2022 Federal Budget - The Highlights
FEDERAL BUDGET 2022 – THE HIGHLIGHTS
First things first, the main item that everyone wants to know: the Federal Budget included no changes to the personal or corporate tax rates, and the taxable capital gains inclusion rate remains at 50%.
To save you some time, we’ve included a high-level overview for the items that are most relevant to our VR clients. The full details of the Federal Budget can be found HERE. All of the measures outlined are only proposed and must receive Royal Assent before they become law. Most will not come into play until 2023.
Housing Affordability
Personal
The Federal Budget proposes several new measures and enhancements to existing measures related to housing affordability. The measures include: a new Tax-Free First Home Savings Account (“FHSA”), doubling the Home Buyers’ Tax Credit to $1,500, Doubling the maximum Home Accessibility Tax Credit to $3,000, and a new Multigenerational Home Renovation Tax Credit (“MHR”).
The FHSA will allow deductible contributions (similar to RRSP) of $8,000 annually (this does not carry forward if unused) and $40,000 in total. The income earned in the account as well as the withdrawals to make the purchase of a first home, would not be taxable (similar to TFSA). This program cannot be combined with a first-time Home Buyers Plan RRSP withdrawal. You will also want to make sure you meet the definition of a first-time home buyer within the program. The program is expected to rollout in 2023.
To support multigenerational families living under one roof, the MHR would provide a tax credit up to $7,500 (based on $50,000 of eligible expenditures) for constructing a secondary unit for a senior or an adult with a disability.
Residential Property Flipping
Personal
Over the last few years, there has been an increased focus in the use of the Principal Residence Exemption (“PRE”), which allowed captain gains on residential properties to occur on a tax-free basis.
The Federal Budget is proposing legislation that would restrict the usage of the PRE when the residential property is owned for less than 12 months. When a person buys and sells a residential property within 12 months, they are considered to be flipping the property.
As a result, all gains from dispositions of residential property (including rental properties) that were owned for less than 12 months will be considered business income. Business income is 100% taxable. This would not be eligible for the 50% treatment applicable to capital gains.
There are exceptions to this rule for certain life events such as: death, relationship breakdown, birth of a child, or disabilities.
Small Business Deduction (taxable capital increase)
Business
Under current rules, Canadian-controlled private corporations (“CCPC”) are eligible for a lower corporate tax rate on their first $500,000 of business income. Access to the lower rate begins to be phased out when the taxable capital (very generally, you could think of taxable capital as retained earnings) exceeds $10 million and is fully phased out at $15 million. Once fully phased out, there is no access to the Small Business Deduction (“SBD”) and all business income is taxed at a higher tax rate.
The Federal Budget is proposing to increase the threshold from $15 million to $50 million. This would allow for a more gradual phase out of access to the SBD, which is favorable for medium-sized businesses. It would allow some income to continue to be taxed at the lower rate.
Intergenerational Transfers (Bill C-208)
Business
In 2021, Bill C-208 was introduced which allowed sales of shares of small business corporations from parents to corporations controlled by their children, to follow the same tax treatment as arm’s length sales. This meant that capital gains could be realized and the transaction may qualify for the use of the Lifetime Capital Gains Exemption.
Since then, there have been concerns that this legislation could allow for transfers beyond genuine intergenerational business successions. And that parties would benefit from this lower tax cost through a practice known as “surplus stripping.”
The Federal Budget reiterated the government’s intention to amend the legislation to restrict these transfers. Further information is expected in fall 2022.
Flow-Through Shares
Business
The Federal Budget proposes to eliminate flow-through shares for oil, gas and coal activities, effective March 31, 2023. And it also includes a new critical minimal exploration tax credit which will allow for flow-through treatment and a 30% credit for exploration activities. The critical mineral exploration tax credit would apply to flow-through share agreements entered into between April 8, 2022 and March 31, 2027.
FUTURE ANNOUNCEMENTS
There were also a several areas of future focus announced in the Federal Budget. Mainly this is an indication of topics they are exploring and we can expect to hear more about them in the fall economic and fiscal update. We’ve highlighted a few of these below and will keep you updated as information becomes available.
One item we see fairly frequently is Alternative Minimum Tax (“AMT”). AMT is a secondary tax calculation which can impact your return in years when you have combinations of certain tax measures such as the use of your Lifetime Capital Gains Exemption, terminal losses, resource deductions and others. This area has been highlighted as there is a perceived advantage to high income earners and the percentage of tax they are paying.
Other programs to be reviewed include: Scientific Research and Experimental Development, various Clean Energy and Green Economy initiatives, General Anti-Avoidance Rule related to unrealized tax attributes and combatting Aggressive Tax Planning.
CONCLUSION
If there is a specific area you are interested in, please reach out to the team and we would be happy to chat about the possible implications to your specific situation. Coffee will definitely be involved.