The long-awaited Federal 2022 Budget, A Plan to Grow Our Economy and Make Life More Affordable (“the Budget”), was tabled on April 7, 2022. Like every year, the Budget surprised the Canadian tax industry by announcing numerous new tax changes to come in the near future—some are even applicable immediately. This blog post briefly summarizes all the tax announcements from the Budget. You can also access in-depth technical commentary from the experts at Dentons Canada LLP in the 2022 Federal Budget Special report. You can access the Special Report and the Federal Budget documents on the main page of AnswerConnect, and you should also receive links to these documents in your “Tax News Headlines” email.
Personal Income Tax Measures
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. Contributions to an FHSA would be deductible and income earned in an FHSA would not be subject to tax. The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000.
Home Buyers’ Tax Credit: Budget 2022 proposes to double the Home Buyers’ Tax Credit amount from $5,000 to $10,000, which would provide up to $1,500 in tax relief to eligible home buyers.
Multigenerational Home Renovation Tax Credit: This new refundable credit would provide recognition of eligible expenses for a qualifying renovation. The value would be 15% of the lesser of eligible expenses and $50,000. Seniors and adults with disabilities would be considered eligible persons for the purpose of the credit.
Home Accessibility Tax Credit: Budget 2022 proposes to increase the annual expense limit of the Home Accessibility Tax Credit from $10,000 to $20,000.
Residential Property Flipping Rule: 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.
Labour Mobility Deduction for Tradespeople: Budget 2022 proposes to introduce a Labour Mobility Deduction for Tradespeople to recognize certain travel and relocation expenses of workers in the construction industry, for whom such relocations are relatively common. This measure would allow eligible workers to deduct up to $4,000 in eligible expenses per year.
Medical Expense Tax Credit for Surrogacy and Other Expenses: Budget 2022 proposes to broaden the Medical Expense Tax Credit (“METC”) to recognize circumstances that involve medical expenses for individuals other than the intended parents, such as medical expenses related to a surrogate mother or sperm, ova or embryo donor; reimbursement of medical expenses incurred by a surrogate mother or sperm, ova or embryo donor; and fees paid to acquire donated human sperm or ova.
Annual Disbursement Quota for Registered Charities: Budget 2022 proposes to make a number of changes to increase expenditures by larger charities, and to improve the enforcement and operation of the disbursement quota (“DQ”) rules, including increasing the Rate of the DQ from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1 million.
Charitable Partnerships: Budget 2022 proposes a number of changes to improve the operation of the rules relating to activities through an intermediary organization (other than a qualified donee), allowing charities to make qualified disbursements to organizations that are not qualified donees.
Amendments to the Children’s Special Allowances Act and to the Income Tax Act: Budget 2022 proposes legislative amendments to the Children’s Special Allowances Act and its regulations and to the Income Tax Act to ensure that the special allowance, the Canada Child Benefit, and the Canada Workers Benefit amount for families continue to support children in need of protection. Budget 2022 also proposes to amend the Income Tax Act to ensure consistent tax treatment of kinship care providers and foster parents who receive financial assistance from Indigenous communities.
Borrowing by Defined Benefit Pension Plans: Budget 2022 proposes to provide more borrowing flexibility to administrators of defined benefit registered pension plans (other than individual pension plans) by maintaining the borrowing rule for real property acquisitions and replacing the 90-day term limit with a limit on the total amount of additional borrowed money (for purposes other than acquiring real property) equal to the lesser of:
- 20% of the value of the plan’s assets (net of unpaid borrowed amounts); and
- the amount, if any, by which 125% of the plan’s actuarial liabilities exceeds the value of the plan’s assets (net of unpaid borrowed amounts).
Reporting Requirements for RRSPs and RRIFs: Budget 2022 proposes to require financial institutions to annually report to the Canada Revenue Agency the total fair market value, determined at the end of the calendar year, of property held in each RRSP and RRIF that they administer.
Business Income Tax Measures
Canada Recovery Dividend and Additional Tax on Banks and Life Insurers: Budget 2022 proposes to introduce the one-time Canada Recovery Dividend (a 15% tax on bank and life insurer groups) and an additional tax on banks and life insurers of 1.5% of the taxable income for members of bank and life insurer groups.
Investment Tax Credit for Carbon Capture, Utilization, and Storage: Budget 2022 proposes to introduce the investment tax credit for carbon capture, utilization, and storage, a refundable credit available to businesses that incur eligible expenses.The following rates would apply to eligible expenses incurred after 2021 through 2030:
- 60% for eligible capture equipment used in a direct air capture project;
- 50% for all other eligible capture equipment; and
- 37.5% for eligible transportation, storage, and use equipment.
Clean Technology Tax Incentives–Air-Source Heat Pumps: Budget 2022 proposes to expand eligibility under Capital Cost Allowance Classes 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating.
Rate Reduction for Zero-Emission Technology Manufacturers: Budget 2022 proposes to include the manufacturing of air-source heat pumps used for space or water heating as a zero-emission technology manufacturing or processing activity eligible for a reduced tax rate.
Critical Mineral Exploration Tax Credit: Budget 2022 proposes to introduce a new 30% Critical Mineral Exploration Tax Credit for specified minerals.
Flow-Through Shares for Oil, Gas, and Coal Activities: 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.
Small Business Deduction: In order to facilitate small business growth, 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 Canadian-controlled private corporation (“CCPC”) and its associated corporations. The new range would be $10 million to $50 million.
International Financial Reporting Standards for Insurance Contracts (IFRS 17): On May 28, 2021, the Government issued a news release to announce that it intends to generally support the use of IFRS 17 accounting for income tax purposes. Following extensive consultations with the insurance industry, Budget 2022 proposes to maintain the policy intent described in the May 2021 Release, but proposes to make certain relieving modifications, as well as consequential changes to protect the minimum tax base for life insurers.
Hedging and Short Selling by Canadian Financial Institutions: Budget 2022 proposes amendments to the Income Tax Act to:
- deny the dividend received deduction for dividends received by a taxpayer on Canadian shares if a registered securities dealer that does not deal at arm’s length with the taxpayer enters into transactions that hedge the taxpayer's economic exposure to the Canadian shares, where the registered securities dealer knew or ought to have known that these transactions would have such an effect;
- deny the dividend received deduction for dividends received by a registered securities dealer on Canadian shares that it holds if it eliminates all or substantially all of its economic exposure to the Canadian shares by entering into certain hedging transactions; and
- provide that in the above situations, the registered securities dealer will be permitted to claim a full, rather than a two-thirds, deduction for a dividend compensation payment it makes under a securities lending arrangement entered into in connection with the above hedging transactions.
Application of the General Anti-Avoidance Rule (“GAAR”) to Tax Attributes: Budget 2022 proposes that the Income Tax Act be amended to provide that the GAAR can apply to transactions that affect tax attributes that have not yet become relevant to the computation of tax.
Genuine Intergenerational Share Transfers: 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.
Substantive CCPCs: Budget 2022 proposes targeted amendments to the Income Tax Act to align the taxation of investment income earned and distributed by “substantive CCPCs” with the rules that currently apply to CCPCs.
Deferring Tax Using Foreign Resident Corporations: Budget 2022 proposes targeted amendments to the Income Tax Act to eliminate the tax-deferral advantage available to CCPCs and their shareholders earning investment income through controlled foreign affiliates.
International Tax Measures
International Tax Reform: Canada is one of 137 members of the Organisation for Economic Co-operation and Development (OECD)/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting that have joined a two-pillar plan for international tax reform agreed to on October 8, 2021. Pillar One is intended to reallocate a portion of taxing rights over the profits of the largest and most profitable multinational enterprises (“MNEs”) to market countries. Pillar Two is intended to ensure that the profits of large MNEs are subject to an effective tax rate of at least 15%, regardless of where they are earned.
Exchange of Tax Information on Digital Economy Platform Sellers: Budget 2022 proposes to implement in Canada the OECD model rules for reporting by digital platform operators with respect to platform sellers.
Interest Coupon Stripping: Budget 2022 proposes an amendment to the interest withholding tax rules to ensure that the total interest withholding tax paid under an interest coupon stripping arrangement is the same as if the arrangement had not been undertaken and instead the interest had been paid to the non-resident lender.
Sales And Excise Tax Measures
GST/HST Health Care Rebate: Budget 2022 proposes that to be eligible for the expanded hospital rebate, a charity or non-profit organization must deliver the health care service with the active involvement of, or on the recommendation of, either a physician or a nurse practitioner, irrespective of their geographical location.
GST/HST on Assignment Sales by Individuals: Budget 2022 proposes to amend the Excise Tax Act to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes.
Taxation of Vaping Products: The proposed federal excise duty framework for vaping products would come into force on October 1, 2022. Retailers may continue to sell until January 1, 2023, unstamped products that are in inventory as of October 1, 2022. A federal excise duty rate of $1 per 2 ml, or fraction thereof, is proposed for the first 10 ml of vaping substance, and $1 per 10 ml, or fraction thereof, for volumes beyond that. If a province or territory were to choose to participate in a coordinated vaping taxation regime administered by the federal government, an additional duty rate would be imposed in respect of dutiable vaping products intended for sale in that participating jurisdiction.
Cannabis Taxation Framework and General Administration under the Excise Act, 2001: Budget 2022 proposes:
- to allow licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis. This option would only be available in respect of a fiscal quarter, beginning on or after April 1, 2022, of a licensee that was required to remit less than a total of $1M in excise duties during the four fiscal quarters immediately preceding that fiscal quarter.
- to allow the Canada Revenue Agency to approve certain contract-for-service arrangements between two licensed cannabis producers.
- to amend the penalty provision for lost stamps so that the higher penalty for losing stamps for a province or territory with an additional cannabis duty adjustment only applies if the adjustment rate is greater than 0%.
- that existing cannabis penalty provisions would also apply to situations where unlicensed parties illegally possess or purchase cannabis products, and where licensed parties illegally distribute cannabis products.
- to exempt holders of a Health Canada-issue Research Licence or Cannabis Drug Licence from the requirement to be licensed under the excise duty regime.
- to allow the CRA to issue licences that would be valid for up to the lesser of five years or the longest period for which the relevant Health Canada licence or licences are valid.
General Administration – Excise Act, 2001: Budget 2022 proposes to:
- add all cancellation criteria for an excise licence, other than a proactive request by a licensee to cancel its licence, to the criteria that may be used to suspend an excise licence.
- require all excise licensees and excise applicants to comply with federal and provincial legislation and regulations regarding the taxation and control of cannabis products.
- remove cash and transferable bonds issued by the Government of Canada, and add bank drafts and Canada Post money orders, to the types of financial security that could be accepted by the CRA.
- confirm the ability of the CRA to carry out virtual audits and reviews of all licensees, where the Agency deems it appropriate.
World Trade Organization (“WTO”) Settlement on the 100% Canadian Wine Exemption: In 2018, the 100% Canadian wine excise duty exemption was challenged at the WTO. Canada reached a settlement on this dispute in July 2020, in which it agreed to repeal the excise duty exemption by June 30, 2022; as a result, Budget 2022 proposes to repeal the 100% Canadian wine excise duty exemption.
Beer Taxation: Budget 2022 proposes to eliminate excise duty for beer containing no more than 0.5% ABV.
