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On April 7, 2022 (“Budget Day“),
Finance Minister Chrystia Freeland delivered Canada’s budget
for 2022 (“Budget 2022“). Budget 2022
continues the trend established in Budget 2021 by adding
significant spending initiatives, closing additional perceived tax
loopholes and continuing to implement international tax
measures.
Budget 2022 proposes a number of new tax measures of note,
including the following, which are described in more detail
below:
- rules to ensure investment income earned by private
corporations that are substantively Canadian-controlled private
corporations (“CCPC“) are subject to the
same refundable tax regime as CCPCs; - amendments addressing “foreign accrual property
income” of a CCPC; - international tax measures that build upon measures already
implemented or proposed in connection with the base erosion and
profit shifting action plan (“BEPS Action
Plan“) by moving forward with domestic rules that
will impose a 15% minimum tax on certain large multinational
groups; - an amendment to the General Anti-Avoidance Rule to deal with
tax attributes; - a new critical mineral exploration tax credit;
- amendments to the flow-through share rules for oil, gas and
coal activities; - hedging and short-selling by Canadian Financial
Institutions; - taxing real estate “flipping” as business income;
and - amendments to the annual disbursement quotas for
charities.
Budget 2022 also introduces the following significant
measures:
- a temporary Canada Recovery Dividend, under which banking and
life insurers’ groups – as determined under Part VI of
the Income Tax Act (Canada) (the
“ITA“) – will pay a one-time 15%
tax on taxable income above $1 billion for the 2021 tax year; - a proposal to permanently increase the corporate income tax
rate by 1.5 percentage points on the taxable income of banking and
life insurance groups (as determined under Part VI of the ITA)
above $100 million, such that the overall federal corporate income
tax rate above this income threshold will increase from 15% to
16.5%; - a number of sales and excise tax measures, including most
notably taxing the assignments of agreements of purchase and sale
for newly constructed (or substantially renovated) residential real
estate; - a proposal to build on the previous $2.2 billion of new
resources provided to the Canada Revenue Agency
(“CRA“) since Budget 2016, with an
additional $1.2 billion over the next five years. This investment
would be used to further expand the CRA’s audit and enforcement
capabilities, with a particular focus on expanded audits of larger
entities and non-residents engaged in “aggressive tax
planning.”
BUSINESS INCOME TAX MEASURES
“Substantive” CCPCs
Budget 2022 contains measures to target the manipulation of a
corporation’s status as a CCPC for the purposes of avoiding
refundable tax on investment income. A CCPC is a corporation that
is incorporated pursuant to the laws of a Canadian jurisdiction
that is not controlled by a public corporation, non-residents, or
some combination of public corporations and non-residents. When a
CCPC earns income from property or a “specified investments
business,” or realizes a taxable capital gain, the CCPC is
subject to refundable tax on its “aggregate investment
income.” Certain amounts are refunded upon payment by the CCPC
of taxable dividends.
Some taxpayers have engaged in tax planning
(“Non-CCPC Planning“) to take advantage
of the fact that Canadian-resident corporations that are not CCPCs
are not subject to the refundable tax regime. Non-CCPC Planning may
involve steps taken by the owners of a CCPC to cause the
corporation not to qualify as a CCPC. Such planning may be effected
prior to the realization of a capital gain by the corporation, or
as part of pre-sale planning in connection with the sale of the
shares of the corporation. These steps often include migrating a
corporation to another jurisdiction so that it is deemed not to be
incorporated in a Canadian jurisdiction and, therefore, cannot
qualify as a CCPC, or by shifting voting control of the corporation
to non-residents. Once the corporation has lost CCPC status, the
corporation is no longer subject to refundable tax on its
investment income or taxable capital gains.
Budget 2022 introduces the concept of a “substantive
CCPC” to nullify the benefits of Non-CCPC Planning. A proposed
amendment to subsection 248(1) of the ITA defines a
“substantive CCPC” as a corporation (other than a CCPC)
that at any time in a taxation year:
- is controlled, directly or indirectly in any manner whatever,
by one or more Canadian resident individuals; or - would, if each share of the capital stock of a corporation that
is owned by a Canadian resident individual were owned by a
particular individual, be controlled by the particular
individual.
Budget 2022 also introduces an anti-avoidance rule to accompany
the new substantive CCPC definition. Proposed subsection 248(43) of
the ITA provides that a non-CCPC that does not otherwise qualify as
a substantive CCPC is deemed to be a substantive CCPC if it is
reasonable to consider that one of the purposes of any transaction
or series of transactions was to cause the corporation not to be a
substantive CCPC.
Where a corporation is a substantive CCPC, such corporation
would be subject to the same tax treatment on its investment income
(including taxable capital gains) as would a conventional CCPC.
Under the proposed amendments, a corporation will be a substantive
CCPC if it is controlled in fact by Canadian resident individuals,
or where shares that would result in control are owned by Canadian
resident individuals. Under this definition, for example, the
proposed amendments would cause a corporation to be a substantive
CCPC in circumstances where the corporation would have been a CCPC
but for the fact that a non-resident or public corporation has a
right to acquire its shares. In each case, the corporation would be
subject to refundable tax and the resulting profit would be
credited to its “low rate income pool” (i.e., the
investment income, including taxable capital gains, could not be
distributed as an eligible dividend subject to the enhanced
dividend tax credit). As a consequence, simply migrating a
corporation to a foreign jurisdiction or vesting voting control of
that corporation in non-residents would no longer avoid the
refundable tax on investment income. Moreover, any attempts to
circumvent the definition of “substantive CCPC” could be
caught by the anti-avoidance rule in proposed subsection 248(43) of
the ITA.
Budget 2022 also indicated that the new “substantive
CCPC” regime would contain an auxiliary measure to extend the
reassessment period for corporate taxpayers who receive dividends
from substantive CCPCs by one year and are consequentially assessed
a Part IV tax liability.
It should be noted that Finance’s proposals indicate that a
“substantive CCPC” would only be considered a CCPC for
the purposes of determining its liability for refundable tax and
the calculation of its “low rate income pool.”
The “substantive CCPC” rules would apply for taxation
years that end on or after Budget Day, except for a taxation year
that ends after Budget Day as a consequence of an acquisition of
control caused by a sale to an arm’s length purchaser of all or
substantially all of the shares of a corporation that is completed
in 2022 under an agreement in writing entered into before Budget
Day.
FAPI of a CCPC/Substantive CCPC
Budget 2022 proposes to eliminate an advantage enjoyed by CCPCs
(both conventional and substantive) and their shareholders that
earn investment income through controlled foreign affiliates
(“CFAs“). Where the CFA of a Canadian
resident corporation earns “foreign accrual property
income” (“FAPI“), the Canadian
resident corporation’s participating share of the FAPI is
included in the Canadian resident corporation’s income on an
accrual basis. Where the CFA is subject to foreign tax on that
FAPI, to avoid double taxation, the ITA permits the Canadian
resident corporation to claim an offsetting deduction in respect of
that foreign tax. The amount of the deduction which can be claimed
is four times the amount of foreign tax paid by the CFA.
Accordingly, a CCPC can effectively earn investment income without
being subject to the additional refundable tax by earning that
income in a CFA that is subject to foreign tax at a rate of 25% or
more. Moreover, if a CCPC receives dividends paid out of FAPI
(taxable surplus) that was subject to foreign tax, the CCPC will be
entitled to add an amount to its “general rate income
pool” (“GRIP”). Eligible dividends can be paid out
of GRIP. A CCPC earning investment income in Canada is not entitled
to add anything to GRIP in respect of that investment income.
Budget 2022 proposes to eliminate the deferral advantage for
CCPCs (and substantive CCPCs) by limiting the deduction in respect
of foreign tax to 1.9 times (which is the factor for individuals),
rather than four times. Substantially more foreign tax would have
to be paid to shelter investment income earned by a CFA of a
CCPC.
Budget 2022 also proposes to exclude from GRIP of a CCPC amounts
related to dividends paid out of hybrid surplus or taxable surplus
so that investment income earned through a foreign affiliate will
not generate GRIP.
Budget 2022 also proposes welcome measures to ensure that
integration works for CCPCs with foreign affiliates. A CCPC or
substantive CCPC will be able to add an amount to its capital
dividend account that approximates the portion of the after-tax
income of a foreign affiliate of the CCPC distributed to the CCPC
to the extent that income was subject to a notional tax rate of
52.63% or more. Amounts added to the capital dividend account will
also include: (i) dividends paid by a foreign affiliate to a CCPC
out of hybrid surplus (less the withholding tax paid) and (ii) the
amount of an inter-corporate dividend deduction claimed with
respect to a dividend paid out of taxable surplus as well as other
non-FAPI amounts included in taxable surplus that were subject to
sufficient foreign tax, as determined based on the relevant tax
factor of 1.9.
These measures would apply to taxation years that begin on or
after Budget Day.
Application of the General Anti-Avoidance Rule to Tax
Attributes
Budget 2022 proposes to expand the scope of the general
anti-avoidance rule (“GAAR“) so that it
applies to transactions that affect tax attributes that have not
yet been used in the computation of tax.
This proposal is apparently in response to the Federal Court of
Appeal decision in Perry Wild v Canada, 2018 FCA 114,
which involved transactions that significantly increased paid-up
capital and the adjusted cost base of shares on a tax-free basis
using the lifetime capital gains exemption. In that case, the
Federal Court of Appeal held that, although the transactions
created the potential for a tax-free distribution in the future,
that potential had not yet been realized and there was accordingly
no “tax benefit.”
Budget 2022 proposes to expand the definition of “tax
benefit” to include a reduction, increase or preservation of
an amount that could at a subsequent time be relevant in computing
tax or other amounts payable under the ITA, and other corresponding
amendments. The supplementary information attached to Budget 2022
states that determinations made before Budget Day, where the rights
of objection and appeal in respect of the determination were
exhausted before Budget Day, would remain binding on taxpayers and
the CRA and that these measures would apply to notices of
determination issued on or after Budget Day.
Small Business Deduction
CCPCs may benefit from the “small business deduction,”
which is a reduced corporate income tax rate (currently 12.2% in
Ontario), as opposed to the general corporate income tax rate
(currently 26.5% in Ontario). The small business deduction applies
on up to $500,000 per year of qualifying active business income
(i.e., the “business limit”) of a CCPC and the business
limit is shared among associated CCPCs.
The business limit is reduced on a straight-line basis when:
- the combined taxable capital employed in Canada of the CCPC and
its associated corporations is between $10 million and $15 million;
or - the combined “adjusted aggregate investment income”
of the CCPC and its associated corporations is between $50,000 and
$150,000.
Budget 2022 proposes to extend the range referred to in
paragraph (i), above, such that the new range would be $10 million
to $50 million. This amendment would allow more medium-sized CCPCs
to benefit from the small business deduction and would increase the
amount of qualifying active business income that can be eligible
for the small business deduction.
This amendment would apply to taxation years that begin on or
after Budget Day.
Critical Mineral Exploration Tax Credit
The flow-through share rules in the ITA permit corporations, the
principal business of which is exploration, mining or mineral
processing, to renounce Canadian exploration expenses
(“CEE“) and Canadian development
expenses to investors. Investors are treated as if they had
incurred the expenses directly and can deduct such expenses in
computing taxable income. In the case of CEE, 100% of the renounced
CEE is deductible to the investor. An individual (other than a
trust) who invests in flow-through shares can receive an additional
tax benefit – a 15% non-refundable Mineral Exploration Tax
Credit (“METC“) on certain CEE defined
as flow-through mining expenditures.
Budget 2022 proposes a new 30% Critical Mineral Exploration Tax
Credit (“CMETC“) which would apply in
respect of exploration expenditures for certain specified minerals.
The list of specified minerals includes copper, nickel, lithium,
cobalt, graphite, rare earth elements and uranium, among others.
These minerals are used to produce batteries and permanent magnets
which are used in zero-emission vehicles and in the production of
clean technology and semiconductors.
Eligible expenses would only qualify for the proposed CMETC, not
for the METC as well. Eligibility for the CMETC will require
certification from a qualified person that the expenditures to be
renounced will arise from an exploration project that primarily
targets the specified minerals.
The proposed CMETC would apply to expenditures renounced under
eligible flow-through share agreements entered into after Budget
Day and on or before March 31, 2027.
Flow-Through Shares for Oil, Gas and Coal
Activities
Budget 2022 proposes to amend the flow-through share rules so
that expenditures on oil, gas and coal exploration and development
can no longer be renounced to an investor.
This change would apply for expenditures renounced under
flow-through share agreements entered into after March 31,
2023.
INTERNATIONAL TAX REFORM & PILLAR TWO
Implementation of Global Minimum Tax
Budget 2022 builds upon measures already implemented or proposed
in connection with the BEPS Action Plan developed by the
Organisation for Economic Co-operation and Development
(“OECD“) by announcing its intention to
move forward with proposals to implement rules to establish a
minimum 15% tax applicable to multinational enterprises
(“MNEs“) with annual revenues of
€750 million or more, as more particularly described in the
second pillar (or “Pillar Two“) of the
inclusive framework on BEPS for international tax reform agreed to
by OECD member countries on October 8, 2021. Previously implemented
measures include minimum standards in tax treaties, proposals
limiting deduction of interest and financing charges, rules to
address hybrid mismatch arrangements, enhanced disclosure and
reporting, and a domestic digital services tax in the event that a
multilateral convention implementing an international framework for
the allocation of profit has not come into force.
Pillar Two is intended to be implemented through changes to each
member country’s domestic tax laws. To this end, the inclusive
framework includes detailed model rules (“Model
Rules“), published on December 20, 2021, as well as
commentary providing guidance on their interpretation and
operation, published on March 14, 2022. Member countries are to
implement Pillar Two in a way that is consistent with the outcomes
provided for under the Model Rules and related commentary.
Under Pillar Two, a subject MNE is generally required to
calculate the effective tax rate on its profits in each
jurisdiction in which it operates. The basic premise of Pillar Two
is that if the effective tax rate for a particular jurisdiction is
below 15%, subject MNEs will be subject to a “top-up tax”
that brings the effective tax rate on the profits in the particular
jurisdiction up to the 15% minimum rate.
The objectives of Pillar Two are achieved via two basic charging
rules for the top-up tax: (1) an income inclusion rule, and (2) an
undertaxed profits rule. If the country in which the ultimate
parent of the MNE is located has adopted the income inclusion rule,
that country is entitled to impose the top-up tax on the ultimate
parent entity. If that jurisdiction has not adopted the income
inclusion rule, then the right to apply the top-up tax shifts to
the jurisdiction of the highest-tier intermediate entity within the
group that has adopted the income inclusion rule. If neither of the
jurisdictions of the ultimate parent or any intermediate entity has
adopted the income inclusion rule, the jurisdiction(s) in which the
MNE operates may then levy the top-up tax if it has adopted the
undertaxed profits rule. Pillar Two also contemplates a
treaty-based subject-to-tax rule that would allow a developing
country to impose a higher rate of withholding tax than might be
applicable under a treaty if the payment is subject to tax in the
payee country at a nominal rate below 9%. Budget 2022 notes,
however, that this rule is not expected to impact Canada.
Budget 2022 anticipates that draft legislation implementing the
Pillar Two proposals will be released for public consultation (no
timeline has been given) and that the income inclusion rule and
domestic minimum top-up tax would come into effect in 2023 (as of a
date to be fixed). The undertaxed profits rules would come into
effect no earlier than 2024.
Consultation on Pillar Two
In order to allow the Government to implement Pillar Two in
accordance with the intended timeline, Budget 2022 is launching a
public consultation on the implementation in Canada of the Model
Rules and a domestic minimum top-up tax.
Budget 2022 refers taxpayers to the full text of the Model Rules
on the OECD website and includes a series of general and specific
questions related to the implementation of Pillar Two that Finance
is particularly interested in. The general questions posed by
Finance relate to the interaction of the Model Rules with the ITA,
which administrative and enforcement provisions of the ITA should
or should not be made applicable, suggestions regarding the general
design of the domestic top-up tax in Canada, and whether there are
any particular issues and uncertainties with how a domestic top-up
tax is treated. Finance poses a number of specific questions in
Budget 2022 in relation to each chapter (one through ten) of the
Model Rules. Budget 2022 notes that Finance is not seeking views on
the major design aspects of the Model Rules or broader policy
considerations. Interested parties should review the Model Rules
together with the general and specific questions posed in Budget
2022.
This preliminary consultation will be open until July 7, 2022,
and interested parties are invited to send written representations
to Finance as directed in Budget 2022.
Exchange of Information on the Digital Economy
In recent years, the digital economy has transformed the way
business is conducted. The rise of the gig and the sharing
economies have allowed many people to carry on business, often on a
part-time or temporary basis. These businesses are generally
carried on through online platforms that facilitate business
activities such as short-term home rentals, food delivery, and ride
sharing. Canada’s income tax system is a system of self
reporting. Many taxpayers engaged in the gig and sharing economies
do not appreciate their tax obligations and such transactions are
not visible to tax authorities such as the CRA.
To address these concerns, the OECD has developed model rules to
require digital platform operators to collect and report
information to tax administrations to ensure that such income can
be properly taxed. Other jurisdictions such as the U.K., the EU and
Australia have announced their intention to implement the model
rules. The OECD model rules are designed to reduce the
administrative burden of such reporting by requiring the platform
to report the information of those persons offering a service or
selling a product through the platform to only one jurisdiction,
the jurisdiction of the platform. The tax administration in that
jurisdiction would then share the information with the tax
administrator in the country in which the partner sellers/service
providers reside.
Budget 2022 proposes to implement the OECD model rules in
Canada. The proposal will require “reporting platform
operators” to determine the jurisdiction of residence of their
“reportable sellers” for “relevant activities”
and to report such information to the CRA. Reporting platform
operators are entities that are engaged in contracting directly or
indirectly with sellers to provide the software that runs a
platform for sellers to be connected to other users or collecting
compensation for the relevant activities facilitated through the
platform. Providers of software that exclusively facilitate payment
processing, the mere listing or advertising, or the transfer of
users to another platform are generally excluded. This measure
would apply to platform operators resident in Canada, or platform
operators not resident in Canada or a partner jurisdiction and that
facilitate relevant activities by sellers resident in Canada or the
rental of real property located in Canada. Platform operators whose
total compensation in the previous year is less than €1
million can elect to be excluded from reporting.
Relevant activities are sales of goods and “relevant
services.” Relevant services are personal services (for
example, tutoring, manual labour or delivery services), rental of
real property or rental of a means of transportation. A reportable
seller is generally a user who is registered on a platform to
provide relevant services or sell goods. There are some exceptions
including those who sell goods and make fewer than 30 sales per
year totalling €2,000 or less.
Reporting platform operators will need to complete due diligence
procedures to identify reportable sellers and their jurisdiction of
residence. For the first year in which a reporting operator becomes
a reporting operator, the due diligence procedures must be
completed by December 31 of the second calendar year in which the
reporting operator is subject to the rules.
The measure will apply to calendar years beginning after 2023.
This means that the first reporting would be due December 31, 2024,
and the first exchange of information will take place in early 2025
with respect to the 2024 calendar year.
Interest Coupon Stripping
Part XIII of the ITA generally imposes a 25% withholding tax on
interest paid or credited by a Canadian resident to a non-arm’s
length non-resident. If the lender is resident in a treaty
jurisdiction, the tax treaty will generally reduce the withholding
tax rate to either 10% or 15%. The tax treaty with the U.S.
generally reduces the withholding tax rate to nil.
To avoid the Part XIII withholding tax on interest paid or
credited to a non-arm’s length non-resident lender, some
non-resident lenders will sell their right to receive future
interest payments (interest coupons) to a purchaser who is either
not subject to withholding tax or subject to withholding tax at a
lower rate. The non-resident lender generally retains the right to
receive the repayment of the principal amount of the loan.
An amendment was made in 2011 to address a particular interest
coupon stripping arrangement; however, there are other arrangements
that the 2011 amendment failed to catch.
Budget 2022 proposes an amendment to the withholding tax rules
to ensure that the total withholding tax paid under an interest
coupon stripping arrangement is the same as it would have been if
the arrangement had not been entered into and instead the interest
payments had been made to the non-resident lender.
In general, where a Canadian-resident borrower owes an amount to
a non-resident person with whom the Canadian-resident borrower does
not deal at arm’s length (the “non-resident
lender“), pays an amount of interest in respect of
that amount owing to another person, and the tax payable under Part
XIII in respect of the interest payment is less than it would have
been if the interest payment had been made to the non-resident
lender, for purposes of Part XIII, the Canadian-resident borrower
will be deemed to have also paid an amount of interest to the
non-resident lender sufficient to impose on the non-resident lender
enough Part XIII tax to reverse the reduction of Part XIII tax.
There is an exception for interest paid on debt issued as part
of an offering lawfully distributed to the public if, in general,
the interest payments were not part of a series of transactions one
of the main purposes of which was to avoid or reduce Part XIII
withholding tax.
In general, this measure applies to interest that accrues on or
after Budget Date. However, it will not apply to interest that
accrues prior to April 7, 2023, if the underlying debt was incurred
before Budget Day, the sale of the right to receive future interest
payments occurred before Budget Day and the interest coupon holder
deals at arm’s length with the non-resident lender.
Hedging and Short Selling by Canadian Financial
Institutions
The ITA generally requires taxpayers to include in computing
income all dividends received in a year but permits a Canadian
corporation that receives a dividend from another Canadian
corporation to deduct the amount of such dividend. Known as the
dividend received deduction (“DRD“),
this regime avoids taxing the same amount of income in more than
one corporation. The ITA contains rules intended to deny the DRD
where the dividend recipient does not have economic exposure to the
share.
The ITA also contains favourable rules dealing with the taxation
of securities lending arrangements
(“SLA“), which are transactions that
facilitate the lending of securities, usually to fill a short
position. The SLA rules provide that dividend compensation payments
made by a borrower of shares to a lender are very generally
deductible to the borrower and treated as a dividend on the share
to the lender. Registered securities dealers are entitled to deduct
only 2/3 of a dividend compensation payment.
The Government has been concerned that certain taxpayers in
financial institution groups were engaging in transactions that
gave rise to unintended tax benefits by exploiting both the DRD and
the deductibility of dividend compensation payments while
eliminating the group’s economic exposure on the subject
shares. For example, a Canadian bank owns shares of a Canadian
corporation and a related registered securities dealer would borrow
identical shares and sell them short (eliminating the economic
exposure). The bank would get the DRD for the dividend and the
securities dealer would also get the 2/3 deduction for the dividend
compensation payment to the lender of the shares. A similar
strategy might involve the registered securities dealer going long
on the shares and short the identical shares. It would get the DRD
for the shares it held and a 2/3 deduction for the dividend
compensation payment made on the borrowed shares. The government
was concerned that this created an “artificial deduction”
under the arrangement equal to 2/3 of the amount of the
dividend.
Budget 2022 proposes to amend the ITA to deny the DRD to a
taxpayer for dividends received on a share of a Canadian
corporation where:
- a non-arm’s length registered securities dealer enters into
a transaction that it knew or ought to have known would hedge the
taxpayer’s exposure; and - the taxpayer is a registered securities dealer and it has
eliminated all or substantially all of its exposure to the
shares.
Where the proposal results in the denial of the DRD, the
registered securities dealer will be entitled to a full deduction
for the dividend compensation payment.
The proposed amendments will apply to dividends received and
dividend compensation payments made on or after Budget Day unless
the relevant hedging transactions or related securities lending
arrangements were in place before Budget Day, in which case the
proposed amendments will apply to dividends received and related
compensation payments made after September 2022.
PERSONAL INCOME TAX MEASURES
Housing
For first-time home buyers, Budget 2022 introduces the Tax-Free
First Home Savings Account (“FHSA“).
Contributions to an FHSA would be deductible, and both income
earned in an FHSA and qualifying withdrawals made to purchase a
first home would be non-taxable. Each eligible individual would be
subject to an annual contribution limit of $8,000 as well as a
lifetime contribution limit of $40,000. Budget 2022 would also
increase the maximum value of the Home Buyers’ Tax Credit from
$750 to $1,500. The Government intends to implement the FHSA in
2023. Draft legislation is not yet available.
For existing homeowners, Budget 2022 introduces the
Multigenerational Home Renovation Tax Credit, which provides tax
relief for individuals who create a secondary dwelling unit within
their existing home to permit a related senior or person with a
disability to live there. The maximum value of the credit would be
$7,500. This measure is intended to take effect on January 1, 2023.
Budget 2022 also increases the maximum value of the existing Home
Accessibility Tax Credit from $1,500 to $3,000 effective for
expenses incurred in the 2022 and subsequent taxation years.
Budget 2022 also takes aim at the “flipping” of
residential property, with a new rule that would deem profits
arising from the disposition of a residential property to be
business income if the property was owned for less than 12 months.
Where the new rule applies, the Principal Residence Exemption would
not be available. The rule would not apply to dispositions in
relation to certain qualifying life events (for example, death,
changes in family composition, disability, certain changes in
employment, etc.). This measure is intended to apply to residential
properties sold on or after January 1, 2023.
Annual Disbursement Quota for Charities
Charities in Canada are required to spend a minimum amount each
year on their charitable programmes or grants to other charities.
The amount, known as the “disbursement quota”
(“DQ“), is determined based on the value
of a charity’s assets that are not used for charitable
activities (averaged over the prior 24 months). The intention of
the DQ is to ensure charities use a significant portion of their
resources for charitable purposes. The current DQ is 3.5% (reduced
from 4.5% in 2004 to account for lower rates of return on
investments at that time).
The government held public consultations in the late summer-fall
of 2021 to seek feedback on issues relating to the DQ, including
whether the DQ should be increased to provide additional funding
for charities (particularly in the context of the pandemic) and if
so, to what level, as well as whether it was desirable to increase
the DQ to a level that would force foundations to encroach on
capital in order to meet their DQs.
Budget 2022 proposes to increase the DQ to 5% for the portion of
assets not used in charitable activities that exceeds $1,000,000;
the government believes this will achieve the goal of increasing
expenditures by charities overall while accommodating smaller
charities that may not have investment returns that are achievable
by larger charities. Charities will continue to be able to request
a reduction to their DQ and Budget 2022 proposes to simplify the
process while ensuring improved transparency. These measures would
apply to charities in respect of fiscal periods beginning on or
after January 1, 2023.
Charitable Partnerships
Charities that wish to carry out charitable activities overseas
must either do so themselves, make grants to other “qualified
donees” (which include Canadian registered charities and
certain foreign entities such as the UN, as well as certain foreign
universities and foreign charities), or maintain control and
direction over the activity of an intermediary in the foreign
jurisdiction. The requirements imposed on charities seeking to
provide aid outside Canada can be unclear if not unduly onerous;
Budget 2022 proposes to streamline these rules and allow Canadian
charities to make disbursements to organizations that are not
qualified donees, provided the disbursements further the Canadian
charity’s charitable purposes and the Canadian charity ensures
the funds are applied to charitable purposes by the recipient
foreign organization. Budget 2022 sets out proposed accountability
requirements for charities wishing to make grants to foreign
organizations. The proposed rules and requirements will apply upon
Royal Assent.
Medical Expense Tax Credit for Surrogacy and Other
Expenses
Budget 2022 proposes to expand the Medical Expense Tax Credit to
include certain medical expenses incurred in connection with the
use of surrogates and/or donors of reproductive material. In
addition, reimbursements paid by a taxpayer to a surrogate will now
be eligible for the tax credit, provided they are in respect of
expenses that would generally qualify under the tax credit. These
measures will apply to expenses incurred in the 2022 and subsequent
taxation years.
SALES AND EXCISE TAX MEASURES
Budget 2022 introduces two changes to the Excise Tax
Act:
- An expansion of entities that may be entitled to benefit from
the enhanced 83% hospital rebate for GST/HST incurred in respect of
inputs used in their exempt supplies. To be eligible for the
enhanced 83% hospital rebate, a charity or non-profit entity must
deliver the health-care service with the active involvement of, or
on the recommendation of, either a physician or a nurse
practitioner. Hence, the expanded hospital rebate would no longer
distinguish between doctors and nurse practitioners, and it would
recognize the ever-increasing role and prominence of nurse
practitioners in administering hospital-like care in non-hospital
settings. This new measure will apply for all rebate claim periods
ending after Budget Day in respect of tax paid or payable after
Budget Day. - A new rule which deems assignment sales of new homes or
condominium units to be unconditionally subject to GST/HST, in
respect of any amounts payable by the assignee over and above any
deposit recoveries. As an example, if a purchaser under an
agreement of purchase and sale for a newly constructed home or
condominium unit (the “assignor“) paid
the builder $100,000 in cumulative deposits for that new home or
unit, and that assignor wishes to assign the purchase agreement to
a new purchaser (the “assignee“) for
consideration equal to $100,000 in “deposit recoveries”
plus an assignment fee of $250,000, the assignor will be obligated
to charge and collect GST/HST on the $250,000 assignment fee (and
not on the $100,000 amount explicitly related to “deposit
recoveries”). However, if the assignor is a non-resident of
Canada, then the assignee will be obligated to self-assess that
GST/HST instead. This new regime will apply for all assignments
completed on or after May 7, 2022. Any assignments consummated
before May 7, 2022, will still be governed by the current regime,
which allows certain assignments to be made exempt from GST/HST if
the circumstances warrant (for example, if the assignor originally
entered into the agreement of purchase and sale to live in the home
but was subsequently required to assign the agreement to the
assignee due to changed life circumstances).
Budget 2022 also introduces comprehensive legislative provisions
that govern the taxation of vaping products under the Excise
Act, 2001. The new federal excise duty framework for vaping
products will come into force on October 1, 2022.
In addition, Budget 2022 introduces technical amendments to the
Excise Act, 2001 governing the cannabis excise duty
framework, in addition to a myriad of technical amendments that
will come into force on Royal Assent to the enabling legislation. A
detailed review of these legislative provisions is beyond the scope
of this update.
OTHER MEASURES
Budget 2022 also proposes the following measures:
- a review of the scientific research and experimental
development (SR&ED) program with a view to ensuring that it is
effective in encouraging R&D that benefits Canada, and to
explore opportunities to modernize and simplify it; - considering, and seeking views on, the suitability of adopting
a patent box regime; - the creation of an employee ownership trust – a new
dedicated type of trust under the ITA – to support employee
ownership of a business and facilitate the transition of privately
owned business to employees; - the establishment of an investment tax credit of up to 30%,
focused on net-zero technologies, battery storage solutions and
clean hydrogen; - a refundable investment tax credit for businesses that incur
eligible carbon capture, utilization, and storage expenses,
starting in 2022, that permanently store capture CO2 through an
eligible use; - accelerating by two years the government’s commitment to
amend the Canada Business Corporations Act to implement a
public and searchable beneficial ownership registry to be
accessible before the end of 2023; - a renewed commitment to examine a new minimum tax regime so as
to ensure that all “wealthy” Canadians pay their
“fair share;” details to be released in the 2022 fall
economic statement; - the release of a broader consultation paper on modernizing the
GAAR, with a consultation period running through 2022, and with
legislative proposals to be tabled by the end of 2022; and - a review to assess whether the tax system is providing adequate
support to investments in growing businesses. The review will
include an examination of the rollover for small business
investments. This measure allows investors in small businesses to
defer tax on capital gains.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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