, a platform operator will not be required to collect tax on any service fee charged to an unregistered property owner or third-party provider in relation to the supply of taxable short-term accommodations facilitated through its platform. In addition, platform operators will be required to keep records and report information on platform use to the CRA.
The new rules would apply to supplies of short-term accommodation in Canada where the consideration for the supply becomes due on or after July 1, 2021 (or is paid on or after that date without having become due).
The government has invited public consultation on the proposed measures related to e-commerce, and comments may be submitted until February 1, 2021.
Income Tax Measures
The Fall Economic Statement did not result in any changes to existing personal or corporate income tax rates. However, a couple of key personal and corporate tax measures were introduced.
The federal government is moving forward with changes to the taxation of stock options, based partially on announcements that were included in its 2019 budget. Under the proposed changes, in general, for stock options granted after June 2021 by employers that are corporations or mutual fund trusts:
- There will be a $200,000 annual vesting limit on options that can qualify for the 50% employee stock option deduction;
- The vesting limit will be based on the fair market value of the underlying shares on the date the options are granted; and
- Subject to certain conditions, the amount of any employee stock option benefits in excess of the vesting limit may be deductible for the employer.
Canadian-controlled private corporations and corporations with consolidated annual revenue of $500 million or less will be exempt from the new rules.
Home Office Expenses Deduction
The government announced that, in consideration of the large number of Canadians working from home during the pandemic, the CRA will allow a streamlined process for the deduction of home office expenses for personal income tax purposes. Under the framework for this streamlined process:
- Employees working from home during the pandemic will be allowed to deduct up to $400 with no additional supporting documentation, based on the number of days worked at home; and
- Form T2200 will generally not be required to be obtained from the employer to claim the deduction.
Further details on the available deduction are expected to be released in the coming weeks.
Extension of COVID-19 Relief
Canada Emergency Wage Subsidy
For Periods 11 to 13 under the Canada Emergency Wage Subsidy (CEWS), the government is proposing to increase the maximum wage subsidy rate for active employees to 75%. The maximum base subsidy will remain at 40%, but the top-up wage subsidy rate will increase to 35%, allowing for a maximum wage subsidy rate of 75% for employers that experienced a revenue decline of 70% or more.
Employers with a revenue decline of less than 50% will continue with the current subsidy rate, which is calculated at 80% of the revenue decline percentage.
Revenue measurement reference periods were also announced for Periods 11 to 13 (i.e., the three periods from December 20, 2020 to March 13, 2021). Under the general approach, an employer’s revenue decline will continue to be determined by comparing its monthly revenue to the respective prior-year monthly revenue (e.g., December 2020 over December 2019). Similarly, under the alternate approach, either current or prior month revenue will be compared to the average monthly revenue for January and February 2020.
Details for future periods up to June 30, 2021 will be released at a later date.
Canada Emergency Rent Subsidy
The government is proposing to extend the current Canada Emergency Rent Subsidy (CERS) rate structure to Periods 11 to 13 (the same reference periods used for the CEWS). Therefore, eligible entities that had a revenue decline of 70% or more in their respective reference period will be eligible for a base subsidy rate of 65%. In addition, qualifying entities may be eligible for an additional 25% in lockdown support.
Further details on the 2020 Fall Economic Statement can be found on the Government of Canada website: https://www.budget.gc.ca/fes-eea/2020/home-accueil-en.html
If you have questions about how any of these proposed changes might impact your organization, please do not hesitate to call the Ryan TaxDirect® line at 1.800.667.1600.