On April 7, 2022, the Federal Government released its 2022 Federal Budget, outlining many proposed economic, social, and income tax measures for 2022 and subsequent years. From an income tax standpoint, most of the proposals outlined were smaller in significance and focused on less specific promises of proposed future tax measures, and the introduction of new boutique tax credits. There were no increases to personal or corporate tax rates. Nor were there any increases to the capital gains inclusion rate. The following is a summary of some of the more important tax measures to be aware of and watch for updates on moving forward.
Improved Access to the Small Business Deduction for Medium Sized Corporations
The existing rules for determining a corporation’s access to the Small Business Deduction, allowing for a reduced rate of corporate tax on Active Business Income for taxation years beginning prior to April 7, 2022, required that where a corporation’s Taxable Capital Employed in Canada (Taxable Capital) exceeded $10 million, there was a reduction of the available Small Business Deduction limit (SBD) on the first $500,000 of active business income.
“Taxable Capital” is essentially a corporation’s net assets (assets less liabilities) plus its outstanding debt, and adjusted for certain other items. Under the previous rules, when the total Taxable Capital of an associated group of corporations exceeded $10 million, a reduction of the SBD available to the associated group was applied, until the entire SBD is eliminated at a Taxable Capital level of $15 million or higher. This represented a loss of $100,000 of SBD for every $1 million of taxable capital in excess of the $10 million threshold.
The 2022 Federal Budget provides an expansion of the range used to demine the reduction to the Small Business Deduction limit with the SBD now reduced between a range of $10 million to $50 million of total Taxable Capital among the associated group. This represents a reduction to the SBD of only $12,500 for every $1 million of Taxable Capital in excess of the $10 million threshold.
The expanded range for the SBD reduction applied to corporations with Taxable Capital over $10 million will surely provide many additional medium sized corporations with added incentive to grow their business, and expand their asset base.
Anti Property Flipping Rules
There has long been speculation that the Federal Government could at some point eliminate or take measures to reduce access to the Principal Residence Exemption (PRE) available to shelter capital gains resulting on the sale of a property in which an individual ordinarily resides. Although the 2022 Federal Budget did not contain any specific changes to the Principal Residence Exemption (i.e. no draft legislation provided), it did include a proposal to restrict use of the PRE as part of the government’s efforts to curb abuse of the exemption in “property flipping” scenarios.
The 2022 Budget proposes a new deeming rule to ensure profits from flipping residential real estate are always subject to full taxation. Specifically, profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months would be deemed to be business income. The proposal would also provide exceptions to the 12-month holding period in situations where the disposition is due to a “life event” including death, separation, a household addition, employment change, and other specific scenarios.
As there is no specific draft legislation provided in regards to these proposals, there is some uncertainty as to how these changes to the PRE would apply, and anyone planning to purchase or sell a property in the near future may want to keep an eye on any further developments on this matter.
Intergenerational Business Transfers (Bill C-208)
In June 2021 Bill C-208 received Royal Assent and provided for changes to the Income Tax Act in regards to the ability for small business owners to sell shares of their corporation to a child or grandchild, while accessing similar tax treatment as would be available on a sale to an unrelated third party. Although the changes provided by Bill C-208 did address what had long been considered unfair and unequitable tax treatment for the sale of a business to a related person, the new law was widely criticized for its unclear and imperfect wording, leaving a wide potential for abuse and application of the revised rules in situations that were likely not intended.
In July 2021, the government promised to review the deficiencies in the legislation and provide revised legislation at a later date. The 2022 Federal Budget did not provide any specific updates or proposed legislation in regards to Bill C-208. Instead, the government has proposed to conduct an additional consultation period with submissions open until June 17, 2022, at which point the government will review the consultation and proposes to release revised draft legislation in the fall of 2022.
In the meantime, Bill C-208 remains valid tax law, and a tool that taxpayers will have at their disposal to facilitate intergenerational business transfers, until such time as the revised draft legislation is passed.
Tax-Free First Home Savings Account
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 like a TFSA, withdrawals to purchase a first home (including investment income) would be non-taxable. Tax-free in, tax-free out.
The government intends to work with financial institutions to ensure that a Tax-Free First Home Savings Account could be opened and contributed to in 2023.
Multi-Generational Home Renovation Tax Credit
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 per cent of up to $50,000 in eligible renovation and construction costs in order to construct a secondary suite.
Changes to Existing Tax Credits
- Doubling of the Home Buyer’s Tax Credit from $5,000 to $10,000.
- Doubling of the maximum Home Accessibility Tax Credit from $10,000 to $20,000 annually.
- Medical Expense Tax Credit – Expanded to include costs for hopeful parents related to payments for a surrogate mother or donor