At 360 Private Wealth Management, our proprietary Natural Wealth™ financial life planning process incorporates tax planning as part of the broader financial life planning and investment management work we do with client households. As part of our tax planning and estate planning services, we want our clients to be aware of measures taken in Federal and Provincial Budgets which may have an impact on their financial life planning and investment portfolios.
On Thursday, April 7, 2022, Canada’s federal Minister of Finance, Chrystia Freeland, tabled the government’s 2022 Federal Budget. This year’s budget was a more targeted document as far as initiatives are concerned. It is primarily focused on four key areas:
- Housing affordability
- Personal tax measures
- Corporate tax measures
- The green economy
Core tax principles, personal tax rates, and personal deductions and tax credits remain the same as they were pre-budget with a couple of new tax credits being added and a few others being modified for 2022 to deal with housing affordability and employment mobility issues.
Some corporate measures will affect private corporations, but as with personal measures, private corporate tax rates and allowable deductions and tax credits remain largely the same as they were pre-budget. The government tightened up some rules around Canadian Controlled Private Corporations (CCPCs) including access to the Small Business Deduction (SBD) and the consultation process for Canadians to share views on recently introduced changes to intergenerational share transfer rules.
Housing affordability has become a major issue across the country. Home prices in some markets have doubled in the last 7 years. The Federal Government recognizes that something needs to be done to allow people to buy and own their own home. To this end, they introduced a couple of new measures and increased the benefit of existing measures in the budget:
- A New Tax-Free First Home Savings Account (FHSA)
- Home Buyers Tax Credit
- Home Accessibility Tax Credit
- Multigenerational Home Renovation Tax Credit
- Residential Property Flipping Rules
Tax-Free First Home Savings Account (New)
The government is proposing t the introduction of a new registered plan, the tax-free First Home Savings Account (FHSA), for 2023 and subsequent tax years. Contributions to the new FHSA are tax-deductible and the income earned in the plan is tax-free. As long as the proceeds of a withdrawal are used for a qualifying first home purchase, the withdrawal of funds from an FHSA is tax-free.
To open an FHSA, an individual must:
- the 18 years old;
- be a resident in Canada, and
- not have lived in a home that they owned at any time during the year the FHSA is opened or during the four preceding calendar years.
The FHSA will have an annual contribution limit of $8000 and a lifetime contribution limit of $40,000.
Amounts up to the $8,000 annual limit can be transferred from an RRSP to an FHSA. Note that transferring amounts from an RRSP to the FHSA will not restore the RRSP contribution room. The advantage will be that the amount drawn from the FHSA will be tax-free if drawn for a qualifying first home purchase.
Conversely, amounts can be transferred tax-free to an RRSP (without affecting the RRSP contribution room) or to a RRIF in the event they are not needed or used for a first home purchase.
The FHSA must be closed if funds are not used within 15 years of opening the account.
The FHSA will be a meaningful addition to the savings arsenal for first-time homebuyers trying to accumulate the required down payment for their first home purchase who are at least a few years away from making the purchase.
It will take a bit of time for financial institutions and investment firms to set up systems for FHS Accounts. We will let everyone know when we have access to this new account.
Please note that the FSHA is a separate measure from the current RRSP Home Buyers Plan (HBP). The HBP allows RRSP holders to withdraw up to $35,000 from their RRSP to fund the purchase of a new home, as long as the RRSP holder qualifies (has not owned a home in the four previous calendar years or in the year of the withdrawal up to 31 days before the withdrawal). The amount drawn must be re-contributed to the RRSP starting in the second year after the withdrawal date over a period of up to 15 years. Any scheduled HBP payment not made (1/15th of the amount withdrawn) in any given tax year will be added to income in that tax year.
First-Time Home Buyers’ Tax Credit Increase
The ITA provides a tax credit for individuals considered first-time homebuyers (the same rules apply as for the FHSA; you have not lived in another home owned by you in the year of acquisition or in the 4 preceding calendar years) called the First-Time Home Buyers’ Tax Credit.
The First-Time Home Buyers Tax Credit is currently 15% of $5,000 (or $750) for qualifying home acquisitions made in tax years before 2022.
The budget proposes to double the tax credit to 15% of $10,000 (or $1,500) for qualifying home acquisitions made on or after January 1, 2022.
The increase to the First-time Home Buyers Tax Credit will provide some a small measure of additional financial relief to households looking to purchase their first home.
Home Accessibility Tax Credit (HATC) Increase
In 2015, the government of the day introduced the Home Accessibility Tax Credit (HATC), a non-refundable tax credit for qualifying expenditures in respect of an eligible dwelling for individuals who are:
- 65 years of age or over at the end of the taxation year, or
- eligible to claim the disability tax credit
Qualifying expenditures incurred in tax years before 2022 provided for a credit equal to 15% of the lesser of qualifying expenditures and $10,000, for a maximum credit of $1,500.
In its 2022 budget, the present government increased the credit for qualifying expenditures incurred on or after January 1, 2022, to 15% of the lesser of qualifying expenditures and $20,000, essentially doubling the maximum credit to $3,000.
Multigenerational Home Renovation Tax Credit (New)
The budget proposes a new refundable tax credit for the 2023 and subsequent taxation years. The proposed tax credit is for eligible expenses incurred to create a secondary dwelling unit within an eligible dwelling to permit an individual who is 65 years of age or older or an adult who is eligible for the disability tax credit to live with a relative.
The credit is equal to 15% of the lesser of eligible expenses or $50,000, for a maximum credit of $7,500.
The eligible dwelling must be a housing unit:
- owned (jointly or otherwise) by the eligible person, their spouse or common-law partner, or the relative; and
- where the eligible person and the relative ordinarily reside or intend to ordinarily reside within 12 months after the end of the renovation period.
The qualifying renovation will be defined as a renovation or addition to an eligible dwelling that is of an “enduring nature” and establishes a secondary unit within the dwelling. The secondary unit must be a self-contained dwelling unit (private entrance, kitchen, bathroom, and sleeping area).
One qualifying renovation per eligible person can be claimed over their lifetime. The credit may be claimed in the taxation year that includes the end of the renovation. (I.e., when the renovation passes a final inspection or proof of completion of the project is obtained).
Eligible expenses include the cost of labour and professional services, building materials, and fixtures, but does not include furniture or other similar items.
The increase in the Home Accessibility Tax Credit will help those who want to stay in their residence longer versus selling and moving to a more accessible residence. The Multigenerational Home Renovation Tax Credit has been introduced to help with the costs associated with keeping a loved one in their home or the home of a relative longer as opposed to seeing the loved one panelled into a care facility. Over the years we’ve had several families who have chosen to care for their elderly mother or father, or a disabled family member, as opposed to having the person move to a personal care facility. These measures help offset some of the costs incurred in setting up an eligible space for them to live.
Residential Property Flipping Rules
The budget introduces new deeming rules which will apply to dispositions of residential properties on or after January 1, 2023. The new rules will deem any gain on disposition of a residential property owned for less than 12 months to be business income and not a preferentially taxed capital gain.
The deeming rule will not apply if the disposition is in relation to at least one of the following life events or circumstances:
- household addition
- personal safety
- disability or illness
- employment change
- involuntary disposition
Where the deeming rule does not apply because of a life event listed above or because the property was owned for 12 months or more a question of fact as to whether the prophets from the disposition are taxed as business income or a capital gain. Where households are regularly buying houses, renovating them and then selling them on a regular basis, the income generated from sales could be deemed to be business income and an audit where they would otherwise qualify as a capital gain or even under the tax-free principal residence rules.
Personal Tax Measures
As mentioned at the outset no changes were made to the Federal personal income tax rates.
There are a couple of notable changes under personal income tax that certain households should be aware of.
Medical Expense Tax Credit (METC) for surrogacy and other expenses
The METC is a 15% non-refundable tax credit on qualifying medical expenses. To help Canadians trying to have a family, the budget proposes to broaden the definition of the patient to eligible to claim eligible medical expenses and expands eligible expenses to include the use of assisted reproductive technology such as in-vitro fertilization procedures a patient will now include parents, the surrogate mother or a donor of sperm of or embryos.
Labour Mobility Deduction (New)
The budget proposes to introduce a Labour Mobility Deduction for tradespeople in the construction industry, which would allow qualified tradespeople to deduct up to $4,000 in eligible travel and temporary relocation expenses each year. This equates to a maximum $600 tax credit per year for eligible taxpayers.
Corporate Tax Measures
There are a couple of measures being introduced in the budget that may impact clients with incorporated businesses and investment corporations.
While the government is cutting taxes for medium-sized family businesses is taking aim at individuals and families currently manipulating the status of the corporation to avoid qualifying as a Canadian Controlled Private Corporation (CCPC). Such moves may provide tax advantages on investment income earned in the corporation. The budget introduces changes to the Income Tax Act (ITA) to have investment income earned and distributed by “deemed” Substantive CCPCs taxed in line with CCPCs.
The new measures apply to taxation years that end on or after Budget Day, subject to exemptions for genuine commercial transactions, entered into before Budget Day for the taxation year of the Corporation ends because of an acquisition of control caused by the sale of all or substantially all of the shares of the Corporation to an arm’s length purchaser.
The 2022 Budget also addresses some rule changes coming into effect on intergenerational business share transfers stemming from a Private Member’s Bill passed on June 29th, 2021. The legislation has muddied the waters as far as a possible unintended ability to “strip” corporate surplus amounts without requiring that a genuine intergenerational business transfer takes place.
CCPCs and investment corporations are more complex entities and require the advice and guidance of a qualified tax professional. If you have any questions or concerns about any family-owned corporations, you should discuss them with your tax professional.
Oil, Gas and Coal Flow-Through Shares on the way out
In addition to the tax measures discussed above, the government is introducing several measures to further its environmental agenda. Investors can invest in investments called “flow-through” shares which flow through expenses to the investor. These shares can be attractive investments for highly-taxed households with higher risk capacity. The 2022 Budget proposes to eliminate the flow-through of exploration and development expenses to investors going forward, beginning after March 31, 2023.
The flow-through mechanism and potential tax advantages of flow-through shares will continue for mining exploration and development companies.
General Anti-Avoidance Rule (GAAR) Changes
The ITA allows all taxpayers to use permitted deductions, tax credits and transactions to minimize the amount of tax they are required to pay.
However, the ITA has rules that state that any activity which takes place in a given person’s or corporation’s financial affairs whose purpose is solely to avoid or reduce tax which might otherwise be payable could get caught and reversed under the Act’s General Anti-Avoidance Rule (GAAR). The Budget introduced some new changes to GAAR to stiffen its parameters.
Qualified tax professionals should be consulted when considering any activities which may result in paying lower amounts of tax than other parts of the ACT may allow, if applied. Do not act without confirming the appropriateness of any strategy. The penalties and interest payable, if an action is ultimately determined to be not allowed or captured by GAAR can be quite significant.
There are a number of additional technical measures in the budget but the vast majority of them will not apply to our client households. If you have questions or concerns about the impact of any tax changes or new measures, feel free to call or email our office or speak with your tax advisor.
The 2022 Federal Budget is estimating a fiscal year budget deficit of almost $53 billion. The government is now estimating additional, declining deficits through 2027.
As mentioned at the outset, the Budget includes significant new spending over the next 5 years to address housing affordability, to fund new and expanded social initiatives and to fund the government’s ongoing push to “green” the economy.
We welcome your questions regarding any of the measures introduced in the budget, tax and its effect on your household’s overall financial life plan and investing activity. Feel free to call us or email us at your convenience. We will do our best to answer your questions and where we can’t, get the answers for you from our trusted professional advisor partners.
Kindest wishes always,
David J. Luke, CFP, CLU, CH.F.C., RFP, CIM, RIAC | Financial Advisor
360 Private Wealth Management/ Manulife Securities Incorporated