Archived - Part 4: 
Fair and Responsible Government

Chapter 10:
Responsible Government

The government is focused on building the middle class and building an economy that works for everyone. To do that, Canadians need a tax system that is fair.

The COVID-19 pandemic has shed new light on the importance of delivering services to Canadians in a timely and efficient manner. Providing these services requires a continued commitment to ensuring that everyone pays their fair share of tax, so that essential supports can be available to those in need—especially in times of crisis.

In Canada, we have a progressive tax system. Those who make more pay more to support the services that all Canadians rely on. That is why the first thing the government did in 2015 was to raise taxes on the wealthiest to pay for a middle class tax cut. At the same time, the government is also committed to maintaining a strong financial sector that Canadians can count on to safeguard their savings and investments.

10.1 A Tax System that Promotes Fairness

Taxes help pay for the government programs and services that benefit Canadians. They provide a social safety net on which all Canadians can rely in times of crisis. And they make sure that Canada can invest in people and in helping our economy grow and recover.

A tax system in which everyone pays their fair share requires action on multiple fronts: addressing aggressive tax planning schemes; aligning our rules with evolving international norms; ensuring that digital service providers pay their fair share of taxes; and strengthening the government’s ability to crack down on tax evasion, money laundering, and terrorist financing.

The actions proposed in Budget 2021 will help Canada continue to have the resources needed to support the middle class and people working hard to join it, invest in Canadians, and keep our economy strong.

Digital Services Tax

The government is committed to ensuring that corporations in all sectors, including digital corporations, pay their fair share of tax on the money they earn by doing business in Canada. Increasingly, many digital companies earn revenues from the active collection and use of Canadians’ data. In the 2020 Fall Economic Statement, the government announced that it would be moving ahead to implement a tax on corporations providing digital services. This builds on the changes announced at that time to ensure that the Goods and Services Tax/Harmonized Sales Tax applies in a fair and effective manner to the growing digital economy.

Canada has a strong preference for a multilateral approach to this issue. Work is underway to reach a multilateral agreement on cross-border digital taxation by mid-2021, and Canada is optimistic about the progress made this year. However, multilateral discussions have been going on since 2013. That is why, while Canada’s hope and preference is for a multilateral solution this summer, whether or not a deal is reached, Canada intends to take action.

• Budget 2021 proposes to implement a Digital Services Tax at a rate of 3 percent on revenue from digital services that rely on data and content contributions from Canadian users. The tax would apply to large businesses with gross revenue of 750 million euros or more. It would apply as of January 1, 2022, until an acceptable multilateral approach comes into effect. This would help ensure that Canada’s tax rules capture new ways in which businesses carry out value-creating activities. Gender-Based Analysis+

It is estimated that this measure will raise $3.4 billion in revenue over five years beginning in 2021-22.

Luxury Tax

Even as Canadians have sacrificed to keep our economy going through the pandemic, some of the wealthiest have done well. Those who can afford to buy luxury goods can afford to pay a bit more. To that end, the government is following through on its commitment to introduce a tax on select luxury goods.

• Budget 2021 proposes to introduce a tax on the sales, for personal use, of luxury cars and personal aircraft with a retail sales price over $100,000, and boats, for personal use, over $250,000. The tax would be calculated at the lesser of 20 per cent of the value above the threshold ($100,000 for cars and personal aircraft, $250,000 for boats) or 10 per cent of the full value of the luxury car, boat, or personal aircraft. This measure would come into force on January 1, 2022. Gender-Based Analysis+

It is estimated that this measure will increase federal revenues by $604 million over five years, starting in 2021-22.

Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners

Across the country, young Canadians who are starting to build their future are running up against sky-high housing prices.

In the 2020 Fall Economic Statement, the government announced that it would take steps over the coming year to implement a national, tax-based measure targeting the unproductive use of domestic housing that is owned by non-resident, non-Canadians. This will help to ensure that foreign, non-resident owners, who simply use Canada as a place to passively store their wealth in housing, pay their fair share.

• Budget 2021 announces the government’s intention to implement a national, annual 1 per cent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused, effective January 1, 2022. The tax will require all owners, other than Canadian citizens or permanent residents of Canada, to file a declaration as to the current use of the property, with significant penalties for failure to file. Gender-Based Analysis+

Homes are to live in. This measure is one tool among several to ensure that Canada’s housing market is a place to grow for Canadians starting their families and building their future.

In the coming months, the government will release a consultation paper to provide stakeholders with an opportunity to comment on the parameters of the proposed tax, including on whether special rules should be established for small tourism and resort communities. Moving forward, the government intends to work closely with provinces, territories, and municipalities.

It is estimated this measure will increase federal revenues by $700 million over four years, starting in 2022-23. These revenues will help to support the government’s significant investments to make housing more affordable for all Canadians.

Limitations on Excessive Interest Deductions

Many firms borrow in order to fund their operations. Generally, the interest charges on those borrowings are considered a cost of doing business and, therefore, are deductible from income for tax purposes. However, some large companies, typically multinationals, use excessive deductions of interest to reduce the taxes they pay in Canada.

All G7 countries—except Canada—have taken action, as a result of the Base Erosion and Profit Shifting (BEPS) Project, to limit excessive interest deductions by large companies.

• Budget 2021 proposes that, starting in 2023, the amount of interest that certain businesses can deduct be limited to 40 per cent of their earnings in the first year of the measure and 30 per cent thereafter. Relief will be provided for small businesses and for other situations that do not represent significant tax base erosion risks. The government expects to release draft legislation this summer and will seek stakeholder input on the new rules. Gender-Based Analysis+

This strengthening of the rules on interest deductibility will ensure that large companies pay their fair share and bring Canada in line with other jurisdictions, including all our G7 peers. It is estimated that this measure will increase federal revenues by $5.3 billion over five years, starting in 2021-22.

Preventing Cross-border Tax Schemes

Hybrid mismatch arrangements are cross-border tax schemes, used primarily by multinational enterprises, that exploit differences between Canadian and foreign income tax laws to avoid paying their fair share of tax. Under the current rules, a multinational company can exploit the different treatment of certain business entities and financial instruments in Canada and another country to earn income that is not taxed in any country. These schemes not only erode the tax base that supports programs and services for Canadians, but they also give an unfair advantage to multinational enterprises over Canadian businesses, particularly our small and medium-sized businesses.

• Budget 2021 proposes to amend the Income Tax Act to eliminate the tax benefits of hybrid mismatch arrangements. These proposals would be implemented in stages starting July 1, 2022. Budget 2021 proposes to amend the Income Tax Act to eliminate the tax benefits of hybrid mismatch arrangements. These proposals would be implemented in stages starting July 1, 2022. Gender-Based Analysis+

These proposals will level the playing field and help ensure everyone pays their fair share. It is estimated that this measure will increase federal revenues by $775 million over four years starting in 2022-23.

Mandatory Disclosure Rules

It is important that the Canada Revenue Agency be able to obtain timely information on arrangements that involve aggressive tax planning. Canada has been an active participant in the Base Erosion and Profit Shifting (BEPS) Project—an initiative of the G20 and the Organisation for Economic Co-operation and Development. The BEPS Project is primarily devoted to tackling the problem of certain corporations and wealthy individuals inappropriately shifting profits offshore and using other international tax avoidance schemes. This project has shown that stronger rules are needed to strengthen the Canada Revenue Agency’s ability to curtail tax evasion and aggressive tax avoidance in both the domestic and international context.

• Budget 2021 launches public consultations on proposals to enhance Canada’s income tax mandatory disclosure rules, building on the advice of the BEPS Project. This consultation will address changes to the Income Tax Act’s reportable transaction rules, a new requirement to report notifiable transactions, and a new requirement for specified corporations to report uncertain tax treatments. Gender-Based Analysis+

Tackling Tax Avoidance and Evasion

The government has made significant investments since 2015 to strengthen the Canada Revenue Agency’s (CRA’s) ability to crack down on complex tax schemes, increase collaboration with international partners, and ultimately bring offenders to justice. These investments have yielded positive results.

Budget 2021 builds on these previous investments with new measures to combat tax evasion and aggressive tax avoidance. Having the means to avoid paying one’s fair share should not mean that one can.

• Budget 2021 proposes an additional $304.1 million over five years, starting in 2021–22, to allow the CRA to fund new initiatives and extend existing programs, including:
  • Increasing GST/HST audits of large businesses where risk assessment models have found the greatest risk of non-compliance.
  • Modernizing the CRA’s risk assessment process to prevent unwarranted and fraudulent GST/HST refund and rebate claims at the outset, and improve the ability to issue refunds for compliant businesses as quickly as possible.
  • Enhancing capacity to identify tax evasion involving trusts and provide better service to executors and trustees.
  Gender-Based Analysis+

Budget 2021 estimates that these measures to combat tax evasion and aggressive tax avoidance will recover $810 million in revenues over five years. Additional gains will be realized by provinces and territories, whose tax revenues will also increase as a result of these initiatives.

Strengthening the CRA

The success of the CRA’s work in combatting aggressive tax planning, the underground economy, and tax evasion depends on the CRA’s ability to collect outstanding taxes in a timely way.

• Budget 2021 proposes to provide $230 million over five years, starting in 2021-22, for the CRA to improve its ability to collect outstanding taxes. It is anticipated that this proposal will lead to the collection of an additional $5 billion in outstanding taxes over five years. Gender-Based Analysis+

Protecting the Fairness and Integrity of Our Tax System

The Federal Court of Appeal decision in Her Majesty The Queen v Cameco Corporation has highlighted concerns with the application of Canada’s domestic transfer pricing rules. Taking into account the court’s reasoning, the government believes that, without reform, shortcomings in the current transfer pricing rules can encourage the inappropriate shifting of corporate income out of Canada, artificially reducing corporations’ taxes owed in Canada. If not addressed, this poses a risk to the integrity of Canada’s corporate income tax system. Furthermore, Canada must ensure that there is not a separate set of rules that large corporations can play by.

• Budget 2021 announces the government’s intention to consult on Canada’s transfer pricing rules with a view to protecting the integrity of the tax system while preserving Canada’s attractiveness as a destination for new investment and business activity. Gender-Based Analysis+

In the coming months, the Department of Finance will release a consultation paper to provide stakeholders with an opportunity to comment on possible measures to improve Canada’s transfer pricing rules. The government will also take next steps to strengthen and modernize Canada’s general anti-avoidance rule, as announced in the 2020 Fall Economic Statement.

Action Against Money Laundering and Terrorist Financing

Money laundering and terrorist financing are a threat to the security of the financial system. An effective regime to combat these threats is essential to protecting Canadians and the integrity of the financial sector.

• Budget 2021 proposes to provide $4.6 million over four years, starting in 2022-23, and $0.6 million per year ongoing, to enable the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to: build its expertise related to virtual currency; supervise the armoured car sector; and develop and administer a cost recovery scheme for its compliance activities. Gender-Based Analysis+

The Canada Revenue Agency plays an important role in the fight against terrorist financing and money laundering in Canada. In support of this role, amendmentsto the Income Tax Act are needed to address legislative gaps and streamline the revocation process to prevent abuse of charitable status.

• Budget 2021 proposes to amend the Income Tax Act to allow for the immediate revocation of charitable status for organizations listed as a terrorist entity. Gender-Based Analysis+
• Budget 2021 also proposes to prevent individuals with a known history of supporting terrorism from becoming a director, trustee, or similar official of a registered charity. Gender-Based Analysis+
• Budget 2021 further proposes to allow for the revocation of charitable status when a charity provides false statements for the purpose of maintaining their registration. Gender-Based Analysis+

By preventing the abuse of charities, these proposed measures will strengthen Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime.

Beneficial Ownership Transparency

To catch those who attempt to launder money, evade taxes, or commit other complex financial crimes, law enforcement, tax, and other authorities need access to accurate and up-to-date data on the individuals who own and control corporations. Building on public consultations in 2020:

• Budget 2021 proposes to provide $2.1 million over two years to Innovation, Science and Economic Development Canada to support the implementation a publicly accessible corporate beneficial ownership registry by 2025. Gender-Based Analysis+

Combatting Abusive Tax Collection Avoidance Schemes

A small number of high-net-worth taxpayers are engaging in complex transactions intended to avoid the collection of their tax debts. This is done by transferring their assets to a non-arm’s length person—such as a corporation owned by the same person—in a manner that leaves them without the assets necessary to pay their tax debts while circumventing an existing tax rule that is intended to prevent this type of scheme.

• Budget 2021 proposes to introduce a number of amendments to the Income Tax Act to address this type of planning, as well as a penalty for those who devise and promote such schemes. Gender-Based Analysis+

Improving Duty and Tax Collection on Imported Goods

The efficient and fair collection of duties and taxes on imported goods protects the competitiveness of Canadian businesses.

• Budget 2021 proposes changes to the Customs Act to improve duty and tax collection. These changes would ensure that goods are valued in a fair and consistent manner by all importers. This would level the playing field between domestic and foreign businesses and generate an estimated $150 million in additional annual duty revenues. The changes would also modernize and digitize the duty and tax payment process for commercial importers, so as to minimize administrative burden. Gender-Based Analysis+

10.2 A Stable and Robust Financial Sector

Canadians expect the financial system to safeguard their savings and investments and deliver the financial services they need, especially in times of uncertainty. The financial sector and its governing framework has performed well during the COVID-19 pandemic, supported by strong supervisory oversight and responses of financial sector agencies.

Budget 2021 proposes measures to further strengthen Canada’s financial sector framework, including: modernizing corporate governance; strengthening Canada’s anti-money laundering and anti-terrorist financing framework; targeted legislative initiatives that will support consumers, promote innovation, and enhance the stability, security, and integrity of the financial system in advance of the next legislative review, in 2025 (see Annex 3); and a new retail payments oversight framework.

Retail Payments Oversight Framework

The current COVID-19 crisis has accelerated the adoption of digital payments and highlighted the need to have safe and reliable digital payments.

• The government will work with provincial partners to introduce legislation to implement a new retail payments oversight framework that would promote growth, innovation, and competition in digital payment services while making these payments services safer and more secure for consumers and businesses. In doing so, the government will work with provincial partners in recognition of complementary objectives and powers in this area. Gender-Based Analysis+

10.3 Better Services for Canadians

The government is continuously modernizing and improving the way it delivers programs and services to Canadians. As we have seen over the last year, fast and efficient government services and programs are critical to helping Canadians and businesses through challenging times.

Budget 2021 moves forward with a plan to ensure Canadians have reliable and secure digital access to more government services.

E-payroll to Help Businesses

The COVID-19 pandemic highlighted the need to accelerate the government’s commitment to implementing a real-time e-payroll solution that will reduce red tape, and increase the delivery, speed, and accuracy of services and benefits. E‑payroll is a “tell-us-once” approach that will streamline employer reporting by collecting electronic payroll, employment, and demographic data directly from businesses in real-time. E-payroll will save time for Canadian businesses, especially small businesses.  

In response to the pandemic, countries with some form of a real-time payroll data reporting system had greater accuracy with targeting support and benefits, and were able to deploy benefits rapidly. The government is committed to a modernized benefits delivery platform that can target support when Canadians need it most and will ensure all Canadians are receiving all the benefits they are entitled to.

• Budget 2021 proposes to provide $43.9 million over three years, starting in 2021-22, for the Canada Revenue Agency (CRA) to accelerate the ongoing work with Digital Government and Employment and Social Development Canada (ESDC), and to develop the first phase of an e-payroll solution through the testing of prototype options for the implementation of a real-time e‑payroll solution for the Government of Canada. Gender-Based Analysis+
• A Central Agency Steering Committee co-chaired by the Privy Council Office and the Office of the Chief Information Officer (Treasury Board Secretariat) will work with the CRA and ESDC to oversee the implementation plan. Gender-Based Analysis+

Protecting Taxpayer Information

Cyber security is more important than ever and the government is committed to securing taxpayer information against any and all who would attempt to breach Canadians’ private information. Millions of Canadians rely on the CRA’s digital services to access financial lifelines like the CERB, wage subsidy, or rent subsidy. Since February 2020, registration for the CRA’s secure digital services has increased by 36 per cent and logins have increased by 170 per cent. To further safeguard the electronic data stored by the CRA and protect Canadians’ personal information from falling into the wrong hands:

• Budget 2021 proposes to provide $330.6 million over five years, starting in 2021-22, with $1.6 million in remaining amortization, and $51.2 million ongoing, to the Canada Revenue Agency to invest in new technologies and tools that match the growing sophistication of cyber threats, and to ensure the CRA’s workforce has the specialized skills to proactively monitor threats and better safeguard Canadian data. Gender-Based Analysis+

Modernizing CRA Services

To modernize CRA services and help people quickly and easily access the tax credits and benefits they are entitled to:

• Budget 2021 proposes to provide $41.7 million over three years, starting in 2021-22, to the CRA to reduce processing time for T1 adjustments (i.e. corrections to people’s general income tax return) by making online self-service more user-friendly and improving automated processing of T1 adjustments. Faster processing of T1 adjustments will provide Canadians with more timely access to their credits and benefits. Gender-Based Analysis+
• The CRA has created a simplified credit and benefit return and Canada Child Benefit form for First Nations individuals, and will be expanding this project to make these forms more widely available to more Indigenous people. The improved forms take into account Indigenous experience—such as community care and nurturing of children—and remove information that is not applicable to Indigenous peoples. Gender-Based Analysis+

Canadian Digital Service

The Canadian Digital Service was established in 2017 to design and deliver digital government services. During the pandemic, its services and expertise were more vital than ever. It launched the COVID Alert App, used by more than 6 million people in Canada and providing over 26,000 exposure notifications, helping to prevent tens of thousands of possible outbreaks in our communities. It also accelerated the development of GC Notify, a platform to provide vital email and text messaging services for an array of COVID-19 services, showcasing how effective design and delivery can serve Canadians. To make sure that the Canadian Digital Service can meet the growing needs of Canadians and Canadian businesses: 

• Budget 2021 proposes to provide $88 million over four years, starting in 2022-23, and $25.8 million ongoing, to the Treasury Board of Canada Secretariat to renew and expand the capacity of the Canadian Digital Service and further improve how the government delivers digital services to Canadians. Gender-Based Analysis+

10.4 Reinforcing Government of Canada Operations

To provide Canadians with the programs and services they deserve and expect, the government must continue to invest in core, mission-critical government operations, while continuously identifying opportunities to use resources more efficiently. The government is committed to improved productivity across federal organizations and cost-effective and efficient government services.

Measuring What Matters

There is a growing recognition internationally that economic growth is only one dimension of what makes for a good quality of life. Currently, Canada collects less detailed information about non-economic indicators than economic indicators. Better federal data sets are needed to better incorporate quality of life measurements into decision-making and budgeting, similar to international approaches such as in New Zealand and Scotland.

• Budget 2021 proposes to provide $7.7 million over five years, and $1.6 million ongoing, to enable Statistics Canada to improve quality of life measures and address key data gaps. Gender-Based Analysis+
• Budget 2021 further proposes to provide $6.1 million over five years, and $0.6 million ongoing, to enable Statistics Canada to bring together key economic, social, and environmental datasets and develop a user interface to better support decision-making and budgeting. Gender-Based Analysis+

These are in addition to more than $285 million over five years, and more than $40 million ongoing, in proposed Budget 2021 investments across government to collect better, disaggregated data that will enable the government, researchers, and others to better understand the experiences of people in Canada and environmental changes.

Reducing Government Travel

COVID-19 has significantly affected the way the federal government operates, with a greater reliance on digital and virtual interaction, reducing the need for travel.

• Budget 2021 proposes to reduce the operating budgets of the departments and agencies with the highest historical travel costs, resulting in combined savings of $1.1 billion over five years, starting in 2021-22, and $222.5 million per year ongoing. Gender-Based Analysis+

These savings will be in the interests of Canadian taxpayers and offset increased costs and requirements related to the pandemic, particularly upgrades to Government of Canada IT systems.

Improving and Defending Our Cyber Networks

Threats to cyber security are growing globally. The protection of Canadians’ personal information is a priority for the government. Maintaining secure, up-to-date cyber security and defence capabilities on reliable networks is essential as more Canadians access government services digitally. To ensure the security of Canadians’ information:

• Budget 2021 proposes to provide $456.3 million over five years, starting in 2021-22, with $60.7 million in remaining amortization and $62.2 million ongoing, to Shared Services Canada and the Communications Security Establishment. Gender-Based Analysis+

Modernizing Critical IT Infrastructure

Canada’s IT infrastructure is aging faster than the pace of repairs or replacements. By investing in IT infrastructure, the government will ensure that key services like Old Age Security and Employment Insurance benefits or immigration and border case management will continue to be delivered and can be modernized in a timely manner. To perform critical upgrades and a modernization of Canada’s IT infrastructure and improve the way benefits and services are delivered to Canadians over the coming decade:

• Budget 2021 proposes to provide a total of $648 million on a cash basis to Employment and Social Development Canada and the Treasury Board Secretariat over the next seven years, starting in 2021-22, to continue implementing Benefit Delivery Modernization, invest in Service Canada’s IT systems and related activities, and support service delivery to Canadians going forward. Gender-Based Analysis+
• Budget 2021 also proposes to provide $300 million on a cash basis to Shared Services Canada over the next three years, starting in 2021‑22, to continue work to repair and replace critical IT infrastructure. Gender-Based Analysis+