On Thursday April 7, the Honourable Chrystia Freeland presented the 2022 Federal Budget.
Surprisingly, there were not a raft of tax changes, the capital gains inclusion rate (or effective capital gains tax rate) was not increased, and Federal budget deficits are projected to decline over the next 5 years.
We are sure you have read a number of news articles, blogs, and other sources outlining the new programs, such as Dental Care for children, moving to a carbon neutral economy at a very rapid pace, and increasing spending on Canada’s military. This article is intended to provide a little bit of insight into the 2022 Federal Budget tax changes that may affect you directly.
Of particular interest to our clients, the following measures were announced for businesses:
Broadening the Range of Taxable Capital for the Small Business Deduction Grind
Corporations or corporate groups with taxable capital in excess of $10M are subject to a reduction of the Small Business Limit. The threshold before the Small Business Deduction is fully eliminated has been increased from $15M to $50M, providing at least some Small Business Deduction to larger private companies. This change is effective for taxation years starting on or after April 7, 2022.
Flow Through Shares
Effective March 31, 2023, companies undertaking oil, gas, and coal activities will no longer be able to take advantage of flow through shares as a way to raise capital.
Intergenerational Share Transfers
In summer 2021, a Private Member’s Bill resulted in significant changes to the Income Tax Act which enabled the tax efficient transfer of private company shares to family members. During the election campaign, it became clear that this “loophole” would be closed shortly after parliament resumed, as the government saw significant risk of lost tax revenue. However, the budget only refers only to a consultation process closing June 17, with changes to be introduced in fall 2022.
“Substantive” CCPC Status
Canadian Controlled Private Corporation (CCPC) status can be very attractive…until your CCPC starts earning substantial investment income. A number of strategies have emerged allowing CCPCs to lose their status, and revert to the general tax rate on investment income. (Recent news reports suggest Jim Balsillie took advantage of such a strategy prior to realizing substantial capital gains, and is now fighting a General Anti-Avoidance Rule assessment in court.)
The government has decided that taking a large number of taxpayers to court is not the most efficient approach, and so have changed the rules of the game. As of April 8, 2022, CCPC status for the purposes of investment income taxation will be determined, not by reference to the actual facts, but by the “duck test”. If it looks like a CCPC…
This “substantive CCPC” concept is designed to apply the refundable tax regime to investment income earned by any company that falls outside the technical definition of a CCPC but is “in substance” a CCPC. The announced measures attempt to align the taxation of investment income earned and distributed by “substantive CCPCs” with the rules that currently apply to CCPCs.
This change to the rules eliminates a recently popularized approach to planning for a business sale, since it will no longer be possible to lose CCPC status at the moment of the acquisition of control. Status will effectively change only after control of the company is actually transferred.
Deals inked prior to budget day have some time to close under the old rules. Deals currently under negotiation must reckon with the new rules.
Foreign Accrual Property Income Rules
The Foreign Accrual Property Income (FAPI) rules are simple to understand in principle: It should not be possible to defer taxation of investment income by earning it in an offshore corporation.
Unfortunately, in practice, these rules are anything but simple to understand. They apply to various types of active business income as well as investment income, and the existence of a tax treaty or even a tax information exchange agreement between Canada and the offshore jurisdiction can affect the determination.
Furthermore, personal ownership of the offshore entity (and by the way, the US is “offshore”) results in a vastly different set of rules than ownership through a Canadian holding company.
However, the existing rules were apparently not a sufficient deterrent. For tax years beginning after budget day, unless your offshore corporation is paying in excess of 50% corporate tax, your Canadian holding company is going to pay Canadian tax on the foreign income of its subsidiary. Of course, if your foreign subsidiary is earning active business income in a treaty country, and that is not somehow caught by the byzantine FAPI definitions, nothing changes. That income is not subject to Canadian tax when earned offshore, nor when repatriated to your Canadian holding company.
Personal Tax Changes
Although no changes were announced to personal tax rates or the capital gains inclusion rate in the 2022 Federal Budget, there were a few noteworthy items on the personal tax front, many addressing Canada’s housing market:
Tax Free First Home Savings Account
The new Tax Free First Home Savings Account (TFFHSA) is a hybrid between a TFSA and an RRSP. Starting in 2023, first-time home buyers will receive a tax deduction for up to $8,000 per year of contributions (to a maximum of $40,000) that they will be able to grow and withdrawal tax-free for the purpose of buying that first home. Contribution room does not carry forward, so use it or lose it! For most eligible individuals, this should be the first registered account contributions go into, followed by a TFSA or RRSP, depending on your specific circumstances.
In an effort to cool the housing market, any home sale within 12 months of purchase will now be treated as business income, unless certain “life events” triggered the sale. This new rule will take effect in 2023.
Home Buyers Tax Credit
This $750 tax savings has been doubled to $1,500 as of January 1, 2022.
Multigenerational Home Renovation Tax Credit
This new credit provides up to $7,500 in tax relief for building a “Granny-Flat.”
Home Accessibility Tax Credit
This credit has doubled to $3,000 in tax relief for renovations that enable seniors (or individuals eligible for the Disability Tax Credit) to continue living at home.
The disbursement quota for Registered Charities will be increased from 3.5% to 5% with respect to assets in excess of $1M, while loosening some restrictions on the disbursement of funds to organizations that are not themselves registered charities. Such disbursements would be subject to strict monitoring and control to ensure the appropriate use of funds.
S+C Partners is committed to helping you
Our dedicated and knowledgeable tax team is here to support you. Please call us at 905-821-9215 or email us at firstname.lastname@example.org if you have any questions concerning the 2022 Federal Budget or require any assistance.
Read our 2021 Federal Budget Commentary.