Federal Budget 2022: Declining Deficits And Measured Tax Changes

• Published date: 11 April 2022
• Subject Matter: Tax, Income Tax, Corporate Tax, Capital Gains Tax, Withholding Tax
• Law Firm: Gowling WLG
• Author: Gowling WLG

Federal Budget 2022 (Budget 2022) is a budget of optimism after two years of recession, pandemic, and now geopolitical instability. It speaks of the recovery of all jobs lost during the recession, the rebound of real GDP in Canada to a level higher than before the pandemic, and a booming economy.

In Budget 2022, the Minister of Finance hit all the hot topics on social media, from affordable housing to the environment and even the current conflict in Ukraine, weaving them into an unexpectedly prudent fiscal narrative.

By picking the pockets of Canada's banks and life insurers with additional taxes, Budget 2022 gives the government a massive source of new revenue which in turn helps the government to forecast substantially lower deficits over the next several years. Indeed, the government forecasts that Canada will have one of the lowest deficits as a percentage of GDP among the G7 countries through to 2023.

However, Budget 2022 isn't just about taxing Canada's largest financial institutions. There are a number of fiscal measures proposed in Budget 2022 which will impact businesses, large and small, as well as homeowners, charities, consumers, and working Canadians. Several of these measures create new tax incentives while others impose new taxes or shut down popular tax planning strategies such as flipping residential properties. One of the measures aimed at stopping the use of tax planning strategies by private corporations is estimated to raise more revenue than the special one time tax proposed in the budget on all the Canadian banks and insurance companies.

Budget 2022 addresses most of the items from the Liberal party's 2021 election platform, including incentives for clean technologies and home ownership, that the government hadn't previously implemented. However, there will be more to come. For example, the election platform included a new 15 per cent minimum tax on wealthy Canadians that was not proposed in Budget 2022. Instead, the government has promised to release details of that new tax in its fall economic and fiscal update. As well, it is conceivable that more changes will come as a result of the recent power-sharing deal with the New Democratic Party.

This is a budget with something for everyone. Our article contains a summary of the tax measures we thought would be of most interest.

1. Investment tax credit for carbon capture, utilization and storage

Budget 2022 proposes to introduce a new refundable investment tax credit (CCUS Tax Credit) for carbon capture, utilization, and storage (CCUS) technologies.

Eligible expenses, equipment, CCUS projects and CO? uses

Acquisition and installation costs incurred after 2021 and before 2041 for equipment that will be used in Canada solely for the capture, transport, storage or use of CO? in an eligible CCUS project would qualify for the CCUS Tax Credit. The CCUS Investment Credit may be claimed the year eligible expenses are incurred, regardless of when the equipment becomes available for use.

Eligible CCUS equipment would be included in two new capital cost allowance (CCA) classes of depreciable property: the first at a rate of 8 per cent on a declining-balance basis, and the second at a rate of 20 per cent on a declining-balance basis. The new classes will be eligible for enhanced first year depreciation.

Eligible CCUS projects are new projects that capture CO? that would otherwise be released into the atmosphere or capture CO? from the ambient air, prepare captured CO? for compression, compress and transport the captured CO?, and store or use captured CO? for an eligible use.

Storage requirements

Eligible uses for CO? include dedicated geological storage and storage in concrete. Storage requirements must be approved by Environment and Climate Change Canada.

CCUS Tax Credit rate

The CCUS Tax Credit for eligible expenses incurred after 2021 through 2030 would be claimed based on the following rates:

• 60 per cent for eligible capture equipment used in a direct air capture project;
• 50 per cent for all other eligible capture equipment; and
• 37.5 per cent for eligible transportation, storage, and use equipment

The following lower rates would apply for eligible expenses incurred after 2030 through 2040:

• 30 per cent for eligible capture equipment used in a direct air capture project;
• 25 per cent for all other eligible capture equipment; and
• 18.75 per cent for eligible transportation, storage, and use equipment.

Recovery of CCUS Tax Credit

As projects become operational, taxpayers must track and account for the amount of CO? being captured and the portions being used for eligible and ineligible uses. Projects will be assessed every five years, to a maximum of 20 years. Where the portion of CO? going to ineligible uses exceeds 5 per cent of that described in the initial project plans, a recovery of CCUS Tax Credits will be calculated. Details of the recovery structure will be released at a later date.

Validation and verification

An initial project tax assessment to identify eligible expenses and applicable CCUS Tax Credit rate would be required for projects anticipated to have eligible expenses of $100 million or more over the life of the project. Natural Resources Canada must verify eligible expenses before a CCUS Tax Credit can be claimed. Verification would be processed at the end of a taxpayer's taxation year but before the taxpayer files its tax return the year so that the refund could be processed upon filing.

Financial disclosure report and knowledge sharing

Taxpayers would be required to prepare a climate-related financial disclosure report that highlights how their corporate-governance, strategies, policies and practices will contribute to the management of climate-related risks and opportunities and to the achievement of Canada's commitments under the Paris Agreement and net zero goal by 2050.

Public knowledge sharing in Canada would be required for CCUS projects expecting to have eligible expenses of $250 million or more over the life of the project.

Details on the financial disclosure report and knowledge sharing requirements will be provided at a later date.

2. Clean technology tax incentives: Air-source heat pumps

CCA for clean energy equipment

Depreciable property included in CCA Classes 43.1 and 43.2 benefit from accelerated depreciation rates of 30 per cent and 50 per cent, respectively. Moreover, where the majority of tangible property in a project is included in Classes 43.1 or 43.2, certain intangible start-up expenses are treated as Canadian Renewable and Conservation Expenses (CRCE), which are fully deductible in the year they are incurred and may be carried forward indefinitely. CRCE may also be renounced to subscribers of flow-through shares who may then deduct the full amount of the CRCE renounced in the year.

Budget 2022 proposes to include air-source heat pumps, primarily used for space or water heating, under Classes 43.1 and 43.2. Property that is acquired and becomes available for use on or after April 7, 2022 would generally be eligible for inclusion in Classes 43.1 and 43.2.

Rate reduction for zero-emission technology manufacturers

Reduced corporate tax rates (7.5 per cent for income otherwise subject to the general corporate tax rate and 4.5 per cent for income otherwise subject to the small business tax rate) were proposed in Budget 2021 for qualifying zero-emission technology manufacturers on eligible zero-emission technology manufacturing and processing income.

Budget 2022 proposes the inclusion of the manufacturing of air-source heat pumps used for space or water heating as an eligible zero-emission technology manufacturing or processing activity for purposes of the reduced corporate tax rate.

The reduced corporate tax rates would apply for taxation years that begin after 2021 and would be phased out starting in taxation years beginning in 2029 and fully phased out for taxation years beginning after 2031.

3. Critical mineral exploration tax credit

Mining corporations are able to renounce certain grassroots exploration expenses as Canadian exploration expenses (CEE) to subscribers of flow-through shares who may then deduct 100 per cent of such expenses for the taxation year in which such expenses are renounced. Subscribers who are individuals may also claim the mineral exploration tax credit (METC) equal to 15 per cent of such expenses incurred in Canada. The ability to renounce eligible expenditures to investors and the METC allows mining corporations to attract equity investors at a premium.

A new 30 per cent critical mineral exploration tax credit (CMETC) is proposed in Budget 2022 for specified minerals that are used in the production of batteries and permanent magnets, which are used in zero-emission vehicles, or are necessary in the production and processing of advanced materials, clean technology, or semi-conductors.

A qualified person (as defined under National Instrument 43-101 published by the Canadian Securities Administrators as of April 7, 2022) must certify that expenditures that will be renounced will be incurred as part of an exploration project targeting the specified minerals.

The CMETC would apply to expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022 and on or before March 31, 2027.

4. Flow-through shares for oil, gas and coal activities

CEE and Canadian development expenses (CDE) incurred in the course of carrying out oil, gas and coal activities may also be renounced to subscribers of flow-through shares. Such subscribers may then deduct 100 per cent of such CEE and 30 per cent of such CDE, on a declining basis in calculating their taxable income

In order to support "Canada's international commitments to phase out or rationalize inefficient fossil fuel subsidies," Budget 2022 proposes to eliminate the flow-through share regime for oil, gas, and coal activities effective for flow-through share agreements entered into after March 31, 2023.

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