On April 7, 2022, Finance Minister, Chrystia Freeland tabled the federal budget. We highlight some of the newly announced tax measures that affect individuals and small business owners.

Quick Recap

• The budget has several tax measures to address housing affordability for first-time home buyers and speculation.
• Reduced tax rates for mid-sized companies by making the small business deduction available to companies with capital of up to $50 Million (previously $15 Million).
• These measures prevent tax-deferral by converting a CCPC into a Non-CCPC.
• There is no change to the personal tax rates, corporate tax rates, or capital gains inclusion rate.

Housing Market Measures

1. Tax-Free First Home Savings Account

Budget 2022 proposes to create the Tax-Free First Home Savings Account (FHSA), a new registered account to help individuals save for their first home.

You can deduct FHSA contributions, and any income you earn in an FHSA would not be taxed. If you withdraw money from an FHSA to purchase a first home, the withdrawal will not be taxed.

Who is eligible?

To open an FHSA, you must be a resident of Canada, and at least 18 years. In addition, you must not have owned a home either:

• at any time in the year the account is opened, or
• during the preceding four calendar years.

Can I Access the FHSA Multiple Times Throughout My life?

No. You are limited to only making non-taxable withdrawals for a single property in your lifetime.

How Much Can I Contribute?

The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000. The full annual contribution limit would be available starting in 2023.

Do Unused Contributions Carry Forward?

No. If you don’t use up your $8,000 annual contribution room, you cannot carry it forward and double up in the following year. Instead, if you contribute less than $8,000 in one year, you would still face an annual limit of $8,000 in subsequent years.

Transfers to and from RRSP Tax-Free

The rules will allow you to transfer money from an FHSA to a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). However, if you withdraw from the RRSP or RRIF, you will be taxed in the usual manner.

You can also transfer funds from an RRSP to an FHSA tax-free, subject to the $40,000 lifetime and $8,000 annual contribution limits. These transfers would not restore an individual’s RRSP contribution room.

15 Year Limit To Purchase First Home

If you haven’t used the funds in your FHSA for a qualifying first home purchase within 15 years of first opening an FHSA, the FHSA would have to be closed. Any unused savings could be transferred into an RRSP or RRIF, or would have to be withdrawn on a taxable basis.

Example

Here’s an example provided in the budget.

• Matthew and Taryn are aspiring homeowners living together.
• Starting in 2023, they each save $8,000 per year (the annual maximum) in their Tax-Free First Home Savings Account and are able to deduct this from their income.
• They both make between $50,000 and $100,000, and the Tax-Free First Home Savings Account allows them each to receive an annual federal tax refund of $1,640.
• Matthew and Taryn have a combined $90,000 (including tax-free investment income of $10,000) in their Tax-Free First Home Savings Account at the end of 2027, when they finally find their ideal first home.
• By using the Tax-Free First Home Savings Account, Matthew and Taryn are finally able to afford a down payment to buy their first home.
• They can withdraw their down payment tax-free, saving thousands of dollars that can be put towards their new home. In addition, they will claim the doubled First-Time Home Buyers’ Tax Credit, providing an additional $1,500 in tax relief.

When Does this New Rule Apply?

The government will work with financial institutions to have the infrastructure in place at “some point” in 2023.

2. Residential Property Anti-Flipping Tax

Budget 2022 proposes to introduce a new deeming rule to ensure profits from flipping residential real estate (including rental properties) owned for less than 12 months are always subject to full taxation as business income rather than capital gains.

The Government is concerned that certain individuals engaged in flipping residential real estate are not properly reporting their profits as business income. Instead, they are reporting it as capital gains (whereby only 50% of the gain is included is taxed).

The Budget states that even if you owned the property for 12 months or more, it doesn’t automatically mean that the gain would be considered capital gains. It still remains a question of fact.

Are there exemptions for legitimate reasons?

Yes. There are certain exceptions if you sell for the following reasons:

• Death: due to, or in anticipation of, the taxpayer’s death or a related person.
• Household addition: due to, or in anticipation of, a related person joining the taxpayer’s household or the taxpayer joining a related person’s household (e.g., the birth of a child, adoption, care of an elderly parent).
• Separation: due to the breakdown of a marriage or common-law partnership, where the taxpayer has been living separately and apart from their spouse or common-law partner because of a breakdown in the relationship for at least 90 days.
• Personal safety: threat to the personal safety of the taxpayer or a related person, such as the threat of domestic violence.
• Disability or illness: a taxpayer or a related person suffering from a serious disability or illness.
• Employment change: for the taxpayer or their spouse or common-law partner to work at a new location or due to an involuntary termination of employment. In the case of work at a new location, the taxpayer’s new home must be at least 40 kilometres closer to the new work location.
• Insolvency: insolvency or to avoid insolvency (i.e., due to an accumulation of debts).
• Involuntary disposition: forced to sell against someone’s will, for example, due to expropriation or the destruction or condemnation of the taxpayer’s residence due to a natural or man-made disaster.

Can I Claim the Principal Residence Exemption?

No. The Principal Residence Exemption would not be available if the above rule applies.

When Does this New Rule Apply?

The measure would apply for residential properties sold on or after January 1, 2023.

3. Doubling the First-Time Home Buyers’ Tax Credit

What Changed?

Budget 2022 proposes to double the Home Buyer’s Tax Credit (HBTC) from $750 to $1,500.

As the credit is non-refundable, you can only use the HBTC to deduct your tax payable for a maximum of $1,500 without creating a refund. Spouses can share the tax credit as long as the total combined does not exceed the $1,500 maximum.

Who Qualifies?

First-time homebuyers who buy a qualifying home may claim the HBTC.

You are considered a first-time home buyer if neither you nor your spouse has owned and lived in another home for the prior four years from the purchase year.

A qualifying home is one that you or your spouse intend to live in as your principal residence no later than one year after you bought it.

Are There Exceptions?

If you are eligible for the Disability Tax Credit, you may claim for the HBTC even if the conditions are not met.

When Does this New Rule Apply?

This measure would apply to qualifying home purchases on or after January 1, 2022.

4. Multigenerational Home Renovation Tax Credit

What’s New?

Canadians have traditions of living together in multigenerational homes, with grandparents, parents, and children under one roof.

To support these families, Budget 2022 introduces the Multigeneration 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.

A secondary unit is a self-contained living space with a private entrance, kitchen, bathroom facilities and sleeping area. The secondary unit could be newly constructed or created from an existing living space that did not already meet the requirements to be a secondary unit. To be eligible, relevant building permits for establishing a secondary unit must be obtained, and renovations must be completed per the laws of the jurisdiction in which an eligible dwelling is located.

One qualifying renovation would be permitted to be claimed for a senior or a disabled adult.

When is the Credit Available?

This measure applies to work performed and paid for and/or goods acquired on or after January 1, 2023.

5. Home Accessibility Tax Credit Doubled

The Home Accessibility Tax Credit is a non-refundable tax credit that provides recognition of eligible home renovation or alteration expenses for seniors with disabilities.

What Changed?

Budget 2022 proposes to double the Home Accessibility Tax Credit from $1,500 to $3,000.

This will allow seniors with disabilities to claim up to $20,000 (previously $10,000) of renovations to improve accessibility, such as building a bedroom and/or a bathroom to permit first-floor occupancy for a qualifying person who has difficulty accessing living spaces on other floors.

The credit is non-refundable. This means you can only use the Home Accessibility Tax Credit to reduce your tax payable for a maximum of $3,000 without creating a refund.

When Does this New Rule Apply?

This measure would apply to expenses incurred in 2022 and subsequent years.

6. GST/HST on Assignment Sales by Individuals

Budget 2022 proposes to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. As a result, the GST/HST would apply to the total amount paid (amount paid for the home plus the assignment) for a new home by its first occupant.

Under the current rules, an assignment sale of newly constructed or substantially renovated residential housing may be taxable or exempt. An assignment sale made by an individual would generally be taxable if the individual had originally entered into the agreement of purchase and sale with the builder for the primary purpose of selling their interest in the agreement. On the other hand, if the individual had originally entered into the agreement for another primary purpose, such as to occupy the home as a place of residence, the assignment sale would generally be exempt. The new rules will make all assignment sales taxable for GST/HST.

Who is Responsible for Collecting and Remitting GST/GST?

The assignor is responsible for collecting and remitting the GST/HST to CRA. If the assignor is a non-resident, the assignee must self-assess and pay the GST/HST directly to the CRA.

When Does this New Rule Apply?

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.

7. Defer Capital Gains on Investments in Small Businesses

The government plans to assess whether the tax system is providing adequate support to investments in growing businesses. The review will include an examination of the rollover for small business investments. This measure allows investors in small businesses to defer tax on capital gains.

Business Tax Measures

1. Small Business Deduction Accessible to Larger Companies

Canadian-controlled private corporations that are small businesses in active business may benefit from a reduced federal corporate income tax rate of 9% (12.2% combined tax rate in Ontario). However, this benefit only applies up to the first $500,000 of active business income per year. This $500,000 is also known as the business limit because it represents the maximum income or limit that can be taxed at the preferential tax rate of 9% (12.2% in Ontario).

What are some key features of this benefit?

• This $500,000 business limit must be shared by corporations that are closely linked (‘associated”) if there is common ownership and or control. 
• The $500,000 business limit is gradually reduced when the passive income of the corporation or of associated corporations is between $50,000 and $150,000. 
• The $500,000 business limit is also gradually reduced when taxable capital (generally retained earnings and loans) of the corporation and associated corporations is between $10 million and $15 million. The business limit is completely eliminated once combined taxable capital exceeds $15 million.

What is the key takeaway from Budget 2022?

Budget 2022 proposes to extend the range over which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations. The new range would be $10 million to $50 million.

This change would allow more medium-sized CCPCs to benefit from the small business deduction.

When Does this New Rule Apply?

This measure would apply to taxation years that begin on or after April 7, 2022. We will need to wait for the provincial budgets to determine if the provinces will also offer the same relief.

2. Flow-Through Share Regime to be Eliminated

Flow-through share agreements allow corporations to renounce or “flow-through” both Canadian exploration expenses and Canadian development expenses to investors, who can deduct the expenses in calculating their taxable income.

Budget 2022 proposes to eliminate the flow-through share regime for oil, gas, and coal activities by no longer allowing oil, gas and coal exploration or development expenditures to be renounced to a flow-through share investor.

When Does this New Rule Apply?

This change would apply to expenditures renounced under flow-through share agreements entered into after March 31, 2023.

3. Eliminating Non-CCPC Tax Deferral Planning

Passive income (i.e. interest, rent, dividends and royalties) earned by a Canadian-controlled corporation (“CCPC”) is subject to tax at 50.17% in Ontario. A portion of this tax is refunded upon paying dividends to shareholders of the corporation; however, the recipient of these dividends will be subject to personal tax on these dividends. This complicated system of taxation is intended to remove any advantage of earning investment in a corporation compared to earning the income personally.

What are some current loopholes?

The 50.17% rate of tax applies only to CCPCs.  Corporations that are not CCPCs pay a combined tax rate in Ontario of 26.5% on investment income.

Some tax plans have been designed to manipulate the corporation’s status as a CCPC, such as continuing the corporation in a foreign jurisdiction, issuing options to non-residents, or having multiple tiers of ownership in the corporate structure. Although the corporation’s ultimate control and central management may be in Canada, a corporation may still be able to avoid CCPC status and therefore avoid the high rate of tax on passive income.

How is Budget 2022 targeting these plans?

Budget 2022 aims to prevent corporations from avoiding CCPC status by enacting a substantive CCPC concept. This concept treats non CCPCs as CCPCs in substance if Canadian residents ultimately control the non-CCPC. The result is that non CCPCs that are CCPCs in substance will have the same tax treatment on passive income (50.17%), which will defeat the purpose of any structuring to avoid CCPC status.

Also, If a corporation is deemed to be a substantive CCPC, the investment income earned by the substantive CCPC cannot be distributed to its shareholders as a lower rate eligible dividend, further discouraging the use of plans designed to manipulate CCPC status.

Investing in controlled foreign corporations

Canadians who earn passive income through a controlled foreign corporation are subject to an accrual tax even if the foreign corporation does not distribute any profits.

This rule is intended to eliminate any deferral advantage if the foreign corporation earns passive income but does not distribute it to the Canadian resident.

In computing this accrual tax, credit is granted for any foreign taxes paid. The mechanism to recognize this credit is complicated, but suffice to say that before Budget 2022, CCPCs enjoyed an advantage that will no longer be available as Budget 2022 will propose equality amongst CCPCs, substantive CCPCs and individuals in the context of investment in controlled foreign corporations.

4. New Rules for Genuine Intergenerational Share Transfers

The Income Tax Act contains a rule to prevent people from converting dividends into lower-taxed capital gains using certain self-dealing transactions—a practice referred to as “surplus stripping.”

Private Member’s Bill C-208, which received Royal Assent on June 29, 2021, introduced an exception to this rule in order to facilitate intergenerational business transfers. The Department of Finance is of the opinion that this exception may unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer takes place.

Budget 2022 announces a consultation process for Canadians to share views as to how the existing rules could be modified to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers. Comments are welcome from the public until June 17, 2022.

Click here to check out our earlier article on this matter, where we explain Bill C-208.

When is Legislation Expected?

The government plans to table legislation in fall 2022 after the conclusion of the consultation process.

5. Employee Ownership Trusts Coming Soon

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. The government will continue to engage with stakeholders to finalize the development of rules for the Employee Ownership Trust and to assess the remaining barriers to the creation of these trusts.

6. Review of Tax Support to R&D and Intellectual Property

The government intends to undertake a review of the Scientific Research and Experimental Development (SR&ED) 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.

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. In particular, the government will consider the suitability of adopting a patent box regime in order to meet these objectives.