- Charles Rotenberg
Federal Budget 2022
This afternoon Finance Minister Chrystia Freeland tabled the 2022 Federal Budget. This is the first Budget since the last election and the first since the Liberal’s deal with the NDP. As expected, the Budget was big on spending, among housing, defence and healthcare. We have already heard that the Government was going to levy a surtax on big banks and insurance companies, and we have seen the draft legislation for the new “Luxury Tax”. We have also heard about the draconian ban on foreign investors buying residential real estate. This is a nice headline, but foreign investors are only 3 or 4% of the investors in residential real estate. And, a foreign investor with deep pockets will find a way. But the increase in housing costs, along with the current inflation generally, is not the fault of foreign investors. As per Liberal tradition, this Budget is piecemeal. There is no overall plan to review and reform the tax system which is now 60 years old. What was not in the Budget There were no general increases in tax rates for small corporations or individuals Contrary to my expectation, there was no increase in the inclusion rate for capital gains. There was no overall tax on principal residences. More about this below There was no change announced to the provisions of Bill C-208 (see my earlier comments on this Bill). There was no change to rules related to surplus stripping. More about this below. There was no provision to move toward a pharma-care initiative. What was in the Budget Housing As expected, housing is a major feature of the Budget. Principal Residence In recent years there has been much speculation about whether the Government would introduce tax on the sale of one’s principal residence. There was no tax on principal residences introduced. However, there is a provision to treat a sale of a residence within 12 months of acquisition as a taxable business transaction rather than the sale of a principal residence. This would tax the gain as full income, not as a capital gain which is only 50% taxable, or as a principal residence which is tax-free. The Budget proposes to introduce new rules to ensure profits from flipping properties are taxed fully. Specifically, any person who sells a property they have held for less than 12 months would be considered to be flipping properties and would be subject to full taxation on their profits as business income. Exemptions would apply for Canadians who sell their home due to certain life circumstances, such as a death, disability, the birth of a child, a new job, or a divorce. Exemptions will be set in forthcoming rules and there will be consultation on the draft legislative proposals. The measure would apply to residential properties sold on or after January 1, 2023. It should be noted that this really just codifies the position of the CRA on flipping properties and decisions of the Tax Court of Canada. There are many assessments of sales of homes tripsas income transactions rather than principal residence sale. As much as I don’t like tax increases, this one is a reasonable approach – there is an exception for changes in circumstances. But flipping houses is a business transaction even without legislation. Taxing Assignment Sales Along with house flipping, speculative trading can include the resale of housing before it has even been constructed or lived in. This is called an “assignment sale.” Currently, when a person makes a new home assignment sale, Goods and Services Tax/Harmonized Sales Tax (GST/HST) may or may not apply, depending on the reason for purchasing the home. For example, GST/HST does not apply if the buyer initially intended to live in the home. This creates an opportunity for speculators to be dishonest about their original intentions, and uncertainty for everyone involved in an assignment sale as to whether GST/HST applies. To address this issue, Budget 2022 proposes to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST/HST purposes, effective May 7, 2022. Again, we will expect to see exceptions for changes in circumstances. Tax-Free First Home Savings Account (does anyone else remember RHOSPs?) Budget 2022 proposes to introduce the Tax-Free First Home Savings Account that would give prospective first-time home buyers the ability to save up to $40,000. Like an RRSP, contributions would be tax-deductible, and withdrawals to purchase a first home and the investment income generated within the Account would be non-taxable, like a TFSA. Tax-free in, tax-free out. Doubling the First-Time Home Buyers’ Tax Credit The Government introduced the First-Time Home Buyer Incentive, which allows eligible first-time homebuyers to lower their borrowing costs by claiming a tax credit. Budget 2022 proposes to double the First-Time Home Buyers’ Tax Credit amount to $10,000. The enhanced credit would provide up to $1,500 tax relief to home buyers. The Budget also announces an extension of the First-Time Home Buyer Incentive to March 31, 2025 Supporting Rent-to-Own Projects Many Canadians rent as a matter of choice. Others rent before they plan to buy their own home, but for those working towards ownership, rising home prices are pushing down payments further out of reach. Rent-to-own arrangements can help alleviate that barrier by providing more time and support to renters on the path to homeownership. Budget2022 proposes to provide $200 million in dedicated support under the existing Affordable Housing Innovation Fund. This will include $100 million to support non-profits, co-ops, developers, and rent-to-own companies building new rent-to-own units. Multigenerational Home Renovation Tax Credit Many Canadians have traditions of living together in multigenerational homes, with grandparents, parents, and children under one roof. For some families across the country, having different generations living together—an elderly grandparent with their daughter’s family or a son with a disability with their parents—can be an important way for them to care for each other. Budget 2022 proposes to introduce a Multigenerational Home Renovation Tax Credit, which would provide up to $7,500 in support for constructing a secondary suite for a senior or an adult with a disability. Starting in 2023, this refundable credit would allow families to claim 15 percent of up to $50,000 in eligible renovation and construction costs incurred in order to construct an “in-law” or “granny” suite. Foreign Investors Budget 2022 announces the Government’s intention to restrict foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational properties for a period of two years. Recreational properties are exempted from these new provisions. There are exceptions for refugees and people who have been authorized to come to Canada under emergency travel while fleeing international crises. International students on the path to permanent residency would also be exempt in certain circumstances, as would individuals on work permits who are residing in Canada. This is a nice-sounding proposal in some circles, but it signals that Canada may not be a healthy investment climate for foreign investors. And, foreign investment is a very small part of the residential housing market so it will have little or no effect on housing prices. Bill C-208 See my earlier newsletters for a discussion of this law designed to put inter-generational transfers of a business on equal footing with transfers to a third party. Retained Earnings Strips Many advisors have been suggesting that their clients engage in a transaction generally referred to as a “retained earnings strip” or “capital gains strip”. Currently, in Ontario, the combined top tax rates are as follows:
In a strip, the object is to extract a company’s retained earnings at capital gains rates, rather than as a dividend or as salary. The benefit is especially significant if the shareholder would otherwise be drawing large amounts from the company. In addition, this is particularly beneficial for shareholders that have large amounts owing to their company. Unless repaid, or declared as a bonus or dividend, the amounts will be added to a shareholder’s income and taxed at top personal rates. The “strip” of retained earnings allows this to be taxed at capital gains rates. Even if the inclusion rate went up, there would still be a benefit to a strip in terms of taxes saved. Bill C-208 didn’t really do anything to “permit” surplus stripping. But what it did do, in the proper circumstances, is open up the possibility of stripping surplus as a capital gain that qualifies for the Lifetime Capital Gains Exemption (LCGE). The Retained Earnings Strip that I am discussing doesn’t have anything to do with the additional “benefit” of getting exempt capital gains. I am a believer in the 1977 judgment of the Tax Review Board in Titeley & Carvell – “Íf you try to drain the last drop out of the stein, the lid will fall down and hit you on the nose”. To me, trying to do a strip and also get exempt gains will trigger the lid of the stein. The Budget announces a consultation process for stakeholders to share their views as to how the existing rules could be strengthened to tighten up on surplus stripping while continuing to facilitate genuine intergenerational business transfers. The Government had committed to making no change to Bill C-208 until the latter of November 1st, 2021 and the date that final form legislation is introduced. With a consultation process, that legislation could be a fair piece down the road. Tax Increases Budget 2022 proposes to introduce a temporary Canada Recovery Dividend, under which banking and life insurers’ groups will pay a one-time 15 percent 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 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. It's hard to imagine the average taxpayer worrying about banks and insurance companies making in excess of $100 Million or $1 Billion Dollars. CCPC Planning to Avoid Refundable Tax on Investment Income Currently, some people are manipulating the Canadian-controlled private corporation (CCPC) status of their corporations to avoid paying the additional refundable corporate income tax that they would otherwise pay on investment income earned in their corporations. This may be done in a number of ways, such as by moving a corporation into a foreign low-tax jurisdiction, by using foreign shell companies, or by moving passive portfolios to an offshore corporation. Budget 2022 proposes targeted amendments to the Income Tax Act 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. It was expected that there would be a provision to deal with manipulating a private company’s CCPC status. This is, again, low hanging fruit. The average taxpayer has no idea what this means other than knowing that some rich taxpayers will pay more. Alternative Minimum Tax The Alternative Minimum Tax (AMT), which has been in place since 1986, helps to ensure that wealthy Canadians pay a minimum amount of tax. However, the AMT has not been substantially updated since its introduction. Budget 2022 announces the Government’s plan to examine a new minimum tax regime and to release details on a proposed approach in the 2022 fall Economic and Fiscal Update. 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. Luxury Tax In Budget 2021, the Government proposed the introduction of a tax on the sale of new luxury cars and aircraft with a retail sale price of over $100,000, and new boats over $250,000. The tax would be calculated at the lesser of 20 percent of the value above these price thresholds or 10 percent of the full value of the luxury vehicle, aircraft, or vessel. The Government released draft legislative proposals in March for public comment. The draft legislative proposals reflect, and respond to, input received during consultations with stakeholders. Two notable new provisions contained in these draft legislative proposals are as follows:
relief is proposed to be provided to after-sale improvements that are made to vehicles, aircraft or vessels purchased below the relevant price threshold; and
relief for aircraft is proposed to be expanded to take into account qualifying flights that are conducted in the course of a business with a reasonable expectation of profit.
Subject to Parliamentary approval, this tax would come into effect on September 1, 2022. The General Anti-Avoidance Rule The general anti-avoidance rule (GAAR) is intended to prevent (what the Government considers) abusive tax avoidance transactions. The GAAR was introduced in 1989. The Government intends to release 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 International Tax Reform Canada is one of 137 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting that joined a two-pillar plan for international tax reform agreed to in October 2021. This will target larger multi-national corporations to ensure a global minimum tax rate to discourage tax haven business structures. Reinforcing the Canada Revenue Agency As in every other Budget, 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; to increase both the investigation and prosecution of those engaged in criminal tax evasion; and to expand its educational outreach. Tax Credits and Benefits Review of Tax Support to R&D and Intellectual Property The Scientific Research and Experimental Development (SR&ED) program provides tax incentives to encourage Canadian businesses of all sizes and in all sectors to conduct R&D. The Government intends to undertake a review of the program, first to ensure that it is effective in encouraging R&D that benefits Canada, and second to explore opportunities to modernize and simplify it. Specifically, the review will examine whether changes to eligibility criteria would be warranted to ensure the adequacy of support and improve overall program efficiency. As part of this review, the Government will also consider whether the tax system can play a role in encouraging the development and retention of intellectual property stemming from R&D conducted in Canada. Small Business Tax Credit Small businesses currently benefit from a reduced federal tax rate of 9 percent on their first $500,000 of taxable income, compared to a general federal corporate tax rate of 15 percent. A business no longer has access to this lower rate once its level of capital employed in Canada reaches $15 million. However, phasing out access to the lower tax rate too quickly—and then requiring a small business to pay more in tax—can discourage some businesses from continuing to grow and create jobs. 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. Supporting Green Technologies Again, as with most Budgets, there are provisions to support green technologies, particularly in the housing sector. There are incentives for investing in Air-source heat pumps, carbon capture and storage, clean electricity, and building a net-zero economy. Employee Ownership Trusts Employee ownership trusts encourage employee ownership of a business, and facilitate the transition of privately owned businesses to employees. Budget 2021 announced that the Government would engage with stakeholders to examine what barriers exist to the creation of these trusts in Canada. These consultations revealed that the main barrier to the creation of employee ownership trusts in Canada was the lack of a dedicated trust vehicle under current tax legislation tailored to the requirements of these structures. Budget 2022 proposes to create the Employee Ownership Trust—a new, dedicated type of trust under the Income Tax Act to support employee ownership. Dental Care for Canadians To appease the NDP, Budget 2022 proposes to provide funding of $5.3 billion over five years, starting in 2022-23, and $1.7 billion ongoing, to Health Canada to provide dental care for Canadians. This will start with under 12-year-olds in 2022 and then expand to under 18-year-olds, seniors, and persons living with a disability in 2023, with full implementation by 2025. The program would be restricted to families with an income of less than $90,000 annually, with no co-pays for those under $70,000 annually in income. Increasing Loan Forgiveness for Doctors and Nurses in Rural and Remote Communities In part due to a shortage of doctors and nurses, many rural communities lack the primary health care they need. As one means of addressing this shortage, the federal Government provides student loan forgiveness to doctors and nurses who work in underserved rural or remote communities, including in the North. Budget 2022 proposes to provide $26.2 million over four years, starting in 2023-24, and $7 million ongoing, to increase the maximum amount of forgivable Canada Student Loans by 50 %. This will mean up to $30,000 in loan forgiveness for nurses and up to $60,000 in loan forgiveness for doctors working in underserved rural or remote communities. In addition, the federal Government will expand the current list of eligible professionals under the program, with details to be announced in the coming year. Help for Canadians Who Want to Become Parents There are those who are facing challenges on their journey to become parents. Whether facing fertility issues, being part of a same-sex couple, or for other reasons, some Canadians rely on surrogacy and expensive procedures in order to build their families. Currently, the Medical Expense Tax Credit is not available to those who need to pay medical expenses of others in order to become a parent. Budget 2022 proposes to allow medical expenses related to a surrogate mother or a sperm, ova, or embryo donor that are incurred in Canada for 2022 and subsequent taxation years to be claimed. This would include costs that have been reimbursed to a surrogate for in vitro fertilization expenses. The Budget also proposes to allow fees paid to fertility clinics and donor banks in Canada in order to obtain donor sperm and ova to be eligible under the Medical Expense Tax Credit for 2022 and subsequent taxation years. Overall Assessment With inflation comes increased Government revenues – fuel taxes, carbon taxes, HST – which could be used to pay down the deficit. But Liberals have a history of spending those revenues instead of paying down deficits. This Budget is true to that history. It is a Budget with little to criticize unless you are a bank or insurance company. No significant tax breaks, but no overall increases either. There are some consultation processes to be seen over the coming months. It is close enough to the line that the NDP will have little choice but to support it, even though some of their big-ticket items, such as pharma-care, are not to be seen. For the average taxpayer, some small benefits. Some “increases” but not for the average taxpayer – they picked low-hanging fruit. At least, for a change, they haven’t targeted the middle class and small business. Not a lot to criticize, but not a lot to recommend it either. I hope you find this analysis useful.