Un moteur de croissance : points saillants du budget fédéral de 2022‑2023

FiscAlerte 2022 number 22, April 7, 2022

^{On April 7, 2022, Canada’s Deputy Prime Minister and Minister of Finance, Chrystia Freeland, tabled the 2022–23 federal budget. The budget includes several tax measures affecting individuals and corporations, but does not include any changes to the general corporate income tax rate or personal income tax rates.}

^{Canada's Deputy Prime Minister and Minister of Finance is forecasting a deficit of $113.8 billion for the 2021-2022 fiscal year and $8.4 billion by the 2026-2027 fiscal year.}

^{Here are the highlights of the budget tabled by Canada’s Deputy Prime Minister and Minister of Finance. The key tax measures announced will be explored in more depth in our Tax Alert 2022 Issue 23, 2022–23 Federal Budget .}

Proposed measures

Measures targeting corporate income tax

• ^{Corporate income tax rate: No changes to the general corporate income tax rate have been proposed.}
• ^{Canadian Recovery Dividend and Additional Tax on Banks and Life Insurers: Introduced the Canadian Recovery Dividend (CRD) as a one-time 15% tax on groups of banks and life insurers. A group would include a bank or life insurer and any other financial institution (for the purposes of Part VI of the  Income Tax Act ) that is related to the bank or life insurer. Groups of banks and life insurers subject to the CRD would be permitted to grant an exemption from taxable income of up to $1 billion by agreement among the members of the group. The CRD obligation would be imposed for the 2022 taxation year and would be payable in equal amounts over five years. Budget 2022 also proposes to introduce an additional 1.5% tax on the taxable income of members of banking and life insurer groups (determined in the same manner as for the purposes of the DRC). Banking and life insurer groups subject to the additional tax would be permitted to grant an exemption of $100 million of taxable income by agreement between the group members.}
• ^{Investment Tax Credit for Carbon Capture, Utilization and Storage: Introducing an investment tax credit for certain types of eligible carbon dioxide (CO2) capture, utilization and storage (CCUS) equipment . This tax credit would be refundable and available to businesses that incur eligible expenditures on or after January 1, 2022. The CCUS project would be subject to the required validation and verification process, would have to meet storage requirements and would have to produce a climate financial disclosure report.}
• ^{Clean Technology Tax Incentives – Air Source Heat Pumps: Expanding eligibility under Classes 43.1 and 43.2 to include air source heat pumps used primarily for space or water heating. This expansion of Classes 43.1 and 43.2 would apply to certain eligible properties that are acquired and become available for use on or after April 7, 2022, where they have not been used or acquired for use for any purpose before April 7, 2022.}
• ^{Critical Minerals Projects in Canada  : Introducing a new 30% Critical Minerals Exploration Tax Credit (CMEC) for specified minerals. The specified minerals that would be eligible for the CMEC are: copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. The CMEC would apply to expenditures renounced under flow-through share agreements entered into after Budget Day and on or before March 31, 2027. Eligible expenditures would not benefit from both the proposed CMEC and the mineral exploration tax credit.}
• ^{Flow-through shares for oil, gas and coal activities: Elimination of the flow-through share regime for oil, gas and coal activities by no longer allowing oil, gas and coal exploration or development expenses to be renounced to a flow-through share holder. This change would apply to expenses that were renounced under flow-through share agreements entered into after March 31, 2023.}
• ^{Small business deduction: Proposal to expand the range within which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and any associated corporations. The new range would be $10 million to $50 million. This measure would apply to taxation years beginning on or after April 7, 2022.}
• ^{International Financial Reporting Standards for Insurance Contracts (IFRS 17) : In May 2021, the government announced its intention to generally support the use of IFRS 17 accounting for tax purposes. However, it was contemplated that certain adjustments would be made to recognize underwriting profits as taxable income to ensure that they remain consistent with economic activities. Specifically, it was contemplated that the contractual service margin (CSM) would not be considered a deductible reserve for tax purposes. The government’s overall objective is to recognize income for tax purposes when key economic activities occur. Budget 2022 proposes to maintain the policy intent outlined in the May 2021 statement, but also to make certain relieving amendments, as well as consequential changes, to protect the minimum tax base for life insurers.}
• ^{Hedging and Short Selling by Canadian Financial Institutions: Amendments to the Income Tax Act to:}
  • ^{deny the dividends received deduction for dividends a taxpayer receives 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 Canadian shares, where the registered securities dealer knows or ought to have known that the transactions would have such an effect;}
  • ^{deny the deduction for dividends received by a registered securities dealer on Canadian shares it holds if it eliminates all or substantially all of its economic exposure to Canadian shares by engaging in certain hedging transactions;}
  • ^{provide that in the above situations, the securities dealer may claim a full deduction, rather than two-thirds, for a dividend compensation payment it makes under a securities lending arrangement agreed in connection with the above hedging transactions.}

• ^{Application of the general anti-avoidance rule to tax attributes (“GAAR”)  : Amendment to the GAAR so that the GAAR can apply to transactions affecting tax attributes that have not yet become relevant in the calculation of tax. This measure would apply to notices of determination issued on or after April 7, 2022.}
• ^{True Intergenerational Share Transfers: A consultation process for Canadians to share their views on how the rules to prevent people from converting dividends into lower-rate capital gains using certain related party transactions could be changed to protect the integrity of the tax system while continuing to facilitate true intergenerational business transfers.}
• <sup>Canadian-controlled private corporation (CCPC) in substance: Tax deferral through foreign entities: Targeted amendments to the Income Tax Act to align the taxation of investment income earned and distributed by “in substance CCPCs” with the rules that currently apply to CCPCs. In substance CCPCs would be private corporations resident in Canada (other than CCPCs) that are ultimately controlled (in law or in fact) by individuals resident in Canada. Like the definition of CCPC, the test would contain an expanded definition of control that would accumulate shares owned directly or indirectly by Canadian resident individuals. The amendments would also ensure that a corporation is an in substance CCPC in situations where the corporation would have been a CCPC except that a non-resident or public corporation had a right to acquire its shares. This measure would apply to taxation years ending on or after April 7, 2022.
  
  Tax Deferral for Foreign-Resident Corporations: Targeted amendments to the Income Tax Act to eliminate the tax deferral benefit provided to CCPCs and their shareholders that earn investment income through controlled foreign affiliates. The deferral benefit would be addressed by applying the same appropriate tax factor to individuals, CCPCs and substantive CCPCs (i.e., the appropriate tax factor that currently applies to individuals). This rule would be accompanied by amendments to address the integration of foreign accrual property income (FAPI) when it is repatriated and distributed by CCPCs and substantive CCPCs to their individual shareholders. These measures would apply to taxation years beginning on or after April 7, 2022.</sup>

Tax measures targeting individuals

• ^{No changes to personal income tax rates have been announced.}
• ^{Residential Real Estate Rush Resale Rule: Introducing a new deeming rule to ensure that profits from a rush resale of residential real estate are always subject to full taxation. In particular, profits from dispositions of residential real estate (including rental property) that have been owned by the taxpayer for less than 12 months would be deemed to be income from a business. The new deeming rule would not apply if the disposition of the property related to certain specific life events. The measure would apply in respect of residential real estate sold on or after January 1, 2023 .}
• ^{Tax-Free Savings Account for First-Time Home Buyers : Creation of a Tax-Free Savings Account for First-Time Home Buyers (TFAPP), a new registered account allowing individuals to save for the purchase of their first home. Contributions to the TFAPP would be deductible and income earned in a TFAPP would not be subject to tax. Eligible withdrawals from a TFAPP made for the purchase of a first home would be non-taxable. The Régie d’accession à la immobilier (RAP) will remain available under the existing rules. However, an individual will not be entitled to make both a TFAPP withdrawal and a HBP withdrawal in respect of the purchase of the same eligible property.}
• ^{Multigenerational Home Renovation Tax Credit: Introduction of a proposed new refundable tax credit that would recognize eligible expenses for an eligible renovation. An eligible renovation would be a renovation that creates a second dwelling to allow an eligible person (a senior or a person with a disability) to live with certain eligible relatives. The value of the credit would be 15% of the lesser of the eligible expenses and $50,000. This measure would apply for the 2023 and subsequent taxation years, in respect of work performed and paid for and/or property acquired on or after January 1, 2023 .}
• ^{Home Buyers' Tax Credit : Increased the credit amount to $10,000, which would provide tax relief of up to $1,500 to eligible home buyers.}
• ^{Home Accessibility Tax Credit: Increased the annual spending limit for the tax credit to $20,000. This measure would apply to expenses incurred in the 2022 and subsequent tax years.}
• ^{Labour Mobility Deduction for Tradespeople: Introduces a deduction to recognize certain travel and relocation expenses of workers in the construction sector. This measure would allow certain eligible workers to deduct up to a maximum of $4,000 for certain eligible expenses per year.}
• ^{Other measures for individuals: Budget 2022 proposes several changes and new rules relating to the medical expense tax credit for surrogacy and other expenses , the Children's Special Allowances Act and the Income Tax Act , borrowing by defined benefit pension plans , and reporting requirements for RRSPs and RRIFs .}

Legislative changes affecting excise and sales taxes

• ^{GST/HST Health Care Rebate: Expanded eligibility rules for the expanded GST/HST hospital rebate to recognize the growing role of nurse practitioners in providing health care services, including in non-remote areas. The expanded hospital rebate would no longer distinguish between health care services provided by physicians and nurse practitioners.}

• ^{Taxation of Vaping Products: Implementation of a new excise duty on vaping products. The tax base for this excise duty would be vaping products that include either liquid or solid vaping substances (whether or not they contain nicotine) with an equivalency of 1 ml of liquid = 1 gram of solid. A federal excise duty rate of $1 per 2 ml, or a fraction thereof, is proposed for the first 10 millilitres of vaping substance, and $1 per 10 ml, or a fraction thereof, for volumes greater than that. If a province or territory chooses to participate in a coordinated federally administered vaping product taxation regime, an additional duty would be imposed in respect of vaping products that are subject to the duty. The proposed combined rate would be $2 per 2 ml, or a fraction thereof, for the first 10 millilitres of vaping substance, and $2 per 10 ml, or a fraction thereof, for larger volumes.}

^{The proposed federal excise duty framework for vaping products would come into effect on October 1, 2022 .}

• ^{Cannabis Taxation Framework and General Administration under the Excise Act, 2001 : Budget 2022 proposes several changes to the cannabis excise duty framework, as well as other excise duty regimes under the Excise Act, 2001  :}
• ^{Excise duty on cannabis}
  • ^{Some licensed cannabis producers may remit excise duty on a quarterly basis rather than monthly.}
  • ^{The Canada Revenue Agency may approve certain contractual service agreements between two licensed cannabis producers.}
  • ^{Holders of a research licence or a cannabis drug licence issued by Health Canada would be exempt from the requirement to obtain a licence under the excise duty regime.}
  • ^{The ARC may issue licenses valid for a longer period.}
• ^{General administration}
  • ^{Added all criteria for cancelling an excise licence, except a proactive request by a licensee to cancel their licence, to the criteria that can be used to suspend an excise licence.}
  • ^{All excise licensees and applicants for excise licenses would be required to comply with federal and provincial laws and regulations regarding the taxation and control of cannabis products.}
  • ^{Cash and transferable bonds issued by the Government of Canada would be removed from the types of financial security that could be accepted by the CRA, but bank drafts and Canada Post money orders would be added.}
  • ^{The CRA's ability to conduct virtual audits and reviews of all licensees would be confirmed, where the Agency deems it appropriate.}
• ^{Repeal of the 100% Canadian Wine Exemption: Budget 2022 proposes to repeal the excise duty exemption on 100% Canadian wine. The proposed measure would come into force on June 30, 2022.}
• ^{Beer Taxation: Excise taxes on beer containing no more than 0.5% alcohol by volume would be eliminated, aligning its tax treatment with that of wine and spirits of the same alcohol content. The proposed measure would take effect on July 1, 2022 .}

Measures targeting international taxation

• ^{Pillar One – Reallocation of taxing rights : Pillar One aims to reallocate a portion of the taxing rights on the profits of the largest and most profitable multinational enterprises (MNEs) to market countries (i.e. where their users and customers are located). In particular, for covered MNEs, 25% of residual profits, defined as profits exceeding 10% of revenue, will be allocated to market countries using a revenue-based allocation key.}

^{The Government is actively working with its international partners to develop the model rules and multilateral convention needed to establish the new multilateral tax framework and bring it into force.}

• ^{Pillar Two – Global Minimum Tax: Pillar Two aims to ensure that the profits of large MNEs are subject to an effective tax rate of at least 15%, regardless of where they are earned. The implementation of Pillar Two consists of two basic imputation rules for the additional tax: the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).}

^{Budget 2022 proposes to implement Pillar Two, along with a national minimum additional tax that would apply to Canadian MNE entities covered by Pillar Two. The Government anticipates that the draft implementation plan would be released for consultation and that the IRDT and the national minimum additional tax would come into force in 2023, starting at a date to be determined. The RPII would come into force no earlier than 2024.}

^{To enable the government to implement Pillar Two on schedule, Budget 2022 launches a public consultation on the implementation in Canada of the Model Rules and a national minimum additional tax. Interested parties are invited to provide written submissions by July 7, 2022.}

• ^{Sharing tax information on online sellers in the digital economy: Budget 2022 proposes to implement in Canada the model rules developed by the Organisation for Economic Co-operation and Development (OECD) for reporting by digital platform operators on online sellers.}

^{The Model Rules require online platforms to collect and report relevant information to tax authorities to ensure that revenue earned by taxpayers through these platforms is properly taxed.}

^{Platform operators subject to reporting would be entities that carry out one of the following activities, as applicable:}

<sup>- enter into contracts directly or indirectly with sellers in order to make available to sellers the software that operates a platform to be connected to other users;

- collect compensation for relevant activities facilitated by the platform.</sup>

^{The activities covered would be the services concerned and the sale of goods. The services concerned would be the following:}

^{- personal services, such as transport and delivery services, manual work, tutoring, data handling and administrative, legal or accounting tasks;}

^{- rental of real estate (residential or commercial property, parking spaces);}

^{- rental of means of transport.}

^{This measure would apply to calendar years beginning after 2023. This would allow the first reporting and sharing of information to occur in early 2025 for the 2024 calendar year.}

• ^{Detached Interest Coupons: Budget 2022 proposes an amendment to the rules regarding withholding tax on interest to ensure that the total withholding tax paid under a detached interest coupon arrangement is the same as if the arrangement had not been undertaken and the interest had instead been paid to the non-resident lender.}

^{Generally, a stripped interest coupon arrangement would be considered to exist where the following conditions are met: (i) a Canadian resident borrower pays or credits a particular amount to a person or partnership (interest coupon holder) as interest on a debt (other than a publicly offered debt obligation) owed by the borrower to a non-resident person with whom the Canadian resident borrower does not deal at arm's length (non-resident lender); and (ii) the tax that would be payable under Part XIII in respect of the particular amount, if it were paid or credited to the non-resident lender, is greater than the tax payable under Part XIII on the particular amount paid or credited to the interest coupon holder.}

^{Where a detached interest coupon arrangement exists, the Canadian resident borrower would be deemed, for purposes of the interest withholding tax rules, to pay an amount of interest to the non-resident lender such that the Part XIII tax on the deemed interest payment is equal to the Part XIII tax otherwise avoided as a result of the detached interest coupon arrangement.}

Tax measures targeting charities

• ^{Annual Disbursement Quota for Registered Charities: Introduced a number of changes to increase expenditures for large charities and improve the delivery and operation of the disbursement quota (“DQ”) rules, including: (i) increasing the DQ rate from 3.5% to 5% for the portion of property over $1 million that is not used for charitable activities or administration, (ii) amending it to clarify that expenses for administration and management are not eligible expenses for the purpose of meeting a charity’s DQ, and (iii) amending the existing rule so that the CRA may, at its discretion, grant a reduction to a charity’s DQ obligation for a given taxation year and allowing the CRA to publicly disclose information related to such a decision. Finally, Budget 2022 proposes to eliminate the property accumulation rule.}
• ^{Budget 2022 proposes a number of amendments to allow charities to make eligible payments to organizations that are not qualified donees, provided they meet certain reporting requirements under the Income Tax Act. Additional measures designed to ensure charities’ compliance with these new rules will follow.}

To learn more

^{To learn more about the above measures or any other topic that may be of interest to you, please contact your EY advisor or EY Law Firm.}

Renseignements sur les budgets : Pour des renseignements à jour sur les budgets fédéral, provinciaux et territoriaux, visitez notre site ey.com/ca/fr/budget.