On April 7, 2022, the Minister of Finance released the 2022 Federal budget. There has been no change in terms of income tax rates or the capital gains inclusion rate. New key measures of relevance are summarized below.
Business Tax Measures.
Small Business Deduction
Currently, Canadian-controlled private corporations (CCPCs) are eligible for a lower corporate income tax rate on their first $500,000 of active business income. Access to the lower rate begins to be phased out when taxable capital of the particular corporation, together with that of associated corporations, exceeds $10 million and is fully phased out at $15 million. The budget proposes to increase these threshold amounts to $10 million and $50 million respectively, allowing more medium-sized businesses to benefit from the lower corporate income tax rate.
Intergenerational Share Transfers
The government plans to consult with stakeholders, up until June 17, 2022, on how the existing rules introduced in Bill C-208 should be modified to allow for genuine intergenerational business transfers while protecting tax system integrity. The key to Bill C-208 was that it only apply in situations involving a “qualified small business corporation share” or a “share in the capital stock of a family farm or fishing corporation.” The Bill addressed inequities in the Income Tax Act that apply to intergenerational transfers of small business corporations, family farm corporations, and family fishing corporations that favoured an unrelated purchaser over a familial purchaser. New legislation to address these issues is expected in fall 2022.
Budget 2022 proposes amendments to prevent taxpayers from restructuring CCPCs, in an attempt to avoid being classified as a CCPC, to achieve a tax deferral on investment income earned in their corporations. The concept of a “substantive CCPC” will be introduced to which the same CCPC refundable tax regime would apply. The new rules would include an extended concept of control, where a corporation would be considered controlled by Canadian resident individuals if such individuals own, directly or indirectly, sufficient shares in aggregate to control the corporation.
Rollover for Small Business Investments
The government is reviewing whether the tax system delivers adequate support for investments in growing businesses. The review will examine the rollover for small business investments, which allows investors in small businesses to obtain capital gain tax deferral.
General Anti-Avoidance Rule (GAAR)
Budget 2022 proposes to amend the Income Tax Act such that the GAAR can apply to transactions that affect tax attributes that have not yet been used to reduce taxes. The definition of “tax benefit” would include a reduction, increase or preservation of an amount that could be relevant for purposes of computing a tax benefit in the future or could result in a tax benefit in the future. This amendment is in response to the precedent set by the courts on the application of the GAAR in certain instances.
Employee Ownership Trusts
Budget 2022 proposes to create a new type of trust under the Income Tax Act to support employee ownership of a business. The government will continue to develop and finalize these new rules.
Business Tax 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 expenses. The credit rates range from 37.5% to 60% between 2022 – 2030, with lower rates applying between 2031 – 2040.
Investment Tax Credit for Clean Technology
Budget 2022 proposes an investment tax credit of up to 30% focused on net-zero technologies, battery storage solutions and clean hydrogen. Details 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 investments in clean energy equipment to include air-source heat pumps. Their manufacturing would also be eligible for the reduced tax rate for zero-emission technology manufacturing or processing activity.
Critical Mineral Exploration Tax Credit
The government proposes a new 30% tax credit for mineral exploration expenses that will be incurred as part of an exploration project that targets specified minerals used to produce batteries and magnets. Eligible expenses would not benefit from both the proposed credit and the existing mineral exploration tax credit.
Flow-Through Shares for Oil, Gas and Coal Activities
The government proposes to eliminate the flow-through share regime for oil, gas and coal activities by no longer allowing related exploration or development expenditures to be renounced to a flow-through share investor.
Scientific Research and Experimental Development Program Review
The government intends to review this program to ensure it is effective in encouraging research and development, and to explore opportunities to modernize and simplify it, including the eligibility criteria.
Patent Box Review
The government will consider and seek views on the suitability of adopting a patent box regime in Canada. A patent box regime, also referred to as an intellectual property (IP) regime, taxes business income earned from IP at a rate below the corporate income tax rate, aiming to encourage research and development.
Personal Tax Measures.
Residential Property Flipping
Budget 2022 proposes a new deeming rule to ensure profits from flipping residential properties are fully taxed. Any person who sells a residential property, including rental property, they have owned for less than 12 months would be deemed to be taxed on their profits as business income. The profits will therefore be ineligible for capital gains treatment or the principal residence exemption. Exemptions will apply for Canadians if the sale is for certain reasons, such as a death, disability, the birth of a child, a new job or a separation.
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, GST/HST may or may not apply. Budget 2022 proposes to deem all assignments of purchase and sale agreements in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes, so that the tax would apply to the total amount paid for a new home by its first occupant.
Tax-Free First Home Savings Account
Budget 2022 proposes to introduce a new Tax-Free First Home Savings Account (FHSA) that would allow prospective first-time home buyers to save up to $40,000. Eligible individuals may contribute up to $8,000 annually, not to exceed the $40,000 lifetime limit on contributions. Like an RRSP, contributions would be tax-deductible and withdrawals used to purchase a first home, including investment income earned, would be non-taxable, like a TFSA. The Home Buyers Plan (HBP) will continue to be available, 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.
First-Time Home Buyers Tax Credit
Budget 2022 proposes to double the amount for this credit to $10,000 from $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.
Additional Housing Support
The government proposes to provide a one-time $500 payment in 2022-23 to those facing housing affordability challenges. Details to be announced.
Multigenerational Home Renovation Tax Credit
To support multigenerational families living under one roof, this new credit will provide up to $7,500 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.
Home Accessibility Tax Credit
Budget 2022 proposes to double the qualifying expense limit of this credit to $20,000, for a maximum tax credit of up to $3,000 for eligible accessibility renovations or alterations.
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.
Medical Expense Credit for Surrogacy and Other Expenses
Eligibility for this tax credit would be extended to:
- medical expenses related to a surrogate mother or a sperm, ova or embryo donor, including expenses reimbursed to a surrogate for in vitro fertilization expenses
- certain fees paid to fertility clinics and donor banks in Canada.
Support for Seniors
The Budget intends 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.
Minimum Tax for High Earners
The government plans to examine a new minimum tax regime targeting high-income Canadians and to release proposed details in its 2022 fall economic and fiscal update.
Increased CRA Funding.
In addition to the measures discussed above, Budget 2022 proposes to provide an additional $1.2 billion over five years 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.
For any questions with respect to the above, contact us.
For more details on the full budget summary please refer to Government of Canada – Budget 2022.