This article was reviewed by Chris Singer, CFP®.
The 2022 federal budget brought forward by Finance Minister Chrystia Freeland on April 7th contained a number of proposals that will impact the financial, tax and estate plans of Canadians. The following is a summary of the most relevant budget proposals that may impact you. Good news is that no changes were made to the personal federal tax rates!
The budget has made an effort to tackle housing affordability and numerous measures are aimed at providing relief to a broad array of Canadians, including renters and those seeking home ownership. Probably the most impactful measure is the Tax-Free First Home Savings Account.
Tax-Free First Home Savings Account (FHSA)
This proposal would allow for first time home buyers to save for purchasing their first home. Essentially, you can save tax-sheltered money and withdraw it tax-free without having to repay the plan. Some highlights include:
- A Canadian resident at least 18 years old
- Not lived in a home they have owned in the year the account was opened, or in any of the preceding four calendar years
- Contributions are tax-deductible and grow tax-sheltered
- Annual limit: $8,000 (Lifetime limit: $40,000)
- Annual contribution room cannot be carried forward
- Annual contribution room will become available starting in 2023
- Non-taxable withdrawals may be made only for the purpose of purchasing a qualifying first home.
- Any other withdrawals will be taxed as income.
- Important Note
- Individuals will not be able to make a Home Buyers’ Plan and an FHSA withdrawal for the same home purchase.
- Unused FHSA amounts can be transferred to an RRSP without reducing RRSP room.
- You can also transfer RRSPs to an FHSA on a tax-free basis.
- This would not be ideal as you would have used RRSP room to do it.
- Although it could be a way to get in $40,000 quickly into the plan.
Home Buyers’ Tax Credit (HBTC)
Budget 2022 proposes a non-refundable Home Buyers’ Tax Credit of up to $1,500 to be available to first-time home buyers who purchase a qualifying home. Under the budget, the HBTC amount will be doubled from $5,000 to $10,000. Spouses and common law partners can split the value of the credit if the total credit does not exceed $1,500.
a) First-time home buyer
A first-time home buyer is an individual (or their spouse or common law partner) who has not lived in another home owned in the calendar year of the home purchase, or any of the four preceding calendar years. An individual who may not be a first-time home buyer, but qualifies for the Disability Tax Credit, may be eligible for this HBTC.
b) Qualifying home
This is a home that the individual or their spouse or common law partner intends to occupy no later than one year after purchase.
Multigenerational Home Renovation Tax Credit (MHRTC)
Budget 2022 introduces a new refundable Multigenerational Home Renovation Tax Credit (MHRTC), which would account for certain eligible expenses for a qualifying renovation – meaning a renovation that creates a secondary dwelling unit for a senior or a person with a disability to live with a relative. Only one qualifying renovation is permitted for the MHRTC per individual over that individual’s lifetime.
A secondary unit is defined as a self-contained unit that has a private entrance, kitchen, bathroom and sleeping area.
The MHRTC will be applicable for renovations occurring after January 1, 2023.
- The eligible senior would be 65 years or older, at the end of the taxation year, including the end of the renovation period, or
- Individuals 18 or older who are eligible for the Disability Tax Credit at the end of the taxation year, including the end of the renovation period.
A qualifying relative is an individual 18 years or older at the end of the taxation year, including the end of the renovation period. These individuals include the following relatives of the eligible person. Parent, Grandparent, Child, Grandchild, Sibling, Aunt, Uncle, Niece, Nephew.
- Eligible Claims
- The MHRTC can be claimed by the following persons:
- An individual who ordinarily resides or intends to ordinarily reside in the property within 12 months of the renovation being completed. This could be an eligible person, the spouse or common law partner of an eligible person, a qualifying relative, or a qualifying relative who owns the house.
- Claims cannot exceed $50,000 of qualifying renovations, irrespective of the number of claimants.
- Eligible Dwelling
- This is a unit that is owned either solely or jointly by an eligible person, their spouse or common law partner, or in regard to a qualifying relative, if that individual ordinarily resides or intends to ordinarily reside in the property within 12 months of the renovation being completed.
Residential Property Flipping Taxation
Buying a house and selling it for much more than what was paid for it over a very short time period is known as property flipping. Budget 2022 expresses concern that some taxpayers may not be properly reporting these profits on their tax returns.
Budget 2022 proposes to introduce a new deeming rule to ensure profits from flipping properties held for less than 12 months would be fully taxable as business income, and not eligible for capital gains taxation, or the Principal Residence Exemption (PRE). There will be exceptions to the rule, including Canadians who sell their home due to certain life circumstances, such as a death, disability, the birth of a child, a new job or a divorce.
The rules are forthcoming, and Canadians will be consulted on the draft legislative proposals.
The measure will apply to residential properties sold on or after January 1, 2023.
Ban of Foreign Purchases
To make sure that housing is owned by Canadians instead of foreign investors, the budget announced the government’s intention to propose restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years. There will be exceptions for refugees fleeing international crises, international students on the path to permanent residency and others.
Non-resident, non-Canadians who own homes that are being underused or left vacant would be subject to the Underused Housing Tax once it comes into effect.
Tax on Real Estate Assignment Sales
Assignment sales involve the resale of a home before it is constructed or lived in; GST/HST may or may not be applicable when there is an assignment sale. For example, GST/HST does not apply if the intention is for the buyer to live in the home. This creates an opportunity for speculators to be dishonest about their original intentions, and uncertainty for everyone involved in an assignment sale as to whether GST/HST applies.
To address these issues, the budget proposes to make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST/HST purposes, effective May 7, 2022.
Small Business Deduction
Canadian-controlled private corporations (CCPCs) have access to a reduced corporate income tax rate of 9% federally on the first $500,000 of active business income, compared to the general corporate income tax rate of 15%. This $500,000 limit is referred to as the “business limit” and is shared among all associated CCPCs.
Under the current rules, the business limit is gradually reduced if the taxable capital employed in Canada of the associated CCPCs combined exceeds $10 million, or the adjusted aggregate investment income (“AAII”) of the associated corporations combined exceeds $50,000. The business limit is fully clawed back if the taxable capital is $15 million or more, or AAII is $150,000 or more.
Budget 2022 proposes to increase the taxable capital limit from $15 million to $50 million which would allow more CCPCs to benefit from the reduced corporate income tax rate. This would apply to taxation years that begin on or after April 7, 2022.
Capital Cost Allowance for Clean Energy Equipment
The Income Tax Act allows taxpayers to deduct a portion of the capital cost of a depreciable property as a capital cost allowance (CCA) when they compute their income for each taxation year.
Classes 43.1 and 43.2 of Schedule II to the Income Tax Regulations provide accelerated CCA rates (30% and 50% respectively) for investments in specified clean energy generation and energy conservation equipment.
Budget 2022 proposes to expand eligibility under Classes 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating. The expansion of these classes applies to property that is acquired and becomes available for use on or after budget day.