Federal Budget 2022: Hopeful for the Future, Built on an Uncertain PresentFriday, April 8, 2022
I certainly did not envy the job that the Minister of Finance Chrystia Freeland and the Department of Finance had in drafting the federal budget that was released on April 7, 2022 (“Budget 2022”). Given the Federal Government’s spending during the pandemic and the economic uncertainty because of the war in Ukraine, it was clear that Budget 2022 was going to have to be a compromise of pre-pandemic economics mixed with the future goals of housing affordability and a green economy. From a tax perspective, there were rumours for months leading up to Budget 2022 that, in order to pay for the pandemic stimulus, the Federal Government would be raising the capital gains inclusion rate or changing the taxation of principal residence. Although Budget 2022 targets specific tax loopholes and initiatives, it is notably silent on tax increases.
Here are three things everyone needs to know about Budget 2022:
1. No New Wealth Taxes and an Increase in the Business Limit for the Small Business Deduction
From a tax perspective, Budget 2022 is most notable for no changes to the general tax rates. It provides no increases to the general tax rates, no change to the capital gains inclusion rates, and no change to how a principal residence is taxed. There is mention of a potential new minimum tax regime for high earners which would put a floor of at least 15% tax after certain income levels are achieved. Most individuals in the higher brackets would pay at least 15% tax, so this does not seem to be material. In addition, Budget 2022 does provide a positive change to the small business deduction for Canadian-controlled private corporations (“CCPCs”) to encourage small business growth. Budget 2022 proposes to increase the amount of qualifying active business income that allows a CCPC to qualify for the lower tax rate. The range will be increased to allow CCPCs with up to $50 million of taxable capital to access the small business deduction, thereby allowing more medium sized CCPCs to benefit.
2. Banks and the Insurance Companies to Pay for the Pandemic Spending
In order to help pay for the pandemic spending, Budget 2022 introduces a one-time Canada Recovery Dividend (the “CRD”) and a going-forward additional tax on banks and life insurers. The CRD will be a one-time 15% tax on bank and life insurer groups, based on the group’s taxable income over $1 billion for the 2021 taxation year and payable over 5 years. Going forward, an additional tax of 1.5% of taxable income will also apply to the bank and life insurer groups on taxable income over $100 million. Query whether these extra tax costs will be passed on to the consumer.
3. Ending Non-CCPC Planning
In articles leading up to Budget 2022, there was much talk about perceived abuse by taxpayers in “non-CCPC” planning. CCPCs are subject to an additional refundable corporate tax on certain investment income, including capital gains, which is aimed at limiting the opportunity for individuals to defer tax on investments that would otherwise be taxed at a high rate in their individual hands. To avoid this higher rate of tax, some taxpayers were taking steps to cause their CCPCs to be considered non-CCPCs, while still being substantively controlled by Canadians. Common planning had emerged for sellers of a CCPC to a non-resident purchaser (called 111(4)(e) planning) which took advantage of the fact that the agreement to purchase by the non-resident caused the target CCPC to no longer be a CCPC. Budget 2022 proposes to end this type of planning by adding a rule that will deem the CCPC to continue to be a substantive CCPC and subject to the additional refundable tax if certain conditions are met. This will practically end the common planning that many taxpayers had availed themselves of when selling to a non-resident purchaser. Stay tuned for a future tax update on this topic.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.