On April 7, 2022, Deputy Prime Minister and Minister of Finance, Chrystia Freeland, tabled Canada’s 2022 federal budget. A slimmer and more tightly focused document than last year, this year’s budget projects a considerably lower deficit of $52.8 billion. However, significant spending initiatives are still planned to address Canada’s overheated housing market, speed the transition to a more environmentally sustainable economy, boost national defence capabilities, foster future economic growth, introduce a national dental care program, and support indigenous reconciliation.
From a tax perspective, many significant measures were announced, including new taxes on large financial institutions, new rules for Canadian-controlled private corporations (CCPCs), corporate income tax incentives designed to encourage the adoption of green technologies, international tax reform initiatives, several personal income tax changes intended to help with home ownership, and various adjustments to sales and excise taxes.
Corporate Income Tax Measures
Canada Recovery Dividend and Additional Tax on Banks and Life Insurers
COVID-19 pandemic relief programs, including the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy, the Hardest-Hit Business Recovery Program, and the Tourism and Hospitality Recovery Program, have cost the Canadian tax system in excess of $350 billion. To help recover the costs of these subsidy programs, this year’s budget targets Canada’s major financial institutions, which generally prospered during the pandemic.
Specifically, the budget proposes:
- A temporary Canada Recovery Dividend, under which bank and life insurance groups [as determined under Part VI of the Income Tax Act (ITA)] will pay a one-time 15% tax on taxable income above $1 billion for the 2021 tax year, payable in equal installments over five years; and
- A permanent increase of 1.5% in the corporate income tax rate applicable to the taxable income of bank and life insurance groups (as determined under Part VI of the ITA) above $100 million, such that the overall federal corporate income tax rate above this income threshold will increase from 15 to 16.5%, for taxation years that end after April 7, 2022.
Canadian-Controlled Private Corporation (CCPC) Measures
Manipulation of Status
The budget targets structures (both domestic and foreign) implemented to manipulate CCPC status to avoid paying the additional refundable corporate income tax that would otherwise be payable on investment income earned in corporations.
For taxation years that end on or after April 7, 2022, investment income earned and distributed by private corporations that are, in substance, CCPCs is subject to the same taxation as investment income earned and distributed by CCPCs.
The proposed regulations target “substantive CCPCs,” which are private corporations resident in Canada (other than CCPCs) that are ultimately controlled (in law or in fact) by Canadian-resident individuals.
Investment income earned and distributed by corporations that are substantive CCPCs would be taxed in the same manner as for CCPCs. This will ensure that private corporations cannot effectively opt out of CCPC status and inappropriately circumvent the existing anti-deferral rules applicable to CCPCs (i.e., Part IV tax on portfolio dividends and the higher rate of taxation on passive investment income).
Investment income would be subject to a federal tax rate of 38⅔%, of which 30⅔% would be refundable upon distribution.
Foreign Accrual Property Income (FAPI) and Integration
The budget will also impact the tax treatment of investment income earned by CCPCs (and substantive CCPCs) through foreign affiliates, which is generally included in FAPI.
Currently, where FAPI exists and is included in income, an offsetting deduction is available for the foreign tax paid on FAPI to prevent double taxation. This deduction is equal to the amount of foreign tax, multiplied by a “relevant tax factor.” The relevant tax factor is 4 where the Canadian taxpayer is a corporation, and 1.9 where the taxpayer is an individual. As a result, a corporation benefits from a higher deduction.
The budget proposes to change the relevant tax factor for CCPCs (and substantive CCPCs) to 1.9, as it currently exists for individuals. Effectively, a full deduction will be available only where the effective foreign tax rate on the relevant income is at least 52.63%.
The budget also proposes changes to tax integration by flowing deductions claimed for taxable surplus dividends, foreign withholding tax in respect of taxable surplus dividends, and hybrid surplus dividends through the capital dividend account of a CCPC. This measure would effectively allow after-tax income taxed in the CCPC at the highest rate to be distributed to Canadian resident shareholders tax free.
Small Business Deduction Limit
The budget proposes changes to allow more medium-sized CCPCs to benefit from the small business deduction. Small businesses benefit from a reduced corporate income tax rate of 9% relative to the general corporate income tax rate of 15%. This rate reduction is provided through the “small business deduction” and applies on up to $500,000 per year of qualifying active business income.
The government has proposed to extend the range over which the small business deduction limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations. The new range would be $10 million to $50 million versus the old range that had an upper limit of $15 million. This measure will be effective for taxation years beginning on or after April 7, 2022.
Clean Energy Incentives
The budget introduces a 30% Critical Mineral Exploration Tax Credit (CMETC) for eligible expenditures incurred in the exploration and mining of specified minerals that are used in the production of certain parts for zero-emission vehicles or advanced materials, clean technology, or semi-conductors. The new credit will be available for qualifying expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022, and on or before March 31, 2027.
In addition, the budget increases eligibility for capital cost allowance (CCA) Classes 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating, effective for eligible property that is acquired and becomes available for use after April 6, 2022.
The budget also proposes to include the manufacturing of air-source heat pumps used for space or water heating as an eligible zero-emission technology manufacturing or processing activity, for the purposes of the temporary reduced corporate income tax rates for qualifying zero-emission technology manufacturers that apply to taxation years beginning after 2021.
As a final clean energy incentive, the budget proposes a new Carbon Capture, Utilization, and Storage (CCUS) refundable tax credit, which can be claimed starting on January 1, 2022 (and onwards) by businesses with eligible expenditures related to the purchase and installation of eligible equipment used in a qualifying new project that captures carbon dioxide (CO2) emissions.
The proposed tax credit would apply to projects that permanently store captured CO2 through eligible uses, including dedicated geological storage and storage of CO2 in concrete, but specifically excludes enhanced oil recovery (which involves injecting industrially emitted CO2 into oil reservoirs to increase oil extraction). Other eligible uses may be added in the future.
The proposed tax credit rates from 2022 to 2030 are:
- 60% for investment in equipment to capture CO2 in direct air capture projects;
- 50% for investment in equipment to capture CO2 in all other CCUS projects; and
- 37.5% for investment in equipment for transportation, storage, and use.
These rates will be reduced by 50% for investments between 2031 and 2040 to encourage earlier implementation of eligible projects.
Elimination of Flow-Through Shares for Oil, Gas, and Coal Activities
To encourage investment in cleaner energy sources, the budget 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.
This change would apply to expenditures renounced under flow-through share agreements entered into after March 31, 2023.
Double-Deduction Structures and Hedging by Canadian Financial Institutions
The budget proposes to amend the ITA to deny the deduction for a dividend received where the taxpayer has entered into financing arrangements to achieve double deductions. The measures will specifically target Canadian financial institutions that have utilized hedging and short-selling arrangements in aggressive tax-planning strategies. The proposed rules would apply to dividends and related compensation payments paid or payable on or after April 7, 2022 (or paid after September 2022, where arrangements were in place prior to budget day).
Enhancements to Anti-Avoidance Provisions and Enforcement
The budget proposes to introduce specific tax anti-avoidance measures to expand the General Anti-Avoidance Rule (GAAR) and address certain types of foreign transactions.
The government intends to amend the ITA to provide that the GAAR can apply to transactions that affect tax attributes that have not yet been used to reduce taxes. Furthermore, the government will introduce a broader consultation paper on modernizing the GAAR, with the consultation period running through the summer of 2022 and legislative proposals to be tabled by the end of 2022.
The budget also proposes to introduce a specific anti-avoidance rule to ensure that the appropriate amount of tax is paid when an interest coupon stripping arrangement is used. Current avoidance plans target the bypass of Part XIII interest withholding tax imposed under the ITA on non-arm’s length debt through interest coupon stripping arrangements. These arrangements generally involve a non-resident lender selling its right to receive future interest payments (i.e., interest coupons) in respect of a loan made to a non-arm’s length, Canadian-resident borrower to a party that is not subject to withholding tax. The non-resident lender generally retains its right to the principal amount under the loan.
The budget 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 (i.e., the interest had been paid to the non-resident lender).
In addition, the budget proposes to provide $1.2 billion over five years, starting in 2022–23, for the Canada Revenue Agency (CRA) to expand audits of larger entities and non-residents engaged in aggressive tax planning and increase both the investigation and prosecution of persons engaged in criminal tax evasion.
Scientific Research and Experimental Development (SR&ED) Measures
Review of SR&ED Program
The government will review the SR&ED program to evaluate its effectiveness with respect to encouraging research and development (R&D). The review will also look into ways that the program can be modernized and simplified, including potentially revising the longstanding SR&ED eligibility criteria to “ensure adequacy of support and improve overall program efficiency.” This language would appear to suggest that the government may be considering expanding the scope of eligibility. Public consultations are expected in advance of any potential change.
Evaluation of Patent Box Regime
The government is also looking at tax mechanisms that would encourage domestic commercialization of intellectual property resulting from Canadian R&D. The government will be investigating a “patent box” regime and indicated that there will be some form of future consultation process. In a patent box scheme, income from certain underlying intellectual property is segregated and taxed at a favourable rate.
International Income 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 joined a two-pillar plan agreed to in October 2021 for international tax reform.
Pillar One of the framework will ensure that the largest and most profitable global corporations, including large digital corporations, pay their fair share of tax in the jurisdictions where their users and customers are located.
For in-scope multinational enterprises (global revenues above €20 billion and a profit margin above 10%), 25% of residual profit, defined as profit in excess of 10% of revenue, will be allocated to market countries using a revenue-based allocation key.
If Pillar One is not ratified by January 1, 2024, the government has already released draft legislative proposals for a Digital Services Tax (DST) in Canada. The DST could be imposed as of that date, but only if the multilateral convention implementing the framework to prevent the double taxation of profit reallocated to market countries has not come into force. In that event, the DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022.
Pillar Two will ensure that large multinational enterprises are subject to a minimum effective tax rate of 15% on their profits in every jurisdiction in which they operate.
Pillar Two also contains a treaty-based rule called the “subject-to-tax rule.” Where applicable, this rule allows a country to impose a higher rate of withholding tax than the negotiated tax treaty rate on certain payments (including interest, royalties, and a defined set of other payments) made between related entities, if the payment is subject to tax in the payee country at a nominal tax rate below 9%.
The budget proposes to implement Pillar Two in Canada, which will be comprised of income inclusion and undertaxed profits rules, along with a domestic minimum “top-up” tax. The government expects the income inclusion rule and domestic minimum top-up tax to be effective in 2023, with the undertaxed profits rule not taking effect before 2024.
The government also announced plans for extensive public consultations on the implementation of Pillar Two and the domestic minimum top-up tax in Canada.
Personal Income Tax Measures
High-Income Earners
The Alternative Minimum Tax (AMT), which has been in place since 1986, seeks to ensure that the wealthiest Canadians do not take advantage of the tax system. However, this system has not been significantly updated since inception.
The budget announced the government’s commitment to examine a new minimum tax regime, with details on a proposed approach forthcoming in the 2022 fall economic and fiscal update.
Tax-Free First Home Savings Account
The budget proposes to create a 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. Qualifying withdrawals from an FHSA made to purchase a first home would be non-taxable.
The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000. The full annual contribution limit would be available starting in 2023.
Multigenerational Home Renovation Tax Credit
A new Multigenerational Home Renovation Tax Credit has been proposed. This refundable credit would provide recognition of eligible expenses for a qualifying renovation. A qualifying renovation would be one that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a qualifying relation. The value of the credit would be 15% of the lesser of eligible expenses and $50,000. This measure would apply with respect to eligible work performed and paid for on or after January 1, 2023, as well as eligible goods acquired on or after that date.
Property Dispositions and First-Time Home Buyers
The government has become concerned that certain individuals engaged in flipping residential real estate are not properly reporting their profits as business income. Instead, these individuals may be improperly reporting their profits as capital gains and, in some cases, claiming the exemption available for a principal residence.
The budget proposes to address this issue by introducing a new deeming rule to ensure that 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. This measure would apply to residential properties sold on or after January 1, 2023.
For acquisitions of a qualifying home made after December 31, 2021, the budget also proposes to double the First-Time Home Buyers’ Tax Credit (HBTC) from $750 to $1,500.
Home Accessibility Tax Credit
The Home Accessibility Tax Credit (HATC) is a non-refundable tax credit at a rate of 15% available on eligible home renovation expenses in respect of an eligible dwelling of a qualifying individual (i.e., an individual who is eligible for the Disability Tax Credit or who is 65 or older at the end of a tax year).
For eligible expenses incurred after 2021, the budget proposes to increase the annual expense limit of the HATC from $10,000 to $20,000.
Commodity Tax Measures
Expanded Eligibility for GST/HST Health Care Rebate
Select public service bodies claim rebates for GST/HST at a prescribed rate. Charities and non-profit organizations may claim a 50% rebate, while a hospital may claim an 83% rebate of the GST or the federal portion of the HST paid on purchases that relate to their exempt supplies. In 2005, the rebate rate available to hospitals was extended to cover eligible charities and non-profit organizations that provide healthcare services similar to those offered by traditional hospitals. To qualify for the higher hospital rebate, the charity or non-profit organization must provide healthcare services with active participation of a physician, or if the service is provided in remote areas, a nurse practitioner.
To acknowledge the increased role of nurse practitioners in the healthcare system, the budget has proposed an extension to the eligibility for the expanded hospital rebate for charities and non-profit organizations to include those that deliver healthcare services with the active involvement of a physician or nurse practitioner, regardless of geographical location. With this change, the expanded hospital rebate will no longer distinguish between a healthcare service provided by a doctor or a nurse practitioner. This change will apply to rebate claim periods ending after April 7, 2022, in respect of tax paid or payable after that date.
GST/HST on Assignment Sales by Individuals
Currently, GST/HST applies to an assignment sale of newly constructed or substantially renovated residential housing where an individual entered into an agreement of purchase and sale with a builder for the primary purpose of selling their interest. Where the primary purpose of the individual entering into the agreement was to occupy the home as a place of residence, the assignment sale would be exempt.
An assignment sale in respect of residential housing occurs where a purchaser (the “assignor”) under an agreement purchases a newly constructed or substantially renovated home from a builder and then, under another agreement, sells their rights and obligations to another person (the “assignee”).
The budget proposes amendments to make all assignment sales in respect of newly constructed or substantially renovated residential homes taxable, with GST/HST applying to the total amount paid for the new home by the first occupant. Because an amount paid as a deposit would have been subject to GST/HST when applied by a builder, the budget also proposes to exclude the deposit amount from the consideration for a taxable assignment sale. The assignor will continue to be responsible for collecting and remitting the tax to the CRA. However, where the assignor is a non-resident, the assignee would be required to self-assess and remit the tax directly to CRA.
These changes may affect the amount of the GST New Housing Rebate or new housing rebate in respect of the provincial portion of the HST that may be available because these rebates are determined based on the total consideration paid for a residential home and, in addition, the total consideration for a taxable assignment sale.
This change will apply to assignment agreements entered into on or after the day that is one month after April 7, 2022.
Vaping Products Taxation Framework
This year’s budget confirms a proposal announced in last year’s budget for a federal excise duty that will be imposed on certain vaping products and indicates this measure will come into force on October 1, 2022. The proposal also allows retailers with unstamped vaping products on hand on as of that date to sell such products until January 1, 2023.
In addition, the federal government is offering to launch a collaborative vaping taxation regime to be coordinated by it. The framework would allow a province or territory to participate in the program and share revenue equally for sales made in their jurisdiction. Under this proposal, licensees would apply stamps and unique markings with specific colours to vaping product packaging to identify any vaping products that are intended to be sold in a particular participating province or territory.
Duty Rates
The duty rate applicable to taxable vaping products will be $1 per 2 millilitres (ml), or fraction thereof, for the first 10 ml of vaping substance, and $1 per 10 ml, or fraction thereof, for additional volumes. Vaping products are typically sold in bottles, pods, or disposable vape pens, and the rate of duty imposed will depend on the volume of vaping substance held in each product.
An additional incremental duty rate will be layered on vaping product sales that take place in a province or territory that chooses to participate in the coordinated vaping products taxation regime. The proposed combined rate will be double the federal rate with $2 per 2 ml, or fraction thereof, applying to the first 10 ml of vaping substance, and $2 per 10 ml, or fraction thereof, applying to additional volumes.
Travellers’ Exemption
Canadian travellers will be permitted to import unstamped vaping products for personal use into Canada duty-free only if they are absent from the country for 48 hours or more. The volume of vaping products that may be imported for personal use duty-free by travellers absent from Canada for the required time is limited to 12 vaping products of 10 ml or less (for a maximum of 120 ml) or any combination of vaping products of 10 ml or more, provided the total imported volume does not exceed 120 ml.
Adjustments to Cannabis Taxation Framework and Other Excise Taxes
The budget proposes several changes related to the cannabis industry, the cannabis excise duty framework, and other excise duty regimes in place under the Excise Act, 2001, most of which will become effective upon receiving Royal Assent.
Cannabis Excise Duty Regime
The first proposal will permit licensed producers remitting less than $1 million in cannabis excise duties during the previous four fiscal quarters immediately preceding a fiscal quarter beginning on or after April 1, 2022, to remit excise duty quarterly rather than monthly.
Currently, excise duty stamps and packaged but unstamped cannabis products cannot be transferred between licensed cannabis producers. Under a second proposal, two licensed producers under a CRA-approved contract-for-service arrangement will be permitted to:
- Stamp and release retail cannabis packaged by another producer into the market;
- Transfer stamps and packaged unstamped products between them; and
- Pay excise duty on cannabis products stamped by another producer.
Penalties applied to licensees that lose excise stamps are higher where the lost stamp is in respect of a jurisdiction that chose to include an additional cannabis duty adjustment clause in their Coordinated Cannabis Taxation Agreement. However, the higher penalties are the same whether the province has an adjustment rate of 0% or greater than 0% and does not reflect the difference in the value of excise duties owed. The budget proposes an amendment to the penalties for lost stamps, with the higher penalty for losing stamps applying only in relation to jurisdictions with a cannabis duty adjustment rate that is greater than 0%.
In addition, it is proposed that existing penalty provisions be made applicable to situations in which licensed parties illegally distribute cannabis products and unlicensed parties illegally possess or purchase cannabis products—situations for which penalties do not currently exist.
Health Canada-issued Research Licence or Cannabis Drug Licence holders will become exempt from the requirement to be licensed under the excise duty regime. This change is proposed because these licence holders typically possess small quantities of cannabis and pose minimal risk to the system. The budget also proposes to synchronize the valid licence period for licence holders, with licences being valid for the lesser of five years or the longest period available to a relevant Health Canada-issued licence.
In addition, general administrative changes have been proposed to:
- Allow the CRA to conduct virtual reviews and audits of licensees, where appropriate;
- Remove cash and transferable government-issued bonds and add bank drafts and Canada Post money orders to the types of financial security accepted by the CRA;
- Require compliance with all federal and provincial legislation and regulations by all licensees and excise applicants with respect to the regulation and taxation of cannabis products; and
- Broaden the criteria allowing the CRA to suspend an excise licence (to match the criteria for the cancellation of a licence).
Domestic Wine Exemption
The budget proposes to repeal the Canadian wine excise duty exemption available to wine producers using 100% Canadian grown content, effective June 30, 2022. Elimination of this exemption is the result of a dispute settlement with the World Trade Organization over the existence of the exemption.
Excise Duty on Low-Alcohol Beer
It is also proposed that the excise duty for beer be eliminated on beer containing no more than 0.5% alcohol by volume, effective July 1, 2022.
Other Tax Measures
Previously Announced Measures
This year’s budget also reaffirms the government’s intention to move forward with several previously announced tax and related measures, with introduction dates ranging from 2016 to 2022.
More Information
For information on new and extended government funding initiatives included in this year’s federal budget, please navigate to:
https://www.mentorworks.ca/blog/government-funding/canada-federal-budget-2022/.
Further details on the 2022 federal budget may be found on the Government of Canada website at:
https://budget.gc.ca/2022/home-accueil-en.html.
If you have any questions about how these proposed changes might impact your organization, please do not hesitate to call the Ryan TaxDirect® line at 1.800.667.1600.