Tax alert: Fiscal update includes tax changes for Netflix, stock options and working from home

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The federal government’s fall economic update included a series of tax proposals that carry implications for businesses and households. If enacted, the measures will cost you more to watch The Crown, but allow simpler deductions for the many Canadians currently working from home.

Ottawa is looking to raise revenue in the coming years via the digital economy. Through a series of proposed taxes on digital goods and services, the federal government aims to raise $6.5-billion over the next five fiscal years (ending in 2025-26).

Some of that would come from adding sales taxes to digital services such as Netflix, which currently doesn’t charge such taxes at the federal level. The bulk would come from a corporate tax on Big Tech companies, although details are coming next year. Canada, like many other countries, is working with the Organization for Economic Co-operation and Development on a multilateral plan. However, Ottawa is “concerned about the delay in arriving at consensus” – hence the reason it’s prepared to go alone.

Digital taxes

Ottawa is looking to raise around $2.8-billion over the next five years by forcing foreign digital companies and e-commerce vendors to collect and remit GST or HST on goods and services sold to Canadian consumers.

As it stands, foreign companies do not charge federal taxes on digital products and services that they sell to Canadians. Starting in July, the federal government would require digital vendors, such as movie streaming services, and online marketplaces, such as app stores, to charge GST or HST on goods and services sold in Canada.

The new regime would only apply to products and services sold directly to consumers; cross-border business-to-business sales won’t be subject to the new tax regime. Ottawa says this proposed measure would result in $1.2-billion of additional tax revenue over the next five years.

The federal government says it would also close a tax loophole that benefits foreign e-commerce companies that use Canadian warehouses as fulfilment centres. Currently, foreign goods that are shipped to Canadian warehouses for distribution to Canadian consumers are taxed at the border. But they are not taxed again at the final sale price.

“This means that the difference between the value at the time of importation and the final price paid escapes the GST/HST,” the economic update states.

Starting in July, Ottawa would require either the foreign e-commerce vendor or the warehousing and distribution company to collect and remit GST or HST on goods sold in Canada, based on the final sale price. Ottawa expects this change to yield $1.6-billion in tax revenue over the next five years.

Remote-work expenses

The federal government said those working from home because of COVID-19 will be able to claim up to $400 in expenses for 2020 as part of a simplified process. Claimants won’t need to track detailed expenses, while the Canada Revenue Agency would “generally” not require a signed form from employers. The deduction amount would be based on how long an employee worked from home. The deduction would carry an estimated cost of $210-million this fiscal year. In October, there were 2.4 million Canadians working from home who normally do not.

Stock options

The federal government is moving ahead with plans to limit tax deductions on stock options, in an attempt to restrict a program that it says disproportionately benefits high-income individuals.

Stock options are a type of compensation that allow employees to buy their company’s stock at a preset price. The employee makes money when they exercise the option at a lower price than the market price of the stock.

As it stands, income from exercising stock options is eligible for a tax deduction and taxed at half the normal personal tax rate – the same rate as capital gains.

The federal government is introducing a cap on the annual value of stock options that are eligible for special tax treatment. People can claim a “stock option deduction” on the first $200,000 worth of stock options that vest – that is, become available to exercise – in a given year. Income earned on stock options over that threshold would be taxed at the normal tax rate.

The federal government proposed the change in 2019, but released details of the plan on Monday. The change would go into effect in July and the federal government believes it would result in $200-million in tax revenue each year.

The new rules would not apply to stock options granted by private Canadian corporations or companies with gross revenues of less than $500-million. This exemption is being granted because startups often rely heavily on stock options in lieu of regular compensation.

Short-term rental tax

The government aims to get tougher on taxation of short-term rental accommodations. It proposes applying the GST/HST on all short-term lodging supplied in Canada through platforms such as Airbnb and Vrbo. The tax would need to be collected and remitted by either the property owner or the platform. The government noted that some short-term rental hosts are not aware of taxation rules for their properties, while platforms bear no responsibility in compliance. “These factors result in the GST/HST not being applied consistently and putting more traditional Canadian accommodation providers, such as hotels, at a comparative disadvantage,” Monday’s update read. This measure would raise an estimated $360-million over five years, ending in fiscal year 2025-26.

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