2022 Federal Budget Highlights
On April 7, 2022, the Honourable Chrystia Freeland tabled her second budget as federal Minister of Finance and Deputy Prime Minister. While previous years’ tax-and-spend budgets have been peppered with some more constraint and long-term plans for containing Canada’s growing deficit, this year’s budget takes aim at several of the Liberal campaign promises and was undoubtedly influenced by the recent announcement of a coalition with the NDP.
The government continues to spend on significant new programs and initiatives and expects a budget deficit of $113.8 billion for the 2021/22 fiscal year. It’s also forecasting continued large deficits of $52.8 billion for 2022/23 and $39.9 billion for 2023/24. Direct program spending is budgeted to decrease from 13.5% in the current year to 6.1% of GDP for 2022/23. The government budgets for another large increase to the CRA’s budget of $1.2 billion over 5 years.
Budget 2022 focuses on several key initiatives:
Addressing housing affordability
Introduction of the new Tax-Free First Home Savings Account (FHSA)
The budget introduces the Tax-Free First Home Savings Account, a tax deductible account which allows certain taxpayers to contribute up to $8,000 per year of tax deductible contributions to a lifetime maximum of $40,000 ($16,000 per year and lifetime maximum of $80,000 including a spouse or common law partner if they also qualify). Similar to TFSAs, income earned in the account is tax-free and withdrawals are tax-free provided withdrawals are for purchases of a qualifying first home.
To qualify, an individual must not have lived in a home they’ve owned in the year the account is opened or during the preceding four calendar years.
Annual contributions to the FHSA will be available starting sometime in 2023.
Increase to the First-Time Home Buyer’s Tax Credit
The budget increases the First-Time Home Buyer’s Tax Credit to $1,500 for eligible first-time home buyers.
Effective January 1, 2022.
Introduction of a Multigenerational Home Renovation Tax Credit
Budget 2022 introduces the Multigenerational Home Renovation Tax Credit which will allow families to claim a 15% tax credit up to $50,000 in renovation and construction costs. This will provide up to $7,500 to create a secondary dwelling unit for a senior or person with a disability to allow them to live with certain family members. Eligible expenses include the cost of labor and professional services, building materials, the cost of fixtures and permits made or incurred during the renovation period.
Effective January 1, 2023.
New taxation rule on ‘flipping’ of residential real estate
The budget introduces a new rule that deems profits from the “flipping” of residential real estate to be business income that is fully taxed and not eligible for the principal residence exemption. This applies where the disposition of the residential property (including rental property) was owned for less than 12 months; however, there are exemptions for dispositions resulting from certain life events such as death, birth of a new child, adoption, separation, for personal safety reasons, disability or illness, change of employment and insolvency.
Effective for sales on or after January 1, 2023.
Taxation of residential assignment sales
The new budget makes all residential assignment sales subject to GST/HST.
Effective to an assignment for a supply made on or after May 7 2022.
Addressing climate change
Several initiatives to address climate change were included in the budget, which hope to spur investment in certain sectors. These include:
Carbon Capture, Utilization and Storage (CCUS) Tax Credit
Budget 2022 introduces a generous refundable tax credit for qualifying carbon capture, utilization and storage (CCUS) projects. The credit applies to the cost of purchasing and installing eligible equipment used to capture CO2 through an “eligible use” and the equipment is used to capture, transport, store or use CO2 as part of an eligible project.
The tax credit rates are 60% for eligible capture equipment used in a direct air capture project, 50% for all other eligible capture equipment and 37.5% for eligible transportation storage and use equipment with lower tax credit rates applicable from 2031 to 2040. National Resources Canada must verify eligible expenses before a credit can be claimed on a tax return. There is a clawback/repayment of credits if the CO2 captured is not through an eligible use.
Effective January 1, 2022.
Introduction of the Critical Mineral Exploration Tax Credit (CMETC)
The budget introduces a new 30% Critical Mineral Exploration Tax Credit (CMETC) for investments in flow-through shares of a mineral exploration company that uses the funds for eligible exploration expenses that target specified minerals. These include those used in the production of batteries and magnets, minerals used in clean technology and semiconductors such as copper, nickel, lithium, cobalt, graphite, rare earth elements, titanium, zinc, platinum group metals, uranium and others.
Effective for eligible flow-through share agreements entered into from April 7, 2022 to March 31, 2027.
Elimination of flow-through shares for exploration and development of oil, gas and coal resources
Budget 2022 proposes elimination of flow-through shares for exploration and development of oil, gas and coal resources by no longer allowing any related exploration and development activities or expenditures to be renounced to a flow-through share investor.
Effective for agreements entered into after March 31, 2023.
Investment tax credit for clean technology
The budget introduces a new investment tax credit up to 30% on investments in net-zero technologies, battery storage solutions and clean hydrogen.
Details to be provided in the 2022 Fall Economic and Fiscal Update.
New or additional taxes
The government has paid for some of its spending initiatives by introducing the following new taxes:
Canada Recovery Dividend (CRD)
Budget 2022 introduces the new Canada Recover Dividend (CRD), which is a one-time 15% tax on banks and life insurance company profits in excess of $1 billion for the 2021 fiscal year.
It will be payable in equal instalments over five years starting in January, 2022.
Tax rate hikes on banks and life insurance groups
The budget proposes a raise in the tax rate on banks and life insurance groups from 15% currently to 16.5%, subject to a $100 million annual taxable income exemption that may be allocated amongst group members.
Effective as of April 7, 2022 and prorated for the number of days in a bank’s or life insurance company’s fiscal year that end after April 6, 2022.
Elimination of the deferral of tax on investment income by using Non-Canadian Controlled Private Corporations (CCPC)
Budget 2022 proposes the elimination of the deferral of tax on investment income by using Non-Canadian Controlled Private Corporations (CCPC).
For taxation years ending after April 6, 2022, a private corporation resident in Canada that is ultimately controlled in fact and in law by Canadian resident individuals (a “Substantive CCPC”) will subject a Substantive CCPC’s investment income (such as the 50% taxable portion of capital gains, interest, dividends, rents and royalties) to the refundable tax regime. The refundable tax regime is a federal tax at 38.67% (50.67% total with BC tax), of which 30.67% is refundable when the Substantive CCPC pays sufficient dividends to its shareholders.
Under these rules, a corporation would be treated as a Substantive CCPC in circumstances where the corporation would have been a CCPC except for the fact that a non-resident or public corporation had a right to acquire its shares. This rule stops certain so-called paragraph 111(4)(e) planning being undertaken when a CCPC is being sold to a public corporation or a non-resident of Canada.
An exception for certain sales transactions entered into before April 7, 2022 and closed before the end of 2022.
Elimination of some impacts of the new IFRS 17
The budget proposes elimination of some impacts of the new IFRS 17, a new international accounting standard applicable to insurance contracts that would allow insurance companies to defer recognition of income under both generally accepted accounting principles and for tax purposes. This initiative addresses the deferral of income related to contract service income which the budget considers to be a non-deductible reserve for tax purposes.
Effective January 1, 2023.
Elimination of tax-deferral advantages for CCPCs
Budget 2022 proposes elimination of the tax-deferral advantages that some CCPCs and their shareholders use to defer tax on investment income earned through controlled foreign affiliates. The deferral advantage is eliminated by decreasing the relevant tax factor from 4 to 1.9—the same factor applicable to individuals. This effectively means that the amount a controlled foreign affiliate’s investment income may be sheltered from tax under Canada’s foreign accrual property income (FAPI) rules will be reduced by more than half. This aims to eliminate any incentive for CCPCs and their shareholders to earn investment income in a controlled foreign affiliate.
These changes include adjustments to the general rate income pool which allows eligible dividends taxed at a lower rate to be paid out to a CCPC’s shareholder, and the capital dividend account which allows tax-free dividends to be paid out to a CCPC’s shareholders.
These changes are accompanied by eliminating the addition of any dividends paid out of a foreign affiliate’s hybrid surplus and taxable surplus, to the extent not deductible in computing taxable income from a CCPC’s general rate income pool. This will thereby only allow such amounts to be paid out as ineligible dividends, subject to a higher rate of tax to Canadian individual shareholders.
Effective for tax years that begin on or after the April 7, 2022 budget date.
Other notable changes
Loosening of rules on CCPCs’ $500,000 annual business limit
Budget 2022 proposes loosening of the rules that grind a CCPCs’ $500,000 annual business limit (the maximum amount of income from an active business carried on in Canada that is eligible for the federal small business tax rate of 9%), where the CCPC and associated companies’ taxable paid-up capital (TPUC) in Canada exceeds $10 million dollars from a previous grind, based on TPUC between $10 million to $15 million, to a grind now based on TPUC between $10 million to $50 million.
Effective for tax years that begin on or after the April 7, 2022 budget date.
Labour mobility tax deduction
The budget proposes a labour mobility tax deduction of up to $4,000 per year in eligible travel and relocation expenses for certain trades persons in the construction industry that have to temporarily relocate from their permanent home for work.
Effective for 2022 and subsequent years.
Consultation on potential changes to rules on intergenerational transfers of small business corporations to family members
Budget 2022 notes the need for a further consultation period, to Fall 2022, on potential changes needed to existing rules that apply to intergenerational transfers of small business corporations to family members (Bill C-208), to prevent an individual from undertaking a surplus strip (i.e. a conversion of corporate surplus in the form of taxable dividends to lower taxed capital gains) where there is no genuine business transfer.
Tax on the wealthiest Canadians
Details of the Liberal promise to tax the wealthiest Canadians by introducing a 15% minimum tax is being deferred until Fall 2022.
Not included in the budget
Budget 2022 does not include any capital gains inclusion rate increases or changes to the principal residence exemption (except the anti-flipping rule noted above), as many had anticipated. Personal and corporate tax rates remain largely unchanged.
You can view and download a copy of the 2022 Federal Budget on the Government of Canada website here.