On Dec. 14, 2021, the Economic and Fiscal Update was provided by Deputy Prime Minister and Minister of Finance, The Honourable Chrystia Freeland, P.C., M.P.

Tax and other related measures that were included in the Economic and Fiscal Update are summarized as follows.

Tax measures

Home Office Expense Deduction

In 2020 the government permitted workers to use a temporary flat rate method to calculate their deduction for home office expenses. The government is proposing to extend the simplified rules for deducting home office expenses and increase the temporary flat rate to $500 annually.

This measure would apply to both 2021 and 2022 tax years.

Enhanced support for teachers

Currently teachers and early childhood educators may claim a 15 per cent refundable tax credit based on an amount of up to $1,000 in expenditures made in a taxation year for eligible supplies.

The government proposes to increase the refundable tax credit from 15 to 25 per cent.

Additional clarifications are also being proposed as follows:

• Removal of the requirement that teaching supplies must be used in a school or regulated child-care facility to be eligible.
• Expansion of the list of prescribed durable goods: calculators (including graphing calculators); external data storage devices; web cams, microphones and headphones; wireless pointer devices; electronic educational toys; digital timers; speakers; video streaming devices; multimedia projectors; printers; and laptop, desktop and tablet computers (provided that none of these items are made available to the eligible educator by their employer for use outside of the classroom).

This measure would apply to the 2021 and subsequent taxation years.

Small Business Air Quality Improvement Tax Credit

The government proposes to introduce a refundable 25 per cent Small Businesses Air Quality Improvement Tax Credit. The refundable credit is applied to an eligible entity’s qualifying expenditures at qualifying locations subject to the following limitations:

• a maximum of $10,000 in qualifying expenditures per qualifying location, and
• a maximum of $50,000 in qualifying expenditures across all qualifying locations (shared within an affiliated group).

This refundable credit would be included in the taxable income of the business in the taxation year the credit is claimed.

Eligible entities

Eligible entities for a taxation year would include unincorporated sole proprietors and Canadian-controlled private corporations with taxable capital employed in Canada of less than $15 million.

Partnership can also be eligible entities as long as credit is claimed by members of the partnership that are qualifying corporations or individuals (other than trusts).

Qualifying expenditures

Qualifying expenditures would include expenses directly attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation and air conditioning (HVAC) systems, as well as the purchase of devices designed to filter air using high efficiency particulate air (HEPA) filters, the primary purpose of which is to increase outdoor air intake or to improve air cleaning or air filtration.

The following would not be included as qualifying expenditures:

• made or incurred under the terms of an agreement entered into before Sept. 1, 2021;
• related to recurring or routine repair and maintenance;
• for financing costs in respect of a qualifying expenditure;
• that is paid to a party with which the eligible entity does not deal at arm’s length;
• that is salary or wages paid to an employee of the eligible entity; or
• that can reasonably be expected to be paid or returned to the eligible entity, or to a person or partnership either not dealing at arm’s length with the eligible entity or at the direction of the eligible entity, and
• expenses attributable to an HVAC system that don’t meet specific requirements.

Qualifying locations

Qualifying locations would include properties used by an eligible entity primarily in the course of its ordinary commercial activities in Canada (including rental activities), excluding self-contained domestic establishments.

Timing

The tax credit would be available in respect of qualifying expenditures incurred between Sept. 1, 2021 and Dec. 31, 2022.

The taxation year for which an eligible entity would claim the tax credit would depend on when the qualifying expenditure was incurred.

• Qualifying expenditures incurred before Jan. 1, 2022 would be claimed by an eligible entity for its first taxation year that ends on or after Jan. 1, 2022.
• Qualifying expenditures incurred on or after Jan. 1, 2022 would be claimed by an eligible entity for the taxation year in which the expenditure was incurred.

Returning the proceeds from the price on pollution directly to farmers

Under the federal carbon pollution pricing system, the government applies a price on pollution in jurisdictions that do not have their own system.

The government proposes to return fuel charge proceeds directly to farming businesses in backstop jurisdictions via a refundable tax credit, starting for the 2021-22 fuel charge year.

The credit amount in respect of an eligible farm business for an applicable fuel charge year would be equal to the eligible farming expenses attributable to backstop jurisdictions in the calendar year when the fuel charge year starts, multiplied by the following payment rate per $1,000 in eligible farming expenses:

• 2021 – $1.47
• 2022 – $1.73

Any credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed. Special rules would apply to properly allocate the credit to the partners (corporation, individual, trust or another partnership).

Eligible farming businesses

Corporations, individuals and trusts that are actively engaged in either the management or day-to-day activities of earning income from farming and incur total farming expenses of $25,000 or more, all or a portion of which are attributable to backstop jurisdictions.

Eligible farming expenses

Farming expenses must be attributable to one or more backstop jurisdictions to be eligible, and would include amounts deducted in computing farming income, but exclude any mandatory and optional inventory adjustments and transactions with non-arm’s length parties. Special rules will apply for allocating farming expenses for taxation years that do not align with the calendar year.

Special rules will apply for businesses operating in multiple jurisdictions to properly apportion eligible farming expenses to respective jurisdictions.

Underused Housing Tax

It is proposed that the Underused Housing Tax of 1 per cent on the value of vacant or underused non-resident, non-Canadian-owned residential real estate in Canada be effective for the 2022 calendar year.

Two exemptions are being proposed:

1. Residential properties would be exempt if it was the primary place of residence of:
   • the owner;
   • the owner’s spouse or common-law partner; or
   • an individual that is the child of the owner or of the owner’s spouse or common-law partner, but only if the child is in Canada for the purposes of authorized study and the occupancy relates to that purpose.
2. Residential properties would be exempt if it was a vacation or recreational property, and:
   • located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents; and personally used by the owner (or the owner’s spouse or common-law partner) for at least four weeks in the calendar year.

An owner eligible for either of the above exemptions would claim the exemption in the annual return that they would be required to file with the Canada Revenue Agency in respect of the residential property.

The initial Underused Housing Tax returns, for the 2022 calendar year, would be required to be filed with the Canada Revenue Agency on or before April 30, 2023 and any tax payable would be required to be remitted on or before that date.

Other measures

• It is proposed that one-time payments will be made to alleviate the financial hardship of GIS and Allowance recipients who received the CERB or CRB in 2020.
• Student relief: The government proposed to provide debt relief to students who, although ineligible, received the CERB, by allowing their CERB-related debt to be offset by the amount they would have received from the CESB.
• The government reiterated its intention to bring forward legislation to extend the Northern Residents’ Deduction so eligible individuals can claim up to $1,200 in eligible travel expenses starting “next month.”
• It is proposed that legislation would be brought forward to extend small businesses’ deadline for the repayment of Canada Emergency Business Account loans.
• The Highly Affected Sectors Credit Availability Program is proposed to be extended to March 31, 2022.