2022 Canadian Federal Budget Update

Last week Canada's finance minister released her second budget. While there seems to be optimism surrounding the reopening of the economy from the COVID-19 pandemic, there still remains concerns about climate change and shifting economic and defence priorities – particularly related to the war in Ukraine.

The government will not be raising personal income tax rates in this budget, however it will be taking measures to increase revenue collected from the highest income earners (including a proposal for a new minimum tax regime for the fall of 2022). On the corporate side, the government is proposing measures to limit tax avoidance by large financial institutions and expanding anti-avoidance rules.

Budget Highlights

Economic Numbers

Real GDP grew by 4.6% in 2021 (lower than the predicted 5.8%). The government expects real GDP to grow by 3.9% in 2022, down from earlier projections of 4.2%. The unemployment rate fell to 5.5%, below pre-pandemic levels and nearly to a 50 year low. The Organization for Economic Cooperation and Development forecasts a 1% reduction in global economic growth and an increase of 2.5% in global inflation due to the ongoing conflict in Ukraine.

Debt and Deficit

The government expects to run a deficit of $113.8 billion for 2021–22, more optimistic than the previous projection of $154.7 billion. It projects this deficit to decline to $8.4 billion by 2026–27, representing 0.3% of GDP. Debt stands at 46.5% of GDP for 2021–22, with an expectation that it will decline to 41.5% of GDP by 2026–27.

Other Initiatives

• Dental Care: Starting with under-12 year olds in 2022, expanding to 18 year olds, seniors, and those living with a disability in 2023. Full implementation by 2025 for families with annual income under $90,000.

• Pharma Care: Universal pharmacare bill expected to pass by end of 2023.

• Climate Change: Measures include mandating 20% of light-duty vehicles sold by 2026 to be zero emission and 60% by 2035; carbon capture tax credits; $183.1 million over 5 years to reduce plastic waste; research into small modular reactors.

• Long Term Care Reform: Up to $4 Billion to help keep seniors safe in long term care facilities.

• CRA Strengthening: $1.2 Billion to be given to the CRA over the next 5 years for expanded audits and prosecution of tax evasion.

Personal Income Tax Initiatives

1. Tax-Free First Home Savings Account (Expected 2023)

• Contributions would be tax-deductible (similar to an RRSP) and income earned would not be subject to tax

• Qualifying withdrawals would be non-taxable towards the purchase of a first home

• Lifetime contribution limit of $40,000 ($8,000 per year); unused contribution room cannot be carried forward

• Unused FHSA dollars can be transferred to an RRSP or RRIF on a tax-free basis

• An individual is not permitted to make both a FHSA withdrawal and a HBP withdrawal towards the purchase of the same qualifying home

2. Home Buyers' Tax Credit

The budget proposes to double the amount, giving $1,500 in tax relief to eligible home buyers (up from $750).

3. Multigenerational Home Renovation Tax Credit

A new tax credit of 15% on eligible renovation expenses (up to $50,000) for qualifying renovations that create a secondary dwelling for a senior or person with a disability. Applies starting in 2023.

4. Home Accessibility Tax Credit

A non-refundable tax credit for eligible home renovations or alteration expenses for qualifying individuals (those eligible for the disability tax credit or individuals 65 years of age or older). Applies to expenses incurred in 2022 and subsequent tax years.

5. Residential Property Flipping

A new rule to prevent the purchase and sale of a property within 12 months. Applies to residential properties sold on or after January 1, 2023.

6. Ban on Foreign Investment in Canadian Housing

The government will prohibit foreign commercial enterprises and people who are not Canadian citizens (or permanent residents) from purchasing non-recreational, residential property in Canada for 2 years.

7. Annual Disbursement Quota for Registered Charities

The DQ rate will increase to 5% for the portion of property not used in charitable activities or administration that exceeds $1 Million (up from 3.5%). Applies to fiscal periods beginning on or after January 1, 2023.

Business Income Tax Measures

Substantive CCPCs – Deferring Tax Using Foreign Entities

The budget proposes to align the taxation of investment income earned and distributed by "substantive" CCPCs with the control rules that apply to CCPCs. Investment income would be subject to a federal tax rate of 38.67%, of which 30.67% would be refundable upon distribution.

Deferring Tax Using Foreign Resident Corporations

The budget proposes to eliminate the tax-deferral advantage available to CCPCs and their shareholders earning investment income through controlled foreign affiliates. Applies to taxation years beginning on or after Budget Day.

Small Business Deduction

The budget proposes to extend the range over which the business limit is reduced based on taxable capital employed in Canada, with the new range being $10 million to $50 million (from $15 million). This allows more medium-sized CCPCs to benefit from the small business deduction and be taxed at a reduced rate of 9%.

Canada Recovery Dividend

A one-time 15% tax on bank and life insurer groups, payable in equal amounts over 5 years.

Additional tax on Banks and Life Insurers

An additional 1.5% tax on the taxable income for members of bank and life insurer groups.

Disclaimer: This report contains information in summary format for viewer convenience. This information should not be construed as providing specific individual financial, investment, tax, legal, or accounting advice and should be informational in nature.