April 8, 2022
On April 7, 2022 (Budget Day) Finance Minister Chrystia Freeland announced the budget, “A Plan to Grow Our Economy and Make Life More Affordable” (Budget 2022). Budget 2022 projects a deficit for the 2022-2023 year of $52.8 billion. The deficit is projected to decline to less than $10 billion over five years.
The major spending announcements in the budget include measures to increase the housing supply, encouraging investment in energy-efficient properties like zero-emission vehicles and carbon capture equipment, increase defence spending and direct support to allow Ukraine to acquire military equipment. In addition, a two-year ban on foreign investors acquiring residential real estate was proposed.
Another key measure is the expansion of healthcare to include dental care. The program will be limited to families with income of less than $90,000, with no co-pays for those who make under $70,000 per year. Initially the plan will only be available to children under 12. The plan is to expand eligibility to children under the age of 18, seniors and persons with disabilities in 2023. The government expects full implementation by 2025, with an annual cost of $1.7 billion.
The tax changes announced in Budget 2022 do not include any major tax increases except for a significant one-time tax and increased tax rate levied on banks and life insurers. Although there was continued speculation that the capital gains inclusion rate would increase, once again there was no such increase.
The following contains our analysis of the key tax highlights of the budget:
PERSONAL INCOME TAX MEASURES
Tax-Free “First Home Savings Account” (FHSA)
Budget 2022 proposes to create the Tax-Free First Home Savings Account (FHSA), to help individuals save for their first home. Contributions to an FHSA would be deductible and income earned in an FHSA would not be subject to tax. Qualifying withdrawals from an FHSA made to purchase a first home would be non-taxable.
In order to be eligible for this account an individual must be at least 18 years of age, and not have lived in a home they owned at any time during the year the account was opened or during the preceding four calendar years.
Contributions would be subject to an $8,000 annual contribution limit, with unused amounts carrying forward to increase contribution limits for future years. The maximum lifetime contribution limit into the FHSA is $40,000.
Funds from a FHSA can be transferred to the individual’s RRSP or RRIF without triggering a tax liability on the transfer. Like other RRSP contributions, these amounts would be taxed on the eventual withdrawal from those accounts. Transfers to an RRSP would not reduce, or be limited by, the individual’s available RRSP room. Withdrawals and transfers would not replenish the FHSA contribution limits.
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.
While the existing Home Buyer’s Plan (HBP) will remain, taxpayers will not be allowed to use the HBP and FHSA in respect of the same home purchase.
Budget 2022 anticipates that the infrastructure will be in place for individuals to be able to open an FHSA and start contributing in 2023.
Home Buyers’ Tax Credit
Currently, first-time home buyers are entitled to a tax credit of up to $750. This amount can be split with the first-time home buyer’s spouse, as long as the total amount does not exceed $750. Budget 2022 proposes to double this credit, providing a tax credit of up to $1,500.
This measure would apply to expenses incurred in the 2022 and subsequent taxation years.
Multigenerational Home Renovation Tax Credit
Budget 2022 proposes to introduce a new Multigenerational Home Renovation Tax Credit. The proposed refundable credit would provide recognition of eligible expenses for a qualifying renovation. A qualifying renovation would be one that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a qualifying relation. The value of the credit would be 15% of the lesser of eligible expenses and $50,000.
This measure would apply for the 2023 and subsequent taxation years, in respect of work performed and paid for and/or goods acquired on or after January 1, 2023.
Home Accessibility Tax Credit
The Home Accessibility Tax Credit is a non-refundable tax credit that provides recognition of eligible home renovation or alteration expenses in respect of an eligible dwelling of a qualifying individual. A qualifying individual is an individual who is eligible to claim the Disability Tax Credit at any time in a tax year, or an individual who is 65 years of age or older at the end of a tax year. Budget 2022 proposes to increase the annual expense limit of the Home Accessibility Tax Credit from $10,000 to $20,000 which increases the potential tax reduction to $3,000.
This measure would apply to expenses incurred in the 2022 and subsequent taxation years.
Residential Property Flipping Rule
Budget 2022 proposes to introduce a new deeming rule to ensure profits from flipping residential real estate are always subject to full taxation (as opposed to 50% income inclusion for capital gains, or less, due to principal residence exemption utilization). Specifically, profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months would be deemed to be business income.
The new deeming rule would not apply if the disposition of property is in relation to at least one of the life events listed below:
- A related person joining the household (i.e.: new child);
- Personal safety;
- Disability or illness;
- Employment change;
- Insolvency; or
- Involuntary disposition.
Where the new deeming rule applies, the Principal Residence Exemption would not be available. Where the new deeming rule does not apply because of a life event listed above or because the property was owned for 12 months or more, it would remain a question of fact whether profits from the disposition are taxed as business income.
The measure would apply in respect of residential properties sold on or after January 1, 2023.
Labour Mobility Deduction for Tradespeople
Budget 2022 proposes to introduce a Labour Mobility Deduction for Tradespeople to recognize certain travel and temporary relocation expenses of workers in the construction industry, for whom such relocations are relatively common. This measure would allow eligible workers to deduct up to $4,000 in eligible expenses per year.
This measure would apply to the 2022 and subsequent taxation years.
Medical Expense Tax Credit for Surrogacy and Other Expenses
Budget 2022 proposes to provide a broader definition of patient in cases where an individual would rely on a surrogate or a donor in order to become a parent. This broader definition would allow medical expenses paid or reimbursed by the taxpayer, or the taxpayer’s spouse or common-law partner, with respect to a surrogate mother or donor to be eligible for the METC.
This measure would apply to expenses incurred in the 2022 and subsequent taxation years.
Tax Measures for the Children’s Special Allowance, Kinship Care Providers and Foster Parents of Indigenous Children
Budget 2022 proposes to amend the Income Tax Act to:
- Allow the Children’s Special Allowance for children under the care of a child protection agency to be paid to an Indigenous Governing Body;
- Clarify that a kinship care provider may be considered to be the parent of a child in their care for the purpose of certain tax benefits; and
- Ensure that financial assistance payments for the care of a child in such an arrangement are considered non-taxable, and are not included in income for determining entitlement to income-tested benefits or credits.
These measures would apply for the 2020 and subsequent taxation years.
Annual Disbursement Quota for Registered Charities
Budget 2022 proposes to increase the Disbursement Quota (DQ) rate from 3.5 % to 5 % for the portion of property not used in charitable activities or administration that exceeds $1 million. This would increase expenditures by charities overall, while accommodating smaller grant-making charities that may not be able to realize the same investment returns as larger charities.
In addition, Budget 2022 proposes to amend the Income Tax Act to clarify that expenditures for administration and management are not considered qualifying expenditures for the purpose of satisfying a charity’s DQ.
Budget 2022 also proposes to amend the existing rule such that the CRA will have the discretion to grant a reduction in a charity’s DQ obligation for any particular tax year and allow the CRA to publicly disclose information relating to such a decision.
These measures would apply to charities in respect of their fiscal periods beginning on or after January 1, 2023.
Additional measures in relation to charities include:
- A number of proposed changes to improve the operation of rules where charities operate through an intermediary organization (other than a qualified donee), allowing charities to make qualified disbursements to organizations that are not qualified donees, provided that they meet certain accountability requirements under the Income Tax Act;
- Proposals to require charities to, upon request by the CRA, take all reasonable steps to obtain receipts, invoices, or other documentary evidence from grantees to demonstrate amounts were spent appropriately; and
- A proposal to extend an existing provision in the Income Tax Act, that would prohibit registered charities from accepting gifts, the granting of which was expressly or implicitly conditional on making a gift to a person other than a qualified donee.
These changes would apply as of Royal assent of the enacting legislation.
Borrowing by Defined Benefit Pension Plans
Budget 2022 proposes to provide more borrowing flexibility to administrators of defined benefit registered pension plans (other than individual pension plans) by maintaining the borrowing rule for real property acquisitions and replacing the 90-day term limit rule with a limit calculated on the total amount of additional borrowed money. These measurers would apply to borrowed amounts on or after Budget Day.
BUSINESS INCOME TAX MEASURES
Canada Recovery Dividend and Additional Tax on Banks and Life Insurers
Budget 2022 proposes to introduce a special one-time tax in the form of the Canada Recovery Dividend (CRD) which is a 15% tax on bank and life insurer groups.
The CRD would be determined based on a corporation’s taxable income for taxation years ending in 2021. Bank and life insurer groups subject to the CRD would be permitted to allocate a $1 billion taxable income exemption by agreement amongst group members.
The CRD liability would be imposed for the 2022 taxation year and would be payable in equal amounts over five years.
Budget 2022 also proposes to introduce an additional tax of 1.5% of the taxable income for members of bank and life insurer groups. There is a $100 million taxable income exemption for group members.
The proposed additional tax would apply to taxation years that end after Budget Day.
Investment Tax Credit for Carbon Capture, Utilization, and Storage
Carbon capture, utilization, and storage (CCUS) is a suite of technologies that capture carbon dioxide emissions to either store or use CO2. Budget 2022 introduces a refundable investment tax credit for CCUS expenditures.
The CCUS Tax Credit would be available in respect of the cost of purchasing and installing eligible equipment used in an eligible CCUS project, so long as the equipment was part of a project where the captured CO2 was used for an eligible use.
The project would also be subject to the required validation and verification process, would need to meet the storage requirements, and a climate-related financial disclosure report would need to be produced in order for the CCUS Tax Credit to be claimed.
For eligible expenses incurred after 2021 through 2030, refundable credits range from 37.5% to 60% depending on the type of equipment. For eligible expenses incurred after 2030 through 2040, refundable credits are lowered, ranging from 18.75% to 30%.
Budget 2022 will also introduce new Capital Cost Allowance classes for CCUS equipment.
This measure would apply to eligible expenses incurred after 2021 and before 2041.
Capital Cost Allowance and Rate Reduction for Clean Energy Equipment
Budget 2022 proposes to expand eligibility for accelerated depreciation under Classes 43.1 and 43.2 (30% and 50%, respectively) to include air-source heat pumps primarily used for space or water heating.
This would apply in respect of property that is acquired and that becomes available for use on or after Budget Day, where it has not been used or acquired for use for any purpose before Budget Day.
Budget 2022 also includes the manufacturing of air-source heat pumps in the qualified activities for the 50% income tax rate reduction for manufacturing zero-emission technology manufactures.
Critical Mineral Exploration Tax Credit
The Mineral Exploration Tax Credit (METC) provides an additional income tax benefit for individuals who invest in mining flow-through shares equal to 15% of specified eligible expenses renounced.
Budget 2022 proposes a 30% Critical Mineral Exploration Tax Credit (CMETC) for specified minerals used in the production of batteries and permanent magnets, both of which are used in zero-emission vehicles, or are necessary in the production and processing of advanced materials, clean technology or semi-conductors.
The CMETC would apply to eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.
Flow-Through Shares for Oil, Gas, and Coal Activities
Budget 2022 proposes to eliminate the flow-through share regime for oil, gas and coal expenditures for flow-through share agreements entered into after March 31, 2023.
Small Business Deduction
Canadian Controlled Private Corporations (CCPCs) may benefit from the Small Business Deduction which reduces the federal corporate income tax rate to 9%, instead of 15%, on active income earned in Canada. This rate reduction applies on active income of up to $500,000 per year.
Currently the “business limit” of $500,000 is reduced on a straight-line basis when:
- the taxable capital of the CCPC and its associates is between $10 million and $15 million; or
- the “adjusted aggregate investment income” of the CCPC and its associates is between $50,000 and $150,000.
Budget 2022 proposes to extend the range over which the business limit is reduced based on the combined taxable capital of an associated group. The new range would be $10 million to $50 million. There is no adjustment to the claw-back related to investment income.
This measure would apply to taxation years that begin on or after Budget Day.
International Financial Reporting Standards for Insurance Contracts (IFRS 17)
New international accounting standards for insurance contracts will substantially change financial reporting for all Canadian insurers. Generally, under this policy a portion of the profits earned on underwritten insurance contracts, the Contract Service Margin (CSM), will be deferred and gradually released into income over the estimated life of the insurance contracts. The government believes this would lead to an undue income tax deferral.
The tax treatment of this income will depend on the type of insurance offered.
Life Insurance and Mortgage and Title Insurance
The CSM would not be deductible for tax purposes (with the exception of the CSM for segregated funds). However, Budget 2022 proposes that 10% of the CSM associated with life insurance contracts be deductible for tax purposes. The 10% deductible portion of the CSM will be included in income for tax purposes when the non-attributable expenses are incurred in the future. There will also be adjustments to the minimum tax calculations for large financial institutions.
Property and Casualty (P&C) Insurance
Budget 2022 proposes to maintain the current tax treatment for P&C insurance contracts on the basis that the CSM reserve is largely insignificant for these short-term contracts that are typically not longer than a year.
Budget 2022 proposes that these measures would apply as of January 1, 2023 and allow a transition period of five years to smooth out the tax impact of converting insurance reserves to IFRS 17.
Genuine Intergenerational Share Transfers
The Income Tax Act has generally provided rules that limit the ability of shareholders to engage in “surplus stripping” by way of converting dividends into lower-taxed capital gains using certain “self-dealing transactions.” However, those same rules also made inter-family business succession plans subject to significantly more taxes as family members could not use corporations to acquire a family member’s interest.
Private Member’s Bill C-208 introduced a partial exception to this rule in order to facilitate intergenerational business transfers between parents and their children. However, the exception may unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer takes place.
Budget 2022 announces a consultation process for Canadians to share views as to how the existing rules could be modified to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers. Comments should be received by June 17, 2022.
Other Business Tax Measures
Budget 2022 also proposes the following measures:
- Eliminating the ability of financial institutions to claim multiple deductions for dividend income in certain hedging and short selling arrangements;
- Ensure the General Anti-Avoidance Rule (GAAR) can apply to unrealized tax benefits by allowing it to reduce tax attributes such as cost bases and paid-up capital;
- Reduce a tax deferral available to CCPCs investing in foreign companies with measures that include reducing the ability to pay eligible dividends, but increasing the ability to pay tax-free capital dividends when sufficient income tax has been paid;
- Eliminate the ability for Canadian private corporations to avoid the additional tax on investment income by registering a corporation outside Canada or otherwise losing CCPC status but maintaining Canadian residency; and
- The government is proposing to create a new type of trust, an Employee Ownership Trust, to facilitate employee ownership of companies. The government will be entering into discussions with stakeholders before proceeding with this measure.
INTERNATIONAL TAX MEASURES
Exchange of Tax Information on Digital Economy Platform Sellers
The online economy allows sellers of goods and services to make use of digital platform operators to connect with their clients or customers. In Canada, the onus is generally on the taxpayers earning business income, including income earned through online platforms, to report to the Canada Revenue Agency.
Budget 2022 proposes to require platform operators to disclose their users income-earning activity to the Canada Revenue Agency. The CRA will share that information with other countries and will receive similar information with respect to Canadians earning income from platform operators in those countries.
This measure would apply to calendar years beginning after 2023. This would allow the first reporting and exchange of information to take place in early 2025 with respect to the 2024 calendar year.
International Tax Reform
Canada, along with a number of other countries, has agreed to the implementation of a “two-pillar” plan for international tax reform agreed to on October 8, 2021.
Pillar One is intended to reallocate the profits of the largest and most profitable multinational enterprises (MNEs) to market countries (i.e., where their users and customers are located) rather than low tax jurisdictions. Pillar Two is intended to ensure that the profits of large MNEs are subject to an effective tax rate of at least 15%, regardless of where they are earned.
In relation to Pillar One, the government is prepared to introduce implementing legislation after terms are multilaterally agreed upon with international partners.
Budget 2022 proposes to implement Pillar Two, along with a domestic minimum top-up tax that would apply to Canadian entities of MNEs that are within the scope of Pillar Two. It anticipates draft implementing legislation would be publicly released for consultation and a portion of the plan would come into effect in 2023 as of a date to be fixed.
Interest Coupon Stripping
Some taxpayers have sought to avoid Part XIII interest withholding tax on non-arm’s length debt using so-called interest coupon stripping arrangements.
Budget 2022 proposes an amendment to the interest withholding tax rules to ensure that the total interest withholding tax paid under an interest coupon stripping arrangement is the same as if the arrangement had not been undertaken and instead the interest had been paid to the non-resident lender.
This measure would apply to interest paid or payable by a Canadian-resident borrower to an interest coupon holder to the extent that such interest accrued on or after Budget Day, subject to certain exceptions.
SALES AND EXCISE TAX AND OTHER MEASURES
GST/HST Health Care Rebate
Under the current GST/HST legislation, hospitals and certain eligible charities and non-profit organizations can claim an 83% rebate of the GST and federal portion of the HST that they pay on inputs used in their exempt supplies.
Budget 2022 proposes to amend the GST/HST eligibility rules to no longer distinguish between health care services rendered by physicians and nurse practitioners, expanding the eligibility of this rebate.
This measure would generally apply to rebate claim periods ending after Budget Day in respect of tax paid or payable after that date.
GST/HST on Assignment Sales by Individuals
An assignment sale in respect of residential housing is a transaction in which a purchaser (an “assignor”) under an agreement of purchase and sale with a builder of a new home sells their rights and obligations under the agreement to another person (an “assignee”). Generally, an assignment sale made by an individual would generally be exempt from GST/HST if the individual had originally entered into the agreement for the primary purpose of occupying the home as a place of residence.
Budget 2022 proposes to amend the Excise Tax Act to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. As a result, the GST/HST would apply to the total amount paid for a new home by its first occupant and there would be greater certainty regarding the GST/HST treatment of assignment sales.
This measure would apply in respect of any assignment agreement entered into on or after the day that is one month after Budget Day.
Certain other tax proposals included in Budget 2022 are as follows:
- Revisions to federal excise duty framework for vaping products;
- Proposals to allow licensed cannabis producers to remit excise duties on a quarterly basis rather than a monthly basis starting from the quarter that began April 1, 2022;
- Proposals to allow for the Canada Revenue Agency to approve certain contract-for-service arrangements between two licensed cannabis producers;
- Changes to certain penalty provisions in relation to cannabis producer stamps;
- Changes to Cannabis license framework;
- Repeal 100% Canadian wine excise duty exemption effective June 30, 2022;
- Eliminate excise duty for beer containing no more than 0.5% alcohol by volume; and
- Proposals to amend the Nisga’a Final Agreement Act to provide force-of-law to all provisions of the taxation agreement.
If you have any questions concerning the above, do not hesitate to contact your trusted advisor at Wilkinson & Company LLP.
This summary deals with proposed matters that are complex and may not apply to particular facts and circumstances. As well, the material and the references contained therein reflect laws and practices which are subject to change. For these reasons, this material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter.
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