Contrary to rampant rumors before the Federal 2022 budget, capital gain tax rates remain unchanged as does the principal residence exemption. The budget announces the government’s intention to propose restrictions that would prohibit foreign buyers acquiring residential property in Canada for a period of two years. The budget proposals were less sweeping and more targeted. The following are our top 5 highlights, and one honourable mention.
1. Introduction of the Tax-Free First Home Savings Account (FHSA) and Doubling of the Home Buyer’s Tax Credit
Introduction of the Tax-Free First Home Savings Account (FHSA)
The budget introduced a new Tax-Free First Home Savings Account (FHSA) as of 2023 to help Canadian resident individuals 18 years and older to purchase their first home. To open an FHSA account, an individual must not have lived in a home that they owned during the calendar year in which the account is opened, or during the preceding four calendar years. The annual contribution limit is $8,000 which is tax-deductible, up to a lifetime maximum of $40,000. Any unused annual contribution room would not be carried forward to the following year. Any income earned in an FHSA is exempt from tax as are withdrawals made to purchase a first home.
The FHSA can only be used once in a taxpayer’s lifetime to fund a single property purchase and this purchase must be made within 15 years of the opening of the FHSA account. Any unused savings may be transferred to a taxpayer’s RRSP or RRIF without regard to an individual’s available RRSP contribution room. Otherwise, any withdrawals from the FHSA would be fully taxable. It will not be possible to utilize both the FHSA withdrawal and an RRSP Home Buyer’s Plan withdrawal for the same home purchase. Individuals would also be allowed to transfer funds from an RRSP to the FHSA tax-free subject to the annual and lifetime maximum contributions.
Doubling of the Home Buyer’s Tax Credit (HBTC)
The existing Home Buyer’s Tax Credit (HBTC) will be doubled to allow a maximum credit of $1,500 for the acquisition of a qualifying home made on or after January 1, 2022.
2. Residential Property Flipping
Profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months will be deemed to be business income. The purpose of this is to avoid taxpayers claiming either capital gains treatment or exempt principal residence status on these sales. This measure is applicable to residential properties sold on or after January 1, 2023. The CRA provides a list of life events exemptions to this rule which include death, separation, employment change, insolvency, and expropriation or destruction.
3. Small Business Deduction
More Canadian-Controlled Private Corporations (CCPCs) will be able to benefit from the small business deduction, which lowers the federal corporate income tax rate for CCPCs from 15% to 9% on qualifying active business income.
Currently, CCPCs with taxable capital in excess of $15M are not eligible for the small business deduction, while CCPCs between $10M and $15M are only eligible for a portion of the $500k annual small business deduction calculated on a graduated scale.
The budget proposes to increase the upper limit of the eligibility threshold to $50M, which allows more medium-sized CCPCs to be eligible for the small business deduction.
This new measure will apply to year ends beginning on or after budget day. CCPCs involved will need to stay tuned to provincial governments’ pronouncements on potential harmonization for provincial corporate income tax purposes.
4. Multigenerational Home Renovation Tax Credit
A $7,500 refundable home renovation tax credit has been proposed to assist different generations living together. This would allow eligible individuals to claim a 15% credit on up to $50,000 in eligible renovation and construction costs incurred in order to construct a secondary suite, which would allow for the accommodation of a senior family member or person with a disability, starting in 2023.
5. Medical Expenses Surrogacy Credit
The budget proposes to expand the reproductive technologies services eligible for the medical expense credit. Specifically, expenses of intended parents who decide to use a surrogate, egg, sperm or embryo donor will now qualify. Eligible expenses include fees paid to a fertility clinic for in vitro fertilization and hormone medication. In addition, if the intended parent reimburses medical expenses paid by the donor or surrogate, these expenses will also qualify for the credit to be claimed by the intended parent.
Annual Disbursement Quota for Registered Charities
The budget proposes an increased disbursement quota for registered charities with a fiscal year beginning on or after January 1, 2023. The disbursement quota on investment assets in excess of $1M is increased from 3.5% to 5%.