As a former tax partner at an accounting firm, one of my jobs was to work through the budget night and into the following morning and write a summary of the salient tax changes that impacted our clients. As budget night approached, I would get the same feeling I had historically felt every Sunday night as a student….that “queasy, anxious, uncertain about the future” kind of feeling. Well, almost six years after retiring from my tax partner role and I still had that feeling as the April 7, 2022 federal budget approached. What changes were coming? How would these changes impact our lives?
From my perspective, this budget ended up being more about what did not change, but there are still some important details to highlight.
- No increase in personal, corporate or HST tax rates
- No increase in the current 50% capital gains inclusion rate
- No wealth tax proposals
- No proposals limiting the current tax planning that allows the extraction of corporate funds at a capital gains tax rate as opposed to a dividend tax rate
While you likely have read a summary of the budget highlights, there are a few proposals that should be noted.
To Be a CCPC or Not to Be a CCPC
A Canadian controlled private company(“CCPC”) that earns passive investment income, including capital gains, pays an additional refundable tax such that the corporate tax rate approximates the highest personal tax rate that an individual taxpayer would pay, resulting in no tax deferral opportunity in earning this income corporately versus personally. When a taxable dividend is paid by the CCPC, the additional tax is refunded. Over the past several years, many tax practitioners have recommended their clients use a non-CCPC to earn this investment income and/or capital gains. The planning resulted in the avoidance of this refundable tax, culminating in a tax deferral of about 23.67% in Ontario, and assumed that dividends were not required by the shareholders in the near term. In order to implement this planning, a former CCPC was continued corporately into a low-tax foreign jurisdiction or by moving investment portfolios with little current gain but high probability of future gains into an offshore corporation.
The Budget proposals introduce the concept of a substantive CCPC. This is a private corporation, other than a CCPC, that is a tax resident of Canada whose legal or factual control is held by Canadian-resident taxpayers. Passive investment income, including capital gains earned by a substantive CCPC will be subject to the same tax rates and the refundable tax system as CCPCs. However, for all other purposes of the Income Tax Act, a substantive CCPC would continue to be treated as a non-CCPC. These proposals impact taxation years that end on or after April 7, 2022.
Access to the Small Business Deduction Expanded
Under the existing rules, a CCPC may benefit from the small business deduction (“SBD”). The SBD is a reduced corporate income tax rate (currently 12.2% in Ontario) imposed on active business income earned in Canada, as compared to the regular corporate tax rate on such income (currently 26.5% in Ontario). The SBD applies to the first $500,000 of qualifying active business income (the “business limit”) earned in a year. Access to the SBD is shared among associated CCPCs and the business limit is reduced on a straight-line basis when the combined taxable capital of the CCPC and its associated companies is between $10 million and $15 million. The Budget proposes to extend this range from $15 million to $50 million and this amendment applies to taxation years that begin on or after April 7, 2022.
Residential Flippers Beware
In response to concerns that taxpayers are “flipping” residential real estate properties within a short period of time and are either designating the property as their principal residence and paying no tax or are claiming capital gains tax treatment on the profit realized, when full income treatment should apply, the Budget proposed rules that will deem profits from the sale of residential property as business income if the property was owned for less than 12 months. This deeming rule will prevent the taxpayer from treating the profit as a capital gain or as non-taxable as the principal residence exemption would no longer be available. The deeming rule will not apply when the disposition occurs as a result of certain qualifying life events, like death, disability, separation, insolvency, employment change, etc. This measure is intended to apply to dispositions after 2022.
Further Housing Measures
The Budget introduced a new registered plan for 2023, the Tax-Free First Home Savings Account (“FHSA”). Contributions to a FHSA would be tax deductible, while the income earned within the account and qualifying withdrawals made to purchase a first home would not be taxable. Eligible individuals would be subject to an annual contribution limit of $8,000 and a lifetime limit of $40,000.
In addition to doubling the maximum value of the First-Time Home Buyers’ Tax Credit from $750 to $1,500 for qualifying home acquisitions after 2021, the Budget also doubled the Home Accessibility Tax Credit from $1,500 to $3,000 for expenses incurred after 2021.
In addition to modifying these existing credits, the Budget introduced a Multigenerational Home Renovation Tax Credit in an effort to provide relief for individuals who create a secondary dwelling unit within their existing home to accommodate a related senior or disabled person to live there. The maximum value of the credit is $7,500 (up to $50,000 of eligible expenses incurred) and is effective for the 2023 taxation year.
In summary, while the Department of Finance has the ability to both “giveth” and “taketh”, my assessment of this Budget is that we were given much more than what was taken away — or what certainly could have been taken away! I hope my stomach can rest easy until the next Budget is announced, or at least until next Sunday night!