2022 Federal Budget Highlights
On April 7, 2022, Finance Minister Chrystia Freeland tabled the government’s 2022 Federal Budget.
There were no increases to personal or corporate tax rates and no increase to the capital gains inclusion rate. Read below for a summary of tax changes:
- Business Income Tax Measures
- Personal Income Tax Measures
- International Tax Measures
- Sales and Excise Tax Measures
- Administrative and Other Matters
Business Income Tax Measures
Small Business Deduction
Where conditions are met, Canadian-controlled private corporations (CCPCs) can claim the Small Business Deduction (SBD) to reduce the federal tax rate from 15% to 9% on the first $500,000 of taxable income. Currently, the SBD limit of $500,000 is phased out for an associated group where taxable capital employed in Canada is in excess of $10 million and is eliminated when this taxable capital reaches $15 million. Parallel rules exist for provincial taxes.
Budget 2022 proposes to change this taxable capital phase out rate, such that the SBD will not be fully phased out until taxable capital reaches $50 million.
The passive income grind rules remain unchanged. These rules also grind the SBD limit to the extent of passive income in excess of $50,000 and eliminate the SBD where passive income in the associated group exceeds $150,000.
The SBD limit is the lesser of the two amounts determined under the taxable capital grind and the passive income grind.
Effective date: Taxation years that begin on or after April 7, 2022.
CCPCs are subject to a refundable tax regime on passive investment income. Under this regime, additional taxes are payable by a CCPC on investment income such that the corporate tax rate is roughly consistent with the top marginal personal tax rate. To achieve tax integration, a portion of this additional corporate tax is refunded when taxable dividends are paid to shareholders.
Currently, certain planning can be done to avoid CCPC status such that the refundable tax regime does not apply, resulting in lower corporate tax rates on passive investment income.
The Budget proposes amendments be made to the Income Tax Act (the Act) which would apply the refundable tax regime to “substantive CCPCs”, defined as corporations that are resident in Canada and are ultimately controlled by Canadian-resident individuals, but which do not otherwise meet the definition of a CCPC. Substantive CCPCs would continue to be treated as non-CCPCs for all other purposes of the Act.
Effective date: Taxation years that end on or after April 7, 2022.
Application of the General Anti-Avoidance Rule (GAAR) to Tax Attributes
The GAAR can be applied by the Canada Revenue Agency (CRA) to assess a taxpayer who has obtained a tax benefit by engaging in transactions considered to be “abusive tax avoidance”. A 2018 Federal Court of Appeal decision held that the GAAR did not apply to transactions that resulted only in an increase to a tax attribute (such as a capital dividend account) unless that tax attribute was utilized to reduce taxes, on the basis that a tax benefit had not been obtained.
The Budget proposes to amend the Act to allow reassessments of the balance of tax attributes under the GAAR.
Effective date: Transactions that occur on or after April 7, 2022, or earlier transactions where a notice of determination is issued on or after that date.
Flow-Through Shares for Oil, Gas and Coal Activities
Flow-through share agreements allow shareholders to deduct certain expenses incurred by corporations. The Budget proposes to eliminate the flow-through share regime for oil, gas, and coal activities.
Effective date: Expenditures renounced under flow-through share agreements entered into after March 31, 2023.
Critical Mineral Exploration Tax Credit (CMETC)
The Budget proposes to introduce a 30% tax credit to investors who invest in mining flow-through shares issued in relation to exploration projects for certain minerals. The minerals deemed critical include a specified list of those used in the production of batteries and permanent magnets, which are used in zero-emission vehicles or required in the production of clean technology or semi-conductors. Rules for this credit will be similar to the rules for the previously existing mineral exploration credit (METC). The METC and CMETC will not apply to the same expenditures.
Effective date: Expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022, and on or before March 31, 2027.
The Budget proposes to:
- provide a temporary reduction in corporate income tax rates for qualifying zero-emission technology manufacturers,
- introduce a refundable investment tax credit of up to 60% to businesses that incur eligible expenses related to carbon capture, utilization, and storage (CCUS) technologies, and
- expand the eligibility for capital cost allowance Class 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating.
Additional Tax on Banks and Life Insurers
The Budget proposes to introduce a one-time 15% income tax, referred to as the “Canada Recovery Dividend”, as well as an additional ongoing income tax of 1.5%, on banks and life insurer groups.
Personal Income Tax Measures
The primary focus of personal tax changes is centered around housing initiatives.
Tax-Free First Home Savings Account (FHSA)
The Budget proposes to introduce the FHSA which would allow first-time home buyers to contribute up to $8,000 per year, with a lifetime maximum of $40,000, to this new registered account. Contributions to the FHSA would be deductible and investment income earned within the account would not be taxable. To the extent funds are used to purchase a first home, withdrawals would not be taxable. Withdrawals for any other purposes would be taxable
To be eligible, individuals must be resident of Canada, at least 18 years of age, and must not have lived in a home that they owned at any time in the year the account is opened or at any time during the preceding four calendar years. Annual contribution limits do not carry over and are capped at $8,000 each year. Withdrawals from an RRSP Home Buyers’ Plan cannot be made for the same home purchase.
The FHSA must be closed within 15 years of opening the account. Any unused funds can be transferred into an RRSP or RRIF, or would otherwise be required to be withdrawn on a taxable basis.
Effective date: 2023, once financial institutions have the infrastructure in place.
First-Time Home Buyer’s Tax Credit (HBTC)
The HBTC is non-refundable tax credit available to individuals who purchase a qualifying home and who, along with their spouse or common-law partner, have not lived in another home owned by them in the calendar year of purchase or any of the four preceding calendar years.
The Budget proposes to increase the HBTC amount from $5,000 to $10,000, which would provide up to $1,500 in tax credits.
Effective date: Qualifying homes purchased on or after January 1, 2022.
Multigenerational Home Renovation Tax Credit (MHRTC)
The Budget proposes to introduce the MHRTC to provide a 15% credit on up to $50,000 of eligible expenses for the costs of constructing a secondary dwelling unit for a family member who is a senior or adult with a disability. The credit may be claimed by either the individual who will reside in the secondary dwelling, the qualifying person who owns the eligible dwelling, or be shared between them. The maximum credit would be $7,500 and could be claimed once the renovation is complete.
Effective date: Expenses incurred for work performed and paid for, or goods acquired, on or after January 1, 2023.
Home Accessibility Tax Credit
The HATC is non-refundable tax credit available in respect of home renovations or alternations that are undertaken to improve accessibility for an individual who is over the age of 65 or eligible for the Disability Tax Credit. The credit is currently 15% on up to $10,000 of eligible expenses. The Budget proposes to increase the annual expense limit to $20,000 which would provide a tax credit of up to $3,000.
Effective date: Expenses incurred in the 2022 and subsequent taxations years.
Residential Property Flipping
Currently, the sale of residential properties purchased for the purpose of reselling for a profit is treated as business income, whereas the sale of residential property purchased for other purposes, such as for personal use or to generate rental income, is generally treated as a capital gain of which 50% is included taxable income. The Principal Residence exemption may apply to reduce a taxable capital gain to $nil where a qualifying election is made by a Canadian resident.
The Budget proposes new rules which would deem any profit from the sale of a residential property (including rental property) held for less than 12 months to be business profits, subject to full taxation and not eligible for the Principal Residence Exemption, regardless of the intended use at the time of purchase. Exceptions would apply to Canadians who sell within 12 months of purchase due certain significant events, including death, disability, threat to personal safety, household addition, separation, employment change, insolvency and involuntary disposition.
Where this new deeming rule does not apply, it remains a question of fact whether profits from the sale of residential properties are taxed as business income.
Effective date: Sales of residential properties on or after January 1, 2023.
Other personal income tax measures proposed by the Budget include:
- Labour Mobility Deduction for travel and temporary relocation expenses of up to $4,000 incurred by eligible tradespersons and apprentices,
- Extension of the Incentives for Zero-Emission Vehicles (iZEV) program until March 2025, for individuals who purchase a qualifying ZEV, and
- Expansion of the Medical Expense Tax Credit criteria to include the costs of surrogacy and related expenses.
The Budget also proposes to examine a new minimum tax regime aimed at wealthy Canadians. Details of this proposal are expected to be announced in the 2022 Fall Economic and Fiscal Update.
International Tax Measures
Foreign Accrual Property Income (FAPI)
Where a Canadian taxpayer earns passive income through a controlled foreign corporation, the FAPI rules will deem an income inclusion to the taxpayer on an accrual basis as the income is earned, rather than upon distribution. An offsetting deduction is available in respect of tax paid in the foreign jurisdiction. For corporations, this deduction is calculated as the amount of foreign tax paid in respect of the investment income multiplied by 4, which is the prescribed “relevant tax factor” for corporations. Currently, this deduction fully offsets FAPI where the tax rate on the passive income in the foreign jurisdiction is at least 25%.
With certain exceptions, dividends received by a Canadian corporation from a controlled foreign affiliate can be deducted in computing the income of the Canadian corporation. The amount of the dividend received is also added to a CCPC’s General Rate Income Pool (GRIP), such that the amount can subsequently be paid to the shareholder as an eligible dividend.
The Budget proposes to reduce the relevant tax factor for corporations that are CCPCs or “substantive CCPCs” from 4 to 1.9. This would reduce the deduction available for tax paid in the foreign jurisdiction and result in a net FAPI income inclusion where the tax rate in the foreign jurisdiction is less than 52.63%, approximating the top personal marginal tax rate.
For the stated purpose of achieving tax integration, the Budget also proposes to remove the GRIP addition for CCPCs on dividends received from a foreign affiliate that was subject to FAPI, and to include those amounts, subject to certain adjustments, in the capital dividend account of the CCPC (or “substantive CCPC”), on the basis that this income has already been subject to tax at 52.63% and should not be subject to further personal tax.
Effective date: Taxation years that begin on or after April 7, 2022.
Exchange of Tax Information on Digital Economy Platform Sellers
To improve transparency for the taxation of digital economy, the Organization for Economic Co-operation and Development (OECD) has developed rules which would require digital platform operators to share information with respect to the activity of sellers using their platform. Platform operators are defined as those who provide software to sellers which connects them to users (i.e., provides an online platform) or those who collect compensation for relevant activities facilitated through a platform. Entities who engage in certain standalone activities would not be included, such as pure payment processers, classified ads boards, and online aggregators.
Budget 2022 proposes to implement these rules in Canada. The measures would apply to platform operators that are resident in Canada for tax purposes and those who facilitate relevant activities of sellers resident in Canada or with respect to rental of Canadian real property. With certain exceptions, these platform operators would need to identify reportable sellers and their jurisdiction of residence and report specified information to the CRA by January 31 each year for the preceding calendar year. The CRA will share information collected with tax administrators in foreign countries, based on Canada’s information exchange agreements.
Effective date: Calendar years beginning after 2023.
Interest Coupon Stripping
The Act generally imposes a 25% withholding tax on interest paid or credited by a Canadian resident to a non-arm’s length non-resident. This rate may be reduced under Canada’s tax treaties.
Some taxpayers have avoided this withholding tax on non-arm’s length debt by using certain interest coupon stripping arrangements involving a party that is not subject to the withholding tax.
The Budget proposes amendments that would see withholding taxes apply in situations where a Canadian resident has received a loan from a non-resident and pays interest to a second non-resident using an interest coupon stripping arrangement.
Effective date: Payments of interest accrued on or after April 7, 2023.
International Tax Reform
Finance has announced its continued commitment to implement the OECD’s two-pillar plan for international tax reform aimed at taxing multinational enterprises, including reallocating taxing rights to market countries and applying a minimum effective tax rate of at least 15%.
Sales and Excise Tax Measures
Assignment Sales by Individuals
The Budget proposes make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. Since any deposit would already be subject to GST/HST when applied by the builder to the purchase price on closing, the deposit will be excluded from the consideration for a taxable assignment sale. The result is that GST/HST will apply to the total amount paid for a new home by its first occupant, as the assignee.
The assignor will continue to be responsible for collecting the GST/HST and remitting the tax to the CRA under these new rules. Where the assignor is non-resident, the assignee will be obligated to self-assess and pay the GST/HST directly to the CRA.
Effective date: Any assignment agreement entered into on or after May 7, 2022.
Other Sales Tax and Excise Tax Matters
Other sales tax and excise tax measures proposed by the Budget include:
- Expansion of the heath care rebate;
- Introduction of a new excise duty on vaping products;
- Changes to the cannabis excise duty framework;
- Repealing the 100-per-cent Canadian wine excise duty exemption; and
- Elimination of excise duty for beer containing no more than 0.5% alcohol by volume.
Administrative and Other Matters
The Budget proposes to increase the annual disbursement quota for registered charities from 3.5% to 5%. This increased disbursement quota applies to the portion of property that is not used in charitable activities or administration in excess of $1 million.
Effective date: Fiscal periods beginning on or after January 1, 2023.
Reporting Requirements for RRSPs and RRIFs
The Budget proposes to require financial institutions to report the fair market value of property held in RRSPs and RRIFs to the CRA on annual basis with the stated purpose of helping the CRA monitor and enforce the qualified investment rules for RRSPs and RRIFs.
Effective date: 2023 and subsequent taxation years.
Borrowing by Defined Benefit Pension Plans
The Budget proposes to provide more borrowing flexibility to administrators of defined benefit registered pension plans, based on defined limits.
Effective date: Amounts borrowed on or after April 7, 2022.
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If you have any questions or would like further information relating to the 2022 budget and its impact on you, please contact your Smythe advisor.