Our experts share with you a summary of tax measures affecting companies and individuals.
Measures affecting companies
Small Business Deduction (SBD)
The ECD allows corporations that are Canadian-controlled private corporations to benefit from a reduced federal tax rate of 9% (rather than 15%) on their active business income up to an annual limit of $500,000 of taxable income (the “business limit”) for all associated corporations.
Under current measures, the business limit is progressively reduced once a corporation and its associated companies have combined taxable capital in excess of $10 million. Currently, the business limit is reduced to zero when taxable capital reaches $15 million.
The budget proposes raising the upper threshold to $50 million. The business limit will now be progressively reduced for taxable capital between $10 million and $50 million. This measure therefore broadens the number of companies eligible for ECD.
Immediate loading
When the 2021 federal budget was tabled, the government had announced a tax deduction that would allow Canadian-controlled private corporations (“CCPCs”) to expense depreciable assets per year acquired for up to $1.5M.
In Budget 2022, the government confirmed its intention to proceed with the immediate expensing measure and proposes to extend it to Canadian resident individuals and partnerships with individual or CCPC partners.
Under this new measure, an eligible person will be able to write off 100% of the cost of a capital asset in the year of acquisition, up to a maximum of $1.5 million per taxation year. The $1.5 million limit must be shared between companies in an associated group. The eligible deduction will only be available for the year in which the property is acquired and becomes available for use. However, certain long-term assets (such as buildings) will not qualify for immediate expensing.
Intergenerational stock transfer
The budget announces a new consultation process on rules to facilitate the intergenerational transfer of businesses. These consultations follow on from Bill C-208, which was passed in the fall of 2021.
Modification to the general anti-avoidance rule
The General Anti-Avoidance Rule (“GAAR”) is a measure in the Income Tax Act designed to restrict abusive tax avoidance transactions. According to a 2018 Court of Appeal decision, these rules did not apply in situations where there was a change in tax attributes without immediate tax reduction. Budget 2022 proposes to amend the law so that the GAAR will apply even where the change in tax attributes has not yet resulted in a tax saving. A greater number of plans will therefore be covered by this extension of the GAAR. These new rules apply from March 7, 2022.
Depreciation of air-source heat pumps
As of Budget 2022, depreciation classes 43.1 and 43.2 will be expanded to include air-source heat pumps used primarily for space or water heating. The depreciation classes in question provide for accelerated depreciation rates of 30% and 50% respectively for investments in clean energy production and energy conservation equipment.
SPCC in a nutshell
For taxation years ending on or after the budget date, the government introduces the notion of “CCPC in substance”. A CCPC in substance would be a private corporation resident in Canada (other than a CCPC) that is ultimately controlled in law or in fact by individuals resident in Canada. This measure essentially targets tax planning schemes that manipulate CCPC status. This includes CCPCs in substance whose shares a non-resident or public corporation has a right to acquire. Income earned by a CCPC in substance would be taxed in the same way as for CCPCs. CCPCs in substance would continue to be treated as non-CCPCs for all other purposes of the law.
Tax deferral through foreign resident corporations
The budget proposes to amend the foreign accrual property income (“FAPI”) rules to eliminate the tax deferral advantage previously available to a CCPC that earns investment income through controlled foreign affiliates (“CFA”). In short, the overall corporate tax rate on this income will be 52.63%. Changes will be made to the definition of the capital dividend account to allow tax-free distribution of the CCPC’s net-of-tax amounts.
This measure applies to taxation years ending on or after April 7, 2022.
Measures affecting individuals
Rule on precipitous resales of residential real estate
When a taxpayer disposes of real estate, the income from the transaction may be taxed as business income or a capital gain. The second treatment reduces income inclusion by 50%, or even to zero if the principal residence exemption applies. The characterization of income depends on the specific circumstances of each transaction, in particular the taxpayer’s intention and the length of the holding period.
To limit the rising cost of housing in Canada and speculative investment, the federal government has announced the introduction of a measure that will restrict the ability of individuals to benefit from capital gains treatment and, by the same token, the principal residence exemption on the rapid resale of a residential property, including a rental property. Residential “real estate flips” carried out by private individuals are therefore specifically targeted.
To the extent that an individual resells such property within 12 months of acquiring it, the income from the sale will be deemed to be business income. He will therefore be taxed on the entire net income resulting from the sale.
This measure should apply to dispositions taking place on or after January 1, 2023.
However, exemptions will be made to take into account certain circumstances that may require an individual to resell his or her property more quickly. It has been announced, among other things, that the following events will be subject to exceptions to the new presumption:
- Death of the taxpayer or a related person;
- Separation of spouses for more than 90 days due to relationship breakdown;
- Incapacity or illness.
Tax-Free Savings Account for First-Time Home Buyers
The 2022 federal budget introduces the new Tax-Free Savings Account for First-Time Home Buyers (“TFSA”). Available from 2023, contributions to this account will be deductible and income earned in the account will be tax-free. In addition, amounts withdrawn to purchase a first home will not be taxable. A taxpayer may contribute up to $8,000 per year to the account, subject to a lifetime limit of $40,000.
To qualify, individuals must be Canadian residents and at least 18 years of age. In addition, he or she must not have lived in a property belonging to him or her at any time during the year in which the account is opened and during the four preceding calendar years. Tax-free withdrawals can be made for a single property during a taxpayer’s lifetime.
It will still be possible to withdraw funds from a Registered Retirement Savings Plan (“RRSP”) under the Home Buyers’ Plan (“HBP”), but the taxpayer will only be able to withdraw under either the TFSA or the HBP for the purchase of his or her home.
First-time homebuyers’ tax credit (housing)
Home accessibility: A first-time homebuyer is currently entitled to a $5,000 first-time homebuyers’ tax credit, representing a tax break of up to $750. Budget 2022 proposes doubling the credit amount to $10,000 to provide up to $1,500 in tax relief for first-time home buyers. This credit applies to all eligible homes purchased on or after January 1, 2022.
Incentive to purchase an extended first property
This incentive, which allows first-time buyers to share the cost of borrowing with the government, will be extended until March 31, 2025.
Tax credit for renovating multigenerational dwellings
Budget 2022 proposes to introduce a new refundable tax credit for the renovation of multigenerational housing. An eligible renovation would be one that creates a second dwelling to enable an eligible person to live with an eligible relative. The value of the credit would be equal to 15% of the lesser of eligible expenses or $50,000.
Luxury goods
The federal budget formalizes the March 11, 2022 legislative proposals for a new tax on the retail sale of luxury goods. Thus, from September 1, 2022, the following assets will be covered:
- New cars or aircraft costing more than $100,000;
- New boats priced over $250,000.
The amount to be paid will be the lesser of 10% of the purchase price of the property in question, or 20% of the difference between the price actually paid and the above-mentioned thresholds.
Labour mobility deduction for tradespeople
The federal budget proposes the addition of a deduction of up to $4,000 in eligible expenses for labour mobility for tradespeople in the construction sector. This measure is aimed at construction workers who incur certain travel and relocation expenses when they temporarily relocate at least 150 kilometers closer to their place of work and for a minimum period of 36 hours. Eligible expenses are the reasonable costs of temporary accommodation, transportation to and from the temporary accommodation and meals for the individual during the round trip.
Mandatory disclosure rules
The budget confirms the government’s intention to require the disclosure of various transactions and the declaration of uncertain tax treatments. Transactions to be disclosed include the manipulation of CCPC status to avoid the anti-avoidance rules applicable to investment income; the creation of straddle losses through a partnership; and the avoidance of the deemed disposition of trust property by transferring the property to a new trust or to a non-resident.
An “uncertain tax treatment” is a tax treatment applied in a tax return for which there is uncertainty as to its acceptance by the tax authorities. A company will have to report uncertain tax treatment if it holds assets worth more than $50 million, and if the uncertainty is reflected in its financial statements for the year.
Enhanced reporting requirements for certain trusts
The budget also confirms that measures to strengthen reporting requirements for certain trusts, originally announced in the 2018 federal budget and covered by legislative proposals released on February 4, 2022, should be implemented soon. They should therefore apply to trusts with taxation years ending after December 30, 2022.
In summary, these measures introduce new tax filing requirements for Canadian resident express trusts. They also apply to the declaration of information concerning the beneficiaries or settlors of a trust, as well as persons with the ability to exercise influence over the trustees’ decisions concerning the allocation of the trust’s income or capital.
Withholding tax on interest for non-residents
The withholding tax rules for interest paid on a debt entered into with a non-arm’s length non-resident person will be amended to broaden their scope when the non-resident lender sells its right to receive future interest payments to a person who is not subject to withholding tax. In this situation, the borrower will be deemed to have paid interest to the non-resident lender, so Part XIII tax will apply.
GST/HST on the assignment of a sales contract by individuals
The budget adds measures to make all sales of newly built or substantially renovated residential housing exempt from GST/HST. The amount of the counterparty attributable to the deposit paid to the builder will be excluded from the consideration subject to the taxable sale.
This measure applies from the month following the budget date.
- Banks and life insurers will have to pay a Canadian stimulus dividend, equivalent to a one-time tax of 15% on their taxable income for the year ending 2021.
- Increase from 15% to 16.5% in the tax rate on taxable income in excess of $100 million for banks and life insurers.
- Gradual phase-out of flow-through shares for oil, gas and coal activities.
- Starting in 2023, digital platform operators will have to report specific information on reportable sellers to the CRA by January 31 of the year following the calendar year.
- Examine a new minimum tax system to ensure that the most affluent pay their fair share of taxes. More details to come in the Autumn 2022 Economic and Budget Update.
- Advancing the timetable for the implementation of a beneficial ownership registry for Canadian companies. This register must now be accessible before the end of 2023.
- Consultations on the effectiveness of the tax program for scientific research and experimental development (R&D) and on the advisability of a new tax regime for intellectual property arising from R&D activities.
If you have any questions about the application of these new measures, or about economic updates that could impact your business, contact our experts!
