The federal Liberal government unveiled its latest budget with billions in new spending and a focus on fiscal responsibility. About a third of the spending is aimed at housing with the rest earmarked for initiatives around climate change, Indigenous reconciliation and national defence. There is also a plan to significantly reduce the country’s deficit in the coming years, but no guide to achieve a balanced budget.
“There were no shocks for investors in the budget, but some anticipated programs were unveiled for groups including first-time homebuyers, real estate investors, small business owners and the charitable sector. Notably, there were no increases to personal income tax rates or the capital gains inclusion rate,” says Tiffany Harding, vice-president and head of wealth planning at Gluskin Sheff, adding that Canadians should consult with qualified legal, tax and other professional advisors before making any decisions based on the budget proposals released on April 7th.
The nearly 300-page budget document, titled “A Plan to Grow Our Economy and Make Life More Affordable,” shows the federal deficit is projected to sit at $113.8 billion for fiscal year 2021-22, down from the $144.5 billion estimated in the latest fiscal update in December. For the 2022-23 fiscal year, the deficit is forecast to fall by about half to $52.8 billion and then drop further to $8.4 billion by 2026-27.
The budget shows the federal debt-to-GDP ratio is projected to decline to 41.5 percent by 2026-27, down from 45.1 percent this year. The ratio was just over 30 percent prior to the COVID-19 pandemic.
The economic recovery has led the government to estimate that it will generate about $15.4 billion more this fiscal year than previously expected.
Some of the highlights include:
In an attempt to cool Canada’s housing market and support first-time buyers, the following measures were announced:
-A Tax-Free First Home Savings Account designed to help first-time homebuyers set aside up to $8,000 per year with a maximum lifetime amount of $40,000. Contributions will be tax-deductible, like an RRSP, while withdrawals to purchase a home would be non-taxable, similar to a TFSA. The program is expected to begin in 2023.
-Doubling the First-Time Home Buyers’ Tax Credit amount to $10,000, which will apply to homes purchased on or after Jan. 1, 2022.
-Beginning on Jan. 1, 2023, the profits from sales of residential property held for less than 12 months will be treated as business income except in specified life events (e.g., death, change in employment, new family member, separation, disability and illness). When this new rule applies, the gain cannot be shielded with the principal residence exemption.
-All assignment sales of newly constructed or substantially renovated residential housing will be taxable for GST/HST purposes, effective May 7, 2022.
-Multi-generational housing retrofits: The budget announced a Multigenerational Home Renovation Tax Credit, which would provide a 15% tax credit of up to $50,000 in qualifying renovation and construction costs. This credit could provide up to $7,500 toward the creation of a secondary suite for a senior family member or one living with a disability.
– Increased Eligibility for the Small Business Deduction
With the small business deduction, small businesses are taxed nine percent on the first $500,000 of taxable income, which is lower than the fifteen percent corporate tax rate. One method of restricting access to the small business deduction is by computing the taxable capital employed in Canada by a Canadian-controlled private corporation (CCPC) and its associated corporations. Access to that lower rate is reduced on a straight-line basis after the small business and its associated corporations’ taxable capital employed in Canada exceeds $10 million and is fully eliminated once it reaches $15 million. The budget proposes a change, so the reduction is on taxable capital over $10 million up to $50 million. It means many larger businesses may now be eligible for the small business deduction, says Mark Chan, vice-president of wealth planning at Gluskin Sheff.
“Business owners should speak to their advisors about eligibility for the small business deduction where their businesses were not eligible in prior years due to the existing taxable capital thresholds,” he says.
Investment income earned by private corporations
The proposed changes to the Income Tax Act to ensure that investment income earned and distributed by private corporations that are, in substance, CCPCs are subject to the same taxation as investment income earned and distributed by CCPCs, effective immediately. The changes include a new definition of 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.
The change targets Canadian-resident investment holding companies that underwent planning initiatives to avoid meeting the definition of a CCPC. The purpose of this planning was to obtain a tax deferral by not being subject to the refundable tax mechanism applicable to CCPCs, explains Jonathan McMurrich, senior wealth planner at Gluskin Sheff. He notes CCPCs are subject to refundable taxes which could result in investment income been taxed as a high as 54.7 percent in some provinces.
-Review of ‘surplus stripping’ and new minimum tax regime
The Income Tax Act prevents individuals from converting dividends into lower-taxed capital gains using certain self-dealing transactions, known as “surplus stripping.” Private Member’s Bill C-208, which received Royal Assent on June 29, 2021, introduced an exception to this rule in order to facilitate intergenerational business transfers, the budget notes. It says the exception may unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer takes place. As a result, the government said it’s consulting and exploring potential changes to legislation regarding intergenerational share transfers.
The government has also committed to examining a new minimum tax regime for high-income individuals that make significant use of deductions and credits to lower their effective tax liability.
-Canada Recovery Dividend and Additional Tax on Banks and Life Insurers
The budget detailed a plan for financial services organizations like banks and life insurers to pay a one-time, 15-per-cent tax on taxable income above $1 billion for taxation years ending in 2021. Banks and life insurers will also see a permanent increase to the federal corporate income tax rate to 16.5 per cent from 15 per cent on taxable income above $100 million for taxation years ending after April 7, 2022.
The tax could affect investors who holds a direct or indirect equity interest in Canadian bank and life insurance companies, McMurrich explains. “Speak to your Client Wealth Management advisor to review the impact on your overall asset allocation,” he says.
-Flow-through share agreements
The budget proposed to eliminate the flow-through share regime for oil, gas and coal activities for agreements entered into after March 31, 2023.
Chan and McMurrich note there is a new 30 percent critical mineral exploration tax credit (CMETC) for specified minerals used in the production of batteries and magnets in manufacturing of zero emission vehicles or necessary for the production and processing of advanced materials, clean technology or semi-conductors. The CMETC applies to expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022, and on or before March 31, 2027.
Likely in response to the decline in revenue, charities are still facing since the beginning of the pandemic, the budget proposes an increase to the disbursement quota (DQ)—to 5 percent from 3.5 percent—on the portion of property not used in charitable activities or administration that exceeds $1 million, for fiscal periods beginning on or after Jan. 1, 2023. The DQ is the minimum amount that registered charities are required to spend each year either on gifts to qualified donees (e.g., other registered charities) or on their own charitable activities.
The change impacts charities and HNW families that are involved in philanthropy, including individuals with private foundations and donor advised funds.
“This doesn’t impact smaller charities with less than $1 million of property not used in charitable activities or administration,” McMurrich notes.
He and Chan recommend working with a wealth advisor to review the charity/foundation’s cash flows and anticipated disbursements to determine if the higher disbursement quota could impact future operations. “If charities are unable to meet its disbursement quota, an application for relief can be made to the Canada Revenue Agency (CRA),” McMurrich says.
More investment in the CRA
The federal government also announced that it will spend $1.2 billion over five years to enable the CRA to expand audits of larger entities and non-residents engaged in “aggressive tax planning.” The federal government said the plan is to increase “both the investigation and prosecution of those engaged in criminal tax evasion; and to expand its educational outreach.”
It said the measures are expected to recover $3.4 billion in revenues over five years, “with additional benefits to be realized by provinces and territories whose tax revenues will also increase as a result of these initiatives.” The government said the investment builds on $2.2 billion in resources provided to the CRA since budget 2016. It said the investment has yielded a return of five dollars to each dollar invested.
If you would like to discuss how the federal budget measures and government initiatives may impact your planning, please speak to a member of the Client Wealth Management or Wealth Planning Team.