The Minister of Finance (Canada), the Honourable Chrystia Freeland, presented the Government of Canada’s (the “Federal Government”) 2022 Federal Budget (“Budget 2022”) on April 7, 2022 (“Budget Day”). Budget 2022 contains significant proposals to amend the Income Tax Act (Canada) (the “ITA”), the Excise Tax Act (the “ETA”) and the Excise Act, 2001 (the “EA”) while also providing updates on previously announced tax measures and policies.
Significant Budget 2022 proposals and updates include:
- a one-time 15% Canada Recovery Dividend tax and 1.5% increase in corporate tax on the taxable income of banks and life insurers;
- measures to ensure that investment income earned and distributed by a corporation that is substantively a Canadian-controlled private corporation (a “CCPC”) is subject to the same taxation as investment income earned and distributed by a CCPC;
- extending the general anti-avoidance rule (the “GAAR”) to apply to transactions that affect tax attributes that have not yet been utilized;
- expanding anti-avoidance rules applicable to cross-border interest coupon stripping arrangements;
- implementation of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting two-pillar plan for international tax reform;
- proposal to implement the OECD model rules for reporting by digital platform operators with respect to platform sellers in Canada; and
- a number of GST/HST, excise and other related tax measures.
Selected proposals and tax measures are detailed below:
- Actions to Improve Compliance with the Canadian Tax System
- Business Income Tax Measures
- International Tax Measures
- Personal Income Tax Measures
- Sales and Excise Tax Measures
- Previously Announced Tax Measures
Budget 2022 announces the following consultations and examinations:
- a consultation paper on modernizing the GAAR, with a consultation period running through the summer of 2022 - legislative proposals to be tabled by the end of 2022;
- a consultation process for stakeholders to share their views on the income tax surplus stripping rules (including the exception introduced by Bill C-208) including how the existing rules could be strengthened to protect the integrity of the tax system while continuing to facilitate intergenerational business transfers – legislation, as necessary to address this specific issue, could be tabled in the fall after the consultation;
- a public consultation on the implementation in Canada of the OECD/G20 Pillar Two Model Rules and a domestic minimum top-up tax;
- an examination of potential changes to the financial transaction approval process to limit the ability of federally regulated financial institutions to use corporate structures in tax havens to engage in aggressive tax avoidance; and
- a commitment by the Federal Government to examine a new minimum tax regime that would replace or supplement the existing Alternative Minimum Tax for high income Canadians - the Federal Government will release details on a proposed approach in the 2022 fall economic and fiscal update.
Investments in the Canada Revenue Agency
Budget 2022 proposes to provide $1.2 billion over five years for the CRA to expand audits of larger entities and non-residents engaged in aggressive tax planning, increase the investigation and prosecution of those engaged in criminal tax evasion, and to expand educational outreach. It was noted that these measures are expected to recover $3.4 billion in revenues over five years and that the previous $2.2 billion provided to the CRA since Budget 2016 has yielded a return of five dollars to each dollar invested from 2016 to 2021.
Measures Affecting Financial Institutions
Budget 2022 proposes to introduce the Canada Recovery Dividend (the “CRD”), which will be a one-time 15% tax on bank and life insurer groups. The CRD would be based on a corporation’s taxable income for taxation years ending in 2021 subject to proration for short taxation years. Bank and life insurer groups would be permitted to allocate a $1 billion taxable income exemption by agreement among group members. The CRD liability is imposed in the 2022 taxation year but would be payable in equal amounts over five years.
Budget 2022 proposes an additional tax for members of bank and life insurer groups equal to 1.5% of the taxable income determined in the same manner as the CRD. Bank and life insurer groups subject to the additional tax would be permitted to allocate a $100 million taxable income exemption by agreement among group members. The proposed additional tax would apply to taxation years that end after Budget Day and is prorated for taxation years that includes Budget Day.
Budget 2022 proposes changes to the ITA to address the impact of International Financial Reporting Standards (IFRS) 17, the new accounting standards for insurance contracts, to ensure that income is recognized for purposes of income tax when key economic activities occur. The amendments will confirm support of the IFRS 17 accounting standards with the exception of a new reserve known as the contract services margin (the “CSM”). Without the exception, profits embedded in the CSM would be deferred for income tax purposes and gradually released into income over the estimated life of the insurance contracts. These measures would apply as of January 1, 2023.
Budget 2022 introduces a specific rule to deal with certain tax planning strategies involving hedging and short selling arrangements by certain Canadian financial institution groups. As an example, two entities of a financial institution group could take different positions in relation to a Canadian dividend-paying stock – one short, one long - to take advantage of special treatment that those Canadian stocks receive with respect to dividends. The result in these arrangements is that the entity that holds the long position is entitled to the dividend deduction. However, a registered securities dealer in the group who holds the short position is entitled to deduct two-thirds of the dividend compensation payment under the securities lending arrangement rules but which the Federal Government views as artificial in this context.
Specifically, the proposals will:
- deny the inter-corporate deduction for dividends received by a taxpayer on Canadian shares if a registered securities dealer that does not deal at arm’s length with the taxpayer enters into transactions that hedge the taxpayer’s economic exposure to the Canadian shares, where the registered securities dealer knew or ought to have known that these transactions would have such an effect;
- deny the deduction for dividends received by a registered securities dealer on Canadian shares that it holds if it eliminates all or substantially all of its economic exposure to the Canadian shares by entering into certain hedging transactions; and
- provide that in the above situations, the registered securities dealer will be permitted to claim a full, rather than a two-thirds, deduction for a dividend compensation payment it makes under a securities lending arrangement entered into in connection with the above hedging transactions.
The proposed amendments would apply to dividends and compensation payments that are paid, or become payable, on or after Budget Day, unless the relevant hedging transactions or related securities lending arrangement were 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.
Investment Tax Credit for Carbon Capture, Utilization, and Storage
Budget 2022 proposes to introduce a refundable investment tax credit for Carbon Capture, Utilization, and Storage (the “CCUS Tax Credit”), which would be available to businesses that incur eligible expenses starting on January 1, 2022.
A taxpayer would be able to claim the CCUS Tax Credit with regards to the cost of purchasing and installing equipment that would be used solely to capture, transport, store, or use CO2 used in an eligible CCUS project that is put in use in Canada. In addition, the equipment would need to be part of a project where the captured CO2 is used for an eligible use and the CCUS Tax Credit would be available regardless of when the equipment becomes available for use.
To be eligible, a project would need to capture CO2 that would otherwise be released into the atmosphere, or capture CO2 from the ambient air, prepare the captured CO2 for compression, compress and transport the captured CO2, and store or use the captured CO2. Eligible uses would initially include dedicated geological storage and storage in concrete but would not include enhanced oil recovery.
Eligible CO2 Uses
Where eligible equipment is part of a project that plans to store CO2 through both eligible and ineligible uses, the CCUS Tax Credit would be reduced by the portion of CO2 expected to go to ineligible uses over the life of the project. To this effect, during the operation of the project, taxpayers would be required to track and account for the amount of CO2 being captured, and the portions that end up going to eligible and ineligible uses. An assessment at five-year intervals would be made based on the total amount of CO2 going to an ineligible use to determine if a recovery of the CCUS Tax Credit is warranted.
Validation and Verification, Knowledge Sharing, and Climate Risk Disclosure
Furthermore, in order for the CCUS Tax Credit to be claimed, the project would also be subject to a required validation and verification process, storage requirements, and the production of a climate-related financial disclosure report highlighting the ways in which the project will help manage climate-related risks and opportunities and contribute to achieving Canada’s commitments under the Paris Agreement and goal of net zero by 2050.
Projects that expect to have eligible expenses of $100 million or greater over the life of the project based on project plans would generally be required to undergo an initial project tax assessment aimed at identifying the eligible expenses, and the applicable rates, based on initial project design.
As for CCUS projects that expect to have eligible expenses of $250 million or greater over the life of the project based on project plans, they would be required to contribute to public knowledge sharing in Canada in order to be eligible for the CCUS Tax Credit.
Credit Rates and Capital Cost Allowances
Applicable rates vary between 37.5% and 60% for eligible expenses incurred after 2021 through 2030. For eligible expenses incurred after 2030 through 2040, the rates are reduced to a bracket between 18.75% and 30%.
Additionally, two new capital cost allowance classes would be established for CCUS equipment. One would include capture, storage and transportation equipment and be depreciable at an 8% rate, on a declining-balance basis. The other would include equipment required for using CO2 in an eligible use and be depreciable at a 20% rate, on a declining-balance basis. These classes would be eligible for enhanced first-year depreciation under the Accelerated Investment Incentive.
Finally, two other new capital cost allowance classes would be established for intangible exploration expenses and development expenses associated with storing CO2. These would be depreciable at rates of 100% and 30% respectively, on a declining-balance basis.
Clean Technology Tax Incentives – Air-Source Heat Pumps
Budget 2022 proposes to expand capital cost allowance (“CCA”) classes 43.1 and 43.2, which provide access to accelerated depreciation rates, to include air-source heat pumps primarily used for space or water heating. Changes in the eligibility criteria for classes 43.1 and 43.2 are proposed to include systems that transfer heat from the outside air and remove eligibility for energy equipment that backs up an air-source heat pump system or distributes heated or cooled air or water within a building. Changes to expand eligibility apply in respect of property available for use on or after Budget Day, where it has not been used or acquired for use for any purpose before Budget Day.
Budget 2021 proposed to reduce the federal general corporate tax rate from 15% to 7.5% and the federal small business tax rate from 9% to 4.5% for qualifying zero-emission technology manufacturers for income from eligible manufacturing activities. Budget 2022 proposes to include the manufacturing of air-source heat pumps used for space or water heating as an eligible zero-emission technology manufacturing or processing activity.
Elimination of Flow-Through Shares for Oil, Gas, and Coal Activities
Under a flow-through share agreement, a corporation may renounce or "flow-through" certain exploration and development expenditures to investors. The investor may subsequently deduct the expenditures in calculating their taxable income (and the corporation is prohibited from deducting such expenditures). Currently, a corporation may renounce various types of expenditures relating to mining, oil, gas, and coal activities.
Budget 2022 proposes the elimination of the flow-through share regime for oil, gas, and coal activities. Proposed amendments will eliminate the ability of a corporation to renounce oil, gas, and coal exploration and/or development expenditures to a flow-through share investor. The restriction would apply to any expenditures renounced under a flow-through share agreement entered into after March 31, 2023.
Critical Mineral Exploration Tax Credit
A holder of flow-through shares may also be eligible for the mineral exploration tax credit (the “METC”). The credit is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to the holder of flow-through shares.
Budget 2022 proposes the introduction of a new exploration tax credit: the Critical Mineral Exploration Tax Credit (the “CMETC”). A flow-through shareholder may claim a CMETC equal to 30% of expenditures (i) incurred as part of an exploration project targeting certain specified minerals, and (ii) renounced to the flow-through shareholder. The specified minerals include copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium (all of which are necessary for the production or processing of zero-emission vehicles, advanced materials, clean technology, and/or semi-conductors). A flow-through shareholder will not be able to claim both the METC and the CMETC in respect of the same expenditures.
The CMETC will 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
In general, a CCPC is liable for a federal income tax at a reduced rate of 9% in respect of the first $500,000 of qualifying active business income earned by the CCPC in a taxation year (versus the general 15% corporate tax rate). This $500,000 limit is referred to as the “business limit”.
The ITA reduces this business limit on a straight line basis to the extent: (i) the CCPC and its associated corporations have between $10,000,000 - $15,000,000 of taxable capital employed in Canada (i.e. the ITA reduces the business limit of the CCPC for every additional dollar of taxable capital employed in Canada in excess of $10,000,000 and the business limit will be nil if the taxable capital employed in Canada exceeds $15,000,000); and/or (ii) the CCPC and its associated corporations earn between $50,000 - $150,000 of passive income in a taxation year (i.e. the ITA reduces the business limit of the CCPC for every additional dollar of earned passive income in excess of $50,000 and the business limit is reduced to nil if passive income exceeds $150,000). The business limit will be equal to the lesser of the two amounts determined by the two straight-line reduction methods.
Budget 2022 proposes a modification to the first straight line reduction method above, increasing the straight-line range over which the ITA reduces the business limit of a CCPC to a range of $10,000,000 - $50,000,000 (versus $10,000,000 - $15,000,000). The change will allow medium-sized CCPCs to continue to benefit from the application of the reduced 9% federal income tax rate, even if the taxable capital of the CCPC employed in Canada exceeds $15,000,000. The new measures will apply to taxation years beginning after Budget Day.
Application of the General Anti-Avoidance Rule to Tax Attributes
The Federal Court of Appeal held in 1245989 Alberta Ltd. v. Canada (2018 FCA 114) that the GAAR did not apply to a transaction that resulted in an increase in a tax attribute that had not yet been utilized to reduce taxes. In response to this outcome and noting that this reasoning has since been applied in subsequent cases, Budget 2022 proposes that the ITA be amended to provide that the GAAR can apply 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.
Private corporations are subject to additional taxes on investment income under Part IV of the ITA with regards to portfolio dividends and under Part I with regards to other investment income where the private corporation also qualifies as a CCPC. The additional taxes are generally wholly or partially refundable following the payment of taxable dividends by the corporation. The policy behind the refundable taxes is to eliminate any tax-deferral opportunity on investment income compared to circumstances where the shareholder directly earns the investment income.
The refundable tax mechanism under Part I of the ITA can be avoided by the corporation not qualifying as a CCPC. For instance, it may be resident in Canada but continued under the corporate laws of another country. Alternatively, it may be controlled by an intermediate non-resident entity. Budget 2022 proposes a new concept of “substantive CCPCs” that would be private corporations resident in Canada that are not CCPCs but that are controlled in law or in fact, directly or indirectly, by Canadian-resident individuals. In addition, a deeming rule would treat a private corporation as a substantive CCPC where Canadian individuals, in aggregate, own sufficient shares to control (in law) the corporation if all such shares were held by one person. Importantly, a substantive CCPC would include a corporation that would otherwise be CCPC but for a non-resident or a public corporation having a right to acquire its shares or because it ceased to be a Canadian corporation (for example, because it continued under foreign corporate law but remained resident in Canada). Substantive CCPCs are to be subject to the same refundable tax mechanism under Part I of the ITA that is applicable to CCPCs. Further, the investment income earned by a substantive CCPC would be added to its “low rate income pool”, which when paid out as a dividend to individual shareholders is not eligible for the enhanced dividend tax credit. CCPCs and their shareholders are entitled to certain preferences under the ITA that will continue to not be available to substantive CCPCs and their shareholders. Generally, these amendments apply to taxation years ending after Budget Day. However, there is an exception for taxation years ending due to an acquisition of control caused by the sale of all or substantially all of the shares of a corporation to an arm’s length purchaser where the purchase and sale agreement is entered into before Budget Day and the share sale closes before the end of 2022.
Deferring Tax Using Foreign Resident Corporations
Canada has foreign accrual property income (FAPI) rules designed to prevent Canadian taxpayers from achieving tax deferrals by earning investment income and other highly mobile income through controlled foreign affiliates. The FAPI rules provide for current taxation of the Canadian shareholders on their participating share of a controlled foreign affiliate’s FAPI. Double taxation is avoided by way of a grossed-up deduction that acts a proxy for a foreign tax credit on FAPI to be included in a resident shareholder’s income.
Budget 2022 proposes to reduce the amount of this grossed-up deduction for CCPCs and substantive CCPCs to correspond to the gross-up that applies to individual shareholders of a controlled foreign affiliate rather than the higher gross-up generally applicable to corporate shareholders.
Under the Budget 2022 proposal, a controlled foreign affiliate would need to be subject to foreign tax on its FAPI at a rate of at least 52.63% in order for its CCPC or substantive CCPC shareholders to obtain a deduction that fully offsets their FAPI related income inclusion, whereas a full deduction is generally available for resident corporate shareholders where the foreign tax rate is at least 25%. Further amendments are proposed to achieve tax integration of after-tax FAPI distributed as dividends to CCPCs and substantive CCPCs and further distributed to Canadian resident individual shareholders. That tax integration is to be achieved through additions to the capital dividend account. Technical amendments to the capital dividend account and general rate income pool of a CCPC and substantive CCPC are to be made to achieve such integration. Corresponding amendments to the capital dividend account and general rate income pool will apply to other dividends received from a foreign affiliate of a CCPC or substantive CCPC paid out of the foreign affiliate’s hybrid surplus (relating to certain foreign affiliate capital gains) and taxable surplus (generally relating to FAPI and active business income earned in a country with which Canada has neither a tax treaty nor a tax information exchange agreement).
Consultation on International Tax Reforms
Budget 2022 noted that Canada is among 137 countries that have agreed to the Pillar One and Pillar Two tax proposals developed by the OECD. Pillar One’s purpose is to re-allocate a portion of taxing rights on profits of the largest multinational enterprises (MNEs) to market jurisdictions where customers are located. Long established principles of allocating tax jurisdiction based on the residency of subsidiaries of an MNE and the location of permanent establishments are considered inadequate with the digitalization of the economy. Under the Pillar One proposals, MNEs having global revenues in excess of €20 billion and profit margins above 10% may be subject to a re-allocation of 25% of “residual profits”, being profits in excess of 10% of revenue, to market countries using a revenue-based allocation key. Profit will be based on financial accounting income, subject to a limited number of adjustments. MNEs carrying on extractive businesses or that are regulated financial institutions will be excluded from Pillar One. The Federal Government notes that it is working with other countries to develop model Pillar One rules for incorporation in domestic legislation and a multilateral convention. However, as a back-up in case the Pillar One regime is not implemented, the Federal Government may impose its previously announced Digital Services Tax as of January 1, 2024 but in respect of revenues commencing January 1, 2022.
Pillar Two is an international framework for a minimum tax for MNEs with annual revenue of €750 million or more. It is meant to ensure that a minimum effective tax rate of 15% applies in each jurisdiction in which the MNE operates. The core charging rules under Pillar Two are an Income Inclusion Rule ("IIR") and an Undertaxed Profits Rule ("UTPR"). The IIR is intended to be applied by the country in which an ultimate parent entity is resident to top-up tax on income earned in jurisdictions where the effective tax rate is less than 15%. This tax may be offset by a local top-up tax designed to impose a 15% minimum tax. The UTPR backstops the IIR where neither the ultimate parent jurisdiction nor any intermediate jurisdiction imposes the IIR. Other jurisdictions in which the MNE operates may impose the UTPR to top-up tax with the top-up tax being allocated among such UTPR jurisdictions on a formulaic basis. In Budget 2022, the Federal Government announced that Canada will implement Pillar Two along with a domestic minimum tax top-up applicable to Canadian entities of an MNE within the scope of Pillar Two. The Federal Government also announced a consultation process to adapt Model Rules published by the OECD to the Canadian legal and tax context. However, the consultation does not extend to policy or major design aspects of the Model Rules. Written submissions under the consultation need to be made by July 7, 2022.
Exchange of Tax Information on Digital Economy Platform Sellers
Budget 2022 proposes to implement the OECD model rules for digital platform operators. The measure would require certain platform operators (“Reporting platform operators”) to determine the jurisdiction of residence of certain of their sellers (“reportable sellers”) and to report certain information on these sellers.
Reporting platform operators will be those entities that are:
- contracting directly or indirectly with sellers to make the software that runs a platform available for the sellers to be connected to other users; or
- collecting compensation for the relevant activities (e.g. personal services, real property rentals) facilitated through the platform.
Exemptions will exist in respect of software that exclusively facilitates the processing of compensation in relation to relevant activities; the mere listing or advertising of relevant activities; and the transfer of users to another platform, provided, in each case, that there is no further intervention in the provision of relevant activities.
These measures will generally apply to platform operators that are resident in Canada for tax purposes and to those that are not resident in Canada but which facilitate relevant activities by sellers resident in Canada or with respect to rental of immovable property located in Canada.
There will be carve-outs from these measures for certain platform operators, including for those that have no reportable sellers and those that elect out of reporting on the basis that compensation from facilitating relevant activities was below a specific threshold.
Reportable sellers will generally be active users who are registered on a platform to provide relevant services or sell goods, but with specific exemptions for governmental entities, certain public companies, large hotels and sellers with very low volume, low value sales.
Reporting platform operators will generally need to complete due diligence procedures to identify reportable sellers and their jurisdiction of residence and report specified information to the CRA on an annual basis. The CRA will then exchange this type of information with partner jurisdictions.
This measure will apply to calendar years beginning after 2023, which will allow the first reporting and exchange of information to take place in early 2025 with respect to the 2024 calendar year.
Interest Coupon Stripping
Budget 2022 introduces a specific anti-avoidance rule intended to prevent certain tax planning relating to the reduction of Canadian non-resident withholding tax on interest payments under an “interest coupon stripping arrangement”.
This new anti-avoidance rule should not impact on loans to Canadian borrowers where the non-resident lender deals at arm’s length with the borrower, as interest payable on such loans is generally exempt from Canadian non-resident withholding tax under the existing provisions of the ITA.
The tax planning that is targeted by this new rule relates to loans to Canadian resident borrowers from non-resident lenders who do not deal at arm’s length with the borrower (e.g. a foreign parent corporation or other related entity). Where non-resident lenders are paid interest from Canadian resident borrowers with whom they do not deal at arm’s length, the ITA imposes a 25% withholding tax on the gross amount of such interest, subject to reduction under an applicable tax treaty between Canada and the jurisdiction within which the recipient of interest is a resident. Typically, the rate of withholding tax under most of Canada’s tax treaties is reduced to 10% or 15%. However, the Canada – US Tax Convention (the “Treaty”) provides that interest paid to a U.S. resident is generally exempt from Canadian withholding tax, even in circumstances when it is paid to a non-arm’s length person that is eligible to claim benefits under the Treaty.
In order to avoid the withholding tax that would otherwise be payable on interest paid to a non-resident lender, the interest coupon on a loan payable by Canadian resident borrower was sold by the non-arm’s length lender to a US resident who is a “qualifying person” under the Treaty or to a recipient who is resident in Canada. The non-resident lender would continue to be entitled to be paid the principal amount of the loan. When the interest payments are ultimately paid by the Canadian resident borrower to the new owner of the interest coupon, the interest payments would either be exempt from Canadian withholding tax under the Treaty or would not be subject to withholding tax, as the interest coupon is paid to another Canadian resident person.
To prevent this type of planning, any interest paid under an interest coupon stripping arrangement will effectively be denied the reduced withholding tax rate. Proposed subsection 212(21) of the ITA provides that the applicable withholding tax rate on interest under paragraph 212(1)(b) will be adjusted where the following two conditions are met:
(a) the Canadian resident borrower pays interest to a person or partnership (the “interest coupon holder”) in respect of a debt or other obligation owed to another person or partnership that is either (i) a non-resident person with whom the borrower is not dealing at arm’s length, or (ii) a partnership (other than a “Canadian partnership” – a partnership where all of the partners are resident in Canada) (the “non-arm’s length creditor”); and
(b) the withholding tax that would be payable in respect of the interest, if the interest was paid to a non-arm’s length creditor rather than the interest coupon holder is greater than the withholding tax payable on such interest, determined without reference to this provision.
Where these conditions are satisfied, the Canadian resident borrower is generally deemed, for purposes of paragraph 212(1)(b) to have paid the interest to the non-arm’s length creditor and, where such interest was not otherwise subject to withholding tax, it would be subject to a withholding tax rate equal to the rate that would have been imposed in respect of the interest if it had been paid to the non-arm’s length creditor. If the payment of interest to the interest coupon holder was subject to withholding tax then the rule deems the rate to be equal to the difference between the rate that would have applied on interest paid to the non-arm’s length creditor and the rate of withholding tax imposed on the interest paid to the interest coupon holder.
An exception to these rules applies to certain “specified publicly offered debt obligations”.
The rules applicable to interest coupon stripping arrangements will apply in respect of interest that accrues on or after Budget Day and is payable by a Canadian resident to an interest coupon holder in respect of debt or other obligations owed to a non-arm’s length creditor. However, there is some transition allowed as the rules will not apply until April 7, 2023 to interest paid or payable in respect of a debt or other obligation incurred by a Canadian resident before Budget Day to an interest coupon holder that deals at arm’s length with the non-arm’s length creditor and that acquired the interest coupon as a consequence of an agreement, in writing, entered into before Budget Day.
Residential Property Flipping Rule
To address concerns that certain individuals are not properly reporting their profits from the disposition of real estate that was purchased with the intention of reselling the property in a short period of time (i.e. flipping) to realize a profit, Budget 2022 proposes to introduce a new deeming rule that will apply to residential properties sold on or after January 1, 2023. If the rule applies, profits from the disposition of residential property, including a rental property, that was owned for less than 12 months will be deemed to be business income and not a capital gain, and the principal residence exemption will not be available.
There are some important exceptions to the deeming rule – if the disposition of the property is in relation to one or more of a number of enumerated life events, the deeming rule will not apply. These life events include the following: death or anticipated death, addition of an individual or individuals to a household, separation from a spouse or common-law partner for a period of at least 90 days on a relationship breakdown, personal safety, disability or serious illness, employment change requiring a person to relocate to work at a new location where the new home is at least 40 kilometers closer to the new work location, involuntary termination of employment, insolvency, or an involuntary disposition such as expropriation or destruction of the property due to a natural or man-made disaster.
In circumstances where the deeming rule does not apply because of a life event or because the property was owned for 12 months or more, it will remain a question of fact whether the profits realized from the disposition are taxable as business income.
Annual Disbursement Quota for Registered Charities
Registered charities are generally required to expend a minimum amount each year. Currently, the disbursement quota is 3.5% of the registered charity’s property not directly used in charitable activities or administration. This is intended to ensure both timely disbursement of funds towards charitable purposes, and still allow asset growth in the charitable sector to support future charitable activities.
Budget 2022 proposes to increase the disbursement quota to 5% for the portion of property in excess of $1 million that is not used in charitable activities or administration. It is intended to increase overall charitable expenditures, but at the same time accommodate smaller charities that may not be able to earn the same investment returns as larger ones. In addition, the ITA will be amended to clarify that expenditures for administration and management will not be considered qualifying expenditures for purposes of satisfying a charity’s disbursement quota.
In circumstances where a charity is unable to meet its disbursement quota, it may apply to the CRA for relief from the requirement, which, if granted, deems the charity to have a charitable expenditure for the taxation year. Budget 2022 proposes to amend this rule to allow the CRA to have discretion to grant a reduction in the charity’s disbursement quota obligation for any particular year to better reflect actual expenditures spent on charitable activities. In addition, to improve transparency, the CRA will be allowed to publicly disclose information related to a decision to reduce a charity’s disbursement quota obligation.
The ITA currently allows a charity to apply to the CRA for permission to accumulate property for a specific purpose. If permission is granted, any property accumulated in accordance with the approval, including any income earned, is ignored in calculating a charity’s disbursement quota. In light of prior changes that simplified the disbursement quota spending requirements and existing provisions available to provide relief to charities, the accumulation of property rule will be removed.
These measures will be applicable to charities in respect of their fiscal periods beginning on or after January 1, 2023. With respect to the removal of the accumulation of property rule, it will not apply to approved property accumulations resulting from applications for accumulation submitted by the charity prior to January 1, 2023.
Under the ITA, a registered charity is limited to devoting its resources to charitable activities it carries on or to providing gifts to qualified donees. If activities are conducted through an intermediary organization that is not a qualified donee, the charity must maintain sufficient control and direction over the activity such that the activity can be considered that of the charity.
In order to improve the operation of these rules, Budget 2022 proposes to allow charities to make qualifying disbursements to organizations that are not qualified donees, provided that the disbursements are in furtherance of the charity’s charitable purposes and that the charity ensures that the funds are applied to charitable activities by the recipient of the disbursement. In addition, in order for the disbursement to be a qualifying disbursement, charities will be required to maintain certain mandatory accountability requirements that are designed to ensure that the resources will be used for charitable purposes.
While a full list of such measures has not been spelled out, Budget 2022 states that the measures will include the following: having a written agreement between the charity and the recipient containing terms and conditions of the grant, record keeping requirements, and a covenant to return funds to the charity which were not used for the purposes for which they were granted; conducting a pre-grant inquiry sufficient to provide reasonable assurances that the charity’s resources will be used for the purposes set out in the agreement, including a review of the identity, past history, practices, activities and areas of expertise of the grantee; monitoring the grantee, including through the receipt of periodic reports (at least annually) and taking remedial action as required; receiving and approving detailed final reports from the grantee which will among other things, detail the results achieved with the funds, how the funds were spent (including through supporting documentary evidence); and the charity publicly disclosing on its annual information return information relating to grants above $5000. In addition, Budget 2022 proposes to require a charity to, upon request, take all reasonable steps to obtain receipts, invoices, or other evidence from grantees to demonstrate that amounts were spent properly.
Since these new proposals could increase the risk of a charity acting as a conduit for donations to other organizations, Budget 2022 also proposes to extend an existing provision in the ITA to prohibit a registered charity from accepting a gift, the granting of which was expressly or impliedly conditional on making a gift to a person other than a qualified donee.
These measures will apply as of Royal Assent of the enacting legislation.
Borrowing by Defined Benefit Pension Plans
A registered pension plan is currently restricted from borrowing money except in limited circumstances. Borrowing is allowed to acquire income-producing real property where the borrowed amount does not exceed the cost of the real property and the real property is the only security for the loan. Borrowing is also permitted where the term of the loan does not exceed 90 days and the property of the plan is not, except in limited circumstances, pledged as security for the loan.
Budget 2022 proposes to provide more borrowing flexibility to defined benefit registered pension plans but maintaining the borrowing rule for real property acquisitions and replacing the 90-day term limit with a limit on the total amount of additional borrowed money. This limit on additional borrowed money would be equal to the lesser of (i) 20% of the value of the plan’s assets (net of unpaid borrowed amounts); and (ii) the amount, if any, by which 125% of the plan’s actuarial liabilities exceeds that value of the plan’s assets (net of unpaid borrowed amounts). The new borrowing limit would be redetermined on the first day of each fiscal year of the plan based on the value of the assets and unpaid borrowed amounts on that day and the actuarial liabilities on the effective date of the plan’s most recent actuarial valuation report. A redetermined limit would not apply to borrowings entered into before that time.
Administrators are reminded that existing standards contained in the provisions of federal or provincial pension benefits standards legislation will continue to apply.
This proposal will apply to amounts borrowed by defined benefit registered pension plans (other than individual pension plans) on or after Budget Day.
Reporting Requirements for RRSPs and RRIFs
Currently, financial institutions are subject to different levels of reporting depending on whether the plan being administered is a registered retirement savings plan (“RRSP”), a registered retirement income fund (“RRIF”), or a tax-free savings account (“TFSA”). For RRSPs and RRIFs, a financial institution administering the plan is required to annually report to CRA the payments out of and contributions to each RRSP or RRIF. However, with respect to TFSAs, the financial institution is required to file a comprehensive annual information return, which includes the fair market value of property held in the account.
For the 2023 and subsequent taxation years, financial institutions will be required to annually report to the CRA the total fair market value, determined at the end of the calendar year, of property held in each RRSP or RRIF that is administered by it.
GST/HST Health Care Rebate
Certain charities and non-profit organizations that provide health care services can claim rebates of their GST/HST expenses at the higher rates once available only to hospital authorities. At present, one of the conditions to be eligible for these higher rebate amounts is that such charities or non-profit organizations must deliver the health care service with the active involvement of, or on the recommendation of, a physician, or in a geographically remote community with the active involvement of a nurse practitioner.
Budget 2022 proposes to expand the eligibility for this rebate to include a charity or non-profit organization that delivers health care services with the active involvement of, or on the recommendation of, either a physician or a nurse practitioner, irrespective of their geographical location.
This measure will generally apply to rebate claim periods ending after Budget Day in respect of tax paid or payable after that date.
GST/HST on Assignment Sales by Individuals
At present, when a residential complex is acquired from a builder under a purchase agreement and prior to the completion of that sale, the rights under the purchaser agreement are assigned to a new buyer, the application of the GST/HST to the assignment will depend on a number of factors; such an assignment could be fully taxable or it could be exempt from GST/HST.
To increase the certainty surrounding the application of GST/HST to such assignments, Budget 2022 proposes to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. As a result, the GST/HST would apply to the total amount paid for a new home by its first occupant and ordinarily the assignor will be responsible for collecting, reporting and remitting such tax.
These changes may affect the amount of a GST New Housing Rebate or of a new housing rebate that may be available in respect of a new home.
This measure will apply in respect of any assignment agreement entered into on or after the day that is one month after Budget Day.
Taxation of Vaping Products
Budget 2022 proposes a framework for a new excise duty on vaping substances that are not otherwise subject to duty under the Cannabis excise duty framework or that are produced by individuals for personal use. The framework will impose licensing requirements and will require licensees to apply excise stamps to vaping products that will ultimately be sold in the retail market.
These measures will come into force on October 1, 2022. Transitional rules will allow retailers to sell unstamped inventory that they have at October 1, 2022 until January 1, 2023.
Cannabis Taxation Framework and General Administration under the Excise Act, 2001
Excise Duty Quarterly Remittances
Budget 2022 proposes to allow licensed cannabis producers to remit excise duties on a quarterly rather than monthly basis, starting from the quarter that began on April 1, 2022. This option will only be available in respect of a fiscal quarter, beginning on or after April 1, 2022, of a licensee that was required to remit less than a total of $1 million in excise duties during the four fiscal quarters immediately preceding that fiscal quarter.
Contracts-for-Service – Cannabis Framework
Budget 2022 proposes to allow the CRA to approve certain contract-for-service arrangements between two licensed cannabis producers. These approved arrangements will permit two licensed producers to:
- transfer stamps, and packaged but unstamped products, between them;
- stamp and enter cannabis products into the retail market that have been packaged by the other producer; and
- pay the excise duty on cannabis products that were stamped by the other producer.
This measure will come into force upon Royal Assent of the enabling legislation.
Penalties – Cannabis Framework
Budget 2022 proposes to amend the penalty provision for lost excise stamps so that the higher penalty for losing stamps for a province or territory with an additional cannabis duty adjustment only applies if the adjustment rate is greater than 0 per cent.
Budget 2022 also proposes to add penalty provisions that will apply to situations where unlicensed parties illegally possess or purchase cannabis products, and where licensed parties illegally distribute cannabis products.
These measures will come into force upon Royal Assent of the enabling legislation.
Licences – Cannabis Framework
Budget 2022 proposes to exempt holders of a Health Canada-issue Research Licence or Cannabis Drug Licence from the requirement to be licensed under the excise duty regime.
Budget 2022 also proposes to allow the CRA to issue licences that would be valid for up to the lesser of five years or the longest period for which the relevant Health Canada licence or licences are valid.
These measures will come into force upon Royal Assent of the enabling legislation.
Budget 2022 confirms the Federal Government’s intention to proceed with previously announced tax and related measure as modified in response to consultations and deliberations:
- legislative proposals relating to the Select Luxury Items Tax Act released on March 11, 2022;
- legislative proposals released on February 24, 2022 in respect of various tax measures;
- legislative proposals tabled on December 14, 2021 to introduce the Digital Services Tax Act;
- legislative proposals released on December 3, 2021 with respect to Climate Action Incentive payments;
- the income tax measure announced in Budget 2021 with respect to Hybrid Mismatch Arrangements;
- the transfer pricing consultation announced in Budget 2021;
- the anti-avoidance rules consultation announced on November 30, 2020 in the Fall Economic Statement;
- the income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year; and
- measures confirmed in Budget 2016 relating to the GST/HST joint venture election.
Budget 2022 reaffirms the Federal Government’s commitment to move forward as required with technical amendments to improve the certainty and integrity of the tax system.