April 27, 2022
Canadian 2022 Federal Budget Summary
The 2022 Federal Budget (A Plan to Grow Our Economy and Make Life More Affordable) was tabled on April 7, 2022. The budget focused on economic growth, affordable housing and public healthcare, plus initiatives to fight climate change.
Here are a few of the highlights:
Tax Rates
There were no changes to personal income tax rates and the capital gains inclusion rate did not increase from 50%.
Dispositions of real property
Budget 2022 proposes to treat the disposition of residential property within 12 months of purchase as business income and not a capital gain. This means the capital gains inclusion rate, which can reduce the tax on the disposition, will not be available if the home is sold within the first 12 months of purchase unless the disposition occurred due to a change in certain life circumstances (i.e. birth of a new child, death, divorce etc.). This rule is proposed to apply to homes sold on or after January 1, 2023.
Tax Free First Home Savings Account (“FHSA”)
Starting January 1, 2023, Budget 2022 proposes to allow taxpayers to make tax-deductible contributions (similar to an RRSP) of up to $40,000 in a lifetime (maximum of $8,000 per year) to their FHSA. Funds in an FHSA can grow tax-free and are not taxable when withdrawn (similar to a Tax Free Savings Account) if used to purchase a qualifying property.
Canadian residents who are at least 18 years old are eligible to open an FHSA. Their contributions to the FHSA do not impact RRSP contribution room limits. However, they cannot use the FHSA and Home Buyer’s Plan (withdrawals from RRSP) on the same property.
Changes to the small business deduction rules (“SBD”)
The SBD provides businesses with a lower tax rate on the first $500,000 of business income earned by a Canadian-Controlled Private Corporation (“CCPC”). The SBD is shared amongst an associated group of companies and will be reduced once the combined taxable capital employed in Canada (essentially the equity and liabilities of the group) reaches $10 million and completely eliminated at $15 million . This was the threshold to determine when a group of companies is considered too “large” to qualify for the SBD.
Budget 2022 increased the threshold to be considered “large”. Corporate groups with taxable capital employed in Canada up to $50 million will now be able to access the SBD. This applies to taxation years that begin on or after April 7, 2022.
Substantive CCPCs – changes to deferral rules on investment income
A CCPC prepays tax on investment income which is retained by the CCPC. This prepayment of tax does not apply to investment income earned by a non-CCPC. This difference can provide a tax deferral which Parliament believes may motivate taxpayers to structure their corporations to not meet the definition of a CCPC.
Budget 2022 proposes to eliminate this deferral for entities that do not meet the definition of a CCPC but are “ultimately controlled” by Canadian residents in a manner similar to CCPCs (referred to as “substantive CCPCs” in the budget documents). Substantive CCPCs will be subject to the prepayment of tax on investment income for taxation years that end after April 7, 2022 .
In addition, Budget 2022 proposes to increase the tax rate for CCPCs and substantive CCPCs which earn investment income though foreign affiliates to preserve integration, to ensure that the tax rate for CCPCs and substantive CCPCs is equal to the tax rate applied if income was earned directly by the company and not through a foreign affiliate. This will apply for taxation years starting after April 7, 2022.
Other items
A consultation process will take place until June 17, 2022, with the goal to strengthen the new rules on intergenerational share transfers as outlined in Bill C208 (https://manningelliott.com/blog/bill-c-208-is-now-law).
The budget proposed a new 30% Critical Exploration Tax Credit (“CMETC”) and eliminated the flow through share treatment for exploration and development expenses incurred by companies conducting oil, gas and coal activities. More details on these changes to come.
A minimum tax regime may be announced in the 2022 fall economic update for wealthy individuals, but no additional details were provided.
Charities will now be subject to an increased disbursement quota of 5% (from 3.5%) on property in excess of $1 million which is not used in charitable activities or administration.
Budget 2022 proceeds with previously announced tax measures including the Select Luxury Items Tax Act, certain items announced in the 2021 Budget including revisiting the General Anti Avoidance Rules, and the reporting requirements for reportable and notifiable transactions.
There are additional tax credits and increased Capital Cost Allowance (CCA) for clean energy investment.
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Our tax experts are here for you. If you still have questions or would like additional clarification on how the 2022 Federal Budget will affect your business, please reach out to our tax experts or contact us through one of our Manning Elliott branches.
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