On April 7, 2022, the Federal Government presented the 2022 Federal Budget. While Budget 2022 proposed various tax measures that will impact both individuals and businesses, there is a significant lack of detail and no legislation for most of the proposed changes.
Housing affordability was a primary concern, with stricter requirements added for the principal residence exemption. There is now a ban on certain non-residents from owning non-recreational and residential property. There’s also a new Tax-Free Home Savings Account allowing Canadians under 40 to save up to $40,000 for their first home. Access to the Home Accessibility Tax Credit has been increased, and a new Multigenerational Home Renovation Tax Credit has been introduced.
Other tax measures included expanding the eligibility of the small business deduction for small and medium sized private businesses, while banks and life insurance companies that made significant profits during the pandemic will see certain tax rate increases.
In addition, budget 2022 provides an additional $1.2 billion to increase the audit capabilities of the CRA. The proposed rules will target tax avoidance transactions and certain tax planning that manipulates tax rates.
Full details of Budget 2022 can be found by clicking here, but summarized below are a few of the items we believe are most relevant to private companies and individuals.
Business Tax Measures
Corporate income tax rates
No changes to the corporate income tax rates are proposed. As such, the income tax rates as of January 1, 2022, will remain as follows:
|BC||Combined (Federal and BC)|
Small Business Deduction
Small businesses may benefit from a reduced corporate income tax rate of 11 per cent (combined BC and Federal rate) – a preference relative to the general corporate income tax rate of 27 per cent. This rate reduction is provided through the “small business deduction” and applies on up to $500,000 per year of qualifying active business income (i.e., the “business limit”) of a Canadian-controlled private corporation (CCPC). There is a requirement to allocate the business limit among associated CCPCs.
To target the preferential tax rate to small businesses, the business limit is reduced on a straight-line basis when:
- The combined taxable capital employed in Canada of the CCPC and its associated corporations is between $10 million and $15 million; or
- The combined “adjusted aggregate investment income” of the CCPC and its associated corporations is between $50,000 and $150,000
The business limit is the lesser of the two amounts determined by these business limit reductions.
A corporation’s taxable capital is, in general, the total of its shareholder’s equity, surpluses and reserves, and loans and advances to the corporation, less certain types of investments in other corporations.
The reduction in the business limit can significantly increase a CCPC’s marginal tax rate as the combined taxable capital of the CCPC and its associated corporations increases from $10 million to $15 million.
To facilitate small business growth, Budget 2022 proposes to extend the range over which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations. The new range would be $10 million to $50 million. This change would allow more medium-sized CCPCs to benefit from the small business deduction. Furthermore, it would increase the amount of qualifying active business income that can be eligible for the small business deduction. For example, under the new rules:
- A CCPC with $30 million in taxable capital would have up to $250,000 of active business income eligible for the small business deduction, compared to $0 under current rules
- A CCPC with $12 million in taxable capital would have up to $475,000 of active business income eligible for the small business deduction, compared to up to $300,000 under current rules
Full details have not yet been provided but this measure would apply to taxation years that begin on or after Budget Day.
Deferring Tax Using Foreign Resident Corporations
The foreign accrual property income (FAPI) rules aim to prevent Canadian taxpayers from gaining a tax deferral advantage by earning certain types of investment income through controlled foreign affiliates (i.e., a non-resident corporation in which the taxpayer has, or participates in, a controlling interest). The rules do this by including the Canadian shareholder’s participating share of the foreign affiliate’s FAPI in the Canadian shareholder’s income in the year it is earned.
To avoid double taxation, such income inclusions in respect of FAPI are subject to a deduction in respect of foreign tax paid in respect of the FAPI (referred to as “foreign accrual tax”). This deduction is a proxy for a foreign tax credit on the FAPI amount included in the Canadian resident taxpayer’s income. The proxy amount is calculated based on the amount of foreign income that was subject to a sufficient level of foreign tax, determined based on the “relevant tax factor” (RTF). The RTF is calibrated to the tax rate to which the taxpayer would have been subject had the income been earned in Canada.
The budget proposes to change the RTF for CCPCs from 4 to 1.9, which would be the same as the RTF for individuals. Accordingly, a full deduction will be available only where the effective foreign tax rate on this income is at least 52.63% (compared to 25% under the old rules). This change is intended to eliminate the tax deferral advantage that could otherwise be obtained where a CCPC earns investment income through a foreign affiliate and relies on foreign tax deductions to shelter this income from the federal refundable tax on investment income.
Full details have not yet been provided but these measures would apply to taxation years that begin on or after Budget Day.
Genuine Intergenerational Share Transfers
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 to facilitate intergenerational business transfers (i.e., sale of private company shares from parent to a child or grandchild). However, the exception may unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer takes place.
Budget 2022 announces the continued 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.
Critical Mineral Exploration Tax Credit
Budget 2022 introduces a 30% Critical Mineral Exploration Tax Credit (CMETC) for eligible expenditures incurred in the exploration and mining of eligible specified minerals that are used in the production of certain parts for zero-emission vehicles, or advanced materials, clean technology or semi-conductors. The CMETC would:
- Apply to expenditures renounced under eligible flow-through share agreements entered in after April 7, 2022, and before April 1, 2027
- Follow the rules in place for the existing Mineral Exploration Tax Credit (METC)
- Not be permitted to be claimed in addition to the METC
Flow-Through Shares for Oil, Gas and Coal Activities
Effective for flow-through share agreements entered in after March 31, 2023, the budget eliminates the flow-through share regime for oil, gas and coal activities, thereby no longer allowing the renunciation of oil, gas and coal exploration and development expenditures to a flow-through share investor.
Personal Tax Measures
Personal Income Tax Rates
No changes to the personal income tax rates are proposed. As such, BC’s top personal income tax rates for 2022 will be as follows:
|Personal Top Marginal Rates (Income > $227,092)|
|Interest and regular income||53.50%|
Tax-Free First Home Savings Account
Budget 2022 proposes to create a new registered account, the Tax-Free First Home Savings Account (FHSA). Individuals will be able to open an FHSA starting 2023.
To open an FHSA, an individual must be a resident of Canada and over 17 years of age and must not have lived in a home that they owned during the year the FHSA is opened or during the preceding four calendar years.
The lifetime limit on contributions to an FHSA will be $40,000, subject to an annual limit of $8,000. Contributions will be deductible, and income earned in an FHSA will not be subject to tax. Unused annual contribution room cannot be carried forward. Individuals will also be allowed to transfer funds from a Registered Retirement Savings Plan (RRSP) to an FHSA on a tax-free basis, subject to the contribution limits.
Withdrawals from an FHSA to make a qualifying first home purchase will be non-taxable. Once an individual has made a non-taxable withdrawal to purchase a home, they will be required to close the FHSA within a year of the first withdrawal and will not be eligible to open another FHSA.
Full details have not been provided but this measure is targeted to be in place for contributions to start at some point in 2023.
Multigenerational Home Renovation Tax Credit
Budget 2022 proposes to introduce a new Multigenerational Home Renovation Tax Credit (MHRTC). 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 who is 65 years of age or older, or a person with a disability who is 18 years of age or order) to live with a qualifying relation (an individual 18 years of age or order and is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, nice, nephew or spouse or common-law partner). The value of the credit would be 15 per cent of the lesser of eligible expenses and $50,000.
One qualifying renovation would be permitted to be claimed in respect of an eligible person over their lifetime.
Full details have not been provided but this measure is to 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.
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. 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 proposed deeming rule would not apply if the disposition of the property is in relation to certain life events, including death, the addition of a related person to the household, separation, personal safety, disability or illness, a qualifying employment change, insolvency or an involuntary disposition (e.g., natural disaster).
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.
Full details have not yet been provided but this measure is to apply in respect of residential properties sold on or after January 1, 2023.
Home Accessibility Tax Credit
The Home Accessibility Tax Credit (HATC) is a non-refundable credit available on eligible home renovation expenses in respect of an eligible dwelling of an individual eligible to claim the Disability Tax Credit, or who is older than 64 at the end of a tax year.
For eligible expenses incurred after 2021, the budget proposes to increase the annual expense limit of the HATC from $10,000 to $20,000. The value of the HATC will be calculated by applying 15% to the lesser of the eligible expenses and $20,000.
Other Tax Measures
Employee Ownership Trusts
In Budget 2021, the Government indicated its support for “employee ownership trusts” and stated that such trusts “encourage employee ownership of a business and facilitate the transition of privately owned businesses to employees.” Such trusts are available in the United Kingdom and the United States. Following the Government’s consultations with stakeholders, Budget 2022 proposes to introduce a new special purpose trust, the “Employee Ownership Trust” under the Income Tax Act.
No specific details are provided. Budget 2022 states that the Government will consider any remaining barriers to the creation of such trusts and will develop rules governing such trusts, with further consultation with stakeholders.
Budget 2022 announces that the Government is examining a new “minimum tax regime.” Currently, the Income Tax Act provides for an “alternative minimum tax” (AMT), which was enacted in 1986. Budget 2022 states that the new regime would “go further towards ensuring that all wealthy Canadians pay their fair share of tax” and notes that high-earning Canadians “make significant use of deductions and tax credits.”
Budget 2022 refers specifically to Canadians who pay personal income tax at a rate of 15% (or less) of their “gross income” more than $400,000. “Gross income” is described as including realized capital gains at a 100% inclusion rate, rather than the 50% inclusion rate required under the Income Tax Act in respect of taxable capital gains. It also includes the cash value of dividend income.
The statistics provided in Budget 2022 are based on personal T1 income tax returns filed for the 2019 taxation year and do not identify the nature of the deductions and tax credits claimed by individual filers. Budget 2022 states that details regarding the new minimum tax regime will be released in the 2022 fall economic and fiscal update.
For more information on how any of the proposed changes may have on your business or you, contact your Rise Advisor.
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