The 2022 Federal budget was presented on April 7, 2022 by the Deputy Prime Minister and Minister of Finance, Chrystia Freeland. Various new measures, including certain tax measures, were announced. The summary below includes the most relevant measures.
To make sure that housing is owned by Canadians instead of foreign investors, Budget 2022 announces the government’s intention to propose 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.
Budget 2022 proposes to create the Tax-Free First Home Savings Account (FHSA), a new registered account 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. The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000.
It must be noted that the Home Buyer’s Plan (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.
It is the government’s intention for individuals to be able to open an FHSA and start contributing at some point in 2023.
Budget 2022 proposes to double the HBTC amount to $10,000 (currently $5,000), which would provide up to $1,500 in tax relief to eligible home buyers (currently up to $750). 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 acquisitions of a qualifying home made on or after January 1, 2022.
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 individual above 65 years of age or a person with a disability who is 18 years of age or older) to live with a qualifying relation (this term includes parents, grandparents, children, grandchildren, brother, sister, uncle, niece, nephew or the spouse of one of these persons, as long as they are 18 years of age or older). The value of the credit would be 15 per cent 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.
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 (i.e. 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).
To better support independent living, Budget 2022 proposes to increase the annual expense limit of the Home Accessibility Tax Credit to $20,000 (currently $10,000). As a result, the tax relief would rise to up to $3,000 (as opposed to the current $1,500). This enhancement would provide additional tax support for more significant renovations undertaken to improve accessibility, such as building a bedroom and/or a bathroom to permit first-floor occupancy for a qualifying person who has difficulty accessing living spaces on other floors.
This measure would apply to expenses incurred in the 2022 and subsequent taxation years.
Profits from flipping residential properties are fully taxable as business income, meaning they are not eligible for the 50 per-cent capital gains inclusion rate or the Principal Residence Exemption.
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 (as opposed to a capital gain).
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:
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.
Budget 2022 proposes to introduce a Labour Mobility Deduction for Tradespeople to recognize certain travel and 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.
Budget 2022 proposes to broaden the Medical Expense Tax Credit (METC) to take into consideration particular situations related to surrogacy.
The following measures are proposed:
This measure would apply to expenses incurred in the 2022 and subsequent taxation years.
Registered charities are generally required to expend a minimum amount each year, referred to as the disbursement quota (DQ). The DQ is currently equal to 3.5 per cent of the registered charity’s property not used directly in charitable activities or administration. The DQ is designed to ensure the timely disbursement of tax-assisted funds towards charitable purposes, while allowing for reasonable asset growth within the charitable sector to support charitable activities in the future.
Budget 2022 proposes to increase the DQ rate from 3.5 per cent to 5 per cent 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. There are exceptions in certain circumstances.
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.
These measures would apply to charities in respect of their fiscal periods beginning on or after January 1, 2023.
Under the Income Tax Act, registered charities are limited to devoting their resources to charitable activities they carry on themselves or providing gifts to qualified donees. Where charities conduct activities through an intermediary organization (other than a qualified donee), they must maintain sufficient control and direction over the activity such that it can be considered their own.
Budget 2022 proposes a number of changes to improve the operation of these rules, 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. Additional measures designed to ensure compliance by charities with these new rules are forthcoming.
These changes would apply as of royal assent of the enacting legislation.
Budget 2022 proposes to require financial institutions to annually report to the Canada Revenue Agency the total fair market value, determined at the end of the calendar year, of property held in each RRSP and RRIF that they administer. This information would assist the Canada Revenue Agency in its risk-assessment activities regarding qualified investments held by RRSPs and RRIFs.
This measure would apply to the 2023 and subsequent taxation years.
Small businesses may benefit from a reduced corporate income tax rate of 9 per cent – a preference relative to the general corporate income tax rate of 15 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.
In order to target the preferential tax rate to small businesses, the business limit is reduced on a straight-line basis when:
The business limit is the lesser of the two amounts determined by these business limit reductions.
In order 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. For example, under the new rules:
This measure would apply to taxation years that begin on or after Budget Day.
Budget 2022 proposes to introduce the following:
The proposed additional tax would apply to taxation years that end after Budget Day. For a taxation year that includes Budget Day, the additional tax would be prorated based on the number of days in the taxation year after Budget Day.
Carbon capture, utilization, and storage (CCUS) is a suite of technologies that capture carbon dioxide (CO2) emissions from fuel combustion, industrial processes or directly from the air, to either store the CO2 (typically deep underground) or use the CO2 in industry.
Budget 2022 proposes to introduce an investment tax credit for CCUS (the CCUS Tax Credit), subject to detailed rules and conditions.
This measure would apply to eligible expenses incurred after 2021 and before 2041.
Under the capital cost allowance (CCA) regime, Classes 43.1 and 43.2 of Schedule II to the Income Tax Regulations provide accelerated CCA rates (30 per cent and 50 per cent, respectively) for investments in specified clean energy generation and energy conservation equipment. Property in these classes that is acquired after November 20, 2018 and that becomes available for use before 2024 is eligible for immediate expensing while property that becomes available for use after 2023 and before 2028 is subject to a phase-out from these immediate expensing rules.
Budget 2022 proposes to expand eligibility under Classes 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating. Eligible property would include equipment that is part of an air-source heat pump system that transfers heat from the outside air, including refrigerant piping, energy conversion equipment, thermal energy storage equipment, control equipment and equipment designed to enable the system to interface with other heating and cooling equipment. Eligible property would not include:
Flow-through share agreements allow corporations to renounce or “flow through” both Canadian exploration expenses and Canadian development expenses to investors, who can deduct the expenses in calculating their taxable income (at a 100-per-cent or 30-per-cent rate on a declining-balance basis, respectively). This facilitates the raising of equity to fund eligible exploration and development by enabling companies to issue shares at a premium.
Budget 2022 proposes to eliminate the flow-through share regime for oil, gas, and coal activities by no longer allowing oil, gas and coal exploration or development expenditures to be renounced to a flow-through share investor.
This change would apply to expenditures renounced under flow-through share agreements entered into after March 31, 2023.
The Income Tax Act generally permits a Canadian corporation, in computing its taxable income, to claim a deduction (the “dividend received deduction”) for the amount of a taxable dividend received on a share (a “Canadian share”) that it holds in another Canadian corporation.
Budget 2022 proposes amendments to the Income Tax Act to:
The proposed amendments would apply to dividends and related dividend compensation payments that are paid, or become payable, on or after Budget Day, unless the relevant hedging transactions or related securities lending arrangement were in place before Budget Day, in which case the amendment would apply to dividends and related dividend compensation payments that are paid after September 2022.
The general anti-avoidance rule (GAAR) is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction. The GAAR is generally applied by the Canada Revenue Agency (CRA) on an assessment of tax.
Where the GAAR applies to a transaction, the Income Tax Act contains a set of rules that are intended to allow the CRA to determine the amount of a tax attribute, such as the adjusted cost base of a property and the paid-up capital of a share, relevant for the purpose of computing tax.
Historically, the Courts have held that the GAAR did not apply to a transaction that resulted in an increase in a tax attribute that had not yet been utilized to reduce taxes. The limitation of the GAAR to circumstances where a tax attribute has been utilized runs counter to the policy underlying the GAAR and the determination rules. This limitation also reduces certainty for both taxpayers and the CRA, as they could have to wait several additional years to confirm the tax consequences of a transaction.
To address these concerns, Budget 2022 proposes that the Income Tax Act be amended to provide that the GAAR can apply to transactions that affect tax attributes that have not yet become relevant to the computation of tax. For greater certainty, determinations made before Budget Day, where the rights of objection and appeal in respect of the determination were exhausted before Budget Day, would remain binding on taxpayers and the CRA.
This measure would apply to notices of determination issued on or after Budget Day.
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.
The active business income of a private corporation is integrated only once dividends are paid out to shareholders. In contrast, additional refundable taxes apply to investment income earned by private corporations in the year in which it is earned. These taxes generally aim to remove any advantage for Canadian individuals of earning investment income in a private corporation (where the investment income would otherwise be subject to a lower tax rate compared to earning such income personally). These refundable taxes form part of an integrated system of measures that link the taxation of income earned by private corporations and their individual shareholders.
Deferring Tax Using Foreign Entities
Some taxpayers are manipulating the status of their corporations in an attempt to avoid qualifying as a CCPC to achieve a tax-deferral advantage on investment income earned in their corporations. The approach taken may involve effecting a change in status of the corporation in anticipation of capital gains on a sale of assets.
Budget 2022 proposes targeted amendments to the Income Tax Act to align the taxation of investment income earned and distributed by “substantive CCPCs” with the rules that currently apply to CCPCs. Substantive CCPCs would be private corporations resident in Canada (other than CCPCs) that are ultimately controlled (in law or in fact) by Canadian-resident individuals.
This measure would apply to taxation years that end on or after Budget Day. To provide certainty for genuine commercial transactions entered into before Budget Day, an exception would 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 Budget Day and the share sale must occur before the end of 2022.
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 highly-mobile income (including investment income) through controlled foreign affiliates (i.e., a non-resident corporation in which the taxpayer has, or participates in, a controlling interest).
Unlike the domestic anti-deferral rules, the FAPI rules do not differentiate between different tax rates applicable to different types of Canadian corporations. This provides a tax-deferral advantage for CCPCs and their individual shareholders earning passive investment income through non-resident corporations.
Budget 2022 proposes targeted amendments to the Income Tax Act to eliminate the tax-deferral advantage available to CCPCs and their shareholders earning investment income through controlled foreign affiliates.
These measures would apply to taxation years that begin on or after Budget Day.
Canada is one of 137 members of the Organisation for Economic Co-operation and Development (OECD)/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) that have joined a two-pillar plan for international tax reform agreed to on October 8, 2021. The historic “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy” (the October Statement) agreed to that day has since been endorsed by G20 Finance Ministers and Leaders.
Pillar One is intended to reallocate a portion of taxing rights over the profits of the largest and most profitable multinational enterprises (MNEs) to market countries (i.e., where their users and customers are located). Pillar Two is intended to ensure that the profits of large MNEs are subject to an effective tax rate of at least 15 per cent, regardless of where they are earned.
Implementation Timeline and Framework
The Pillar Two project has now entered the implementation phase. The October Statement provides that countries should implement Pillar Two effective in 2023, with the Undertaxed Profits Rule (UTPR) coming into effect in 2024.
In Canada, the onus is generally on taxpayers earning business income, including those carrying on business through online platforms (i.e., platform sellers), to report to the Canada Revenue Agency (CRA) the income they have earned. However, not all platform sellers are aware of the tax implications of their online activities. In addition, transactions occurring digitally through online platforms may not be visible to tax administrations, making it difficult for the CRA to identify non-compliance.
To address these concerns, which are shared by other jurisdictions, the Organisation for Economic Co-operation and Development (OECD) has developed model rules for reporting by digital platform operators with respect to platform sellers. The model rules require online platforms to collect and report relevant information to tax administrations in order to ensure that revenues earned by taxpayers through those platforms can be properly taxed. An online platform would generally need to report the information to only one jurisdiction, and that jurisdiction would then share the information with partner jurisdictions based on the residence of each platform seller earning revenue through the platform (and, in the case of a rental property, the jurisdiction where the rental property is located).
Budget 2022 proposes to implement the model rules in Canada. The measure would require reporting platform operators that provide support to reportable sellers for relevant activities to determine the jurisdiction of residence of their reportable sellers and report certain information on them.
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.
In general terms, an interest coupon stripping arrangement would be considered to exist where the following conditions are met:
Part XIII of the Income Tax Act generally imposes a 25-per-cent withholding tax on interest paid or credited by a Canadian resident to a non-arm’s length non-resident. The 25-per-cent withholding tax rate is generally reduced for interest paid to a resident in a country with which Canada has a tax treaty. These Canadian tax treaties typically reduce this withholding tax rate to either 10 per cent or 15 per cent.
Some taxpayers have sought to avoid Part XIII interest withholding tax on non-arm’s length debt using so-called interest coupon stripping arrangements. These arrangements generally involve a non-resident lender selling its right to receive future interest payments (interest coupons) in respect of a loan made to a non-arm’s length Canadian-resident borrower to a party that is not subject to withholding tax. The non-resident lender generally retains its right to the principal amount under the loan.
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
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”).
Under the current Goods and Services Tax/Harmonized Sales Tax (GST/HST) rules, an assignment sale in respect of newly constructed or substantially renovated residential housing may be either taxable or exempt. An assignment sale made by an individual would generally be taxable if the individual had originally entered into the agreement of purchase and sale with the builder for the primary purpose of selling their interest in the agreement. If, on the other hand, the individual had originally entered into the agreement for another primary purpose, such as to occupy the home as a place of residence, the assignment sale would generally be exempt.
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.
Typically, the consideration for an assignment sale includes an amount attributable to a deposit that had previously been paid to the builder by the assignor. Since the deposit would already be subject to GST/HST when applied by the builder to the purchase price on closing, Budget 2022 proposes that the amount attributable to the deposit be excluded from the consideration for a taxable assignment sale.
This measure would apply in respect of any assignment agreement entered into on or after the day that is one month after Budget Day.