On April 7, 2022 (Budget Day), The Honourable Chrystia Freeland, deputy prime minister and minister of finance, delivered the highly anticipated 2022 Canadian federal budget (Budget 2022).

Although Budget 2022 does not propose to change the federal personal or corporate tax rates, it does introduce a one-time 15% tax on bank and life insurer groups, an additional 1.5% tax on the taxable income for members of bank and life insurer groups and allows more medium-sized Canadian-controlled private corporations to benefit from the small business deduction.  In addition, the government stated it was examining a new minimum tax regime for individuals with an intention to release details of the new minimum tax in the 2022 fall economic and fiscal update.

The tax highlights contained in Budget 2022 include:

Business income tax proposals

• Canada Recovery Dividend.  Budget 2022 imposes a one-time 15% tax - the Canada Recovery Dividend (CRD) - on bank and life insurer groups.  The CRD will be based on a corporation’s taxable income for taxation years ending in 2021.  Bank and life insurer groups subject to the CRD would be permitted to allocate a $1 billion taxable income exemption by agreement among the members.  The CRD liability will be imposed for the 2022 taxation year and will be payable in equal amounts over five years.

• Tax on Banks and Life Insurers.  Budget 2022 introduces an additional tax of 1.5% on the taxable income of members of bank and life insurer groups.  A $100 million taxable income exemption can be shared by agreement among the group members.  This measure would apply to taxation years ending after Budget Day. 

• Investment in Clean Technology.  Budget 2022 includes a number of measures aimed at promoting clean technology. Notably, Budget 2022 includes new refundable investment tax credits of up to 60% for eligible expenses incurred after 2021 in connection with certain carbon capture, utilization and storage projects and creates two new classes of depreciable property for eligible equipment used in such projects. 

• Flow-Through Shares and Mineral Exploration Tax Credit.  Budget 2022 proposes to eliminate the flow-through share regime for oil, gas, and coal exploration and development, and to introduce an enhanced mineral exploration tax credit for exploration expenses incurred in connection with “specified minerals” that are used in producing batteries and other clean technology, such as copper, lithium and cobalt.  Eliminating the flow-through share regime for oil, gas and coal activities is proposed to be effective for renunciations under flow-through share agreements entered into after March 31, 2023 and the enhanced mineral exploration tax credit is proposed to apply to expenditures renounced under eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.

• Small Business Deduction. To allow more medium-sized Canadian-controlled private corporations (CCPCs) to benefit from the small business deduction, Budget 2022 proposes to increase from $15 million to $50 million the range over which the small business deduction limit is reduced based on the combined taxable capital employed in Canada, effective to taxation years that begin on or after Budget Day.

• Hedging and Short Selling by Canadian Financial Institutions.  Budget 2022 contains measures to restrict certain tax benefits where financial institution groups structure transactions to take advantage of both the intercorporate dividend deduction and the deduction for a dividend compensation payment under the securities lending arrangement rules in connection with the same securities. Generally, the intercorporate dividend deduction will be denied in respect of dividends received on shares of a Canadian corporation if a registered securities dealer that is, or that is non-arm’s length to, the shareholder enters into certain hedging transactions to eliminate or substantially reduce the economic exposure to the shares. In this case, the registered securities dealer will be permitted to claim a full (rather than two-thirds) deduction for a dividend compensation payment made under a securities lending arrangement entered into in connection with the hedging transactions. This measure is proposed to apply to dividends and related dividend compensation payments that are paid, or become payable, on or after Budget Day, unless the relevant hedging transactions or related securities lending arrangement was in place before Budget Day, in which case the amendment would apply to dividends and related dividend compensation payments that are paid after September 2022.

• Application of the General Anti-Avoidance Rule to Tax Attributes.  Budget 2022 proposes to expand the application of the general anti-avoidance rule (GAAR) to deny the increase of tax attributes that have not yet been utilized to reduce taxes. Specifically, Budget 2022 proposes to amend the Income Tax Act (Canada) (the Tax Act) to allow the minister to issue notices of determination under GAAR with respect to transactions that affect tax attributes that have not yet become relevant to the computation of tax. This measure would apply to notices of determination issued on or after Budget Day.

• Intergenerational Share Transfers.  The Tax Act currently contains anti-surplus-stripping rules aimed at preventing the conversion of dividend income into capital gains through self-dealing transactions. In 2021, an exception to these rules was introduced to facilitate intergenerational business transfers, but this exception inadvertently permitted surplus stripping more broadly than intended. Budget 2022 announces a consultation process (ending on June 17, 2022) for stakeholders to comment on how these rules could be modified to prevent surplus stripping while still allowing for genuine intergenerational business transfers.
  
  
• Substantive CCPCs.

• Budget 2022 proposes measures to introduce the concept of a “substantive CCPC” in the Tax Act, in order to prevent certain tax planning strategies designed to avoid or lose CCPC status in a manner that circumvents the anti-deferral and integration mechanisms applicable to the passive income of CCPCs, effective for taxation years that end on or after Budget Day, except for certain taxation years ending as a result of an acquisition of control resulting from a sale of all or substantially all of the shares of a corporation to an arm’s length purchaser pursuant to a purchase and sale agreement entered into before Budget Day provided that the sale occurs before the end of 2022.
  
  
• Budget 2022 also includes proposed amendments to the Tax Act to eliminate any tax incentive for CCPCs and their shareholders to earn investment income in a controlled foreign affiliate. The foreign accrual property income (FAPI) rules in the Tax Act currently do not differentiate between the tax rates applicable to different types of Canadian corporations, which creates a potential tax deferral for CCPCs earning investment income through a foreign affiliate. Budget 2022 proposes to eliminate this deferral by applying to both CCPCs and substantive CCPCs the current tax factor applicable to individuals. Amendments to address the integration of FAPI as it is repatriated to and distributed by CCPCs and substantive CCPCs would also be adopted. These measures would apply to taxation years that begin on or after Budget Day.  

International tax proposals

• International Tax Reform. Budget 2022 proposes to implement the Organisation for Economic Co-operation and Development (OECD) Pillar Two minimum tax rules, along with a domestic minimum top-up tax that would apply to Canadian entities of multinational enterprises that are within the scope of Pillar Two, effective as of a date to be fixed in 2023, and an undertaxed profits rule to come into effect no earlier than 2024, subject to consultation. To allow time to implement Pillar Two in accordance with the intended timeline, Budget 2022 announced a public consultation on the implementation of the Pillar Two model rules and the domestic minimum top-up tax.

• Exchange of Tax Information on Digital Economy Platforms. Budget 2022 proposes to implement the OECD model rules for the exchange of tax information on digital economy platform sellers in Canada. These rules will require reporting platform operators that provide support to reportable sellers for relevant activities to determine the jurisdiction of residence of their reportable sellers and report certain information on them, generally effective for calendar years beginning after 2023.

• Interest Coupon Stripping
  
  
  • Budget 2022 proposes an amendment to the interest withholding tax rules in the Tax Act to address certain arrangements under which a non-resident lender sells its right to receive future interest payments in respect of a loan made to a non-arm’s length Canadian-resident borrower to a party (the interest coupon holder) that is not subject to Canadian withholding tax (referred to as an interest coupon stripping arrangement).
    
    
  • Where an interest coupon stripping arrangement exists, under the proposals contained in Budget 2022, the Canadian-resident borrower would be deemed, for the purposes of the interest withholding tax rules, to pay an amount of interest to the non-resident lender such that the withholding tax payable on the deemed interest payment equals the withholding tax otherwise avoided as a result of the interest coupon stripping arrangement. 
    
    
  • This measure is proposed to apply to interest paid or payable by a Canadian-resident borrower to an interest coupon holder to the extent that such interest accrued on or after Budget Day, unless the interest payment (i) is in respect of a debt or other obligation incurred by the Canadian-resident borrower before Budget Day; and (ii) is made to an interest coupon holder that deals at arm’s length with the non-resident lender and that acquired the interest coupon as a consequence of an agreement or other arrangement entered into by the interest coupon holder, and evidenced in writing, before Budget Day. For circumstances falling within this exception, the measure is proposed to apply to interest paid or payable by a Canadian-resident borrower to an interest coupon holder to the extent that such interest accrued on or after the day that is one year after Budget Day.

Personal income tax proposals

• Home Ownership. Budget 2022 includes a number of measures directed at home ownership and aging-in place, including:
  
  • The introduction of a new tax-free First Home Savings Account (FHSA) for individuals who are resident of Canada, over the age of 18 and have not lived in a home that they owned in the year the FHSA is opened or the preceding four calendar years. It is proposed that contributions to an FHSA will be tax deductible (similar to an RRSP) and that income earned in the FHSA and withdrawals to make a qualifying first home purchase would not be subject to tax. Budget 2022 proposes that annual and lifetime contributions to an FHSA will be capped at $8,000 and $40,000, respectively. Budget 2022 proposes that FHSAs will be available for contributions starting at some point in 2023.
    
    
  • An increase in the First-Time Home Buyers’ Tax Credit from $5,000 to $10,000 and the Home Accessibility Tax Credit from $10,000 to $20,000, both of which are proposed to be effective for acquisitions of a qualifying home made on or after January 1, 2022.
    
    
  • A new Multigenerational Home Renovation Tax Credit that provides a 15% tax credit for expenses up to a maximum of $50,000 for a renovation that creates a secondary dwelling to permit a senior or a person with a disability to live with a relation. This measure is proposed to apply for work performed and paid for on or after January 1, 2023.
    
    
• Residential Property Flipping Rule. Budget 2022 introduces a new rule that deems profits arising from dispositions of residential property (including rental property) that was owned for less than 12 months to be business income and therefore not on account of capital. The deeming rule does not apply if the disposition relates to certain life events including death, additions to the household, separation, personal safety, disability or illness, employment change, insolvency, and involuntary disposition. Notably, the principal residence exemption is not available if the new deeming rule applies. Where the property was owned for 12 months or more, it would remain a question of fact whether profits are business income. This measure would apply to residential properties sold on or after January 1, 2023.
  
  
• Labour Mobility Deduction for Tradespeople. Budget 2022 proposes to introduce a deduction of up to $4,000 per year for eligible expenses incurred by tradespersons or apprentices that ordinarily reside in Canada and who make a temporary relocation for employment purposes. Eligible expenses include reasonable expenses incurred for temporary lodging, transportation to/from the temporary lodging, and meals in the course of travel. Budget 2022 proposes that this measure would apply for the 2022 and subsequent taxation years.
  
  
• Medical Expense Tax Credit (METC). The METC regime provides a 15% tax credit for qualifying medical expenses in excess of the lesser of $2,479 and 3% of the individual’s net income. Budget 2022 proposes to expand the METC to cover medical expenses paid by taxpayers or their spouses or common-law partners with respect to reproductive technologies and procedures for surrogates and donors. The regime is further expanded to allow for reimbursements paid by the taxpayer to a patient to be eligible for the METC provided the expense would otherwise qualify. Lastly, fees paid to fertility clinics and sperm/ova donor banks would now be eligible for the credit. Budget 2022 proposes that this measure would apply to expenses incurred in the 2022 and subsequent taxation years.
  
  
• Charities.
  
  • Budget 2022 proposes to increase the disbursement quota of registered charities from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1 million. In addition, Budget 2022 proposes to amend the Tax Act to clarify that expenditures for administration and management are not considered qualifying expenditures for the purposes of satisfying a charity’s disbursement quota. The Canada Revenue Agency will have the discretion to grant a reduction in a charity’s disbursement quota for any particular tax year. Canada Revenue Agency will be allowed to publicly disclose information relating to such a decision. These measures would apply to charities in respect of their financial periods beginning on or after January 1, 2023. 
    
    
  • Budget 2022 also proposes a number of changes to the rules allowing charities in limited circumstances to conduct activities through – and make disbursements to – an intermediary organization (other than a qualified donee). In addition, Budget 2022 proposes to prohibit registered charities from accepting gifts, the granting for which was expressly or implicitly conditional on making a gift to a person other than a qualified donee. These two last measures would apply as of royal assent of the enacting legislation.
    
    
• Borrowing by Defined Benefit Pension Plans. Budget 2022 proposes to provide more borrowing flexibility to administrators of defined benefit registered pension plans (other than individual pension plans) by replacing the 90-day term limit with a new limit on the total amount of additional borrowed money (for purposes other than acquiring real property), effective on or after Budget Day.
  
  
• Reporting Requirements for RRSPs and RRIFs. Budget 2022 proposes to require financial institutions to annually report to the Canada Revenue Agency the total fair market value, as at calendar year-end, of property held in each RRSP and RRIF that they administer, effective as of 2023.