2022 Federal Budget Details ' Continued Spending With Limited Tax Measures (Video)

• Published date: 12 April 2022
• Subject Matter: Government, Public Sector, Tax, Income Tax, Capital Gains Tax, Sales Taxes: VAT, GST, Tax Authorities, Fiscal & Monetary Policy
• Law Firm: Moodys Private Client Law LLP
• Author: Mr Kim G.C. Moody, Kenneth Keung, Aasim Hirji and Brad Severin

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On April 7, 2022, the Government of Canada released the 2022 Federal Budget. Like the 2021 budget, which we blogged about here, the government is continuing to spend tremendous amounts of money with deficits that have no end in sight. For 2022-2023, the federal deficit is projected to be $52.8B and $39.9B for 2023-2024. For a small country like Canada, these deficit amounts are tremendously high but admittedly lower than the $113B expected for the 2021-2022 year and over $300B for the 2020-2021 year. With strong performances by the oil and gas sector and high inflation, tax revenues were higher than expected thus giving the government incentives to spend more. Time will tell how Canada deals with its deficit management, inflationary pressures, and labor shortages.

With significant spending promises made by the Liberal Party during the 2021 federal election along with economic challenges mostly presented by COVID issues, many professionals have been very concerned about how taxation policies might be impacted to ensure Canada has sufficient funds to provide for its necessary spending. With the recent NDP-Liberal Party "coalition", there has been even more concern especially if one has previously reviewed the 2021 election policy platforms of both federal parties. There have been many prognosticators - including us - who have made predictions on how tax rates, capital gains inclusion rates and the possible introduction of new taxes might arise. The 2022 Budget, for now, answers some of those questions.

This year's budget contained some interesting tax measures that our firm's audience will be most interested in. For those not interested in reading the entire blog, below is an executive summary of the tax measures relevant to our clients and friends:

EXECUTIVE SUMMARY

1. No personal tax rate increases - notwithstanding the NDP party's 2021 election policy platform that promised to raise personal tax rates for the "wealthy" by an additional 2%, there are no direct personal tax rate increases in the budget.

2. No corporate tax rate increases (except for certain financial institutions as described below) - there were no general corporate tax rate increases in the budget.

3. No capital gains inclusion rate increases - despite significant concern and predictions by many - including us - that the capital gains inclusion rate would increase from its current rate of 50%, there are no capital gains inclusion rate increases in the budget.

4. No introduction of a new "wealth tax" - despite numerous recommendations made by way of papers and articles released by left-wing "think-tanks" over the last few years, there are no new wealth taxes included in the 2022 federal budget.

5. No amendments to the principal residence exemption - while the budget did introduce an "anti-flipping" tax (more on this below), there are no proposed amendments to the principal residence exemption despite numerous concerns that the exemption might be changed.

6. Bill C-208 - Another Consultation - the government is proposing yet another consultation on how to deal with the inter-generational transfer issue facing family businesses. Frustrating.

7. Ban on Foreign Investment in Canadian Housing - the budget is proposing to impose a ban on "foreign money" being used to acquire Canadian housing. The proposal is sparse in detail and has more questions than answers.

8. Increasing Taxable Capital Threshold for Small Business Tax Rate - Good news for small businesses. The Budget proposes that, effective for taxation years that begin on or after April 7, 2022, the new small business tax rate phase out range will be between $10 million to $50 million of taxable capital (rather than between $10 million to $15 million currently). The more gradual pace of the small business limit grind should reduce disincentives for businesses to grow beyond $10 million of capital.

9. Deferring Tax Using Foreign Entities - the Budget contains a two-prong approach to require certain corporations to be subject to the current refundable tax regime currently imposed on Canadian Controlled Private Corporations
   1. Substantive CCPCs - the Budget and accompanying Notice of Ways and Means Motion introduces a new type of corporation, the "Substantive CCPC". Essentially, any private corporation that is not a CCPC but is de facto controlled by Canadian residents will be subject to the refundable Part I and Part IV tax regimes.
   2. Modification of the taxation of Foreign Accrual Property Income ("FAPI") - The Budget proposes alterations to the taxation of FAPI. The stated intent is to effectively tax FAPI earned by CCPCs or Substantive CCPCs at an upfront rate of 52.63% (inclusive of foreign tax paid). The Budget appears to also propose to fix the integration of FAPI such that the net tax on a fully distributed basis is equal to 52.63% through a combination of CDA inclusions, restriction of additions to the general rate income pool ("GRIP") for FAPI and potentially altering the surplus definitions. The high-level commentary leaves more questions than answers and we anxiously await draft legislation to be able to understand the mechanisms that will attempt to accomplish these Budget goals.

10. Residential Property Flipping Rule - the government intends to impose a rule that any profits from the disposition of residential real estate - including rental properties - that occurs less than 12 months from its acquisition date will be deemed to be business profits and not capital gains (thus excluding the disposition from being treated as a principal residence eligible for the related exemption) subject to certain "life event" exclusions. We believe this new proposal is littered with issues and not necessary to curb the abuse that it is intending to stop.

11. Elimination of Flow-Through Shares for Oil, Gas and Coal Activities - the government strikes a blow against oil & gas and coal companies who seek financing through flow-through share issuances by eliminating the "flow-through share regime".

12. New 30% Critical Minerals Exploration Tax Credit - the Budget provides an opportunity for investors in critical minerals to realize a 30% investor tax credit under the proposed Critical Minerals Exploration Tax Credit.

13. Expansion of the GAAR to Tax Attributes - the Budget proposes to overturn the Wild case by legislating that a "tax benefit" now includes increase or preservation of tax attributes. As a result, GAAR can now apply to abusive tax avoidance transactions where only tax attributes (e.g PUC, CDA, losses, etc.) are created or preserved. This may not be a bad amendment from a policy perspective, but we are disappointed that the government proposes to implement this retroactively so that historical transactions are also subject to this amendment to the extent they haven't yet been issued a GAAR notice of determination before the Budget date.

14. A Commitment to Create a New Minimum Tax Regime for "High Earners" - the government announced that in the 2022 fall economic and fiscal update, it will release details on a proposed new minimum tax. No details have been released to date. What was noteworthy was the misleading statistics cited by the government, which adds nothing substantive to the real conversation needed in this country. Stay tuned....as the government is already indicating the economic and fiscal update will have important tax measures.

15. Additional Taxes on Large Financial Institutions - the Budget proposes to introduce two additional significant taxes on affected financial institutions. We believe there are significant concerns with these additional taxes that we hope the Government has carefully thought through.

16. Employee Ownership Trusts - the Budget announces that it will create a new dedicated type of trust - the Employee Ownership Trust - to support and encourage employee ownership of a business. Consultations will continue and no further details were released.

17. Government to Review the SR&ED Program - The SR&ED Program will be reviewed to ensure that it targets research, development, and the development of intellectual property beneficial to Canada. The proposed review will also consider the application of a "patent box" regime.

18. More Money for the Canada Revenue Agency ("CRA") - The government proposes to once again, allocate significantly more resources to the Canada Revenue Agency.

19. GST/HST on Assignment Sales - Budget 2022 proposes to amend the Excise Tax Act to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes.

20. New 'Boutique Tax Credits' - Budget 2022 delivers a bounty of "boutique tax credits". A little something for everyone it seems.

ANALYSIS

Bill C-208 - Further Consultation

Bill C-208 has an interesting and notorious history. For good background, have a listen to our firm's TaxBreak's podcast numbers 020 and 021 that can be accessed here. The short story is that Bill C-208 that received Royal Assent last June 2021 was an imperfect bill that dealt with the long-standing problem of the Income Tax Act not providing for tax efficient transfers of family businesses to the next generation as compared to arm's length transfers. This problem has existed since 1985. In 2017, the government asked for submissions on how to deal with this long-standing issue. Credible organizations and people provided good submissions on the topic. Unfortunately, the government did not materially move forward other than to continually assert that they were interested in trying to come up with an efficient solution to the problem.

When Bill C-208 (a private members bill) unexpectedly passed, it was obvious that the government was surprised with the passing of the imperfect bill. It released a press release in July 2021 promising to release draft legislation soon, but it has not yet done so. In the budget materials, the government is now proposing to commence anotherconsultation asking for submissions from...