Federal Budget 2022: Kicking Certainty Down the Road
The Federal government released its 2022 budget (“Budget 2022“) on April 7th. While Budget 2022 did not include the recurrent prediction of an increase to the capital gains inclusion rate, amendments to the principal residence exemption, or the introduction of a wealth tax, the government reiterated its commitment to ensuring that the “wealthiest people” pay “their fair share”. As with other recently proposed tax measures, Budget 2022 approaches this objective by introducing and broadening anti-avoidance rules, with the stated goal of shutting down “sophisticated tax planning”. Evidently the long-standing principle that a taxpayer is entitled to arrange their affairs in order to minimize tax payable[i] is under political threat. The government continued its open suggestions that taxpayers who engage in tax planning are obtaining unfair advantages while minimizing the fact that many such taxpayers make regular and powerful contributions to our society by directing available funds toward operating businesses in Canada, investing in the Canadian economy, and making donations to Canadian charities, community programs, and non-profit organizations.
For entrepreneurs and high-net-worth individuals, the following Budget 2022 proposals are noteworthy:
- Increasing eligibility for the small business deduction: A Canadian-controlled private corporation (“CCPC“) operating in Canada may benefit from the small business deduction (“SBD“), meaning the first $500,000 of a CCPC’s taxable income is taxed at the federal small business rate of 9% rather than the general corporate rate of 15%. CCPCs that are “associated” with each other for purposes of the Income Tax Act (Canada) (“Act“) must share the $500,000 SBD. Additionally, access to the SBD is reduced where (a) the combined taxable capital employed in Canada of a CCPC and its associated corporations is between $10 million and $15 million, with the SBD being unavailable to associated groups with over $15 million of taxable capital in Canada (the “Taxable Capital Reduction“), or (b) the combined “adjusted aggregate investment income” of the CCPC and its associated corporations is between $50,000 and $150,000.
Budget 2022 proposes to modify the Taxable Capital Reduction, with a more gradual reduction based on a range of $10 million to $50 million of taxable capital in Canada. Accordingly, associated CCPCs with less than $50 million of aggregate taxable capital in Canada may be eligible to benefit from the SBD for taxation years beginning on or after April 7, 2022.
- Introducing a new residential property flipping rule: The Federal government is concerned that individuals who engage in “house flipping” (i.e., purchasing residential property with the aim to resell at a profit within a short period of time) are improperly reducing tax payable on their income from these ventures by reporting profits as capital gains (taxable at a 50% inclusion rate) or by claiming the principal residence exemption to avoid tax entirely. Accordingly, beginning January 1, 2023, taxpayers who dispose of a residential property owned for less than 12 months will be required to pay tax on the profits as business income, and the principal residence exemption will not be available. This new rule will be subject to certain exemptions for sales motivated by various life events, such as a new job, the birth of a child, a divorce, or a death.
It should be noted that this new rule does not change the taxation of dispositions of residential properties held for longer than 12 months. In those cases, the taxpayer must determine whether profits are taxable on account of income or capital and whether the criteria to apply the principal residence exemption are met.
- Targeting high earners with amendments to the alternative minimum tax regime: Further details will be announced in the 2022 fall economic and fiscal update.
- Shutting down non-CCPC planning: Budget 2022 is concerned that taxpayers are manipulating the status of their private corporations to intentionally not qualify as a CCPC in order to achieve a tax advantage by avoiding the application of the refundable tax rules. This may be achieved by continuing a corporation under the laws of a foreign jurisdiction, by interposing a non-resident corporation in the corporate structure, or by issuing options to a non-resident person.
Budget 2022 proposes amendments to the Act that will apply the refundable tax regime to private corporations resident in Canada (other than CCPCs) that are ultimately controlled by Canadian residents (i.e., “Substantive CCPCs“). Additionally, Budget 2022 proposes to include a one-year extension of the normal reassessment period in certain circumstances in order to assist in facilitating the administration of the rules applicable to Substantive CCPCs. For all other purposes of the Act, Substantive CCPCs would continue to be treated as non-CCPCs.
In order to provide certainty for genuine commercial transactions entered into before April 7, 2022, Budget 2022 provides an exception for transactions where the taxation year of a 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 (provided the purchase and sale agreement pursuant to which the acquisition of control occurs was entered into before April 7, 2022 and the transfer of shares occurs by December 31, 2022).
- Increasing the annual disbursement quota for registered charities: For charities having property not used in charitable activities or administration in excess of $1 million (e.g., endowment funds intended to generate investment income to support charitable objectives in perpetuity), the annual disbursement quota (being the minimum amount that a charity must expend on charitable activities or donations to other qualified donees each year) will be raised from 3.5% to 5% effective January 1, 2023.
- Strengthening the general anti-avoidance rule: In response to the Federal Court of Appeal’s decision in Wild v Canada (2018 FCA 114), which held that the general anti-avoidance rule (“GAAR“) does not apply to transactions that result in an increase in any tax attributes which have not been used to reduce taxes, Budget 2022 proposes changes which will result in the application of the GAAR to transactions which affect tax attributes even if they have not yet become relevant to the computation of tax if the transactions occur on or after April 7, 2022.
- Additional measures to be considered: The government has also announced an intention to begin public consultations, to be followed by further legislative proposals, on various other tax topics, including (a) steps to “modernize” the GAAR, and (b) amendments to Bill C-208 (a set of amendments to the Act which came into force in June 2021, having a stated objective of facilitating intergenerational transfers of family businesses), to address concerns about “abusive” tax planning.
[i] Duke of Westminster v Commissioners of Inland Revenue,  UKHL TC_19_490.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.