The Deputy Prime Minister and Finance Minister Chrystia Freeland tabled the 2022 Federal Budget on April 7, 2022. This article provides our summary of some of the tax measures proposed in the Budget.
Overall, the Budget expects a deficit of $114 billion for 2021-2022. The primary focus of the budget is on affordable housing and transition to a green economy. In regards to personal and corporate tax rate changes, no increase or decrease in the tax rate was announced. However, the budget did introduce a one-time 15% tax and an ongoing 1.5% tax on bank and life insurer groups. Lastly, the Budget relaxed the rules around the reduction of the small business deduction which should allow more medium-sized Canadian-controlled private corporations (CCPCs) to benefit from a lower tax rate.
Tax-Free First Home Savings Account
The Tax-Free First Home Savings Account (FHSA) is a new registered account that will assist in saving for your first home. Similar to a Registered Retirement Savings Plan (RRSP), contributions to a FHSA will be deductible. Additionally, income earned within a FHSA and qualifying withdrawals for purchasing a first home are non-taxable. However, you will not be permitted to make both a FHSA withdrawal and a Home Buyers Plan withdrawal for the same home.
To open a FHSA, you must be a Canadian resident at least 18 years of age and must not have lived in a home that you owned in the year or during the previous four calendar years.
The lifetime limit of contributions for the FHSA will be $40,000, subject to an annual contribution limit of $8,000. Any unused savings could be transferred into an RRSP or RRIF or would otherwise have to be withdrawn on a taxable basis.
Home Buyers’ Tax Credit
The Budget proposes to double the First-Time Home Buyers’ Tax Credit (HBTC) amount to $10,000 (currently at $5,000), which would increase the tax relief from $750 to $1,500 for eligible home buyers. Spouses or common-law partners will continue to be able to split the value of the credit as long as the combined credit does not exceed $1,500.
Multigenerational Home Renovation Tax Credit
The Budget proposes to introduce a new Multigenerational Home Renovation Tax Credit, which will provide a refundable tax credit in recognition of eligible expenses for qualifying renovations. Qualifying renovations includes a secondary dwelling unit to permit an eligible family member (a senior or a person with a disability) to live with you. The value of the credit is 15% of the eligible expenses (maximum of $50,000).
Eligible expenses would include the cost of labour and professional services, building materials, fixtures, equipment rentals, and permits. It is also important to note that one qualifying renovation will be permitted to be claimed over each person’s lifetime.
Home Accessibility Tax Credit
The Home Accessibility Tax Credit currently provides a non-refundable tax credit in recognition of eligible home renovation expenses with respect to an eligible dwelling of a qualifying individual. The Budget has proposed to increase the annual expense limit of the HATC to $20,000 (currently $10,000) that represents an increase to the non-refundable tax credit of $1,500.
Residential Property Flipping Rule
It is a question of fact if the gain on the sale of a property is considered to be a capital gain or business income. The Budget proposes to tax profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months as business income. The proposed rules provide for exceptions related to life changing events such as death, divorce, disability or involuntary dispositions.
Medical Expense Tax Credit for Surrogacy and Other Expenses
The Budget proposes to broaden the medical expenses related to fertilization procedures that qualify for the medical expense tax credit. The Budget is intended to further help those who are trying to become parents. In addition to the previously allowed fertility expenses such as in vitro fertilization procedures, the Budget allows certain medical expenses related to a surrogacy mother or sperm, ova, or embryo donor to be eligible for the medical expense tax credit.
Canada Recovery Dividend and Additional Tax on Banks and Life Insurers
The Budget introduces a one-time Canada Recovery Dividend on bank and life insurer groups. The Canada Recovery Dividend is a 15% tax based on the portion of 2021 taxable income of the bank and life insurer group that is in excess of $1 billion. The tax would be imposed for the 2022 taxation year and would be payable in equal instalments over five years.
Moreover, the Budget proposes an additional annual tax of 1.5% on the taxable income of the bank and life insurer group exceeding $100 million.
Small Business Deduction
Small businesses benefit from a reduced federal corporate income tax rate of 9% compared to the general rate of 15%. The reduced rate is referred to as a ‘small business deduction’ and is eligible for taxable income from active business income of up to $500,000 per year (business limit) for a CCPC.
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 $10M and $15M.
The budget has proposed to extend this range for taxable capital to amounts between $10M and $50M. This should allow more mid-sized businesses to take advanced of the small business deduction and the overall lower tax rate.
The Canadian tax system applies refundable tax rules on investment income earned in a CCPC. In general, the refundable tax regime for CCPCs removes the incentive for a Canadian individual to earn investment income in a corporation rather than directly. In certain situations, a private corporation controlled by Canadian residents may not qualify as a CCPC and, therefore, would not be subject to the refundable tax regime on its investment income. The Budget targets these individuals that that are proactively taking steps to cause the corporations not to be a CCPC for the purpose of avoiding refundable taxes.
The Budget introduced the new definition of “substantive Canadian-controlled private corporation” (Substantive CCPC) to counter this change in CCPC status. In simple terms, a substantive CCPC is a private corporation resident in Canada (other than a CCPC) that is ultimately controlled, legally or factually, by Canadian resident individuals. Substantive CCPCs will be taxed as CCPCs with respect to investment income earned and distributed.
The proposal will apply to taxation years that end after April 6, 2022. However, “to provide certainty for genuine commercial transactions” entered into before April 7, 2022, an exception will be provided where the taxation year of the corporation ends because of an acquisition of control caused by the sale of all or substantially all of the shares of a corporation to an arm’s length purchaser. The purchase and sale agreement pursuant to which the acquisition of control occurs must have been entered into before April 7, 2022 and the share sale must occur before the end of 2022.
Clean Technology Tax Incentives – Air-Source Heat Pumps
Certain investments in specified clean energy generation and energy conservation equipment are eligible for accelerated capital cost allowance (CCA) rates in Classes 43.1 and 43.2. In this regard, the Budget has proposed to expand Classes 43.1 and 43.2 to include air-source heat pumps used primarily for interior space heating or cooling (e.g. refrigerant piping, energy conversion equipment, thermal energy storage equipment, and control equipment).
GST/HST on Assignment Sales by Individuals
Under the current GST/HST rules, an assignment sale of interests in real property (e.g., assignment of a pre-construction condominium unit) could be exempted from GST/HST under certain circumstances. For example, GST/HST would generally not be applicable if an individual originally intended to use the property as the primary residence.
The Budget proposes to make all assignment sales of newly constructed or substantially renovated residential real property taxable for GST/HST purposes, effective May 7, 2022. Additionally, the Budget proposes to confirm that the amount subject to GST/HST would be the profit on the sale. The amount attributable to the deposit previously paid to the builder would be exempted from GST/HST on the assignment sale.
For a more detailed discussion surrounding the changes proposed by the 2022 Budget and how they impact you or your business, please reach out to Grewal Guyatt LLP.