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Federal Budget 2023: Business Measures

Strengthening the Intergenerational Business Transfer Framework

Historically where parents transferred shares of their corporation to a corporation owned by their children, deemed dividends rather than capital gains would arise on the disposition (due to Section 84.1 of the Income Tax Act). In 2021, legislation was passed (Bill C-208) to provide an exception from this deemed dividend treatment to facilitate the transfer of family businesses to the next generation. This exception allowed parents to utilize the lifetime capital gains exemption or simply receive capital gain treatment on the disposition, and enjoy the same tax benefits available on a sale to unrelated third parties.

However, the government was concerned that this exception contained insufficient safeguards and may have provided an inappropriate tax advantage where there was no transfer of a business to the next generation.

More specifically, this exception did not require that:

  • the parent cease to control the underlying business of the corporation whose shares are transferred,
  • the child(ren) purchasing the shares have any involvement in the business,
  • the interest in the purchaser corporation held by the child(ren) continue to have value, or
  • the child(ren) retain an interest in the business after the transfer.

Proposed Amendments

Budget 2023 proposes to amend these rules to ensure that they apply only where a genuine intergenerational business transfer (IBT) takes place.

A genuine IBT under the current law would be a transfer of shares of a corporation (the Transferred Corporation) by an individual shareholder (the Transferor) to another corporation (the Purchaser Corporation) where both of the following conditions are satisfied:

  1. each share of the Transferred Corporation must be a “qualified small business corporation share” or a “share of the capital stock of a family farm or fishing corporation” (both as defined in the Income Tax Act), at the time of the transfer (in general terms, this requires that all or substantially all of its assets be used in an active business carried on in Canada); and
  2. the Purchaser Corporation must be controlled by one or more persons each of whom is an adult child of the Transferor (the meaning of “child” for these purposes would include grandchildren, step-children, children-in-law, nieces and nephews, and grandnieces and grandnephews).

To ensure that only genuine IBTs are excluded from the deemed dividend rules, Budget 2023 proposes additional conditions be added. To provide flexibility, taxpayers who wish to undertake a genuine IBT may choose to rely on one of two transfer options:

  1. an immediate business transfer (three-year test) based on arm’s length sale terms; or
  2. a gradual business transfer (five-to-ten-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing the value of their economic interest in a corporation into shares that no longer share in growth in the corporate value to allow future growth to accrue to their children while the parent’s fixed economic interest is then gradually diminished by the corporation repurchasing the parent’s shares).

The immediate transfer rule would provide finality earlier in the process, though with more stringent conditions. In recognition that not all business transfers are immediate, the gradual transfer rule would provide additional flexibility for those who choose that approach.

Both the immediate and gradual business transfer options would reflect the hallmarks of a genuine IBT. The chart on the next page outlines the proposed conditions to qualify as a genuine IBT under each option.

When the current exception was introduced, it was intended that there be restrictions for transfers of large corporations. However, these restrictions were not effectively implemented. Budget 2023 indicates that there would be no limit on the value of shares transferred in reliance upon this rule.

The current exception includes restrictions on sale of the business by the purchaser corporation within five years of the share transfer. Budget 2023 proposes that these requirements would be eliminated. In addition, new relieving rules would apply to deem requirements 3, 4 and 5 in the above chart to be met in respect of a child where either of the following occurs:

  • the child dies or becomes permanently disabled; or
  • the child disposes of their entire their interest in the business in an arm’s length disposition.

In order to benefit from the exception to the deemed dividends, the Transferor and child(ren) would be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child(ren) would be jointly and severally liable for any additional taxes payable by the Transferor on deemed dividends resulting from a transfer that does not meet the above conditions. The joint election and joint and several liability recognize that the actions of the child could potentially cause the parent to fail the conditions and to be reassessed in this regard.

The limitation period for reassessing the Transferor’s liability for tax that may arise on the transfer is proposed to be extended by three years for an immediate business transfer and by ten years for a gradual business transfer, ensuring that the Transferor can be reassessed if the requirements are not met throughout the applicable period.

Budget 2023 also proposes to provide a ten-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions, which would allow capital gains to be brought into income over a period of up to ten years, in proportion to proceeds received. The normal limit for such reserves is five years.

These rules would apply to share sales occurring on or after January 1, 2024.

Employee Ownership Trusts (EOTs)

An EOT is a form of employee ownership where a trust holds shares of a corporation for the benefit of the corporation’s employees. EOTs can be used to facilitate the acquisition by employees of their employer’s business, without requiring them to pay directly to acquire shares. This will provide business owners an additional option for succession planning. Budget 2023 proposes new rules to facilitate the use of EOTs to acquire and hold shares of a business.

The following subsections describe the general rules that would apply to EOTs. Complex requirements are set out in draft legislation included in the Budget papers.

Definitions

To be an EOT, a trust would be required to be resident in Canada (excluding deemed resident trusts) and have only two purposes. First, it would hold shares of qualifying businesses for the benefit of the employee beneficiaries of the trust. Second, it would make distributions to employee beneficiaries, where reasonable, under a distribution formula that could only consider an employee’s length of service, remuneration and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.

An EOT would be required to hold a controlling interest in the shares of the qualifying business. A qualifying business would need to meet certain conditions. It would be required to be a Canadian-controlled private corporation. All or substantially all of the fair market value of its assets must be attributable to assets used in an active business carried on in Canada. A qualifying business would not be able to carry on business as a partner in a partnership. An EOT would not be permitted to allocate shares of a qualifying business to individual beneficiaries.

Trustees of the EOT would be elected by the beneficiaries every five years. Individuals who held a significant economic interest in a business prior to its acquisition by the EOT would not be able to make up more than 40% of the trustees of the EOT, the directors of a corporation serving as a trustee of the EOT or the directors of any qualifying business owned by the EOT. This limit would also include persons related to such individuals.

Trust beneficiaries would be limited to qualifying employees. Individuals, and persons related to them, who hold, or held prior to the disposition to the EOT, a significant economic interest in the business would be excluded from being qualifying employees.

The Tax Treatment

The EOT would be a taxable trust and will be generally subject to the same rules as other personal trusts. Therefore, undistributed trust income would be taxed in the EOT at the top personal marginal tax rate. If the EOT distributes dividends received from the qualifying business, those dividends would retain their character when received by employee beneficiaries and would be eligible for the dividend tax credit.

Qualifying Business Transfer

A qualifying business transfer would occur when a taxpayer disposes of shares of a qualifying business for proceeds that do not exceed fair market value. The shares must be disposed of to either a trust that qualifies as an EOT immediately after the sale or a corporation owned 100% by the EOT. The EOT must own a controlling interest in the qualifying business immediately after the qualifying business transfer.

Benefits

  1. A 10-year capital gain reserve would be available, therefore allowing capital gains to be brought into income over a period of up to ten years, in proportion to proceeds received. The normal limit for such reserves is five years.
  2. A loan from the qualifying business to the EOT for the purchase of the shares of the qualifying business could be repaid within 15 years, an exception to the usual rule that loans to a shareholder are included in income if not repaid by the end of the following fiscal year.
  3. The EOT would be able to hold the shares indefinitely without being deemd to realize capital gains. Most trusts are deemed to realize all gains accumulated in their assets every 21 years.

These amendment would apply as of January 1, 2024.

Clean Electricity Investment Tax Credit

Budget 2023 proposes to introduce a 15% refundable tax credit for eligible investments in:

  • non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors);
  • abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035);
  • stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and
  • equipment for the transmission of electricity between provinces and territories.

Both new projects and the refurbishment of existing facilities will be eligible. Taxable and non-taxable entities such as Crown corporations and publicly owned utilities, corporations owned by Indigenous communities, and pension funds, would be eligible. The clean electricity investment tax credit could be claimed in addition to the Atlantic investment tax credit, but generally not with any other investment tax credit.

In order to access the tax credit in each province and territory, other requirements will include a commitment by a competent authority that the federal funding will be used to lower electricity bills, and a commitment to achieve a net-zero electricity sector by 2035.

The clean electricity investment tax credit would be available as of Budget Day 2024 for projects that did not begin construction before Budget Day 2023. The credit would not be available after 2034.

Clean Hydrogen Investment Tax Credit

Budget 2023 proposes to introduce the clean hydrogen refundable investment tax credit for investments made in clean hydrogen production based on the lifecycle carbon intensity of hydrogen (previously noted in the 2022 Fall Economic Statement). The amount of the credit, which ranges from 15% to 40%, is based on assessed carbon intensity of the hydrogen that is produced (i.e., kilogram (kg) of carbon dioxide equivalent (CO2e) per kg of hydrogen).

The credit would be available in respect of the cost of purchasing and installing eligible equipment for projects that produce hydrogen from electrolysis or natural gas (so long as emissions are abated using carbon capture, utilization, and storage).

Property that is required to convert clean hydrogen to clean ammonia would also be eligible for the credit, at the lowest credit rate of 15%.

This measure would apply to property that is acquired and that becomes available for use on or after Budget Day. The credit would be fully phased out for property that becomes available for use after 2034.

Clean Technology Investment Tax Credit

The 2022 Fall Economic Statement proposed a 30% clean technology investment tax credit for Canadian businesses adopting in clean technology and investing in eligible property that is acquired and that becomes available for use on or after Budget Day 2023. Eligible capital costs include investments in:

  • electricity generation systems, including solar photovoltaic, small modular nuclear reactors, concentrated solar, wind, and water (small hydro, run-of-river, wave, and tidal);
  • stationary electricity storage systems that do not use fossil fuels in their operation, including but not limited to: batteries, flywheels, supercapacitors, magnetic energy storage, compressed air storage, pumped hydro storage, gravity energy storage, and thermal energy storage;
  • low-carbon heat equipment, including active solar heating, air-source heat pumps, and ground-source heat pumps; and
  • industrial zero-emission vehicles and related charging or refuelling equipment, such as hydrogen or electric heavy-duty equipment used in mining or construction.

Budget 2023 proposes to expand eligibility of the tax credit to include geothermal energy systems that are eligible for Class 43.1 of Schedule II of the Income Tax Regulations. The expansion would apply in respect of property that is acquired and becomes available for use on or after Budget Day, where it has not been used for any purpose before its acquisition.

The phase-out of the credit would commence in 2034, rather than 2032 as previously announced.

Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS)

Budget 2022 proposed a refundable investment tax credit for the cost of purchasing and installing eligible equipment used in an eligible CCUS project for businesses that incur eligible expenses starting on January 1, 2022.

Budget 2023 proposes the following changes in respect of the CCUS, with details to be released in the coming months:

  • Dual use equipment that produces heat and/ or power or uses water, that is used for CCUS as well as another process, would be eligible for the CCUS tax credit on a pro-rated basis in proportion to the expected energy balance or material balance supporting the CCUS process over the first 20 years of the project.
  • British Columbia would be added to the list of eligible jurisdictions for dedicated geological storage, applicable to expenses incurred on or after January 1, 2022.
  • Credits related to eligible refurbishment costs incurred once the project is operating would be calculated based on the average of the expected eligible use ratio for the five-year period (the period) in which they are incurred, and each subsequent period (i.e., the periods over which they contribute to the useful life of the project).

These measures would apply to eligible expenses incurred after 2021 and before 2041.

Labour Requirements Related to Certain Investment Tax Credits

Budget 2023 proposes to implement the government’s intention to attach prevailing wage and apprenticeship requirements to the proposed clean electricity, clean technology and clean hydrogen investment tax credits. In general, the rates available for these credits will be reduced by 10% if the following labour two requirements are not met.

  • Wage requirement – Businesses would need to ensure that all covered workers are compensated at a level that meets or exceeds the relevant wage, plus the substantially similar monetary value of benefits and pension contributions (converted into an hourly wage format), as specified in an “eligible collective agreement.”
  • Apprenticeship requirement – Businesses would need to ensure that for a given taxation year, not less than 10% of the total labour hours performed by covered workers engaged in subsidised project elements be performed by registered apprentices. Covered workers are those whose duties correspond to those performed by a journeyperson in a Red Seal trade.

The requirements would apply to work performed on or after October 1, 2023. Budget 2023 also indicated that labour requirements are intended to apply to the investment tax credit for carbon capture, utilization, and storage, with details to be announced at a later date.

Clean Technology Manufacturing Investment Tax Credit

Budget 2023 proposes to introduce a 30% refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing, on the capital cost of eligible property associated with eligible activities, including:

  • extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements;
  • manufacturing of renewable or nuclear energy equipment;
  • processing or recycling of nuclear fuels and heavy water;
  • manufacturing of grid-scale electrical energy storage equipment;
  • manufacturing of zero-emission vehicles; and,
  • manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.

The credit would apply to property that is acquired and becomes available for use on or after January 1, 2024. The credit would be gradually phased out, starting with property that becomes available for use in 2032 and would no longer be in effect for property that becomes available for use after 2034.

Interaction of Clean Energy Investment Tax Credits

For a particular property, businesses would be able to claim only the investment tax credits for carbon capture, utilization and storage; clean technologies; clean electricity; or clean technology manufacturing. However, multiple tax credits could be available for the same project if the project includes different types of eligible property.

Zero-Emission Technology Manufacturers

In 2021, the corporate income tax rate for qualifying zero-emission technology manufacturers was reduced by 50%.

Budget 2023 proposes to expand eligible activities to include the following nuclear manufacturing and processing activities:

  • manufacturing of nuclear energy equipment;
  • processing or recycling of nuclear fuels and heavy water; and
  • manufacturing of nuclear fuel rods.

This expansion would apply for taxation years beginning after 2023.

Budget 2023 proposes to extend the availability of these reduced rates by three years, such that the planned phase-out would start in taxation years that begin in 2032. The measure would be fully phased out for taxation years that begin after 2034.

Tax on Repurchases of Equity

The 2022 Fall Economic Statement announced the government’s intention to introduce a 2% tax on the net value of all types of share repurchases by public corporations in Canada. Budget 2023 provides the design and implementation details of the proposed measure. The tax would apply only to public corporations (Canadian-resident corporations whose shares are listed on a designated stock exchange).

It would not apply to mutual fund corporations, but would apply to real estate investment trusts, specified investment flow-through (SIFT) trusts and SIFT partnerships if they have units listed on a designated stock exchange.

The proposed tax would apply in respect of repurchases and issuances of equity that occur on or after January 1, 2024.

General Anti-Avoidance Rule (GAAR)

The GAAR in the Income Tax Act is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction.

A consultation on various approaches to modernizing and strengthening the GAAR has recently been conducted. A consultation paper released last August identified a number of issues with the GAAR and set out potential ways to address them. As part of the consultation, the government received a number of submissions, representing a wide variety of viewpoints.

Preamble

A preamble would be added to the GAAR, in order to help address interpretive issues and ensure that the GAAR applies as intended. While the GAAR informs the interpretation of, and applies to, every other provision of the Income Tax Act, it fundamentally denies tax benefits sought to be obtained through abusive tax avoidance transactions. It in effect draws a line: while taxpayers are free to arrange their affairs so as to obtain tax benefits intended by Parliament, they cannot misuse or abuse the tax rules to obtain unintended benefits. The preamble would also clarify that the GAAR is intended to apply regardless of whether or not the tax planning strategy used to obtain the tax benefit was foreseen.

Avoidance Transaction

The threshold for an “avoidance transaction” potentially subject to the GAAR would be reduced from a “primary purpose” test to a “one of the main purposes” test. This is consistent with the standard used in many modern anti-avoidance rules in other countries and is considered by the government to strike a reasonable balance, as it would apply to transactions with a significant tax avoidance purpose but not to transactions where tax was simply a consideration.

Economic Substance

A rule would be added to the GAAR to better meet the objective of requiring economic substance in addition to literal compliance with the words of the Income Tax Act. Currently, Supreme Court of Canada jurisprudence has established a more limited role for economic substance.

The proposed amendments would provide that economic substance is to be considered at the ‘misuse or abuse’ stage of the GAAR analysis and that a lack of economic substance tends to indicate abusive tax avoidance. A lack of economic substance will not always mean that a transaction is abusive. It would still be necessary to determine the object, spirit and purpose of the provisions or scheme relied upon, in line with existing GAAR jurisprudence. In cases where the tax results sought are consistent with the purpose of the provisions or scheme relied upon, abusive tax avoidance would not be found even in cases lacking economic substance.

The amendments would provide indicators for determining whether a transaction or series of transactions lacks economic substance. These are not an exhaustive list of factors that might be relevant and different indicators might be relevant in different cases. However, in many cases, the government believes that the existence of one or more of these indicators would strongly point to a transaction lacking economic substance. These indicators are:

  1. whether there is the potential for pre-tax profit;
  2. whether the transaction has resulted in a change of economic position; and
  3. whether the transaction is entirely (or almost entirely) tax motivated.

Budget 2023 provided the example of an individual contributing to a tax-free savings account. Such a transfer could be considered to be entirely tax motivated, with no change in economic position or potential for profit other than as a result of tax savings. Even if the transfer is considered to be lacking in economic substance, it is clearly not a misuse or abuse of the relevant provisions of the Income Tax Act. The individual is using their tax-free savings account in precisely the manner that Parliament intended. There are contribution rules that specifically contemplate such a transfer and, perhaps more fundamentally, the basic tax-free savings account rules would not work if such a transfer was considered abusive.

The proposal would not supplant the general approach under Canadian income tax law, which focuses on the legal form of an arrangement. In particular, it would not require an enquiry into what the economic substance of a transaction actually is (e.g., whether a particular financial instrument is, in substance, debt or equity). Rather, it would require consideration of a lack of economic substance in the determination of abusive tax avoidance.

Penalty

A penalty would be introduced for transactions subject to the GAAR, equal to 25% of the amount of the tax benefit. Where the tax benefit involves a tax attribute that has not yet been used to reduce tax, the amount of the tax benefit would be considered to be nil. The penalty could be avoided if the transaction is disclosed to CRA, either as part of mandatory disclosure rules which are currently proposed or voluntarily.

Reassessment Period

A three-year extension to the normal reassessment period would be provided for GAAR assessments, unless the transaction had been disclosed to CRA as discussed above.

Consultation

Budget 2023 announced a consultation on these proposals to close on May 31, 2023. Following this consultation, the government intends to publish revised legislative proposals and announce the application date of the amendments.

Dividends Received Deduction by Financial Institutions

Corporations are able to deduct dividends received on shares of other corporations resident in Canada in computing their taxable income, preventing the same earnings being subject to multiple levels of corporate taxation. The government considers this treatment inconsistent with the mark-to-market rules that essentially classify gains on portfolio shares held by banks as business income. Budget 2023 proposes to deny the dividend deduction in respect of dividends received by financial institutions on shares that are mark-to-market property, effective for dividends received after 2023.

Income Tax and GST/HST Treatment of Credit Unions

A credit union (as defined for income tax and GST purposes) benefits from a GST/HST rule allowing it to receive most taxable supplies of goods and services from credit union centrals and other credit unions on an exempt basis. The definition prevents a credit union that earns more than 10% of its revenue from sources other than certain specified sources (such as interest income from lending activities) from meeting the definition of “credit union,” and qualifying for the special income tax and GST/HST rules governing credit unions.

This could arise even though the credit union’s governing legislation permits it to earn revenue from these other sources. Most credit unions are currently full-service financial institutions that offer a comprehensive suite of financial products and services. Budget 2023 proposes to eliminate the revenue test from the definition of “credit union” and amend that definition to accommodate how credit unions currently operate, effective for taxation years ending after 2016.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Federal Budget 2023: International Measures

International Tax Reform – Base Erosion and Profit Shifting

Canada is one of 137 members of the OECD/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) that have joined a two-pillar plan for international tax reform agreed to on October 8, 2021. Budget 2023 reiterates Canada’s commitment to the framework, and its intention to implement the Pillar One (intended to reallocate a portion of taxing rights over the profits of the largest and most profitable multinational enterprises to market countries where their users and customers are located) and Pillar Two (intended to ensure that the profits of large multinational enterprises are subject to an effective tax rate of at least 15%, regardless of where they are earned) initiatives.

Budget 2023 announces the government’s intention to introduce legislation implementing the income inclusion rule and a domestic minimum top-up tax applicable to Canadian entities of MNEs that are within scope of Pillar Two, with effect for fiscal years of MNEs that begin on or after December 31, 2023.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Federal Budget 2023: Previously Announced Measures

Budget 2023 confirms the government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release.

  • Legislative proposals released on November 3, 2022 with respect to Excessive Interest and Financing Expenses Limitations and Reporting Rules for Digital Platform Operators.
  • Tax measures announced in the Fall Economic Statement on November 3, 2022, for which legislative proposals have not yet been released, including: automatic advance for the Canada workers benefit; investment tax credit for clean technologies; and extension of the residential property flipping rule to assignment sales.
  • Legislative proposals released on August 9, 2022, including with respect to the following measures:
  • borrowing by defined benefit pension plans;
  • reporting requirements for Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs);
  • fixing contribution errors in defined contribution pension plans;
  • the investment tax credit for Carbon Capture, Utilization and Storage;
  • hedging and short selling by Canadian financial institutions;
  • substantive Canadian-controlled private corporations;
  • mandatory disclosure rules;
  • the electronic filing and certification of tax and information returns;
  • Canadian forces members and veterans amounts;
  • other technical amendments to the Income Tax Act and Income Tax Regulations proposed in the August 9th release; and
  • remaining legislative and regulatory proposals relating to the Goods and Services Tax/Harmonized Sales Tax, excise levies and other taxes and charges announced in the August 9th release.
  • Legislative proposals released on April 29, 2022 with respect to hybrid mismatch arrangements.
  • Legislative proposals released on February 4, 2022 with respect to the Goods and Services Tax/Harmonized Sales Tax treatment of cryptoasset mining.
  • Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
  • The transfer pricing consultation announced in Budget 2021.
  • The income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year, from eight years to nine years.
  • Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

CRA Audit

Surviving a CRA Audit: What You Should Know

It’s the letter you never want to receive from the Canadian Revenue Agency (CRA). You are subject to a CRA Audit.

The CRA sends thousands of letters every year to notify people that they’re being subjected to an audit. Of all the returns they receive, it’s usually business taxes that they take a fine-tooth comb to. This is unfortunate because business owners and entrepreneurs are often swamped with numbers, and the last thing they have time for is to parse through each one.

If you want the best chance of successfully getting through a CRA audit, we’ll look at how they decide who to investigate, what you can do to prepare, what’s going to happen, and what your accountant should be doing in the meantime.

Risks for a CRA Audit

The biggest risk for being selected for a CRA audit is the size of your business. The majority of the CRA audit program spending is devoted to small and medium-sized businesses. When they run through all of the numbers, here’s what they’re looking for:

  • Discrepancies: Officials are looking for gaps and glaring margins between the reports. For instance, if your reported income is different than the average reported income in prior years, this could be a red flag for the CRA. Or if your income is far higher than the norm in your industry, this may trigger the next step.
  • Deductions: Sometimes just claiming home office deductions, which can include utilities, insurance, and property taxes, can be enough to have the CRA send you a letter. Because many people will claim these expenses when they aren’t explicitly used for the business, many of the write-offs don’t qualify. You may also face an audit if you’re making a lot of charitable donations or medical expenses.
  • Cash: Dealing with a lot of cash in a business opens the path to fraud because it’s notoriously difficult to track. This is doubly true if you’re reporting loss after loss in a cash-heavy business.
  • Family: There are plenty of business owners out there who will take advantage of their familial connections to make it easier to pay their taxes. So while plenty of people will employ family members without breaking the rules, you may be flagged simply for having a child or spouse on the books.

How the CRA Audit Process Works

The first step is a CRA auditor contacting you (usually by mail or by phone). They’ll give you specifics of the auditing process and then conduct an on-site audit at the place of business. The auditor is generally looking at the following paperwork:

  • Tax returns, perhaps and organizational chart or property details, depending on the nature of the audit.
  • Ledgers, invoices, receipts, contracts, bank statements.
  • Records of other individuals or entities not being audited (e.g., partnerships, corporations, spouses, common-law partners, etc.)

The records looked at will include those for your place of business but also your personal records as well. They’ll also look at any adjustments made by your bookkeeper or accountant to ensure that they were all completed according to tax law.

By the end of a CRA audit, the auditor will either declare your filing to be a correct assessment, which means that your case is complete and your audit will be closed. Or they may conclude that you either owe additional taxes or that you’re entitled to a refund.

What You Can Do to Prepare For A CRA Audit

The best way to prepare is by organizing all your records and ensuring that there’s concrete evidence to justify your numbers and answer any questions. This can include anything from invoicing history to physical receipts. The CRA requirement is to keep your records for at least seven years before shredding them, though CRA will generally audit within three years of your return being filed.

You can also consider gathering proof for regional shifts in supply and demand for your industry. For instance, if you’ve taken several losses over the course of your business, you may be able to point to general trends that have pushed down revenue among all of your competitors. However, these records are not to be shown to the auditor unless specifically asked for. Simply having them at the ready can help give you a sense of confidence as you move into the proceedings.

In addition, when you’re getting ready to speak to the auditor, make sure that you’ve given some thought about what you want to address with them. Generally, less is more and answer what is asked of you.  You should be friendly but also thorough when asking about anything from due dates to expectations. It’s common for people to get flustered when they’re talking to an official from the CRA — even when they haven’t done anything to be nervous about. When the auditor is working with you, they should get the sense that you have nothing to hide.

The Role of Your Accountant During A CRA Audit

A CRA audit can be difficult for many reasons, particularly if you’re a busy business owner who doesn’t have a lot of bandwidth to organize, catalog, and verify every last record. When you have a good accountant on your side, they can help you manage the process from beginning to end. Accountants stand between you and the auditor, making it easier to handle the questions and produce the paperwork they need to close the case.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

2023 tax changes for 2022 filing

Tax Changes for Filing Your 2022 Tax Return

Like many years, Tax Year 2022 comes with several changes you need to know about when filing your personal and business taxes. Understanding the tax changes for 2023 filing is critical to reducing the risk of overpaying your taxes. The following are some of the most important changes Canadians must know about heading into tax filing season.

Repayment of COVID-19 Benefits

Those who received COVID-19 benefits in 2022 from CRA, such as any of the following, are likely to receive a T4A slip to report these benefits on tax returns:

  • Canada Recovery Benefit (CRB)
  • Canada Recovery Caregiving Benefit (CRCB)
  • Canada Sickness Recovery Benefit (CSRB

Those with a net income after adjustments higher than $38,000 from the CRB will need to repay some or all of the benefits they received. For those who repaid all or some of those benefits in 2022, it is possible to claim the tax deduction in the year you desire (when received or when repaid).

Updated Basic Personal Amount

The Basic Personal Amount (BPA) was adjusted to $14,398 for 2022. As a result, you may see a slight boost in your tax return for the year. In 2023, the BPA will increase to $15,000.

Shifts in Federal Tax Brackets

For the tax year 2022, the federal tax brackets are as follows:

  • Up to $50,197 income: 15%
  • From $50,197 to $100,392: 20.5%
  • From $100,392 to $155,625: 26%
  • From 155,625 to $221,708: 29%
  • Above $221,708.01: 33%

Be sure to adjust and plan for any tax changes this year based on your income. The upward adjustment of these tax brackets means that some people may see a shift from a lower tax bracket to a higher one compared to last year’s filing.

Work-From-Home Expenses

As so many people have transitioned to working from home, the government has worked to carry over the work-from-home tax credit first put in place in the previous year. That means Canadians who have expenses from working from home and keep documentation of those costs can now claim up to $500 in those expenses on their income taxes. If you did not calculate this, you can use a $2 per day flat rate for each day you worked at home.

First-Time Home Buyers’ Tax Credit

The First-Time Home Buyers’ Tax Credit is on its way up. The HBTC aims to make it more affordable for Canadians to purchase a home. For the tax year 2022, if you purchased a home, you can now claim $10,000 as a non-refundable income tax credit on your taxes. That is twice as much as it was in the year prior. That could provide up to a $1,500 tax savings for some people.

Change in Old Age Security Income Limits

Another update for the tax season this year is a change in Old Age Security income limits. Seniors who make more than what is allowable may have to pay some of their OAS back to the government. For the 2022 tax year, the new limits are:

  • $80,761, the minimum income recovery threshold
  • $134,626, the maximum recovery threshold for those between the ages of 65 and 74
  • $137,331, the maximum recovery threshold for those over the age of 75

If you made more than the minimum amount, you might need to repay some of your OAS. However, your OAS might be cancelled if you made more than the maximum amount listed here.

TFSA Limited Increases

Tax-free savings account limits have also increased for the tax year 2022 to $6,500.

Air Quality Improvement Tax Credit

Another federal change to note is the Air Quality Improvement Tax credit. Businesses that made suitable ventilation upgrades under this credit can claim 25% up to $10,000 can be made in 2022. That provides up to a $2,500 tax credit.

Labour Mobility Deduction

For those who work as apprentices, tradespeople, or employees in the construction industry, the Labour Mobility Deduction (LMD) will allow for claims for meals and lodging expenses. This applies when those in this field must move to a temporary location to work in the industry.

RRSP Dollar Limit Increase

The Registered Retirement Savings Plan (RRSP) dollar limit for 2022 is $29,210. You cannot, however, go beyond 18% of your earned income from the previous year.

For more tips on retirement planning, we recommend checking out this post.

Consult an Accountant to Ensure You’re Filing Properly

With the changes occurring in income tax returns for 2023, be sure to set up a consultation with your accountant to discuss any that may affect you. That helps ensure you are compliant and take full advantage of all potential deductions. If you’d like to discuss these changes with us, just book a free consultation.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Why Do My Financial Statements Show a Profit, But Then Show a Loss After My Accountant Makes Adjustments?

Disappearing Profit: Why Financial Statements Change After Accounting Adjustments

Why do my financial statements show a profit, but then show a loss after my accountant makes adjustments? If you’ve ever asked yourself that question you’re not alone.

Accurate financial statements must reflect many business expenses, and it’s not unusual for these adjustments to change profits after an accountant includes them all. If you’ve received statements back from an accountant and they show less profit than you expected (or loss), here are some possible reasons why.

Sales-Related Expenditures

Financial statements may not immediately reflect all of the expenses needed to produce a product/service. 

For example, suppliers sometimes don’t send invoices until after those supplies have been used. Similarly, contracted service providers might bill 30 or even 90 days afterward. If there are still expenditures that will be due, a financial statement should reflect these.

An accountant will be familiar with what sorts of expenses your business incurs when producing its products/services. The accountant will make sure to include any that you might not yet have recorded. Any expenses that your accountant includes will have to be deducted from gross revenues.

Asset Depreciation and Amortization

Depreciation and amortization both account for the falling value of assets. Depreciation applies to physical assets (e.g., buildings, equipment, vehicles, etc.). Amortization applies to intangible assets (e.g., patents, franchise agreements, copyrights, etc.).

As these assets decline in value over time, their costs should be deducted throughout their useful life span. Even if your business doesn’t actually pay to renew or replace an asset in a given year, it theoretically must prepare for the future expense.

An accountant will know how assets can be depreciated or amortized according to tax regulations, and they’ll take care of the calculations for you. Although depreciation directly lowers your business’s profits, it’s something you should do. Your business will likely have to pay the cost eventually to replace the asset, and depreciating assets can provide significant tax benefits as it’s usually a write-off.

Standard Accounting Adjustments

A variety of standard accounting adjustments may have to be made to bring your business’s financial statements in line with accepted practice. Your business’s financial documents also won’t be complete and fully accurate until these adjustments are made.

An accountant will know what adjustments have to be made, and how to make them. Adjustments related to works in progress and inventory are fairly common, and businesses may have specialized expenses, too. Any of these can lower the bottom line when comparing the accurate documents to the unadjusted ones.

Learn how to better read and understand your financial statements with our Guide to Reading and Understanding Financial Statements for Business Owners.

Get Complete and Accurate Financial Documents

While you should always do your best compiling financial documents, realize that they likely won’t fully reflect your business’s finances until an accountant reviews them. You could very well see some adjustments that lower your business’s profits. If you’d like a review of your financial statements book a free consultation with us and let’s talk.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

tax on investment income

How To Minimize Tax On Investment Income

Different types of investments can offer different benefits. There are also different ways that your investments can be taxed. Sometimes it can get a bit confusing. In this post, we’re going to look at three ways your investments may be taxed and strategies you can use to minimize the tax on investment income you generate.

While business leaders tend to succeed because they possess rare skills and a laser focus on their respective industries, sometimes it’s important to tap the brakes. By enlisting the support of an experienced accounting firm, professionals can reduce their tax on investment income.

How Are Your Investments Being Taxed?

Although taxes are one of life’s certainties, they prove complicated in Canada. The government considers the mechanisms everyday people utilize to generate income and assign different tax methods and rates. The tax on investment income often depends on a person’s marginal bracket and the revenue source. These are ways tax on investment income typically works.

  • Income From Interest: The income generated from interest on bonds, for example, ranks among the hardest tax hits. This source of revenue is usually subjected to the full weight of someone’s highest marginal tax rate.
  • Dividends: If the dividend payment you received comes from a Canadian source, it may be eligible to be taxed at a lower percentage than your marginal income bracket. A foreign company’s dividend is typically ineligible and, therefore, taxed at a higher rate.
  • Capital Gains: Fifty percent of profits from the sale of assets are usually added to adjusted gross income and taxed at someone’s marginal rate. While half of the capital gain is not subject to taxation, sudden spikes in income can drive business professionals into higher brackets.

Canadian residents routinely invest in American companies, and professionals would be wise to consider the tax implications. While upwardly mobile entities attract global investors, Canadians can anticipate paying up to 30 percent withholding tax on foreign dividends.

Tax on Investment Income Questions Worth Considering

Proactive business professionals thrive by making savvy decisions and quickly following through with a plan of action. But people outside the accounting trades may not realize the tax on investment income liability they are inadvertently creating. Consider the following questions and talk to an expert before making financial moves.

Are You Effectively Managing RRSP and TFSA Contributions?

Both the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Accounts (TFSA) rank among the best small business tax deductions available. Sole proprietors and partners can derive significant benefits. These tax shelters are driven by maximum contributions, marginal tax rates, and can also be carried forward. Increasing contributions when your salary is high could reduce your marginal tax rate and overall liability.

Do You Have a Capital Gains Tax Strategy?

The taxes on capital gain profits continue to prove complicated, and professionals sometimes pay more than required. Liquidating assets to increase revenue can drive industry leaders into higher brackets because they failed to take advantage of deferment options and exemptions.

How Can Non-capital Losses Save Money?

It sounds counterintuitive, but sometimes a loss can save an organization money. Should a small business or non-profit experience higher expenses than revenue, the shortfall can be put to work. But that financial hit doesn’t necessarily have to be taken for the year you lost money. These losses can be carried forward to strategically lower your tax liability.

Do Non-profits Pay Tax on Investment Income?

The Canada Revenue Agency treats non-profits and charities differently. Although neither can use income as a member perk, charities are largely tax-exempt. Because there is significant overlap between non-profits and charities, it would be wise to know whether an organization qualifies as tax-exempt. An experienced accounting firm can help answer that question and do the paperwork to save you money. If you operate a small business or lead a non-profit organization, knowing the tax on investment income implications can help you make informed decisions.

At Avisar Chartered Professional Accountants in Langley, British Columbia, our experienced team works diligently with private sector and non-profit business leaders to minimize tax liability and plan for success.

Book a free consultation to talk about your investment tax strategy.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

small business accountant Vancouver

Federal Budget 2022: Business Measures

Small Business Deduction

Canadian-controlled private corporations (CCPCs) benefit from the small business deduction (SBD), a reduced corporate tax rate on active business income from the 15% general rate to 9% federally. Each province also has an SBD regime. A “business limit” of $500,000 of annual income (shared between associated corporations) limits eligibility to the SBD federally, and in all provinces except Saskatchewan, which has a $600,000 provincial business limit.

The business limit is reduced for corporations or associated groups which have “taxable capital” in excess of $10 million, with the business limit reduced by $1 for every additional $10 of taxable capital over the $10 million threshold, until it is eliminated where taxable capital equals or exceeds $15 million.

Budget 2022 proposes to reduce the business limit by $1 for every $80 of taxable capital in excess of $10 million, such that the limit will be more gradually reduced, and only eliminated where taxable capital equals or exceeds $50 million. This measure is proposed to apply for corporate taxation years beginning on or after April 7, 2022.

No changes are proposed to the parallel reduction to the business limit where adjusted aggregate investment income exceeds $50,000.

Anti-Avoidance Measures – Corporate Investment Income

In addition to being ineligible for the SBD, investment income (such as interest, royalties, rent and taxable capital gains) earned by CCPCs is subject to a significantly higher corporate tax rate of 38 2/3% (plus provincial tax which, in most provinces, results in a combined tax rate of over 50%). A similar regime (Part IV Tax) applies to portfolio dividends received by CCPCs. This is intended to result in corporate taxes similar to the top personal tax rates.

A portion of this tax is refundable when taxable dividends are paid by the corporation to its shareholders, so that the combined corporate taxes after this refund and personal tax paid by the ultimate individual shareholders is comparable to the tax that would have been paid if the investments had been made personally, rather than corporately.

As these special rules apply only to CCPCs, some planning strategies have been developed where corporations are structured to fall outside CCPC status. These include the use of corporations governed by a foreign country’s corporate legislation, or the issuance of options or voting shares to non-Canadians. A number of taxpayers who have implemented such strategies have been challenged by CRA, with appeals to be heard by the Tax Court of Canada, however such challenges are both time-consuming and costly for the government.

Budget 2022 proposes that private corporations which are not CCPCs, but are factually controlled by one or more Canadian persons, be subject to the same investment income rules as a CCPC. An anti-avoidance rule will also apply this treatment to any corporation falling outside the technical rules, where it is reasonable to consider that one or more transactions were undertaken to avoid these rules. This measure will generally apply to taxation years that end on or after April 7, 2022, with possible deferral where an arm’s length sale pursuant to a written purchase and sale agreement was entered into prior to that date.

Intergenerational Business Transfers

A complex anti-avoidance rule prevents the sale of shares of closely-held corporations by individual shareholders to related corporations from resulting in capital gains, instead causing the seller to realize dividends. In addition to attracting higher taxes than capital gains, dividends are not eligible for the lifetime capital gains exemption (LCGE).

This provision has been a source of frustration for business owners wishing to transition a family business to the next generation, denying them access to the LCGE which would have been available on a similar sale to unrelated parties. On June 29, 2021, legislation (Bill C-208) exempting sales of shares of small business corporations or family farm or fishing corporations from parents to corporations controlled by their children from this provision, allowing the realization of capital gains potentially eligible for the LCGE, was passed into law.

The government had indicated that they were concerned that this legislation could permit transfers beyond genuine intergenerational business successions to benefit from this lower tax cost, a practice commonly referred to as “surplus stripping,” and that further amendments would be made to limit these transactions to their intended purpose.

Budget 2022 reiterates the government’s intention to amend the legislation to restrict these transactions to genuine intergenerational business transfers, while continuing to facilitate legitimate business successions. It announces a consultation by the Department of Finance, with specific mention of the agriculture sector, to close on June 17, 2022. Comments can be sent to intergenerational-transfers-transfertsintergenerationnels@fin.gc.ca. The government indicated that amending legislation would be included in a bill to be tabled in the fall after the conclusion of the consultation process.

Flow-through Shares

Flow-through share agreements allow corporations to renounce or “flow through” specified expenses to investors, who can deduct the expenses in calculating their taxable income. These are common in the resource sector, where they allow certain resource pools to be claimed by investors, rather than the corporations incurring the costs. A Mineral Exploration Tax Credit equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors also applies to some flow-through shares.

Increased Credit for Critical Minerals

Budget 2022 proposes to introduce a new 30% Critical Mineral Exploration Tax Credit for specified minerals, specifically copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. These minerals are used in the production of batteries and permanent magnets, both of which are used in zero-emission vehicles, or are necessary in the production and processing of advanced materials, clean technology, or semi-conductors. This will effectively double the credit for exploration expenditures related to such minerals.

This enhanced credit would apply to expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022 and on or before March 31, 2027.

Elimination of Flow-through Shares for Oil, Gas and Coal

Budget 2022 proposes to eliminate the flow-through share regime for oil, gas and coal activities. Such expenditures would not be permitted to be renounced to share purchasers under flow-through share agreements entered into after March 31, 2023.

Other Business Measures

Several business measures proposed in Budget 2022 target specific sectors. These include the following:

Real Estate

  • Budget 2022 announces a federal review of housing as an asset class, including the examination of potential changes to the tax treatment of large corporate players that invest in residential real estate. Further details on the review will be released later in 2022, with potential early actions to be announced before the end of the year.
  • Budget 2022 announces that anti-money laundering and anti-terrorist financing requirements will be extended to all businesses conducting mortgage lending in Canada.

Green Economy

  • Budget 2022 proposes to launch a new purchase incentive program for medium- and heavy-duty Zero-Emission Vehicles (ZEVs). Transport Canada will work with provinces and territories to develop and harmonize regulations and to conduct safety testing for long-haul zero-emission trucks. Natural Resources Canada will expand the Green Freight Assessment Program, which will be renamed the Green Freight Program, to support assessments and retrofits of more vehicles and a greater diversity of fleet and vehicle types.
  • Budget 2022 announces a consultation with experts to establish an investment tax credit of up to 30%, focused on net-zero technologies, battery storage solutions and clean hydrogen. Further details will be announced in the 2022 fall economic and fiscal update.
  • Air-source heat pumps primarily used for space or water heating acquired and becoming available for use on or after April 7, 2022 will be eligible for inclusion in Class 43.1 or 43.2, special accelerated CCA classes for investments in specified clean energy generation and energy conservation equipment. In addition, the manufacturing of such air-source heat pumps will be included in the definition of eligible zero-emission technology manufacturing or processing activities, eligible for reduced federal tax rates (halved rates for taxation years beginning in 2022 to 2028, then gradually increased to the standard rates, with no reduction for years beginning in 2032 or later).
  • A refundable tax credit for the cost of purchasing and installing eligible equipment used in an eligible carbon capture, utilization and storage (CCUS) project will be implemented. Eligible expenses incurred after 2021 until 2030 would benefit from credits ranging from 37.5% to 60%, with expenditures incurred until 2040 eligible for credits at half of these rates. New capital cost allowance classes at rates of 8% and 20% are also proposed for certain CCUS equipment.

Business Investment Initiatives

  • Budget 2022 proposes to create the Employee Ownership Trust, a new type of trust to support employee ownership. The government will engage with stakeholders to develop rules for these trusts.
  • Budget 2022 proposes the Canada Growth Fund, an independent public investment vehicle that will invest using a broad suite of financial instruments, with the goal that every dollar invested will attract at least three dollars of private capital. Further details will be announced in the 2022 fall economic and fiscal update.

Encouraging Innovation

  • Budget 2022 announces an independent federal innovation and investment agency, with further consultation later this year. Support delivered through the innovation and investment agency is expected to enable innovation and growth within the Canadian defence sector and boost investments in Canadian defence manufacturing. Further details will be announced in the 2022 fall economic and fiscal update.
  • Budget 2022 announces a review of the Scientific Research and Experimental Development (SR&ED) program, to assess its effectiveness in encouraging R&D that benefits Canada, and to explore opportunities to modernize and simplify the program. As part of this review, the government will also consider whether the tax system can encourage the development and retention of intellectual property, including seeking views on the suitability of adopting a patent box regime.

Financial Sector

  • Budget 2022 announces the government’s intention to launch a financial sector legislative review focused on the digitalization of money and maintaining financial sector stability and security. The first phase of the review will be directed at digital currencies, including cryptocurrencies and stablecoins.
  • A one-time 15% tax on bank and life insurance groups, based on taxable income in excess of $1 billion for taxation years ended in 2021, would be imposed for the 2022 taxation year and payable over five years. For subsequent years, a 1.5% additional tax would apply to income of such corporate groups in excess of $100 million.
  • A new accounting policy requirement, IFRS 17, will require insurers to defer recognition of contract service margins (CSMs) for accounting purposes commencing on January 1, 2023. Budget 2022 proposes that this deferral will not be permitted for income tax purposes. The timing of income inclusions for CSMs for income tax purposes will be set by legislation.
  • Proposed anti-avoidance measures will impact certain hedging and short-selling transactions undertaken by Canadian financial institutions and registered securities dealers.

Combatting Aggressive Tax Planning

  • Budget 2022 proposes to provide $1.2 billion over five years for CRA to expand audits of larger entities and non-residents engaged in aggressive tax planning; increase both the investigation and prosecution of those engaged in criminal tax evasion; and to expand its educational outreach.
  • The General Anti-avoidance Rule (GAAR) is proposed to be amended to allow CRA to challenge transactions that affect tax attributes (e.g. asset costs, losses carried forward, paid-up capital, capital dividend account) that have not yet become relevant to the computation of tax. This specific measure overrides a 2018 Federal Court of Appeal decision that held that GAAR could only be applied when the tax attribute was utilized to reduce income taxes.

Federal Budget 2022: Previously Announced Measures

Budget 2022 confirms the government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

  • Legislative proposals relating to the Select Luxury Items Tax Act (a tax on certain automobiles, boats and aircrafts) released on March 11, 2022.
  • Legislative proposals released on February 4, 2022 in respect of the following measures:
  • electronic filing and certification of tax and information returns;
  • immediate expensing;
  • the Disability Tax Credit;
  • a technical fix related to the GST Credit top-up;
  • the rate reduction for zero-emission technology manufacturers;
  • film or video production tax credits;
  • postdoctoral fellowship income;
  • fixing contribution errors in registered pension plans;
  • a technical fix related to the revocation tax applicable to charities;
  • capital cost allowance for clean energy equipment;
  • enhanced reporting requirements for certain trusts;
  • allocation to redeemers methodology for mutual fund trusts;
  • mandatory disclosure rules;
  • avoidance of tax debts;
  • taxes applicable to registered investments;
  • audit authorities;
  • interest deductibility limits; and
  • crypto asset mining.
  • Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
  • Legislative proposals released on December 3, 2021 with respect to Climate Action Incentive payments.
  • The income tax measure announced in Budget 2021 with respect to Hybrid Mismatch Arrangements.
  • The transfer pricing consultation announced in Budget 2021.
  • The anti-avoidance rules consultation announced on November 30, 2020 in the Fall Economic Statement, with an expected paper for consultation over the summer of 2022, and legislative proposals tabled by the end of 2022.
  • The income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year, from eight years to nine years.
  • Measures confirmed in Budget 2016 relating to the GST/HST joint venture election.

Budget 2022 reiterates the government’s intention to return a portion of the proceeds from the price on pollution to small and medium-sized businesses through new federal programming in backstop jurisdictions (Alberta, Saskatchewan, Manitoba and Ontario). Budget 2022 proposes to provide funds, starting in 2022-23, to Environment and Climate Change Canada to administer direct payments to support emission-intensive, trade-exposed small and medium-sized enterprises in those jurisdictions.

Budget 2022 also reaffirms the government’s intention to revise the Employment Insurance (EI) system, including its support for experienced workers transitioning to a new career and coverage for seasonal, self-employed and gig workers. A long-term plan for the future of EI will be released after consultations conclude. As an interim measure, Budget 2022 proposes to extend previous expansions to EI coverage for seasonal workers.

Federal Budget 2022: International Measures

Digital Platform Operators – Disclosure Requirements

The digital economy (including the sharing and gig economies, and online sellers of goods) continues to grow at a rapid pace. Participants in the digital economy often make use of digital platforms. Many tax authorities are concerned that not all participants are aware of the tax implications of their online activities. In addition, transactions occurring digitally through online platforms may not be visible to tax administrations, making it difficult for CRA to identify non-compliance.

The Organisation for Economic Co-operation and Development (OECD) has developed model rules for reporting by digital platform operators with respect to platform sellers which require the platforms to collect and report relevant information to tax administrations. The model rules provide for the sharing of information between tax administrations so that an online platform would generally need to report the information to only one jurisdiction, and that jurisdiction would then share the information with partner jurisdictions based on the residence of each person earning revenue through the platform. Jurisdictions which have announced their intention to implement such a framework include the European Union, the United Kingdom and Australia.

Budget 2022 proposes to implement the model rules in Canada. They would require reporting platform operators that provide support to reportable sellers for relevant activities to determine the jurisdiction of residence of their reportable sellers and report certain information on them. Reporting platform operators would be entities that make software that runs a platform available for the sellers to be connected to other users, or to collect compensation through the platform.

The measure would generally apply to platform operators that are resident for tax purposes in Canada, and to platform operators that are not resident in Canada or a partner jurisdiction (one that has implemented similar rules and will share data with CRA on Canadian activity) and that facilitate relevant activities by Canadian residents or with respect to rental of real property located in Canada.

Relevant activities would be sales of goods and relevant services including the following:

  • personal services outside of an employment relationship (e.g. transportation and delivery services, manual labour, tutoring, data manipulation and clerical, legal or accounting tasks);
  • rental of real property (residential or commercial; parking spaces); and
  • rental of means of transportation.

Reporting would not be required in respect of sellers that represent a limited compliance risk, including government entities, publicly listed entities, large providers of hotel accommodation (more than 2,000 per year in respect of a property listing) and, with respect to the sales of goods, sellers who make less than 30 sales a year for a total of not more than 2,000 euro.

Reporting platform operators would be required to provide the required disclosures to CRA by January 31 of the year following the calendar year. CRA would automatically exchange information received on sellers resident in partner jurisdictions. Likewise, CRA would receive information on Canadian sellers from partner jurisdictions. This measure would apply to calendar years beginning after 2023, with the first reporting and exchange of information expected to take place in early 2025 with respect to the 2024 calendar year.

Ban on Residential Real Estate Purchases by Non-residents

The government intends to prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years. This would not apply to refugees and people authorized to come to Canada while fleeing international crises, certain international students on the path to permanent residency or individuals on work permits who are residing in Canada.

Other International Measures

International Tax Reform – Base Erosion and Profit Shifting

Canada is one of 137 members of the OECD/Group of 20 (G20) Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) that have joined a two-pillar plan for international tax reform agreed to on October 8, 2021. Budget 2022 reiterates Canada’s commitment to the framework, and its intention to implement the Pillar One (intended to reallocate a portion of taxing rights over the profits of the largest and most profitable multinational enterprises to market countries where their users and customers are located) and Pillar Two (intended to ensure that the profits of large multinational enterprises are subject to an effective tax rate of at least 15%, regardless of where they are earned) initiatives.

Budget 2022 sets out the government’s plans for consultation and implementation of these initiatives.

Anti-Avoidance – Interest Stripping

Interest paid from a Canadian resident to a non-arm’s length non-resident is generally subject to a 25% flat withholding tax, reduced under various tax treaties (often to either 10% or 15%; generally to nil where paid to U.S. residents). Budget 2022 proposes measures to address certain arrangements (referred to as interest coupon stripping arrangements) to ensure that this withholding tax is not avoided.