On April 7, 2022, the Honourable Chrystia Freeland tabled her second budget as Deputy Prime Minister and Finance Minister, A Plan to Grow Our Economy and Make Life More Affordable.
This commentary summarizes the highlights of the new budget focusing on tax changes and other measures affecting individuals, businesses and not-for-profit organizations. The full budget document is available on this link.
Canada has come back strong from the COVID-19 pandemic with some of the following encouraging statistics:
There are no increases to personal or corporate income tax rates (excluding changes impacting banks and life insurers).
The federal minimum wage is raised to $15.55 per hour.
By the end of 2022, child care fees will have been reduced by an average of 50 per cent, and by 2025-26, the average child care fee for all regulated child care spaces across Canada will be $10 a day.
Changes aimed at slowing rising housing costs include a two year ban on foreign residents acquiring non-recreational residential property and changes to ensure property flipping is taxed as business income.
Billions in new funding has been introduced to provide:
The government is winding down emergency COVID-19 expenditures and implementing a fiscal plan that ensures federal debt remains on a downward track as a share of the economy. After accounting for the new Budget’s measures, Canada is looking at a $113.8 billion expected deficit in 2021-22, improving to a projected deficit of $8.4 billion in 2026-27. The federal debt is expected to decline from 46.5 per cent of GDP in 2021-22 to 41.5 per cent of GDP in 2026-27.
Compared to our international peers, Canada continues to have the lowest net debt-to-GDP ratio in the G7, and the second-lowest deficit as a per cent of GDP among these same countries.
The government announced the creation of a new registered account (the FHSA) to help Canadians save for their first home. The lifetime limit on contributions will be $40,000 subject to an annual contribution limit of $8,000 (which can not be carried forward). The full annual contribution limit would be available starting in 2023. Like an RRSP, contributions to the FHSA are tax deductible. Withdrawals used to purchase a first home, including on the investment income earned in the FHSA, are non-taxable, like a TFSA.
Eligibility – To open an FHSA, an individual must be:
Individuals would be limited to making non-taxable withdrawals in respect of a single property in their lifetime. Once an individual has made a non-taxable withdrawal to purchase a home, they would be required to close their FHSAs within a year from the first withdrawal and would not be eligible to open another FHSA.
The Home Buyers’ Plan (HBP) is still available, but Canadians cannot make both an FHSA and an HBP withdrawal for the same home purchase.
The Budget proposes to double the amount for this credit to $10,000, providing up to $1,500 of tax relief for eligible first-time home buyers.
The Budget proposes to double the qualifying expense limit to $20,000, providing up to $3,000 of tax relief for eligible accessibility renovations or alterations.
The Budget introduces a new home renovation tax credit starting in 2023 for a qualifying renovation that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a qualifying relative. The value would be 15% of the lesser of eligible expenses and $50,000 (a maximum refundable credit of up to $7,500). This measure will apply for the 2023 and subsequent tax years.
Any person who sells a residential property that they have held for less than 12 months will be fully taxed as business income (in comparison to capital gains). This also means they can not claim the principal residence exemption (PRE). Exemptions apply if the sales is for certain reasons, such as death, disability, birth of a child, a new job or separation.
Budget 2022 proposes to make assignment sales on newly constructed or substantially renovated residential housing taxable for GST/HST purposes. The reimbursement of the deposit the assignor made to the builder will be excluded from the assignment fee subject to GST/HST. This will apply in respect of any assignment agreement entered into on or after the day that is one month after Budget Day.
The Budget proposes a tax deduction of up to $4,000 per year for eligible travel and temporary relocation expenses by eligible tradespersons and apprentices.
The government plans to examine a new minimum tax regime targeting high income Canadians and to release details on a proposed approach in its 2022 fall economic and fiscal update.
Under current rules, Canadian-controlled private corporations (CCPC) are eligible for a lower corporate income tax rate on their first $500,000 of business income.
Access to the lower rate begins to be phased out when taxable capital exceeds $10 million and is fully phased out at $15 million. The budget proposes to increase these threshold amounts to $10 million and $50 million respectively, allowing more medium-sized businesses to benefit from the small business rate. These changes will apply to taxation years that begin on or after April 7, 2022.
A private members bill (Bill C-208) was passed in 2021 to allow for intergenerational transfers of small businesses. The Department of Finance was concerned that, based on the way the bill was written, it could be used for non-genuine intergenerational transfers. The government plans to consult with stakeholders on how the rules introduced in Bill C-208 should be amended to allow for genuine intergenerational business transfers while protecting tax system integrity. New legislation to address these issues is expected to be tabled in the fall after the consultation.
The tax act currently taxes investment income earned by companies that are not Canadian controlled private corporations (CCPC) at a lower rate than a CCPC. This means public companies and foreign controlled corporations pay a lower corporate tax rate on investment income. This is ultimately a tax deferral than an absolute tax savings. The Globe and Mail ran an article about this earlier in the month.
The budget proposes targeted amendments that would prevent taxpayers from, in their words, manipulating the status of their corporations in an attempt to avoid being classified as a CCPC to achieve a tax deferral on investment income earned in their corporations. The Budget proposes amendments for taxation years that end on or after April 7, 2022, that ensure investment income earned and distributed by private corporations that are, in substance, CCPCs (“substantive CCPC”) are subject to the same taxation as investment income earned and distributed by CCPCs.
Deferring tax using foreign resident corporations –Canada has foreign accrual property income (FAPI) rules to ensure investment income earned through controlled foreign affiliates is taxed in Canada as earned. To avoid double tax, there is a mechanism to deduct foreign tax paid multiple by a relevant tax factor. The result is where foreign tax of 25% or more is paid, there is no income to report in Canada. The budget proposes changes to effectively ensure a CCPC pays tax on the FAPI unless it paid a rate of tax higher than the highest personal tax rate. This is to ensure there is no deferral of tax relative to investing personally.
Investment tax credit for carbon capture, utilization and storage – The budget introduces a refundable investment tax credit for eligible carbon capture, utilization and storage expenses. The credit rates range from 37.5 to 60 per cent through 2030 and lower rates apply in later years.
New investment tax credit for clean technology – Budget 2022 announces that the government will engage with experts to establish an investment tax credit of up to 30 per cent, focused on net-zero technologies, battery storage solutions and clean hydrogen. Details of the investment tax credit will be provided in the 2022 fall economic and fiscal update.
Clean technology tax incentives – CCA classes 43.1 and 43.2 would be expanded to include air-source heat pumps and their manufacturing would also be eligible for the reduced tax rate for zero-emission technology manufacturing or processing activity proposed in last year’s budget.
Critical mineral exploration tax credit – The government proposes a new 30 per cent credit for renounced exploration expenses that will be incurred as part of an exploration project that targets specified minerals used to produce batteries and magnets. Eligible expenses would not benefit from both the proposed credit and the existing mineral exploration tax credit.
Flow-through shares for oil, gas and coal activities – The government proposes to eliminate the flow-through share regime for oil, gas and coal activities by no longer allowing related exploration or development expenditures to be renounced to a flow-through share investor.
Measures for financial institutions – Budget 2022 proposes to increase corporate income tax rates for banking and life insurance groups to 16.5 per cent (from 15 per cent) on taxable income over $100 million. These companies would also be subject to a temporary Canada Recovery Dividend, a one-time, 15 per cent tax on taxable income above $1 billion for the 2021 tax year, which would be payable over five years. Finally, specific legislation will be introduced to prevent taxpayers from realizing artificial tax deductions using hedging and short selling arrangements.
Scientific Research and Experimental Development program review – The government intends to review this program to ensure that it is effective in encouraging research and development and to explore opportunities to modernize and simplify it, including the eligibility criteria.
Patent box review – The government will consider and seek views on the suitability of adopting a patent box regime in Canada.
Rollover for small business investments – The government is reviewing whether the tax system delivers adequate support for investments in growing businesses. In particular, the review will examine the capital gain deferral for small business investments.
Employee ownership trusts – Based on feedback from consultations, the budget proposes to create rules for employee ownership trusts to support employee ownership of a business. The government will continue to engage with stakeholders as it develops and finalizes the rules.
Registered charities are generally required to expend a minimum amount each year, referred to as the disbursement quota (DQ). The DQ is currently equal to 3.5 per cent of the registered charity’s property not used directly in charitable activities or administration.
The Budget proposes to make a number of changes to increase expenditures by larger charities, and to improve the enforcement and operation of the DQ rules.
Changes include increasing the DQ rate from 3.5 per cent to 5 per cent for the portion of property not used in charitable activities or administration that exceeds $1 million.
In addition, the budget proposes to clarify that expenditures for administration and management are not considered qualifying expenditures for the purpose of satisfying a charity’s DQ. The budget also proposes changes to the relief provisions relating to the DQ.
These measures would apply to charities in respect of their fiscal periods beginning on or after January 1, 2023.
Under the Income Tax Act, registered charities are limited to devoting their resources to charitable activities they carry on themselves or providing gifts to qualified donees. Where charities conduct activities through an intermediary organization (other than a qualified donee), they must maintain sufficient control and direction over the activity such that it can be considered their own.
Budget 2022 proposes a number of changes to improve the operation of these rules, allowing charities to make qualifying disbursements to organizations that are not qualified donees, provided that these disbursements are in furtherance of the charity’s charitable purposes and the charity ensures that the funds are applied to charitable activities by the grantee.
In addition, in order to be considered a qualifying disbursement, charities will be required to meet certain mandatory accountability requirements defined in the Income Tax Act that are designed to ensure that their resources will be used for charitable purposes.
These changes would apply as of royal assent of the enacting legislation.
Disclaimer: This summary is intended to inform readers in general terms. It is not intended to provide any tax or business advice. Please consult your Stern Cohen advisor if you have any questions about your unique situation and how these proposed changes might impact you or your business or not-for-profit organization. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.