A post-pandemic blueprint
Over the last two years the Federal government spent massively on combatting COVID-19 and its economic fallout. In this year’s budget, Finance Minister Chrystia Freeland shifted focus to a number of areas, including increased spending on health care, national defence, climate measures and housing. The budget also contains new tax measures, with the deficit expected to decline to $52.8 billion this year from $113.8 billion in 2021.
To help you understand how the 2022/23 budget affects individuals and businesses financially, our Tax and Estate Planning Team has provided this analysis.
Here are the highlights.
Note: There were no changes in the personal tax rates and in the capital gains inclusion rate in this budget.
1. Measures Concerning Individuals
A Tax-Free First Home Savings Account (FHSA)
To help Canadians save for their first home, Budget 2022 proposes to introduce the Tax-Free First Home Savings Account that would give prospective first-time home buyers the ability to save up to $40,000. Like a registered retirement savings account (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home, including investment income, would be non-taxable, like a tax free savings account (TFSA). Tax-free in, tax-free out. The government intends to work with financial institutions to ensure that a Tax-Free First Home Savings Account could be opened and contributed to in 2023.
Eligibility. To open an FHSA, an individual must be a resident of Canada, and at least 18 years of age. In addition, the individual must not have lived in a home that they owned either:
- At any time in the year the account is opened, or
- During the preceding four calendar years.
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.
Contributions. The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000. The full annual contribution limit would be available starting in 2023.
Unused annual contribution room could not be carried forward, meaning an individual contributing less than $8,000 in a given year would still face an annual limit of $8,000 in subsequent years. This is an interesting constraint, given that RRSP and TFSA contribution room can be carried forward to future years with only limited constraints.
An individual would be permitted to hold more than one FHSA, but the total amount that an individual contributes to all of their FHSAs could not exceed their annual and lifetime FHSA contribution limit.
Withdrawals and Transfers. Amounts withdrawn to make a qualifying first home purchase would not be subject to tax. Amounts that are withdrawn for other purposes would be taxable.
To provide flexibility, an individual could transfer funds from an FHSA to an RRSP (at any time before the year they turn 71) or registered retirement income fund (RRIF). Transfers to an RRSP or RRIF would not be taxable at the time of transfer, but amounts would be taxed when withdrawn from the RRSP or RRIF in the usual manner. Transfers would not reduce, or be limited by, the individual’s available RRSP room. Withdrawals and transfers would not replenish FHSA contribution limits.
If an individual has not used the funds in their FHSA for a qualifying first home purchase within 15 years of first opening an FHSA, their FHSA would have to be closed. Any unused savings could be transferred into an RRSP or RRIF, or would otherwise have to be withdrawn on a taxable basis.
Individuals would also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the $40,000 lifetime and $8,000 annual contribution limits. These transfers would not restore an individual’s RRSP contribution room.
Home Buyers’ Plan. The HBP will continue to be available as under existing rules. However, an individual will not be permitted to make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase. This will create unique planning considerations for qualifying individuals who plan to purchase their first home in the next few years.
Doubling the First-Time Home Buyers’ Tax Credit
The First-Time Home Buyers’ Tax Credit is intended to provide support to Canadians buying their first home. Budget 2022 proposes to double the First-Time Home Buyers’ Tax Credit amount to $10,000. The enhanced credit would provide up to $1,500 in direct support to home buyers. Spouses or common-law partners would continue to be able to split the value of the credit as long as the combined total does not exceed $1,500 in tax relief. This measure would apply to homes purchased on or after January 1, 2022.
Multigenerational Home Renovation Tax Credit
Budget 2022 proposes to introduce a Multigenerational Home Renovation Tax Credit, which would provide up to $7,500 in support for constructing a secondary suite for a senior or an adult with a disability. Starting in 2023, this refundable credit would allow families to claim 15 per cent of up to $50,000 in eligible renovation and construction costs incurred in order to construct a secondary suite.
Doubling the Home Accessibility Tax Credit
The Home Accessibility Tax Credit provides support to offset cost on renovations and upgrades that make homes safe and accessible. Budget 2022 proposes to double the qualifying expense limit of the Home Accessibility Tax Credit to $20,000 for the 2022 and subsequent tax years. This will mean a tax credit of up to $3,000 — an increase from the previous tax credit of up to $1,500 — for important accessibility renovations or alterations.
Ban on Foreign Investment in Canadian Housing
The Government proposes to introduce new legislation that would prohibit certain foreign entities and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years.
Refugees and people who have been authorized to come to Canada under emergency travel while fleeing international crises would be exempted. International students on the path to permanent residency would also be exempt in certain circumstances, as would individuals on work permits who are residing in Canada.
Property Flippers Pay Their Fair Share
Budget 2022 proposes to introduce new rules to ensure profits from flipping properties are taxed fully and fairly. Specifically, any person who sells a property they have held for less than 12 months would be considered to be flipping properties and would be subject to full taxationon their profits as business income. Exemptions would apply for Canadians who sell their home due to certain life circumstances, such as a death, disability, the birth of a child, a new job, or a divorce. Exemptions will be set in forthcoming rules and Canadians will be consulted on the draft legislative proposals. Where the new rule applies, the Principal Residence Exemption would not be available. The measure would apply to residential properties sold on or after January 1, 2023.
Dental Care for Canadians
Budget 2022 proposes to provide funding, over five years to Health Canada to provide dental care for Canadians. This program will start with under 12-year-olds in 2022, and then expand to under 18-year-olds, seniors, and persons living with a disability in 2023, with full implementation by 2025. The program would be restricted to families with an income of less than $90,000 annually, with no co-pays for those under $70,000 annually in income.
Making the Switch to Zero-Emission Vehicles (ZEVs) More Affordable
To help make ZEVs more affordable for Canadians, the federal government has offered purchase incentives of up to $5,000 for eligible vehicles since 2019. Budget 2022 proposes to extend the Incentives for Zero-Emission Vehicles (ZEV) program until March 2025. Eligibility under the program will also be broadened to support the purchase of more vehicle models, including more vans, trucks, and SUVs, which will help make ZEVs more affordable. Further details will be announced by Transport Canada in the coming weeks.
Phasing Out Flow-Through Shares for Oil, Gas, and Coal Activities
Budget 2022 proposes to eliminate the flow-through share regime for fossil fuel sector activities. Oil, gas, and coal exploration and development expenditures will no longer be allowed to be renounced to flow-through share investors for flow-through share agreements entered into after March 31, 2023.
Help for Canadians Who Want to Become Parents
Budget 2022 proposes to allow medical expenses related to a surrogate mother or a sperm, ova, or embryo donor that are incurred in Canada for 2022 and subsequent taxation years to be claimed. This would include costs that have been reimbursed to a surrogate for in vitro fertilization procedures and related expenses. Budget 2022 also proposes to allow fees paid to fertility clinics and donor banks in Canada in order to obtain donor sperm and ova to be eligible under the Medical Expense Tax Credit for 2022 and subsequent taxation years.
Next Steps Towards a Minimum Tax for High Earners
The Alternative Minimum Tax (AMT) has not been substantially updated since its introduction. Budget 2022 announces the government’s commitment to examine a new minimum tax regime, which will go further towards ensuring that all wealthy Canadians pay their fair share of tax. The government will release details on a proposed approach in the 2022 fall economic and fiscal update.
Strengthening the General Anti-Avoidance Rule
The general anti-avoidance rule (GAAR) is intended to prevent abusive tax avoidance transactions, while not interfering with legitimate commercial and family transactions. Budget 2022 proposes to amend the Income Tax Act to provide that the GAAR can apply to transactions that affect tax attributes that have not yet been used to reduce taxes. This measure would apply to notices of determination issued on or after Budget Day.
2. Measures concerning businesses
Cutting Taxes for Canada’s Growing Small Businesses
Small businesses currently benefit from a reduced federal tax rate of nine per cent on their first $500,000 of taxable income, compared to a general federal corporate tax rate of 15 per cent. A business no longer has access to this lower rate once its level of capital employed in Canada reaches $15 million. However, phasing out access to the lower tax rate too quickly—and then requiring a small business to pay more in tax—can discourage some businesses from continuing to grow and create jobs. Budget 2022 proposes to phase out access to the small business tax rate more gradually, with access to be fully phased out when taxable capital reaches $50 million, rather than at $15 million. This measure would apply to taxation years that begin on or after Budget Day.
The introduction of a new 30 per cent tax credit for Critical Mineral Exploration
A new Tax Credit for specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors will be introduced. The tax credit would apply to certain exploration expenditures targeted at nickel, lithium, cobalt, graphite, copper, rare earths elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals, or uranium, and renounced as part of eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.
Employee Ownership Trusts
Employee ownership trusts encourage employee ownership of a business, and facilitate the transition of privately owned businesses to employees. Budget 2021 announced that the government would engage with stakeholders to examine what barriers exist to the creation of these trusts in Canada. These consultations revealed that the main barrier to the creation of employee ownership trusts in Canada was the lack of a dedicated trust vehicle under current tax legislation tailored to the requirements of these structures. Budget 2022 proposes to create the Employee Ownership Trust—a new, dedicated type of trust under the Income Tax Act to support employee ownership.
A New Tax Credit for Investments in Clean Technology. Budget 2022 announces that the Department of Finance Canada 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. The design details of the investment tax credit will be provided in the 2022 fall economic and fiscal update.
Support for Business Investment in Air-Source Heat Pumps. Budget 2022 proposes to expand the accelerated tax deductions for business investments in clean energy equipment to include air-source heat pumps. To support job creation and growth in clean technology manufacturing in Canada, the government proposes to extend the 50 per cent reduction of the general corporate and small business income tax rates for zero-emission technology manufacturers to include manufacturers of air-source heat pumps.
Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS)
Budget 2022 proposes a refundable investment tax credit for businesses that incur eligible CCUS expenses, starting in 2022. The investment tax credit would be available to CCUS projects to the extent that they permanently store captured CO2 through an eligible use. From 2022 through 2030, the investment tax credit rates would be between 37.5 per cent and 60 per cent depending on the type of investment. To encourage the industry to move quickly to lower emissions, these rates will be reduced by 50 per cent for the period from 2031 through 2040.
Requiring Financial Institutions to Help Pay for the Recovery
Budget 2022 proposes to introduce a temporary Canada Recovery Dividend, under which banking and life insurers’ groups will pay a one-time 15 per cent tax on taxable income above $1 billion for the 2021 tax year. The Canada Recovery Dividend will be paid in equal installments over five years. Budget 2022 also proposes to permanently increase the corporate income tax rate by 1.5 percentage points on the taxable income of banking and life insurance groups above $100 million.
Preventing the Use of Foreign Corporations to Avoid Canadian Tax
Currently, some people are manipulating the Canadian-controlled private corporation (CCPC) status of their corporations to avoid paying the additional refundable corporate income tax that they would otherwise pay on investment income earned in their corporations. This may be done in a number of ways, such as by moving a corporation into a foreign low-tax jurisdiction, by using foreign shell companies, or by moving passive portfolios to an offshore corporation.
Budget 2022 proposes targeted amendments to the Income Tax Act to ensure that, for taxation years that end on or after April 7, 2022, investment income earned and distributed by private corporations that are, in substance, CCPCs is subject to the same taxation as investment income earned and distributed by CCPCs.
3. Other measures
Bill C-208 Follow-up
The Income Tax Act contains a rule to prevent people from converting dividends into lower-taxed capital gains using certain self-dealing transactions—a practice referred to as “surplus stripping.” Private Member’s Bill C-208, which received Royal Assent on June 29, 2021, introduced an exception to this rule in order to facilitate intergenerational business transfers. However, the exception may unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer take place. Budget 2022 announces a consultation as to how the existing rules could be strengthened to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers.
Review of tax treatment for large corporations that invest in residential real estate
Budget 2022 announces a federal review of housing as an asset class, in order to better understand the role of large corporate players in the market and the impact on Canadian renters and homeowners. This will include the examination of a number of options and tools, including potential changes to the tax treatment of large corporate players that invest in residential real estate. Further details on the review will be released later this year, with potential early actions to be announced before the end of the year.
For more information
To find out more about the 2022-2023 Federal Budget, click here.
This article is published by SLGI Asset Management Inc. and contains information in summary form. This article is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.