Well, here we are - it’s budget time again. After skipping a budget release altogether in 2020 due to the Covid pandemic, April of 2021 saw the release of Chrystia Freeland’s first budget which projected a $354.2 billion-dollar deficit for 2020 and $154.7 billion projected deficit for 2021. These enormous deficits, based on the spending programs to help Canadians in the wake of the Covid-19 pandemic have become finalized with the 2020 and 2021 numbers coming in at $274.4 billions and $113.8 billion respectively.
As we approached the release of the 2022 budget, there were a number potentially contentious issues that had many Canadians concerned.
• Could tax rates to the top income earners rise?
• Would there be an increase to the capital gains inclusion rate (currently at 50%)
• Would the federal government fiddle with the Principal Residence Exemption on the sale of Canadian’s homes and apply some sort of capital gains tax?
Today we’ll explore which of these, if any came to fruition as well as discuss numerous other items of interest from the 2022 Budget.
Let’s begin with the deficit. For 2022, the federal government expects the deficit to decline to $52.8 billion and to have it continue to decline in the years to come. For many Canadians concerned with the impact of heightened government spending on both inflation in the short term and the long-term economic success as a country long term, this appears to be a step forward. Here are some of the highlights of the 2022 budget:
High Income Canadians Being Under-Taxed
The government has expressed concern that some high-income Canadians are finding significant loopholes by way of tax deductions to lower their federal tax rate significantly. According to the budget, some 28% of personal income tax filers making over $400,000 pay 15% or less in federal tax. The government will be “examining a new minimum tax regime” which should be released in the fall and will attempt to ensure these high-income earners pay their “fair share” of tax.
Tax-Free First Home Savings Account: Starting in 2023, individuals looking to buy their first home will be excited by the introduction of the Tax-Free First Home Savings Account (FHSA). This new registered account for Canadian residents aged 18 years or older allows individuals to make tax deductible contributions (like an RRSP) of up to $8,000 a year up to a lifetime contribution limit of $40,000. Investments made within the FHSA grow tax free, and like a TFSA, all withdrawals to purchase a home are also tax free. In addition, subject to the annual and lifetime contribution limits just mentioned, individuals may also contribute to the FHSA by transferring funds on a tax-free basis from their RRSP.
The FHSA account holder has 15 years from the opening of the account to purchase a qualifying first home. If the funds haven’t been used, they may either transfer the money to an RRSP or RRIF with no tax payable at the time of transfer, or the money can be withdrawn where it will be taxed as income.
First-Time Home Buyers’ Tax Credit: The budget also proposed to double the First-Time Home Buyers’ Tax Credit amount to $10,000, which would result in an additional $1500 in direct support to home buyers.
Multigenerational Home Renovation Credit: Starting in 2023, a new refundable tax credit will allow families to claim 15% of up to $50,000 in renovation costs that are incurred to construct a secondary suite for a senior or an adult with a disability.
Home Accessibility Tax Credit: This non-refundable tax credit provides assistance for individuals who renovate their home to support seniors (65 and older) and individuals who are eligible to claim the disability tax credit. The government proposes to raise the credit from $10,000 to $20,000.
Cracking Down: Canadians who “flip” real estate will find new punitive measures in the budget. Usually, real estate sold at a profit is either subject to no tax due to the Principal Residence Exemption or to a reduced tax amount as a capital gain. However, the budget focuses on eliminating those two options where speculative investing is involved. “Specifically, any person who sells a property they have held for less than 12 months would be considered to be flipping properties and would be subject to full taxation on profits as business income.”
Big Banks and Insurers Must Pay
The government has proposed a one-time tax of 15% on income over $1 billion that was earned in 2021 is to be levied on the big banks and insurers in Canada. Entitled the Canada Recovery Dividend, the government argues that spending initiatives through the pandemic insulated these financial institutions from the economic challenges that Covid-19 created, and they would like some compensation in return for that de-risking. Overall, the government expects to generate about $6.1 billion from this initiative, which will be paid over 5 years.
A second initiative by the government proposes that, for bank and life insurance groups, once their income rises above $100 million, then the tax rate they pay should also rise from 15% to 16.5%. There are a few other initiatives as well including preventing banks and insurers from using foreign corporations in tax havens to avoid Canadian tax, to closing the double deduction loophole on certain hedging strategies .
Other Items of interest in the budget:
As expected, the government is proposing a national dental care program. The cost is expected to be $5.3 billion over five years and $1.7 billion a year after that. The goal of the plan is to help families with income below $90,000 a year.
The government also plans to:
• Eliminate flow-through shares for oil, gas, and coal exploration and development.
• Help Canadians wishing to become parents by allowing medical expenses related to a surrogate mother or a sperm, ova, or embryo donor to be claimed on their tax returns.
• Support mid-sized businesses that have often lost out on the small business deduction because of their size, by “extending the range over which the business limit is reduced.”
• Spend $8 billion over five years on defence spending,
• Have several initiatives and incentives relating to the environment and climate change
• Continue to contribute to indigenous families and their communities
• Continue to work towards their diversity and inclusion goals. As a reminder, we review client accounts regularly to ensure portfolio weightings are in-line with our current views. We will always call to discuss any changes we feel are necessary to get your approval to proceed. We are pleased with our proactive approach and the results we have created for our clients.
If you would like to discuss the 2022 budget or simply review your asset allocation and portfolio holdings, please call us at (780) 426-2400, or e-mail us at email@example.com to schedule an appointment.
Thank you for being our client.
Gary Koss & the LGK Investment Team