Income tax measures in the 2022 Federal Budget

On April 7, 2022 the Honourable Chrystia Freeland introduced her second Budget (Budget 22). Here is a summary of the individual and corporate income tax changes that were included in the budget.

Personal income tax changes

Several of the tax changes affecting individuals dealt with improving house affordability for first-time home owners in particular. These are covered in the “Government programs to support first-time home buyers” article in this edition of Business Matters. Some additional measures were proposed to improve housing affordability in general.

Multigenerational Home Renovation Tax Credit

In addition to the support for first-time home buyers, Budget 22 proposes a new refundable credit for up to $50,000 of eligible expenses to renovate a home to create a secondary residential unit for a qualifying relative who is senior or person with a disability. The maximum tax savings would be $7,500 (15% times $50,000).

Home accessibility tax credit

The home accessibility tax credit is a non-refundable tax credit for up to $10,000 of eligible home renovation expenses to make a home more accessible for a person eligible to claim the Disability Tax Credit or who is 65 years or older at the end of the taxation year. Budget 22 proposes to double the annual renovation expense limit to $20,000, which will increase the maximum tax savings from $1,500 to $3,000. The increased limit will be effective for 2022 and subsequent years.

Residential property flipping rule

Budget 22 proposes a new deeming rule to ensure that profits from flipping residential real estate are always treated as business income. This means that profits are fully taxable, rather than capital gains that are 50 per cent taxable or offset by the Principal Residence Exemption.

The new rule will apply when you sell a residential property, including a rental property, that you owned for less than 12 months. Exceptions to this rule will be available when there are “life events” that necessitate the sale of the home. Examples of life events include death, marriage, separation, new baby or senior coming to live with you, a new job in a different location, insolvency, or a threat to personal safety. This new deeming rule would apply for all sales on or after January 1, 2023.

Labour Mobility Deduction for Tradespeople

Expenses associated with temporary relocations that are common in the construction industry often do not qualify for the current deductions for moving or travel expenses. Budget 22 proposes to introduce new Labour mobility deductions for tradespeople and apprentices who make such temporary locations to obtain or maintain employment in a construction activity at a particular work location in Canada. The relocation must be for a minimum of 36 hours and the temporary lodging must be at least 150 kilometres closer to the work location than the ordinary residence. Expenses eligible for this deduction include temporary lodging, transportation and meal expenses for the tradesperson for one round trip from their ordinary residence, up to a maximum of $4,000 per year. This deduction would apply for 2022 and subsequent taxation years.

Medical Expense Tax Credit

The list of eligible expenses for the non-refundable Medical Expense Tax Credit is proposed to be expanded to include the reimbursement of medical expenses incurred by a surrogate mother or sperm, ova or egg donor. It would also include fees paid to fertility clinics or donor banks in Canada to obtain sperm or ova. These changes would be effective for 2022.

More changes to come for high-income Canadians

In addition to the personal tax changes noted above, Budget 22 announced a review of a new or amended minimum tax regime for high-income Canadians. More details are expected to be released in the 2022 fall economic and fiscal update.

Corporate tax changes

Expansion of the small business deduction

The small business deduction (SBD) allows small Canadian-controlled private corporations (CCPCs) to benefit from a lower corporate tax rate on the first $500,000 per year of qualifying active business income in the associated group of CCPCs. There are two “size” tests applied to the CCPC and its associated companies to ensure that the SBD targets small companies. The $500,000 limit is reduced on a straight-line basis when:

• The combined taxable capital employed in Canada is between $10 million and $15 million.
• The combined adjusted aggregate investment income is between $50,000 and $150,000.

When both business limit reductions apply, the lesser of the two amounts will apply. To make more mid-sized businesses eligible for the SBD, Budget 22 proposes to change taxable capital criteria so that it would continue to start reducing the SBD at $10 million, but not be fully eliminated at $50 million. Since the reduction is calculated on a straight-line basis, this means that each $1 million of taxable capital over the $10 million threshold would reduce the SBD limit by $12,500 instead of $100,000 under the current rules. This measure would apply to taxation years beginning on or after April 7, 2022.

Substantive CCPCs

CCPCs pay a refundable tax on investment income earned in the corporation; this tax is fully or partially refunded when taxable dividends are paid to the shareholders. This process, known as integration, is designed to ensure that income earned directly by an individual is taxed at approximately the same rate as if it was earned through a corporation.

Some taxpayers have attempted to manipulate status of private corporations to avoid being a “Canadian” corporation, and thereby avoid these refundable taxes. Budget 22 introduces the concept of “substantive CCPCs” that are in law or in fact controlled by Canadian-resident individuals. The taxation of substantive CCPCs would be aligned with the rules for actual CCPCs. This would be effective for taxation years that end on or after April 7, 2022.

Foreign resident corporations

Budget 22 proposes some changes to the way investment income earned by CCPCs and substantive CCPCs through foreign subsidiaries or affiliates is taxed. These changes would apply to taxation years beginning on or after April 7, 2022.

Canada Recovery Dividend

Budget 22 proposes to introduce a new one-time 15 per cent tax on the 2021 taxable income of bank and insurance company groups in excess of $1 billion for the taxation year ending in 2021. The proposed Canada Recovery Dividend would be calculated in 2022 and payable in equal instalments over five years.

Additional tax on banks and life insurers

The budget proposes an additional 1.5 per cent tax on bank and life insurer groups on taxable income in excess of $100 million. This would apply to taxation years ending after April 7, 2022, and would be prorated for taxation years that include that date.

Investment tax credit for carbon capture, utilization and storage

Budget 22 proposes a new refundable tax credit for the cost of purchasing and installing eligible equipment used in eligible projects where the captured carbon dioxide is used for eligible uses. Projects would be subject to a validation and verification process, and rates for expenses incurred after 2021 would vary from 60 per cent for equipment used in a direct air capture project, 50 per cent for all other capture equipment, and 37.5 per cent for transportation, storage and use equipment. Those rates would be halved for expenditures after 2030 and before 2040.

Clean technology tax incentives for air-source heat pumps

The capital cost allowance rules for investments in specified clean energy generation and energy conservation equipment provide accelerated deductions for these assets. Budget 22 proposes to expand the definition of these assets to include purchases of air-source heat pumps primarily used for space or water heating after April 7, 2022.

Budget 22 proposes that the tax rate reductions introduced in the 2021 budget for qualifying zero-emission technology manufacturing and processing income will be extended to include the manufacturing of air-source heat pumps and related components.

Critical Mineral Exploration Tax Credit

Flow-through share agreements allow corporations to renounce certain expenses to investors, who can deduct the expenses on their own tax returns. In addition to the deduction of the renounced expenses, a new Critical Mineral Exploration Tax Credit (CMETC) is proposed for companies that mine minerals used in the production of batteries and permanent magnets which are used in zero-emission vehicles. This credit will flow-through to the shareholder based on 30 per cent of the renounced exploration expenses, and apply to eligible flow-through share agreements entered into between April 7, 2022 and March 31, 2027. Eligible expenses will not be able to benefit from both the new CMETC and the existing 15 per cent flow-through Mineral Exploration Tax Credit.

Flow-through share for oil, gas and coal activities

The government proposes to eliminate the flow-through regime that allows shareholders to deduct renounced oil, gas and coal exploration and development expenses. This change is effective for flow-through share agreements entered into after March 31, 2023.

Anti-avoidance measures

Several changes are proposed in Budget 22 to address transactions that the government considers to be aggressive or abusive. The government proposes introducing specific changes to the Income Tax Act to prevent financial institutions from realizing artificial tax deductions through hedging and short selling Canadian shares. It is also proposing amendments that would specifically extend the general anti-avoidance rule (GAAR) to include tax attributes that had not yet been used to reduce taxes (a 2018 Federal Court of Appeal decision had limited the application of GAAR to circumstances where the tax attribute had been utilized). This change would be effective for notices of determination issued on or after April 7, 2022.

Future consultations

The budget included announcements on several consultation projects on tax legislation. These include the following:

• A review of the alternative minimum tax regime for individuals noted above.
• A review of how the rules to prevent people from converting taxable dividends into capital gains, which are taxed at a lower rate, can facilitate genuine intergenerational share transfers in a more targeted manner.
• Engaging with stakeholders on the development of tax rules for Employee Ownership Trusts – a new dedicated type of trust to support employee ownership of a business.
• Consulting with experts on the design of a new 30 per cent investment tax credit for investments in net-zero technologies, battery storage solutions and clean hydrogen.
• A review of the Scientific Research and Experimental Development program to improve program efficiency and effectiveness.
• A review of whether Canada should seek to adopt a “patent box” regime, which provides lower effective tax rates on income derived from intellectual property.

More details on many of these consultations are expected to be released in the fall economic and fiscal update.