Photo by Stock.com/Vividus
Words by Steve Farnham
Our Take
There is a plethora of comprehensive budget commentaries available on the internet for those who crave detail or suffer from insomnia. The intent of this communication is to provide a high level overview of those measures most relevant to the circumstances of our entrepreneurial clients.
Overview
From a taxation perspective, the budget was relatively benign. There were no changes announced to either personal or corporate income tax rates. Despite pervasive rumours, the capital gains inclusion rate was not increased, and there was no tinkering with the principal residence exemption. All good news.
There were, however, a number of very targeted measures announced that will impact some of our clients. These include:
Preventing the Use of Foreign Corporations to Avoid Tax
In recent years there has been the increasing use of a strategy to avoid the imposition of refundable corporate income tax by changing the jurisdiction of a private corporation so it is no longer considered a Canadian Controlled Private Corporation ( CCPC ). The Budget proposes amendments, applicable to taxation years ending on or after April 7, 2022, to ensure that capital gains and investment income reported by corporations that are in substance CCPC’s is subject to the same taxation as investment income earned in a CCPC.
We will be assessing the details of the proposed changes and advising our impacted clients of the appropriate course of action.
Increasing Access to the Small Business Tax Rate
The Small Business Deduction ( SBD ) results in a reduced federal corporate tax rate of 9% ( compared with the general rate of 15% ) on the first $500,000 of active, taxable income. Under present rules, this $500,000 limit is reduced when taxable capital employed in Canada exceeds $10 million and completely eliminated when taxable capital reaches $15 million.
The Budget proposes a more gradual phasing out of the business limit such that it is not completely eliminated until taxable capital reaches $50 million.
This measure will provide modest relief to some of our larger, capital intensive clients.
Adjustment to Foreign Accrual Property Income ( FAPI ) Inclusion Rates
The FAPI regime is intended to prevent Canadian resident taxpayers from using low tax foreign jurisdictions to defer or avoid tax on investment income earned in those jurisdictions. Foreign tax paid is permitted to be claimed as a deduction against the inclusion of FAPI in taxable income. This deduction is calculated using a “relevant tax factor”.
The budget proposes that for Canadian Controlled Private Corporations with taxation years beginning on or after April 7, 2022 the “relevant tax factor” will be reduced from 4 to 1.9 meaning, in simple terms, the deduction for foreign taxes paid will be significantly reduced.
We will be looking at these provisions in detail and will be providing advice to impacted clients.
Reinforcing the Canada Revenue Agency ( CRA )
An ongoing and recurring theme in recent budgets has been the expansion of funding to the CRA to add auditors and target specific areas of concern and abuse. The 2022 Budget proposes to provide $1.2 billion over 5 years to expand the audits of larger entities and non-residents engaged in aggressive tax planning ; increase the investigation and prosecution of those engaged in criminal tax evasion ( for example intentionally not reporting income) and to expand educational outreach. If only they would invest in the ability to communicate via email.
Stay tuned
Increasingly, at least it seems that way, budgets announce more things that may come in the future than will be implemented immediately. Included in that category are the following:
Review of the Minimum Tax Regime
Since 1986 there have been provisions in the Income Tax Act, known as Alternative Minimum Tax, or AMT, to ensure that some minimum level of tax is paid irrespective of the impact of various legitimate tax credits and deductions that reduce income tax. AMT is commonly triggered when a taxpayer reports significant deductions associated with flow-through shares or the lifetime capital gain exemption.
The present government believes that there remains an unacceptable number of “high-income” Canadians not paying their fair share of tax. The Budget announced the government’s commitment to examine a new minimum tax regime “which will go further towards ensuring that all wealthy Canadians pay their fair share of tax.”
Intergenerational Business Transfers
Section 84.1 of the Income Tax Act contains rules that, among other things, has prevented access to the lifetime capital gain exemption in most transactions involving intergenerational business transfers. The result has been a significant disadvantage to a vendor who sells a corporation to a family member instead of an arms-length person.
Private member Bill C-208, which received royal assent on June 29, 2021, introduced an exception to these rules to facilitate intergenerational business transfers in a more fair manner.
The Department of Finance raised concerns that the amendments may permit abuse where there is not a genuine intergenerational transfer and hinted at amending legislation or possibly a complete reversal as early as November 2021. That did not happen.
The Budget did not address the concerns but announced a consultation process and a commitment to table new legislation in the Fall of 2022.
General Anti-avoidance Rule ( GAAR )
The GAAR is intended to prevent abusive tax avoidance transactions that otherwise adhere to the existing provisions of the Income Tax Act. It is a big stick, arguably not always wielded with discrimination.
Recently the government has lost a number of GAAR cases they are not particularly happy about. The Budget proposes to introduce legislation to reverse a particular recent court case and to also release a consultation paper on “modernizing” the GAAR. We all understand what “modernizing” means.
Lightning Round
In addition to the announcements described above, here are a number of other “headline” items in no particular order:
- The flow through share regime permitting the renunciation of oil, gas and coal exploration expenditures to flow-through share investors will be eliminated after March 31, 2023.
- Residential flipping – with certain limited exemptions profits arising from the disposition of a residential property owned less than 12 months will be deemed to be business income.
- The Annual Disbursement Quota for registered charities will be increased from 3.5% to 5%.
- Multi-generational Home Renovation tax Credit (MHRTC) provides a refundable tax credit of 15% of the lessor of eligible expenses and $50,000 in respect of renovations that create a secondary dwelling space for a qualifying relation.
- Tax Free First Home Savings Account permits tax deductible annual contributions of up to $8,000 with a lifetime limit of $40,000 which can be withdrawn tax free to make a qualifying first time home purchase. The proposed rules permit transfers to and from an RRSP.
- Additional funding to make switch to zero-emission vehicles more affordable and extending the program to March 2025.
- Two year ban on the purchase of non-recreational residential property by foreign buyers.
Should you have any questions on whether or how these proposals may affect your specific circumstances please do not hesitate to contact us.