The 2021 Federal Budget Highlights for the Agriculture Sector

Federal Budget 2021

On April 19, 2021, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, delivered the 2021 Federal Budget: A Recovery Plan for Jobs, Growth, and Resilience – the first Federal Budget since 2019.

The 2021 Budget does not propose any drastic changes to the taxation landscape of the Canadian agricultural sector as a whole; however, there are specific areas that received immediate, targeted policy measures and others with proposed legislative changes coming on the horizon.

Immediate Deduction

Budget 2021 provides an upfront tax incentive for businesses to undertake significant capital asset purchases, by allowing for the immediate deduction of up to $1.5 million of certain depreciable property purchased from arm’s length parties between April 19, 2021, and January 1, 2024. 

Qualifying assets include newly purchased capital property that is subject to the capital cost allowance (CCA) rules, other than certain specific classes of depreciable assets, most notably Class 1 (buildings), Class 6 (bins and outbuildings), and Class 14.1 (quota, goodwill). Purchases of used property are included as eligible for immediate expensing, provided the vendor was not a non-arm’s length person.

The $1.5 million expense limit refreshes each year until January 1, 2024 and is to be shared among associated corporations. As an example, a farm corporation could purchase new combines totalling $1.5 million and for tax purposes be permitted to fully expense the entire amount. In Saskatchewan, where the general corporate tax rate is 27%, the result would be up to $405,000 of immediate tax savings. Under the current Accelerated Investment Incentive in place, the same combine purchases would result in $182,250 of upfront tax savings, which demonstrates the benefit of this new incentive. 

It is important to note that these tax savings are realized at the expense of future taxation years, as the assets have been fully expensed for income tax purposes and there will be less CCA available in those years. Nonetheless, this measure provides welcome stimulus for capital reinvestment and expansion plans.

Interest Deductibility Limits

Budget 2021 proposes new rules that could potentially limit the net interest expense deduction that 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 measures will be phased in, with a fixed ratio of 40 percent for taxation years beginning on or after January 1, 2023, but before January 1, 2024 (the transition year), and 30 percent for taxation years beginning on or after January 1, 2024. Any excess interest denied under these rules can be carried backward or forward as applicable. 

Exemptions from this rule would be available for:

• Canadian-controlled private corporations that, along with any associated corporations, have taxable capital of less than $15 million; and
• Groups of corporations and trusts whose aggregate net interest expense is less than $250,000.

This proposal has the potential to negatively impact capital intensive industries, including agriculture and farming operations which are highly leveraged. Draft legislation is expected to be released in summer 2021 which will provide additional detail on this proposed policy.

Carbon Tax Rebates

In recognition that many farmers use natural gas and propane in their operations, Budget 2021 announces the Government’s intention to return a portion of the proceeds from the federal carbon tax directly to farmers in backstop jurisdictions (currently Alberta, Saskatchewan, Manitoba, and Ontario), beginning in 2021-22. It is estimated farmers could receive $100 million in the first year. Rebates will increase in future years based on the carbon tax receipts and rate increases in those years. Further details will be released later in 2021.

Luxury Tax on New Cars, Aircraft and Boats

The Federal Budget has proposed, effective for purchases beginning on or after January 1, 2022, an additional tax on new luxury vehicles and aircraft priced over $100,000 and boats priced over $250,000. Federal and provincial sales tax will apply to the gross price of the vehicle, making it even more punitive to the end consumer. The formula results in the new luxury tax equaling the lesser of 10 percent of the total price of the item or 20 percent of the amount over the threshold. 

For example, consider a luxury vehicle with a pre-tax price tag of $140,000. The lesser of the two rates is determined as follows: 

1. 10% x $140,000 = $14,000; or
2. 20% x ($140,000 - $100,000) = $8,000. 

As a result, the price of the vehicle would increase to $148,000 plus GST/HST/PST. 

There are a number of vehicles, aircrafts and boats that will be excluded from the new tax, such as motorcycles, ATVs, racing cars, motor homes, and construction, commercial, and farm vehicles. However, the general rule is that if it is a personal-use vehicle that accommodates less than 10 passengers, it may very well be caught. The rules for boats are similar in that commercial fishing boats, ferries, and floating homes will be excluded.

Supporting Food Processors – New Trade Agreements

In order to help support processors of all supply-managed agricultural products adapt to the Canada-European Union Comprehensive Economic and Trade Agreement, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Budget 2021 includes an additional $292.5 million over seven years to create a Processor Investment Fund to support private investment in processing plants.