150th Throne Speech – does it lend towards fiscal recovery and what can we speculate for tax?

The 150th Throne Speech on September 23, 2020 by Governor General Julie Payette, marks a somber reality – the need for continued government spending to fight off an economic crisis due to COVID-19 while also trying to chart a roadmap for fiscal recovery. 

With a projected budget deficit of $343bn where over more than $212bn has gone to COVID-19 support the fiscal deficit is the largest since World War II – this will be a significant challenge for Finance Minister Chrystia Freeland to identify ways in recovering the spending spree. The speech was limited in detail and deriving any tax implication from the speech will be purely speculative. Here is what we know:

What’s new?

·       Extension of the CEWS to summer 2021;

·       Introduction of free, automatic tax filing for simple returns to ensure citizens receive the benefits they need – this is relatively a soft measure with no tax consequence except that this can accelerate the needy get their tax credits without delays (if administered well).

 Previously announced as part of the 2019 election platform:

·       Cutting the corporate tax rate in half for companies making zero-emission products;

·       Addressing corporate tax avoidance by digital giants;

·       Identifying additional ways to tax extreme wealth inequality, including by concluding work to limit the stock option deduction for wealthy individuals at large, established corporations.

What can one speculate for tax?

Does the Throne Speech lend itself to the goal of financial recovery – much of it are likely soft measures and your guess is as good as mine and here is mine:

A.     Extension of the wage subsidy to summer 2021 – 

·       Enacting new rules for CEWS as the current CEWS do not address the mechanisms for subsidies commencing Dec 2020;

·       An increase in the subsidy with a simplified plan - the latest CEWS benefits works on a two-tier declining basis that is tied directly to a business revenue. The benefits are not substantial and is complex - thereby adding to professional accountants filing costs. This could be lowered with a simplified filing plan;

·       Unlikely changes to the broad anti-avoidance rules. Without any anti-avoidance provisions, there can be abuse, but broader provisions will imply limited access for fear of being subject to CRA audits and subsequent denial of the subsidies or even open up new audits unrelated to CEWS;

·       Changing the new CRA CEWS audit to a simplified form to not scare away genuine CEWS applicant.

Overall, increasing the subsidy will increase deficits and broader anti-avoidance provisions will lead to increased CRA resource deployed on audits and increasing spending costs for the government.

B.     50% Tax reduction for corporation producing zero emission products –

·       The tax break needs clarity at the legislative level – especially, identifying corporations’ eligibility. The way it is currently worded, it is an end product specific test which is broad and hence can capture a number of corporations – say for example a company that facilitates as end products - a video conferencing portal or an internet security company (assuming the energy expensed in the internet transfer is not part of an emission calculations) – neither of this will lead towards the goal of fiscal recovery as many companies can adapt to meet the end product test;

·       Corporations that conduct research and development with ability to claim SR&ED tax credits will benefit with increased cash inflow – especially, with the tax credits taxed at 50% lower rate - since this benefit is industry or end-product specific will this lead a change to the SR&ED tax credit rate or special income inclusion rules (similar to subsection 12(1)(x) inducement rules).

It is no brainer that a reduction of tax will also lead to lower revenue for the treasury.

C.     Tax on the extreme wealth inequality –

It is unclear what this will actually mean – perhaps introduction of a wealth threshold amount (amount is a term defined in the Income Tax Act) which can then trigger a wealth tax of some sort - I say “some sort” since the speech refers to “wealth inequality” and the implementation method is to be clarified). Examples can include:

·       Introduction of tax based on net capital worth that exceeds a certain threshold or another similar measure that can both define and quantify wealth inequality;

·       An increase of capital gains inclusion rates for amounts that exceed a certain threshold;

·       Limit or fully eliminate capital gains exemption on principle residence over a certain threshold.

There is a fear of an impending legislations on changes to taxing capital gains - but can this become a complex tax rule – especially, if Finance desires to capture all possible scenarios - recollect the new TOSI rules?!

Overall, this measure will be ineffective especially given the wealthy Canadians constitute a small fraction – unless there is a large significant tax imposition. If so, this can lead to erosion of capital from Canada and in some cases lower investment (if we assume the wealthy also invest back in to the economy) – none of this will get the government closer to the goal of fiscal recovery.

D.    Stock option deductions for larger established corporations –

Administratively this is a challenge and the overall benefits in the tax base will be small since tax neutrality will mean deductions for corporations when the benefits become taxable at the employee level – if this is a go – a likely grandfathering rule in place is a possibility with some anti-avoidance provisions that is broad. In such cases, one may consider advising clients to issue stock options where possible (without being caught under an anti-avoidance provision) so as to be grandfathered? Again, this measure is unlikely to get the government closer to the goal of fiscal recovery.

E.     Adapting towards the future for Canadian businesses –

·       Will this mean new increased finance and tax incentives, access to capital and assist for new investment and hence also increase job creation - note that in terms of capital infusion, the current CEBA has been challenge for many Canadian business;

·       For technology corporations, this can be a mixed result especially if there is an option to claim SR&ED tax credits leading to complexities related to recapture rules where a benefit is used "directly" for SR&ED eligible activity.

If exercised properly, this can increase jobs and also increase the overall tax base leading the government closer to the goal of fiscal recovery.

F.     Introduction of support for certain industry segment –

The program is targeted towards tourism, travel and hospitality. Given the new extension of the benefits to furloughed employees, what will this mean – especially, given the reduced travel due to COVID-19 restrictions and no real work available in this segment. Will this imply additional capital infusion directly into the business and not specific to employee retention? Hard to guess!

If the capital is infused into the business, this will be a taxable benefit to the business – however, a mere infusion of capital is not efficient for tax recovery purposes especially if affected corporations (or within the corporate group) have tax attributes to lower tax payables and are also not inclined to spend on employees, given current lack of work in this segment. 

G.    Targeted investment to support middle class –

If this implies lowering tax bracket targeting middle class, can imply increased benefits to support families with children and caregivers. This is a soft tax measure and it is likely counter intuitive towards the overall fiscal recovery goal.

H.    Identity additional ways to tax digital giants –

·       Canadian markets which are largely based on small to medium enterprises, in the authors opinion, this is not an effective tax policy if fiscal recovery is the goal;

·       Larger digital corporations have access to tax havens and access to expensive tax planning resources – a tax audit chase by the CRA will be expensive, time consuming and inconsistent with the goal for fiscal recovery;

Before moving along these directions, Canadian policy has to be also consistent with the OECD measures and given the underlying complexity it is likely not an immediate impact for fiscal recovery.

F.   Introduction of free, automatic tax filing for simple returns –

·       There is no new tax consequences to this measure.

In summary the Throne Speech has provided limited clues and based on the speculated tax implications it is unlikely that Canada will lead itself to a quicker path for fiscal recovery.

Balaji (Bal) Katlai is a Toronto based tax professional and all views expressed here are his own and so are any errors or omissions – this tax note is not a substitute for any tax planning or advice. Always consult a professional tax advisor for any tax planning advice.