Small Business Guide to the 2022 Canadian Federal Budget

Deputy Prime Minister and Minister of Finance Chrystia Freeland delivered the 2022 Federal Budget Yesterday. This is the liberal government’s seventh budget since 2015. This one is a bit different than his others!

Overall, this is not pandemic heavy, almost pretends COVID is done for expense purposes. However, there is still an awful amount of spending included. You’ll note that there are no increases in personal taxes discussed in the budget.

Liberal government doubling down on growth and reinvesting. Liberal government likes to look at Debt as % of GDP. Which they say will be decreasing from 46.5% (2021-22) to 41.5% (2026-2027). This is high compared to historic standards, but low when you compare to G7 countries.

The Budget mentions “Tax” 373 times in it’s 304-page document. We examine the crucial impacts to small business owners here today.

Summary

Lots of tax measures in this budget. Series of new taxes for banks, insurers and international organizations involved in very aggressive tax planning. Has a few leniencies for small business owners (if you can qualify), but discusses broad impact for earners over an odd definition of high income earners. Relief for home owners and intended home owners is also expected. 

Major announcements

For businesses

  • Canada Recovery Dividend – Banking and life insurers’ groups will pay a one-time 15 per cent tax on taxable income above $1B for the 2021 tax year. Which will be paid over 5 year period in installments.
    • It’s a very strange one-time tax, that’s actually only paid equally over the next 5 years.
  • Increased corporate tax rate(Bank and insurance) – Banking and life insurance groups will see an increase in corporate tax rate from 15% to 16.5%.
      • Lots of the budget will be funded by these two additional taxes. In addition to the additional tax revenue expected from increase in price of oil.
  • CCPC Manipulation
      • CCPC allows for preferential tax treatment as a Canadian Controlled Private Corporation(CCPC). They will amend the Income tax Act (ITA) to stop certain international foreigners from abusing rules to access CCPC designation.
  • Tightening of Bill C-208 – Some aggressive business owners were exploiting a gap in previous legislation to “pretend” to sell their business to their kids and buy it back soon after.
  • GAAR – Expansion
      • General Anti-Avoidance Rule (GAAR) will be amended to apply to transactions that have not yet been used to reduce taxes.
        • Initiated from a Court Case in which Tax Courts found the company was in the wrong, but the company had not YET received any tax benefit(as it was saving it for later).
      • Government plans to “Modernize” GAAR and hold consultations with relevant stakeholders.
        • Expanding GAAR is always a bit scary because GAAR is an overarching rule that CRA uses to contest tax planning from business owners.
  • Small Business Deduction – Erosion
      • If you have over $15M in a capital employed in your business you start to lose on the small business deduction. Government will increase this to $50M, so that slightly larger smaller businesses don’t lose access to the small business tax rate.
      • This does not change the erosion of $50K-$150K/year in passive investment income.
    • 15% Global Tax – Government is still moving forward on this initiative. OECD’s BEPS (pillar 1 and 2). Which will be a global minimum corporate tax of 15% and an allocation model that will distribute the tax dollars based on the company’s location of customers.

 

For individuals

  • Alternative Minimum Tax (AMT) review – New minimum 15% tax on high income earners that find multitude of tax credits.
    • 28% of people who make over $400K pay less than 15% income tax
    • New undisclosed measures coming
    • Governments wants to incentivize certain activities by providing a tax benefit to those who do that activity. So, some taxpayers do that activity in order to get that tax incentive. But now the CRA backpedals and makes you pay tax on it anyways.
      • Includes: Capital Cost Allowance(CCA), some losses from partnerships, carrying charges, income from flow-through shares, etc
      • This includes 2x your taxable Capital Gains
    • AMT has not been substantially updated since it was enacted 1986. Some would say is already punitive.
    • We’ll see what happens
  • Home Ownership Incentives
      • Lots of help with making purchasing easier, but that won’t help much unless there are more homes to buy. Making it easier to buy does not help lower prices of homes, just makes it easier to buy them.
      • The people you’re bidding against have the exact same government benefit, so people can afford to offer more for a house.
    • Tax-free First Home Savings Account – Tax free account to help new home buyers save for their first home.
      • $40K Maximum ($8K per year)
      • Tax deduction when you contribute (Like a RRSP)
      • Tax free withdrawals (even better than RRSP)
      • Can’t use both RRSP Home Buyers Plan and this program.
    • Doubling the First-Time Home Buyers Tax Credit to $10K
    • Doubling the Home Accessibility Tax Credit
    • Banning foreign ownership of homes
      • Prohibit foreign ownership for people and companies who are not Canadian citizens or permanent residents from acquiring property in Canada for a period of two years.
        • That’s an odd measure, given that non-resident owners accounted for only 4-5% of homes in 2020. Good for Canadians who vote I guess.
    • Multigenerational Home Renovation Tax credit
      • If you’re creating a secondary dwelling in your home for a parent, you can get $7,500 in refundable support for constructing that secondary suite for a senior (or adult with disability)
    • Continuing the First-Time Home Buyer incentive (shared equity) with federal government. It’s a bad idea anyways for buyers, so we don’t recommend it.
    • Anti-Flipping Tax – For residential properties bought and sold within 12 months
      • Geared to people who were claiming these properties as principal residence and making gains tax free, or they were claiming a regular capital gain. Risky game to claim primary residence so many times anyways. This gives CRA the power to tax at full business income rates instead.
      • Effective on properties sold on or after Jan 1, 2023. Sell property before then!

Shifty stuff

  • If you’re into some shifty accounting and money laundering, watchout! Because FINTRAC is getting an extra 24% increase in funding, to focus on crowdfunding platforms, crypto world and modernize its intelligence.
  • Reinforcing CRA – The 2022 Federal Budget is investing heavily into CRA. More than doubling the CRA Budget from 2021 Fiscal to 2024 Fiscal. We all love getting CRA calls, and now we just might get more of them. They will expand audits of larger entities and non-residents engaged in aggressive tax planning; increase both the investigation and prosecution of those engaged in criminal tax evasion; and to expand its educational outreach. So truthfully, if you’re getting a call from these initiatives, you’re in big doo doo.

Other

  • Canada Caregiver Credit – There was speculation that we would see the Canada Caregiver Credit converted from a non-refundable to refundable credit. Unfortunately, we did not see that in the budget.

Now what?

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Eric Saumure, CPA, CA, Principal

Eric Saumure, CPA, CA, Principal

Eric is a recognized Chartered Accountant (CA) and Chartered Professional Accountant (CPA) in the province of Ontario.
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