Increased taxes, new anti-avoidance rules may be on Canada's 2021 tax agenda

With a federal deficit forecast at around $382 billion in 2020-2021, the government may consider new revenue-raising measures, as well as launch consultations in respect of Canada’s anti-avoidance rules in 2021 and make proposals to tax digital businesses, McCarthy Tétrault LLP says in its tax outlook for the year.

Whether the government will introduce a number of tax revenue-raising measures this year given that the pandemic is ongoing remains to be seen, says Raj Juneja, head of tax at McCarthy Tétrault, in Toronto, and lead author of the firm’s recent report “Tax Perspectives: Review of 2020 & 2021 Outlook.”

Relief measures brought into place such as the Canada Emergency Wage Subsidy, the Canada Recovery Benefit and the Canada Emergency Response Benefit have been costly, and raise the question of “this massive deficit they created in 2020, and [when] are they going to think about dealing with that?” says Juneja.

In the corporate tax area, two proposals that the Liberals promised to introduce when campaigning for election in 2019 would limit the deduction of interest, and are rules that many countries around the world have already adopted, he says.

One of the proposals is the 30-per-cent EBITDA limitation, which would limit the amount of interest that a corporation could deduct against its income for a taxation year to no more than 30 per cent of earnings before interest, taxes, depreciation and amortization (EBITDA), subject to certain exceptions, and would apply to corporations with an annual net interest expense exceeding $250,000. Corporations that are part of a multinational group would be able to deduct above the 30 per cent ratio, up to the group’s worldwide ratio.

The second proposal would implement anti-hybrid rules that would deny the deduction of interest on hybrid debt arrangements, meaning arrangements or instruments that are debt for Canadian tax purposes but treated otherwise for foreign tax purposes.

“They may move forward [with those proposals] in this budget, and they would be big changes to the corporate tax regime,” Juneja says.

In the federal Department of Finance’s Fall Economic Statement it announced that the government would “launch consultations in the coming months on the modernization of Canada’s anti-avoidance rules, in particular the General Anti-Avoidance Rule,” which permits the Canada Revenue Agency to impose adverse tax consequences to deny any tax benefits resulting from a tax avoidance transaction.

“That would be interesting,” says Juneja, “because there’s been 20 years of case law on the General Anti-Avoidance Rule now, setting out the law and more interpretation”; changing the existing rules would be “very significant,” affecting individuals and corporations, domestically and internationally.

Also in its Fall Economic Statement the government announced its intention to implement new GST/HST registration and collection requirements for non-resident vendors and digital platform operators, which it referred to as measures to provide “A Fair Tax System for the Digital Economy.”

Many jurisdictions have discussed taxing digital businesses such as Facebook and its ilk, which currently aren't subject to Canadian tax because they’re not technically operating within Canada, Juneja says. The Organisation for Economic Co-operation and Development (OECD) has a joint project to propose new rules to tax those digital businesses, but Canada has announced it will implement its own rules in the interim, to be effective January 1, 2022.

“That’ll be very interesting to see, what the government's going to propose.”

And casting a look back at 2020, two significant decisions for the tax bar were those in MacDonald v. The Queen, and The Queen v. Cameco Corporation. In the MacDonald case the Supreme Court of Canada addressed the test for whether a derivative contract constitutes a hedge of a capital asset; the Supreme Court dismissed the taxpayer’s appeal, finding that a forward contract was a hedge and not speculative (it was “a good conclusion” says Juneja).

The Cameco case addressed transfer pricing, which the CRA has been challenging for years, he says. Cameco involved the interpretation of the transfer pricing substitution rules in paragraphs 247(2)(b) and (d) of the Tax Act, “and provides helpful guidance on the scope of such rules,” the McCarthy Tétrault authors wrote in their report. The Federal Court of Appeal dismissed the Minister of National Revenue’s appeal, rejecting its attempt to recharacterize the pertinent paragraphs of the Transfer Pricing Rules.

“We all thought the FCA decision was the right one,” Juneja notes. “It will be interesting to see if the Supreme Court will grant leave to appeal.”