2022 Federal Budget Highlights

Before getting into the 2022 Federal budget changes and how they could affect you, we thought it would be easier to start with what didn’t change. Namely, the federal inclusion rate on capital gain remains 50%, allowing investors with large unrealized capital gains in their non-registered accounts to breath a sigh of relief. Also, some Canadian homeowners were concerned that the government would limit access to the principal residence exemption, which did not happen (unless you are a house flipper).

We’ve broken the proposed budget into the three categories below. Clicking on them will take you directly to that section:

Home Buyers/Owners

Disability Enhancements

Business Owners

Tax-Free First Home Savings Account (FHSA)

In a largely uneventful budget, the first home savings account was likely the most relevant item for Canadians. The plan is for FHSAs to be available by January 2023. Here are other rules of how the FHSA will work.

• Contributions to an FHSA will be tax deductible and withdrawals will be tax-free. Combining the best features of an RRSP and TFSA.
• The FHSA would only be available for use once per individual in their lifetime.
• To open a FHSA, an individual must be a resident of Canada and at least 18 years of age.
• The account owner must not have lived in a home that they owned:
  • At any time in the year the account is opened, or
  • During the preceding four calendar years
• The lifetime contribution limit would be $40,000, with an annual limit of $8,000 beginning in 2023.
• Individuals would have 15 years from the time they open the FHSA to purchase a qualifying home or move the proceeds to an RRSP, tax-free, without affecting their RRSP contribution room.
• RRSPs already offer a similar benefit called the first time, home buyers plan (HBP). Individuals would not be eligible to use the FHSA and HBP for the same purchase.

This will be a better version of HBP for young Canadians saving for their first home. Unlike the HBP, FHSA withdrawals will not have to be repaid and the limit is higher. Purchasing the first home now will likely need much more than $40,000 for a downpayment, but the FHSA will help.

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Home Buyers’ Tax Credit

First-time home buyers who acquire a qualifying home can get up to $750 in tax relief by claiming the First-Time Home Buyers’ Tax Credit (HBTC).

An individual is a first-time home buyer if neither the individual nor spouse or common-law partner owned and lived in another home in the calendar year of the home purchase or in any of the four preceding calendar years. This credit is also available for certain acquisitions of a home by or for the benefit of an individual who is eligible for the Disability Tax Credit, even if the first-time home buyer condition is not met.

Budget 2022 proposes to double the HBTC amount to $10,000, which would provide up to $1,500 in tax relief to eligible home-buyers. Spouses or common-law partners would continue to be able to split the value of the credit if the combined total does not exceed $1,500 in tax relief. This measure will apply to acquisitions of a qualifying home made on or after January 1, 2022.

An additional $750 to go back in the pocket of first-time home buyers could be used this to buy a really nice vacuum cleaner to go with their new home!

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Multigenerational Home Renovation Tax Credit

Budget 2022 proposes to introduce a new Multigenerational Home Renovation Tax Credit. The refundable credit would provide recognition of eligible expenses for a qualifying renovation. A qualifying renovation would be one that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a qualifying relation. The value of the credit would be 15% of the lesser of eligible expenses and $50,000.

For the purposes of this credit, a qualifying relation, would be an individual who is 18 years of age or older at the end of the taxation year that includes the end of the renovation period. A qualifying relation could be a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the eligible person, which includes the spouse or common-law partner of one of those individuals.

A qualifying renovation would be defined as a renovation or alteration of, or addition to, an eligible dwelling that is:

• of an enduring nature and integral to the eligible dwelling; and
• undertaken to enable an eligible person to reside in the dwelling with a qualifying relation, by establishing a secondary unit

One qualifying renovation would be permitted to be claimed by an eligible person over their lifetime. Eligible expenses would include the cost of labour and professional services, building materials, fixtures, equipment rentals and permits. Items such as furniture, as well as items that retain a value independent of the renovation such as construction equipment and tools, would not be integral to the dwelling and expenses for such items would therefore not qualify for the credit.

Expenses would not be eligible for the Multigenerational Home Renovation Tax Credit if they are claimed under the Medical Expense Tax Credit and/or Home Accessibility Tax Credit.

This measure would apply to the 2023 and subsequent taxation years, with respect to work performed and paid for and/or goods acquired on or after January 1, 2023.

The government wants to support seniors who choose to stay in their home. For individuals who want to keep their aging parents close to home, this credit has the potential to create up to $7,500 of tax savings.

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Home Accessibility Tax Credit

The Home Accessibility Tax Credit is a non-refundable tax credit that provides recognition of eligible home renovation or alteration expenses with respect to an eligible dwelling of a qualifying individual. A qualifying individual is an individual who is eligible to claim the Disability Tax Credit at any time in a tax year, or an individual who is 65 years of age or older at the end of a tax year. The value of the credit is calculated by applying the lowest personal income tax rate (15% in 2022) to an amount that is the lesser of eligible expenses and $10,000.

To better support independent living, Budget 2022 proposes to increase the annual expense limit of the Home Accessibility Tax Credit to $20,000. This measure would apply to expenses incurred in the 2022 and subsequent taxation years.

Seniors who want to stay in their homes can make gradual accessibility upgrades annually and get a tax credit worth up to $1,500, which will be helpful to many homeowners.

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Small Business Deduction (SBD)

The reduced corporate income tax rate of 9% applies on the first $500,000/yr of qualifying active business income through the “small business deduction” and (i.e., the “business limit”) of a Canadian-controlled private corporation (CCPC). The business limit must be allocated among associated CCPCs and is reduced on a straight-line basis when:

• the combined taxable capital employed in Canada of the CCPC, and its associated corporations is between $10 million and $15 million; or

Budget 2022 proposes to extend the upper threshold over which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations, from $15 million to $50 million. This will allow small to medium-sized CCPCs to benefit from the SBD and would apply to tax years beginning on or after Budget Day.

If you are running a small to medium sized business where your total capital employed is $15 million or over you would not have had access to the small business rate on your retained earnings. If your business earned $1,500,000 last year, after expenses, your tax payable would have been almost $397,000, with this new measure your total tax payable would be ~$335,000, a savings of $63,000.

For small to medium business owners with $15 million or more of capital employed, this will make a difference. Any time the tax burdens of businesses are lightened, it should help business grow and thrive.

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More Tax for House Flippers

The Budget proposed rules that will deem profits from the sale of residential property as business income if the property was owned for less than 12 months. This rule will prevent a taxpayer from classifying the profit as a capital gain or the full principal residence exemption. The deeming rule will not apply when the disposition occurs because of certain qualifying life events, like death, disability, separation, insolvency, employment change, etc. This measure is intended to begin at the end of 2022.

For home flippers, it may make more sense to hold the home for longer before selling. Though holding a home for a few extra months should not make a huge difference for a house flipper’s profit, not paying attention to this rule lead to a huge tax hit. Let’s say you can buy a property for $500 K fix it up for $50 K and sell it for $700 K. If you are in the highest combined tax bracket in Ontario, and your $150 K in profit is taxed at normal inclusion rates, you’ll be pay ~$40 K of additional tax, than when you were taxed at capital gain rates.

Conclusion

There were several other items in the budget that we thought were less applicable for most Canadians. If you’re looking for a more comprehensive overview of the 2022 Federal budget, the CI Tax, Retirement and Estate Planning (TREP) team published this longer form article.

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