Canada Federal Budget 2022 Highlights
A. Individuals – proposal
1. A Tax-Free First Home Savings Account (CELIAPP)
A new account will be available starting January 2023 to help taxpayers save money for their first home. The contributions will be deductible from their taxable income and the income earned in this account will not be taxable.
The lifetime limit contribution will be $40,000 and the annual limit contribution will be $8,000. Qualifying withdrawals to purchase a first home will not be taxable.
The taxpayer must be 18-year-old of age and must not have lived in a house that they owned during the year or the past 4 years. The taxpayer also cannot use the tax-free first home savings account as well as the home buyer’s plan for the same house.
2. Doubling the First-Time Home Buyers’ Tax Credit
The amount eligible for the Home Buyer’s tax credit is now doubled to $10,000. An eligible taxpayer can now receive up to $1,500 in tax credit for the purchase of his qualifying house. The taxpayer must not have owned a house during the year of the purchase the prior 4 years.
Spouses or common-law partners must continue to split the credit, meaning that the combined tax credit cannot exceed $1,500.
3. Home Accessibility Tax Credit
The qualifying expense limit to the Home Accessibility tax credit is now doubled to $20,000 for 2022 and subsequent tax years.
A taxpayer can receive a tax credit up to $3,000 for qualifying expenses for important accessibility renovations or alterations.
4. Multigenerational Home Renovation Tax Credit
Starting January 1, 2023, a refundable credit will be available for qualifying renovations to permit an eligible person, such as a senior or a person with a disability, to live with a qualifying relation in a secondary dwelling unit.
The secondary unit must have a private entrance, a kitchen, a bathroom and a sleeping area.
The value of the credit would be 15% of the lesser of eligible expenses and the $50,000 limit, providing a tax relief up to $7,500.
5. Making Property Flippers Pay Their Fair Share
A new deeming rule would apply to residential properties, including rentals, sold on or after January 1, 2023, and held for less than 12 months. These would be considered flipping properties and therefore fully taxed as business income.
The new deeming rule will not apply to certain life events such as: death, disability, the birth of a child, a new job, insolvency, or a divorce.
In cases where the deeming rule applies, the principal-residence exemption will not be available.
6. Taxing Assignment Sales
An assignment agreement entered into on or after May 7, 2022, would be taxable for GST/HST purposes in respect of newly constructed or substantially renovated residential housing, regardless of the primary purpose of the taxpayer when entering the agreement.
The GST/HST on the new home would apply on the total amount paid by its first occupant and would be collected and remitted to the CRA by the assignor.
7. Labour Mobility Deduction for Tradespeople
A deduction up to $4,000 recognizing travel and relocation expenses of tradespeople working in the construction industry would be available for 2022 and subsequent tax years. The expenses including lodging, travel and meals.
To qualify, the temporary lodging must be at least 150 km closer than the ordinary residence to the work location, must be in Canada and must be for a duration of minimum 36h.
8. Help for Canadians Who Want to Become Parents
The medical expense tax credit for surrogacy and other expenses incurred in Canada is available for 2022 and subsequent tax years in excess of the lesser of $2,479 and 3% of the taxpayer’s net income.
The definition of patients in respect to the METC now includes the taxpayer, the taxpayer’s spouse or common-law partner, as well as a surrogate mother or a donor of sperm, ova or embryos.
The fess paid to fertility clinics and donors banks to obtain donor sperm or ova and used by the taxpayer to become a parent are also eligible fees in respect to METC.
B. Individuals – Announcements
1. Next Steps Towards a Minimum Tax for High Earners
A new minimum tax regime will be proposed in the 2022 fall economic and fiscal update to ensure that all wealthy Canadians pay their fair share of tax.
2. Limiting Aggressive Tax Avoidance by Financial Institutions
Changes to the financial transaction approval process will be examined to restrict the use of corporate structures in tax heavens of federally regulated financial institutions to engage in aggressive tax avoidance operations.
3. A Ban on Foreign Investment in Canadian Housing
New restrictions are proposed to prohibit certain foreign entities and individuals who are not Canadian citizens or permanent residents from buying nonrecreational, residential property in Canada for a period of two years.
C. Corporation – proposals
1. Cutting Taxes for Canada’s Growing Small Businesses
Budget 2022 proposes to phase out access to the small business tax rate more gradually, with access to be fully phased out when taxable capital reaches $50 million, rather than at $15 million.
This measure would apply to taxation years that begin on or after Budget Day.
2. Investment Tax Credit for Carbon Capture, Utilization, and Storage
Budget 2022 proposes a refundable investment tax credit for businesses that incur eligible Carbon Capture, Utilization, and Storage (“CCUS”) expenses, starting in 2022.
The investment tax credit would be available to CCUS projects to the extent that they permanently store captured CO2 through an eligible use.
3. Requiring Financial Institutions to Help Pay for the Recovery
Budget 2022 proposes to introduce a temporary Canada Recovery Dividend, under which banking and life insurers’ groups (as determined under Part VI of the Income Tax Act (“ITA”)) will pay a one-time 15 per cent tax on taxable income above $1 billion for the 2021 tax year.
The Canada Recovery Dividend will be paid in equal installments over five years.
Budget 2022 also proposes to permanently increase the corporate income tax rate by 1.5 percentage points on the taxable income of banking and life insurance groups (as determined under Part VI of the ITA) above $100 million, such that the overall federal corporate income tax rate above this income threshold will increase from 15 per cent to 16.5 per cent.
4. Preventing the Use of Foreign Corporations to Avoid Canadian Tax
Budget 2022 proposes targeted amendments to the ITA to ensure that, for taxation years that end on or after April 7, 2022, investment income earned and distributed by private corporations that are, in substance, CCPCs is subject to the same taxation as investment income earned and distributed by 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.
Similar to the CCPC definition, the test would contain an extended definition of control that would aggregate the shares owned, directly or indirectly, by Canadian resident individuals, and would therefore deem a corporation to be controlled by a Canadian resident individual where Canadian individuals own, in aggregate, sufficient shares to control the corporation
Budget 2022 also proposes targeted amendments to the ITA to eliminate the tax-deferral advantage available to CCPCs and their shareholders earning investment income through controlled foreign affiliates.
The deferral advantage would be addressed by applying the same relevant tax factor to individuals, CCPCs and substantive CCPCs (i.e., the relevant tax factor currently applicable to individuals).
This relevant tax factor is calibrated based on the highest combined federal and provincial or territorial personal income tax rate and would thus eliminate any tax incentive for CCPCs and their shareholders to earn investment income in a controlled foreign affiliate.
These measures would apply to taxation years that begin on or after Budget Day.
5. Closing the Double-Deduction Loophole
Some Canadian financial institutions have been using hedging and short selling arrangements in aggressive tax planning strategies.
Budget 2022 proposes to amend the ITA to deny the deduction for a dividend received where the taxpayer has entered into such transactions.
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.
6. Expanding Anti-Avoidance Tax Rules
Due to differences between Canada’s various tax treaties, the interest received from Canadian residents is often subject to different tax rates depending on where the recipient resides.
Interest coupon stripping arrangements exploit these differences and allow some to pay less in taxes (taxpayers are avoiding paying tax on cross-border interest payments).
Budget 2022 proposes to create a specific anti-avoidance rule in the ITA to ensure that the appropriate amount of tax is paid when an interest coupon stripping arrangement is used.
7. Strengthening the General Anti-Avoidance Rule
Budget 2022 proposes to amend the ITA to provide that the GAAR can apply to transactions that affect tax attributes that have not yet been used to reduce taxes.
This measure would apply to notices of determination issued on or after Budget Day.
The government intends to release in the near future a broader consultation paper on modernizing the GAAR, with a consultation period running through the summer of 2022, and with legislative proposals to be tabled by the end of 2022.
8. Pillar Two (Global Minimum Tax)
Pillar Two is a framework for a minimum tax applicable to multinational enterprises (“MNEs”) with annual revenues of €750 million or more. It is designed to ensure these MNEs are subject to a minimum effective tax rate (ETR) of 15 per cent on their profits in every jurisdiction in which they operate.
Budget 2022 proposes to implement Pillar Two in Canada, along with a domestic minimum top-up tax. The primary charging rule and domestic minimum top-up tax (Income Inclusion Rule) would be effective in 2023, with the secondary charging rule (Undertaxed Profits Rule) effective not before 2024.
Budget 2022 is also launching a public consultation on the implementation of Pillar Two and the domestic minimum top-up tax in Canada.
9. Employee Ownership Trusts
Budget 2022 proposes to create the Employee Ownership Trust—a new, dedicated type of trust under the ITA to support employee ownership.
D. Corporate – Announcements
1. Review of Tax Support to R&D and Intellectual Property
This review will examine whether changes to eligibility criteria would be warranted to ensure adequacy of support and improve overall program efficiency.
2. A New Tax Credit for Investments in Clean Technology
Budget 2022 announces that the Department of Finance Canada will engage with experts to establish an investment tax credit of up to 30 per cent, 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.
E. Other Specific Measures
1. Canada’s Critical Minerals and Clean Industrial Strategies
The introduction of a new 30 per cent Critical Mineral Exploration Tax Credit for specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors
2. Support for Business Investment in Air-Source Heat Pumps
Budget 2022 proposes to expand the accelerated tax deductions for business investments in clean energy equipment to include air-source heat pumps.
3. Taxation of Vaping Products
Budget 2022 proposes to implement the previously announced excise duty on vaping products, 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.
4. Increasing the Capacity of Superior Courts
Budget 2022 proposes to amend the Judges Act, the Federal Courts Act, and the Tax Court of Canada Act to add 24 new superior court positions, including new Associate Chief Justices for the Court of Queen’s Bench for Saskatchewan and for the Court of Queen’s Bench of New Brunswick.
Budget 2022 also proposes to provide $83.8 million over five years, starting in 2022-23, and $17.8 million ongoing, for these 24 additional superior court positions.
5. Stronger Partnerships in the Charitable Sector
Budget 2022 proposes to amend the ITA to allow a charity to provide its resources to organizations that are not qualified donees, provided that the charity meets certain requirements designed to ensure accountability.
This is intended to implement the spirit of Bill S-216, the Effective and Accountable Charities Act, which is currently being considered by Parliament
6. International Accounting Standards for Insurance
Budget 2022 proposes legislative amendments to confirm support of the use of IFRS 17 accounting standards for income tax purposes, with the exception of a new reserve known as the contract service margin, subject to some modifications.
Without this exception, profits embedded in the new reserve would be deferred for income tax purposes.
7. Reinforcing the Canada Revenue Agency
Budget 2022 proposes to provide $1.2 billion over five years, starting in 2022-23, for the CRA to expand audits of larger entities and non-residents engaged in aggressive tax planning.
8. Eliminating Excise Duty on Low-Alcohol Beer
Budget 2022 proposes to eliminate excise duty on low-alcohol beer, effective as of July 1, 2022.
This will bring the tax treatment of low-alcohol beer into line with the treatment of wine and spirits with the same alcohol content, and make Canada’s practices consistent with those in other G7 countries.