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This year’s federal budget has a variety of tax measures affecting individuals, corporations and charities. Here are some of the highlights.
A new alternative minimum tax?
Currently, the top federal tax rate of 33 per cent kicks in at income of more than $221,708 for 2022. The budget didn’t introduce a rate change, but the government expressed concern that “some high-income Canadians still pay relatively little in personal income tax as a share of their income.” For example, 28 per cent of filers with gross income above $400,000 pay an average federal tax rate of 15 per cent or less by using a variety of tax deductions and tax credits.
Canada already has an Alternative Minimum Tax (AMT), which has been around since 1986, but it hasn’t been substantially updated since its introduction. As a result, the budget said the government will be exploring a new minimum tax regime, expected to be unveiled in the fall 2022 economic update.
The budget contained a variety of new tax measures for homeowners. For starters, we got more info about the upcoming Tax-Free First Home Savings Account (FHSA), a new registered account. FHSA contributions would be tax deductible and income earned in an FHSA would not be taxable while in the plan, nor taxable when withdrawn to buy a first home.
To open an FHSA, you must be at least 18 years of age and a resident of Canada. In addition, you can’t have lived in a home that you owned either in the year you open the account or during the prior four calendar years. Individuals can only participate once in their lifetime and, once the funds are withdrawn to purchase a home, the FHSA must be closed within one year from the first withdrawal.
There’s a lifetime contribution limit of $40,000, and an annual contribution limit of $8,000, beginning in 2023. Unlike registered retirement savings plan (RRSP) or tax-free savings account (TFSA) contributions, unused annual contribution room cannot be carried forward, meaning an individual contributing less than $8,000 in a given year would still face an annual limit of $8,000 in subsequent years.
To provide greater flexibility, you’ll be able to transfer funds from an FHSA to an RRSP or registered retirement income fund (RRIF) on a tax-deferred basis. Transfers to an RRSP or RRIF won’t be taxable at the time of transfer, but amounts will be taxed when withdrawn from the RRSP or RRIF in the usual manner. Transfers will not affect RRSP contribution room in any way.
If you haven’t used the funds in your FHSA for a qualifying first home purchase within 15 years of opening the FHSA, it must be closed and any unused savings can either be transferred into an RRSP or RRIF, or it can simply be withdrawn on a taxable basis.
You’ll also be allowed to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the $40,000 lifetime and $8,000 annual contribution limits. It’s expected that individuals will be able to open an FHSA and start contributing at some point in 2023.
The government continues to be concerned with individuals who purchase residential real estate with the intention of “flipping” it by selling it in a short period of time to realize a profit. Under our tax law, profits from flipping properties are fully taxable as business income. In other words, they’re not eligible for the 50-per-cent capital gains inclusion rate nor the principal residence exemption.
In recent years, the Canada Revenue Agency has been cracking down on perceived abuse of the exemption, most recently with a letter campaign, in which the CRA sent letters to individuals “who may have applied the principal residence exemption (PRE) in error.”
The budget, therefore, proposed to introduce a new deeming rule, effective Jan. 1, 2023, to ensure that profits from flipping residential real estate are always subject to full tax. Specifically, profits from the sale of residential real estate, including a rental property, that was owned for less than 12 months would be deemed business income.
The new deeming rule won’t apply, however, if the sale of the disposition is related to a life event, including death, a household addition, separation, personal safety, disability or illness, employment change, insolvency or an involuntary disposition such as an expropriation.
The government also proposes to double the First-Time Home Buyers’ Tax Credit to $10,000, worth $1,500 in non-refundable credits, double the Home Accessibility Tax Credit for eligible home renovations up to $20,000 (up from $10,000) for alteration expenses made by seniors or those entitled to the Disability Tax Credit to make their homes more accessible.
It also plans to introduce a new Multigenerational Home Renovation Tax Credit, which would provide a 15-per-cent refundable credit for eligible expenses (up to $50,000) incurred for a qualifying renovation that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a relative.
The budget is expanding the list of medical expenses qualifying for the Medical Expense Tax Credit to include a variety of expenses individuals may incur to become parents in the areas of surrogacy, sperm, ova or embryo donations.
Corporations and charities
On the corporate side, the budget expanded eligibility for the lower nine-per-cent small-business corporate tax rate on the first $500,000 of active business income by upping the range of taxable capital over which the business limit is reduced, with the new range being $10 million to $50 million (up from $10 million to $15 million), allowing more medium-sized businesses to be able to claim the lower rate.
Finally, as predicted, the government has shut down the non-Canadian-controlled private corporation (CCPC) planning that some taxpayers have been using to avoid paying the additional refundable corporate income tax that they would otherwise pay on investment income earned in those corporations. It is also bumping up the disbursement quota for charities to five per cent (from 3.5 per cent), effective for 2023.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com
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