2022 Canadian Federal Budget: Personal Tax

Budget 2022 did not make any of the drastic changes to personal taxation in Canada as speculated before the budget’s release. No changes were made to the capital gains inclusion rate or to the federal income tax rates for individuals. Nor was the principal residence deduction limited or restricted in any way by Budget 2022 other than by the residential property-flipping rules discussed below, which largely just codify the existing law in this area. 

Essentially, the most significant personal tax measures in Budget 2022 are limited to several new personal credits, the introduction of the tax-free First Home Savings Account, and the announcement of a plan to reform the Alternative Minimum Tax system. 

Minimum tax for high earners

Citing its concern that many high income-earning Canadians were paying lower effective rates of tax than might be expected, the federal government announced a commitment to updating or reforming the current Alternative Minimum Tax regime with a view to ensuring high-income earning Canadians pay a minimum level of tax. Further details of proposed reforms are expected in the 2022 fall economic and fiscal update.

Multigenerational Home Renovation Tax Credit

The Multigenerational Home Renovation Tax Credit is a refundable credit for eligible expenses made in respect of a qualifying renovation. The credit is equal to 15% of eligible expenses made (to a maximum of $50,000). Eligibility for the credit is limited to enduring renovations undertaken to enable an eligible person to reside in a dwelling by establishing a secondary unit for occupancy by either the eligible person or the claimant. A space is considered a secondary unit if it is self-contained with a private entrance, kitchen, bathroom and sleeping area.

Eligible persons are seniors over the age of 65 at the end of the year the renovation concludes and adults with disabilities that are 18 and older who are otherwise eligible for the Disability Tax Credit in that year. The credit can be claimed by eligible persons who ordinarily reside or intend to ordinarily reside in the home, their spouses or common-law partners or the parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the particular eligible person (including spouses or common-law partners of those persons).

For an expense to qualify, it must be made during the renovation period, which begins when a building permit application is submitted and ends when the renovation receives a final inspection or proof of completion in compliance with local laws is obtained. 

Eligible expenses must reasonably be made for the purpose of the qualifying renovation. Examples of eligible expenses include the cost of labour and professional services, building materials, fixtures, equipment rentals and permits. 

Examples of non-eligible expenses include items that retain a value independent of the renovation (i.e., furniture), routine maintenance costs, appliances/electronics, gardening, housekeeping, and security. Financing costs would not be eligible for the credit. Goods and services provided by persons not dealing at arm’s length with the claimant will not be eligible unless that person is registered for GST purposes. It’s not clear whether expenses would be eligible if you wanted to do the work yourself; however CRA has indicated in the context of the existing Home Accessibility Tax Credit that expenses for materials, supplies, equipment rentals, plans and permits could be eligible. 

Notably, the credit can be claimed in the taxation year that includes the end of the renovation period, so the renovation must be completed before the credit can be claimed. The credit would apply for eligible expenses that were paid for on and after January 1, 2023. Only one claim for a qualifying renovation can be made by eligible persons over their lifetime. The credit can be shared among eligible claimants, but the total amount claimed for the qualifying renovation cannot exceed $50,000. 

Budget 2022 also proposes to increase the annual expense limit for the existing Home Accessibility Tax Credit to $20,000. This is a non-refundable tax credit available for individuals 65 and over or eligible for the Disability Tax Credit and can be claimed on expenses made for significant renovations undertaken to improve accessibility. The enhanced credit limit applies for expenses made in 2022 and subsequent taxation years.

Tax-free First Home Savings Account (FHSA)

To help individuals save for their first home, Budget 2022 proposes to create the FHSA for individuals resident in Canada who are at least 18 years old. For individuals to be eligible for the FHSA they must not have owned and lived in a home at any time in the year the account is opened or the preceding four calendar years. 

Contributions to an FHSA are deductible and any income earned in the FHSA is earned tax-free. The FSHA has an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Individuals can transfer funds from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF) to an FHSA tax-free, subject to these contribution limits. Such transfers would not reduce or restore individuals’ contribution limits for their RRSP. It’s not clear if spousal transfers are permitted under the new rules.

Amounts withdrawn from an FSHA to purchase a home would not be subject to tax, but amounts withdrawn for other purposes would be taxable. Individuals are limited to making non-taxable withdrawals for a single property in their lifetime. Unused funds can be transferred to an individual’s RRSP or RRIF. Such transfers would not be taxable at the time of transfer, but are taxed in the usual manner when withdrawn. Transfers from an FHSA to an RRSP are not limited by the individual’s RRSP contribution limit. 

FHSA contributions can start in 2023 when financial institutions are expected to have the appropriate infrastructure in place. The account must be used or closed within 15 years. Unused savings can either be transferred into an RRSP or RRIF or withdrawn on a taxable basis.

Budget 2022 clarifies that the existing Home Buyers’ Plan (HBP), which allows individuals to withdraw up to $35,000 from an RRSP to purchase or build a home without having to pay tax on the withdrawal, remains unchanged. Withdrawals from an RRSP under the HBP are required to be repaid to an RRSP over 15 years. Withdrawals from an FHSA are not subject to similar repayment obligations. Taxpayers will not be permitted to make withdrawals from an FHSA and pursuant to the HBP for the same home purchase.

Home Buyers’ Tax Credit (HBTC)

The existing HBTC is a non-refundable credit of up to $750 ($5,000 multiplied by the lowest personal tax rate in 2022) for first-time home buyers. The credit can be claimed by individuals or their spouses or common-law partners and is only available if neither individuals nor their spouses or common-law partners owned and lived in another home in the year of the purchase or any four preceding calendar years. Budget 2022 proposes to double the HBTC amount from $5,000 to $10,000 for qualifying home purchases made in 2022.

Residential property-flipping rules

To address concerns with taxpayers improperly reporting profits from property flipping, Budget 2022 introduces a new rule that deems profits arising from certain dispositions of residential property (including rental property) to be business income and not a capital gain. The principal residence exemption is not available for dispositions subject to the new deeming rule.

This measure would apply on dispositions of property that was owned for less than 12 months. The rule does not apply in the event of certain unforeseeable life events such as death, the birth of a child, separation, personal safety, disability/illness, changes of employment, insolvency or involuntary dispositions. For properties owned for 12 months or more, the federal government said it remains a question of fact whether such profits are business income or capital gains. No draft legislation was released for this measure, so it’s unclear whether such profits will be treated in the usual manner under the existing rules or whether new legislation will be introduced for that purpose.

This measure will apply to residential properties sold on or after January 1, 2023.

Labour mobility deduction for tradespeople

A deduction of up to $4,000 in eligible expenses per year is now available for tradespersons or apprentices who ordinarily reside in Canada and who make a temporary relocation for employment purposes. An eligible temporary relocation has a minimum duration of 36 hours, must be located in Canada and must be at least 150 kilometres closer to the worksite. Eligible expenses include reasonable expenses incurred for temporary lodging, transportation to/from the temporary lodging, and meals in the course of travel. 

To be eligible for the deduction, the taxpayer must maintain an ordinary residence elsewhere from the temporary lodging. If workers receive financial assistance from their employer for an expense, the deduction cannot be claimed for that amount.

The deduction will be available in 2022 and subsequent taxation years.

Medical Expense Tax Credit (METC) for surrogacy and other expenses 

The existing METC regime provides a 15% tax credit for qualifying medical expenses in excess of the lesser of $2,479 and 3% of an individual’s net income. To acknowledge different approaches to family building that may involve surrogates and donors, 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 those 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 will now be eligible for the credit. The METC is restricted to expenses incurred in Canada and all claims must be in accordance with the Assisted Human Reproduction Act and its regulations.

This measure will apply to expenses incurred in the 2022 and subsequent taxation years.

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