Synopsis
Deputy Prime Minister and Minister of Finance the Hon. Chrystia Freeland tabled the Federal Government’s budget on April 7, 2022.
On April 7, 2022, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, delivered the 2022 Federal Budget: A Plan to Grow Our Economy and Make Life More Affordable.
The measures announced focus on affordable housing, economic growth and innovation, clean energy initiatives, and public healthcare. The Government announced significant investments towards these initiatives, including $5.3 billion over the next five years to build a public dental care program.
There were a significant number of tax measures included in this Budget, as well as items for future review or consultation.
Below are the tax highlights from this year’s announcements.
Corporate Tax Measures
Corporate Tax Rates
No new corporate income tax rate changes were announced in this Budget, other than for certain financial institutions as discussed below.
Bill C-208 Intergenerational Transfers
There were no changes announced with respect to the current provisions under Bill C-208 relating to intergenerational transfers of family businesses. Instead, Budget 2022 announces a consultation process for stakeholders to share their views 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.
MNP Insight:
Modifying the legislation to account for the taxable capital threshold increase to $50 million as introduced in Budget 2022 (discussed below) would allow more Canadians to utilize the capital gains exemption in a transfer of a business, allowing family businesses to stay family businesses.
Small Business Income Tax Measures
Small Business Deductions
Budget 2022 proposes to phase out access to the small business income tax rate on a more gradual basis by extending the taxable capital range over which the small business limit is reduced to $50 million, rather than the current $15 million limit. The new phase-out range will therefore be $10 million to $50 million.
This measure is intended to allow more medium-sized Canadian-controlled private corporations (CCPCs) to access the small business deduction and would apply in respect of taxation years that begin after April 7, 2022 (Budget Day).
MNP Insight:
The available small business limit is the lesser of the amount of the limit imposed by the taxable capital of the associated group and the grind that results from “adjusted aggregate investment income” (investment income) between $50,000 and $150,000. Accordingly, these changes will not impact businesses already restricted by the level of their investment income.
Review of Tax System for Small Businesses
The Government announced it will be undertaking a review to assess whether the current tax system is providing adequate support to investments in growing businesses. Specifically, the review will include an examination of the rollover for small business investments, which allows investors in small businesses to defer tax on capital gains.
Financial Institutions
The Budget introduces several tax measures specific to financial institutions.
Canada Recovery Dividend
Budget 2022 proposes to introduce a one-time tax of 15 percent on certain banks, life insurers, and any other financial institution.
The tax will be payable on corporate taxable income in excess of $1 billion earned in the taxation year ending in 2021. The resulting tax liability would be imposed for the 2022 taxation year and would be payable in equal installments over five years. This measure is specifically intended to help Canada’s economic recovery from the pandemic.
Tax Rates for Financial Institutions
Budget 2022 proposes to permanently increase the corporate income tax rate by 1.5 percent on the taxable income of certain banking and life insurance groups above $100 million. The $100 million taxable income exemption is allocated by agreement amongst a group.
As a result of this measure, the overall Federal corporate income tax rate for income for a group of banks or life insurers in excess of $100 million will increase from 15 percent to 16.5 percent. The additional tax would apply to taxation years that end after Budget Day.
Other Measures Impacting Financial Institutions
Additional measures proposed in the Budget in respect of financial institutions include:
- Measures in response to new accounting standards for insurance contracts effective January 1, 2023.
- Rules to limit the ability for financial institution groups to engage in transactions that generate additional tax deductions through hedging and short-selling activities.
- Additional requirement to report to the Canada Revenue Agency (CRA) the total fair market value at the end of each calendar year of property held in Registered Retirement Savings Plans and Registered Retirement Income Funds.
- Intention to examine potential changes to the financial transaction approval process to minimize aggressive tax avoidance through the use of tax havens.
MNP Insight:
There is uncertainty as to whether the new rules discussed above apply to credit unions. This may not be confirmed until legislation for the proposed measures is introduced.
Other Corporate Measures
Use of Foreign Corporations to Defer Canadian Tax
Budget 2022 proposes to introduce measures to prevent taxpayers from restructuring CCPCs to avoid the refundable tax regime which applies to investment income earned by a CCPC. This will be achieved by introducing the concept of a “substantive CCPC” to which the same refundable tax regime would effectively apply.
This measure would apply to taxation years that end on or after Budget Day, with some exceptions made for commercial transactions entered into before Budget Day.
Housing Owned by Corporations
The Government announced its intention to perform a review of housing as an asset class to better understand the role of large corporate players in the market, and the impact on Canadian renters and homeowners. In its review, the Government indicated it will consider tools to address concerns 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.
Employee Ownership Trusts
To encourage and facilitate transition of employee ownership, Budget 2022 proposes to create a new, dedicated type of trust under the Income Tax Act (ITA) to support employee ownership — an Employee Ownership Trust. There are no further details on the mechanics and intended benefits afforded to these new trusts included in the budget documents, as development of the rules are still in progress.
General Anti-Avoidance Rule (GAAR)
Budget 2022 proposes to amend the ITA such that the GAAR can apply to transactions that affect tax attributes that have not yet been used to reduce taxes. This measure is in response to the precedent set by the courts on the application of the GAAR in certain instances.
This measure would apply to notices of determination issued on or after Budget Day.
In addition, the Government announced it intends to release a consultation paper on modernizing the GAAR, with a consultation period running through the summer of 2022. Legislative proposals are expected to be tabled by the end of 2022.
Business Incentives
Investment Tax Credit for Carbon Capture, Utilization, and Storage
The Budget proposes a refundable investment tax credit for businesses that incur eligible carbon capture, utilization, and storage (CCUS) expenses, starting in 2022. The 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 as follows:
- 60 percent for investment in eligible equipment to capture CO2 in direct air capture projects;
- 50 percent for investment in eligible equipment to capture CO2 in all other CCUS projects; and
- 37.5 percent for investment in eligible equipment for transportation, storage and use.
These rates will be reduced by 50 percent for the period from 2031 through 2040.
Tax Credit for Investments in Clean Technology
The Government proposes an investment tax credit of up to 30 percent 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
The Budget proposes to expand the accelerated tax deductions for business investments in clean energy equipment to include air-source heat pumps. This measure would apply in respect of property acquired and available for use on or after Budget Day.
In addition, the Government proposes to extend the 50-percent reduction of the general corporate and small business income tax rates for zero-emission technology manufacturers to include manufacturers of air-source heat pumps. The reduced rates would apply to taxation years that begin after 2021 and phased out from 2029 to 2031.
Other Business Measures
Critical Mineral Exploration Tax Credit
A new 30-percent Critical Mineral Exploration Tax Credit is proposed for specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors as part of an agreement entered into after Budget Day and on or before March 31, 2027.
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 by no longer allowing related exploration or development expenses to be renounced to flow-through share investors. This change would apply to flow-through share agreements entered into after March 31, 2023.
Engaging with the Cannabis Sector
The Government announced it intention to engage with all stakeholders in the cannabis sector, to identify ways to grow the legal cannabis sector in Canada.
Personal Tax Measures
Personal Tax Rates
No new personal income tax rate changes were announced in this Budget.
Measures to Improve Overall Housing Affordability for Canadians
Tax-Free First Home Savings Account
Budget 2022 proposes to create the Tax-Free First Home Savings Account (FHSA) for prospective first-time home buyers. Eligible individuals may contribute up to $8,000 annually, not to exceed the $40,000 lifetime limit on contributions. The full annual contribution limit will be available effective 2023.
Similar to a Registered Retirement Savings Plan, contributions to an FHSA will be deductible and any income earned will not be subject to tax. Qualifying withdrawals from an FHSA, including investment income earned, made to purchase a first home will be non-taxable.
The Home Buyers’ Plan (HBP) will continue to be available as under existing rules, however, individuals will only be permitted to make a withdrawal under one of the programs (FHSA or HBP) in respect of the same qualifying home purchase.
Home Buyers’ Tax Credit
Under the existing rules, first-time home buyers can obtain up to $750 in tax relief by claiming the First-Time Home Buyers’ Tax Credit (HBTC). The Budget proposes to double the HBTC amount to $10,000 (previously $5,000). The enhanced credit will provide up to $1,500 in tax relief to eligible home buyers. Spouses or common-law partners may continue to split the credit as long as the combined tax relief does not exceed $1,500.
This measure will apply to homes purchased on or after January 1, 2022.
An Extended and More Flexible First-Time Home Buyer Incentive
Budget 2022 announces an extension of the First-Time Home Buyer Incentive to March 31, 2025. The Government is also exploring options to make the program more flexible and responsive to the needs of first-time home buyers, including single-led households.
Additional Housing Support
The Budget proposes to provide a one-time $500 payment in 2022-23 to those facing housing affordability challenges. The specifics and delivery method will be announced at a later date.
Ban on Foreign Investment in Canadian Housing
Budget 2022 proposes restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years. Exemptions would apply for refugees, international students on the path to permanent residency and individuals on work permits who are residing in Canada.
Multigenerational Home Renovation Tax Credit
Budget 2022 proposes to introduce a new Multigenerational Home Renovation Tax Credit, which will provide up to $7,500 in support for constructing a secondary dwelling unit for a senior or a person with a disability. The credit will be available for the taxation year in which the renovation is completed.
This measure will apply for 2023 and subsequent taxation years, in respect of work performed or goods acquired on or after January 1, 2023.
Home Accessibility Tax Credit
Budget 2022 proposes to double the annual expense limit of the Home Accessibility Tax Credit to $20,000 for the 2022 and subsequent taxation years. Eligible individuals can receive a credit of up to $3,000, an increase from the previous tax credit of up to $1,500, for significant accessibility renovations or alterations for an eligible dwelling.
Alternative Minimum Tax
The Government announced its commitment to examine a new minimum tax regime and will release details on a proposed approach in the 2022 fall economic and fiscal update.
Residential Property Flipping
Budget 2022 proposes a new deeming rule to ensure profits from flipping residential properties are subject to full taxation. Specifically, profits arising from dispositions of residential property, including rental property, that was owned for less than 12 months would be deemed to be business income. Exemptions will 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. The Principal Residence Exemption would not be available if the new deeming rule applies.
The measure will apply in respect of residential properties sold on or after January 1, 2023.
Medical Expense Tax Credit for Surrogacy and Other Expenses
For 2022, the non-refundable Medical Expense Tax Credit (METC) is available for qualifying medical expenses in excess of the lesser of $2,479 and three percent of the individual’s net income. The Budget proposes to expand eligible expenses that are incurred in Canada for 2022 and subsequent taxation years.
Labour Mobility Deduction for Tradespeople
Budget 2022 proposes to introduce a Labour Mobility Deduction for Tradespeople, which will provide a deduction of up to $4,000 per year in eligible travel and temporary relocation expenses to eligible tradespersons and apprentices. This measure will apply to the 2022 and subsequent taxation years.
Support for Seniors
The Budget announces the intention to explore various measures for seniors, including:
- Considering a Career Extension Tax Credit to increase the labour force participation of seniors who want to continue to work later in life;
- Assessing a potential increase to the Guaranteed Income Supplement;
- Creating an expert panel to study the idea of an Aging at Home Benefit; and
- Increased funding for the New Horizons for Seniors Program to support projects to improve the quality of life for seniors.
International Tax Measures
Adjustment to Foreign Accrual Property Income (FAPI) Inclusion Rates
The FAPI rules are an anti‐deferral regime — the aim of which is to prevent Canadian resident taxpayers from using low tax jurisdictions to defer and avoid income recognition in Canada by using foreign subsidiary companies.
Foreign tax paid in respect of the FAPI (Foreign Accrual Tax (FAT)) is allowed as a deduction, as a proxy for a foreign tax credit. Prior to Budget 2022, the FAT deduction could fully offset FAPI for Canadian corporations where a controlled foreign affiliate's tax rate was equal to or exceeded 25 percent. For other Canadian taxpayers, the rules required a foreign tax rate of 52.63 percent to offset FAPI.
Budget 2022 eliminates the lower 25 percent foreign tax requirement for Canadian corporations. The new rules will apply the same 52.63 percent foreign tax requirement to all Canadian taxpayers and will also look to adjust the capital dividend accounts of CCPCs, where repatriated amounts have been notionally taxed at 52.63 percent. The proposed rules will also impact the taxation of certain foreign affiliate surplus pools.
MNP Insight:
Taxpayers relying on the current FAPI rules to manage taxation in Canada should revisit their corporate structures to determine the potential impact of the proposed rules.
Updated Interest Coupon Stripping Rules
Canada generally imposes a 25 percent withholding tax on interest paid to a non-arm’s length non-resident of Canada, but this rate may be reduced depending on the applicable tax treaty in effect. Certain interest-stripping arrangements were already prevented under 2011 rules, and generally involved a non-resident selling the right to future payments (i.e., the interest coupon). Budget 2022 expands the number of variations to this type of practice that are prevented.
Under Budget 2022, where coupon stripping arrangement are found to exist, the Canadian borrower is deemed under withholding tax rules to pay Part XIII tax to the extent of withholding tax otherwise avoided. Exemptions to the new rules apply in respect of debt owing before Budget Day, and where the arrangement between arm's length parties was agreed to in writing before Budget Day.
International Tax Reform
Canada is one of 137 members of the Organisation for Economic Co-operation and Development (OECD) and G20 Inclusive Framework on Base Erosion and Profit Shifting that joined a two-pillar plan for international tax reform agreed to in October 2021.
Pillar One — Digital Services Tax
The aim of Pillar One is to ensure that large multinational enterprises are fairly taxed in the jurisdictions of their customers, and not just according to the residency of their businesses. As previously addressed, the Government aims to introduce legislation for a Canadian Digital Services tax after a multilateral framework is agreed to.
Pillar Two — Global Minimum Tax
The aim of Pillar Two is to ensure that large multinational enterprises are subject to minimum global effective tax rate of 15 percent on their profits in every jurisdiction in which they operate. This can include the income earned in affiliates of Canadian companies that are domiciled in lower tax jurisdictions and will involve a “top-up” Canadian tax where the global minimum tax rate is not met in the other jurisdiction. Budget 2022 is launching a public consultation on the implementation of the OECD model rules and a domestic minimum top-up tax.
Indirect Tax Measures
Taxing Assignment Sales
An “assignment sale” is the resale of housing before it is constructed or lived in. Currently, when a person makes a new home assignment sale, Goods and Services Tax / Harmonized Sales Tax (GST / HST) may or may not apply, depending on the situation. To address the perceived non-compliance of the current rules by housing speculators, the Budget proposes to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST / HST purposes, effective May 7, 2022.
GST / HST Health Care Rebate
The Budget proposes to expand eligibility for the 83 Percent Health Care Rebate for hospitals, charities and certain non-profit organizations to include facilities that are overseen by a nurse practitioner. The proposed measure would generally apply to rebate claim periods ending after Budget Day in respect of tax paid or payable after that date.
Taxation of Vaping Products
Budget 2022 proposes to implement the previously announced excise duty on vaping products (that do not contain cannabis), effective as of October 1, 2022. The proposed federal excise duty rate would be $1.00 per 2 mL, or fraction thereof, for containers with less than 10 mL of vaping liquid. For containers with more than 10 mL, the applicable federal rate would be $5.00 for the first 10 mL, and $1.00 for every additional 10 mL, or fraction thereof. The Government is also proposing a coordinated vaping taxation framework with the provinces and territories, in which revenues would be shared between governments.
Measures on Alcoholic Beverages
The Budget includes the following measures on certain alcoholic beverages:
- Proposed repeal of the 100 percent Canadian wine excise duty exemption effective June 30, 2022.
- To bring the tax treatment of low-alcohol beer in line with the treatment of low-alcohol wine and spirits, the Budget proposes to eliminate excise duty on low-alcohol beer, effective as of July 1, 2022.
Cannabis Taxation Framework and General Administration
The Budget proposes various changes to streamline, strengthen, and adapt the cannabis excise duty framework. Proposed changes would generally come into force once the enabling legislation receives Royal Assent.
Strengthening Canada’s Trade Remedy and Revenue Systems
The Budget proposes various measures to improve its trade remedy and revenue systems, including:
- The intention to introduce amendments to the Special Import Measures Act and the Canadian International Trade Tribunal Act;
- Providing additional funding over five years, starting in 2022, to the Canada Border Services Agency to create a Trade Remedy Counselling Unit; and
- The introduction of amendments to the Customs Act to implement electronic payments and clarify importer responsibility for duties and taxes.
Scientific Research and Experimental Development (SR&ED)
The Government intends to undertake a review of the current SR&ED program to assess its effectiveness in encouraging research and development (R&D) that benefits Canada, as well as to explore opportunities to modernize and simplify the program. As part of the review, the Government will also consider whether the tax system can play a role in encouraging the development and retention of intellectual property stemming from R&D conducted in Canada.
Other Tax Measures
Disbursement Quota for Registered Charities
Budget 2022 proposes to increase the current annual disbursement quota for registered charities from 3.5 percent to 5.0 percent for the portion of property in excess of $1 million that is not used in charitable activities or administration. In addition, the ITA will be amended to clarify that expenditures for administration and management are not considered qualifying expenditures in achieving a charity’s disbursement quota, and to provide the Minister discretion to grant relief to a registered charity from the disbursement quote for a particular year under certain circumstances.
These measures would apply to fiscal periods beginning on or after January 1, 2023.
Charitable Partnerships
The Government announced its intent to design additional measures to allow charities to make qualified disbursements to organizations that are not otherwise considered qualified donees, provided those organizations meet certain accountability requirements, as will be defined in the ITA. For example, a charity will be required to monitor the recipient, including receiving periodic reports on the use of the charity’s resources, at least annually (e.g., details on the use of the funds, compliance with the terms of the grant, and progress made toward the purposes of the grant), and publicly disclosing in its annual return all such grants above $5,000.
These changes would apply as of Royal Assent of the enacting legislation.
Tax Administration
Reinforcing the CRA
The Budget proposes to provide an additional $1.2 billion over five years, starting in 2022-23, to expand CRA audits of larger entities and non-residents engaged in aggressive tax planning, increase efforts to investigate and prosecute those engaged in criminal tax evasion, and expand its educational outreach.
Implementing a Publicly Accessible Beneficial Ownership Registry
The Government is accelerating its commitment to amend the Canada Business Corporations Act to implement a public and searchable beneficial ownership registry, which will now be accessible before the end of 2023.
Legislative proposals will be forthcoming as part of the Budget Implementation Act. The Government intends to work with provincial and territorial partners to advance a national approach to a beneficial ownership registry of real property, similar to other countries.
Exchange of Tax Information on Digital Economy Platform Sellers
Budget 2022 proposes to implement the Organisation for Economic Co-operation and Development (OECD) model rules in Canada with respect to the exchange of tax information on digital economy platform sellers. The measure would require reporting platform operators that provide support to reportable sellers to determine the jurisdiction of residence of their reportable sellers and report certain information on them. This measure will apply to calendar years beginning after 2023. This will allow the first reporting and exchange of information to take place in early 2025 with respect to the 2024 calendar year.
Summary
Budget 2022 includes a number of personal, corporate, and indirect tax measures focused on housing, targeted investments, innovation, and the green transition. These measures were, however, introduced with varying levels of detail and certainty. As legislation and consultations unfold, it is important that you speak to your local MNP Advisor to determine the impact to you and your business.
This report is provided by MNP. It is for informational and educational purposes only as of the date of writing. This information should not be considered investment, tax or legal professional advice. For specific advice about your situation, please consult a tax, accounting, legal or financial professional. The information contained in this report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. CDSPI, CDSPI Advisory Services Inc., MNP and our affiliates are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.