2022 Canadian Federal Budget Update
Last week Canada's finance minister released her second budget. While there seems to be omptimism 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 to enhance or replace the current regime).
On the corporate side, the government is proposing measures to limit the amount of tax avoidance by large financial institutions and expanding anti avoidance rules.
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, which is also down from earlier projections of 4.2%. This lowered projection mainly has to do with ramifications from the omicron variants affect on the economy.
The government also cited employment numbers as an indicator that Canada is coming out of the economic downturn caused by COVID-19. In particular, the unemployment rate fell to 5.5%, which is below pre-pandemic levels and nearly to a 50 year low.
The Budget also touched on the war in Ukraine and its effect on the Global Economy. 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.
During COVID we saw inflation primarily affect discretionary items (used cars, houses, boats, etc.) whereas the war in Russia tends to have a larger effect on consumer goods (food and energy in particular). This combined with China's extreme lockdown measures to contain COVID outbreaks will lead to further price increases in the coming weeks and months as well as supply chains are hit hard.
Debt and Deficit
The government expects to run a deficit of $113.8 billion for 2021-22. This is a little more optimistic than the previous year projections of $154.7 billion. It projects this deficit to decline to $8.4 billion by 2026-27 representing 0.3% of GDP.
Debt, however, stands at 46.5% of GDP for 2021-22, with an expectation that it will decline to 41.5% of GDP by 2026-27. This is also an improvement over the 50% range projection that the government had thought would be in place until the end of the decade.
1. Dental Care:
Dental care will start with under-12 year olds in 2022, expanding to 18 year olds, seniors, and those living with a disability in 2023. In 2025 this will expand to full implementation for families with an annual income of less than $90,000.00 (median income).
2. Pharma Care:
The government tabled and expects to pass a universal pharmacare bill by the end of 2023. The government will then task the Canadian Drug agency to develop a national formulary of essential medicines and bulk purchasing plans.
3. Climate Change
Various measures will be introduced to reduce carbon pollution, build a clean energy sector, protect lands, lakes, oceans and move to a net zero carbon economy. Measures include
Mandating at least 20% of light-duty vehicles sold by 2026 to be zero emission and 60% by 2035
Encourage carbon capture utilization and storage technologies for a refundable business tax credit for projects that store CO2.
Providing $183.1 million over 5 years to reduce plastic waste
Provide funds for further research into small modular reactors
4. Long Term Care Reform
The government will include up to $4 Billion to help keep seniors safe in long term care facilities. However it did not specify a plan of action or any specific initiatives.
5. CRA Strengthening
$1.2 Billion to be given to the CRA over the next 5 years to help it expand audits of larger entities and non-residents engaged in aggressive tax planning, increase the investigation and prosecution of those engaged in tax evasion.
Personal Income Tax Initiatives
1. Tax-Free First Home Savings Account (Expected 2023)
The budget proposed the creation of a new Tax Free Savings Account (FHSA). Contributions to the FHSA 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.
Once the FHSA has been withdrawn, the account is to be closed and the individual would not be eligible to open another.
The FHSA would have a lifetime contribution limit of $40,000.00 ($8000.00 per year). Unused contribution room in one year can not be carried forward.
An individual can transfer unused FHSA dollars to an RRSP or RRIF. This transfer would not be taxable at the time of transfer.
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
Currently, first time home buyers who acquire a qualifying home can obtain $750 in tax relief by claiming the First Time Home Buyers Tax Credit.
The Budget proposes to double the amount, which would give $1500 in tax relief to eligible home buyers.
3. Multigenerational Home Renovation Tax Credit
The budget proposes to introduce a new tax credit where the credit would provide recognition of eligible expenses for a qualifying renovation. A qualifying renovation would be one that creates a secondary dwelling to permit a senior or a person with a disability to live wit ha qualifying relation. The value of the credit would be 15% of the lesser of eligible expenses and $50,000.00. This would start to apply in 2023 and subsequent years.
4. Home Accessibility Tax Credit
The budget proposes to create a non-refundable tax credit that provides recognition of eligible home renovations or alteration expenses in respect of a qualifying individuals accessibility (an individual who is eligible to claim the disability tax credit or an individual who is 65 years of age or older at the end of the tax year). This would apply to expenses incurred in 2022 and subsequent tax years.
5. Residential Property Flipping
The budget proposes to introduce a new rule to prevent the purchase and sale of a property within 12 months. The measure would apply to residential properties sold on or after January 1st, 2023.
6. Ban on Foreign Investment in Canadian Housing
The budget announced that the government would 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
Registered charities are typically required to expend a minimum amount each year, referred to as the Disbursement Quota (DQ). The DQ is currently equal to 3.5% of the registered charity's property but not used directly in charitable activities or administration.
The budget proposes to increase the rate to 5% for the portion of property not used in charitable activities or administration that exceeds $1 Million.
This would apply to charities (in respect of their fiscal periods) beginning on or after January 1, 2023.
Business Income Tax Measures
1. Deferring Tax Using Foreign Entities
The budget proposes to align the taxation of investment income earned and distributed by "substantive" CCPCs with the control (in law or in fact) rules that apply to CCPCs.
Measures would include an anti-avoidance rule to address particular arrangements or transactions where it is reasonable to conclude that these arrangements or transactions were undertaken to avoid the deferral rules applicable to investment income. Measures would also include a 1 year extension of a normal reassessment period of any consequential assessment of Part IV tax that arises from a corporation being assessed or reassessed a dividend refund.
The affect of these amendments would include:
substantive CCPCs earning and distributing investment income would be subject to the same anti-deferral and integration mechanisms as CCPCs.
Investment income would be subject to a federal tax rate of 38.67%, of which 30.67% would be refundable upon distribution.
Investment income earned by substantive CCPCs would be added to their "low rate income pool" such that distributions of such income would not entitle the shareholders to the enhanced dividend tax credit.
Substantive CCPCs would continue to be treated as non-CCPCs for all other purposes of the income tax act.
This measure only applies to taxation years that end on or after budget Day. An Exception would be provided where the tax 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.
2. 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. These measures would apply to taxation year that begin on or after Budget Day
3. Small Business Deduction
The budget proposes to extend the range over which the business limit is reduce based on the combined taxable capital employed in Canada of the CCPC and it's associated Corporations. The new range would be $10 million to $50 million (from $15 million)
This change allows more medium sized CCPCs to benefit from the small business deduction (and therefore be taxed at a reduce rate of 9%) and increases the amount of qualifying businesses.
4. Canada Recovery Dividend
The budget proposes to introduce a one time 15 percent tax on bank and life insurer groups. This would be based on a number of factors including: Corporations taxable income for 2021 and an allocation rule that allows $1 Billion to be exempt by agreement among group members. This could also be payable in equal amounts over 5 years.
5. Additional tax on Banks and Life Insurers
The budget proposes to introduce 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 report was prepared using a number of sources including the 2022 Budget Tax Measures document. This information should not be construed as providing specific individual financial, investment, tax, legal, or accounting advice and should be informational in nature.