The Professional Sector and Budget 2021

The Federal Government tabled a budget – the first in more than two years – on April 19, 2021, proposing a number of measures to support Canadians through the pandemic and into recovery.

For professionals, Budget 2021 holds several tax measures of interest, including immediate deductions of certain “eligible property” acquired by a Canadian-controlled private corporation (CCPC). This immediate deduction will be available for eligible property acquired on or after Budget Day and available for use before January 1, 2024, up to a maximum amount of $1.5 million per taxation year.

Professionals may want to review the application of this tax measure when planning future acquisitions and expansions of professional practices. The $1.5-million limit will be shared among associated members of a group of CCPCs.

In light of this proposed measure, when considering an asset acquisition, it may also be beneficial to evaluate whether to lease or purchase assets.

CCPCs with capital cost additions of eligible property in a taxation year that exceed $1.5 million will decide which capital cost allowance (CCA) classes the immediate deduction will be attributed to, and any excess capital costs will be subject to the normal CCA rules. For those CCPCs with less than $1.5 million of eligible capital costs, no carry-forward of excess capacity will be allowed.

It is important to note these measures are not applicable to unincorporated professionals.

Interest Deductibility Limitations

Budget 2021 proposes rules to limit the amount of net interest expense an entity may deduct in computing its taxable income to no more than a fixed ratio of tax EBITDA. Generally, EBITDA is a corporation’s taxable income before taking into account interest expense, interest income and income tax, and deductions for depreciation and amortization. 

The proposed measure would be phased in for taxation years beginning on or after January 1, 2023 and apply to existing as well as new borrowings by corporations, trusts and partnerships.

Many professional businesses with debt will be exempted from these rules, however, large professional businesses with high debt levels could be affected. Connect with a trusted tax advisor to gain a more personalized and specific understanding of how the changes could affect you.

New and extended wage support

Budget 2021 proposes to extend the Canada Emergency Wage Subsidy (CEWS) until September 2021, with the possibility to add additional qualifying periods until November 20, 2021. As well, the Government introduced the new Canada Recovery Hiring Program (CRHP) which provides eligible employers a subsidy of up to 50 percent on the incremental remuneration paid to employees between June 6, 2021 and November 20, 2021.

As eligible employers can claim either the CRHP or the CEWS for a particular qualifying period, you should work with your tax advisor to determine which support program will be more beneficial for your practice.

Student loans and RRSPs

While no new personal income tax rate changes were announced in Budget 2021, some relief was provided for students through extending the waiver of interest on Canada student loans, the doubling of the Canada Student Grants and disability supports under the Canada Student Loans Program. However, interest must be paid on student debt to obtain a personal tax credit.

As well, Budget 2021 proposed including postdoctoral fellowship income in “earned income” for registered retirement savings plan (RRSP) purposes. This income currently does not qualify.

Under the proposed measure, professionals who earned postdoctoral fellowship income between 2011 and 2020 could request the Canada Revenue Agency (CRA) to adjust their RRSP room for the years in which the fellowship income was earned. The additional RRSP room will provide individuals an opportunity to contribute additional funds to their RRSP and reduce their taxes owing.

Tax on Luxury Goods

If you are considering buying a luxury vehicle, boat or plane, avoid additional charges by making the purchase prior to the end of 2021. Effective January 1, 2022, luxury items such as new cars and personal aircraft valued at more than $100,000 and watercraft (boats) over $250,000 will be subject to taxation changes. Separate legislation will be introduced as this will not be considered a sales tax. 

For a more detailed analysis of the announcements included in Budget 2021, please view the MNP 2021 Federal Budget Summary.