This past spring, the federal government delivered its budget with few significant changes for investors: no changes to the capital gains inclusion rate or federal income tax rates. Many initiatives address the hot housing market. Here are some highlights:
Tax-Free First Home Savings Account (FHSA). The federal government proposed a new account to help Canadians save for their first home. Expected to begin in 2023, the account will have a lifetime contribution limit of $40,000, with an annual limit of $8,000. Contributions will be tax-deductible, similar to the RRSP, and withdrawals will be tax free, similar to the Tax-Free Savings Account (TFSA). When the FHSA was originally proposed in the 2021 election campaign, it came with an age limit. This was removed in the most recent budget. If this change stands, a recent article in the popular press suggests that tax-planning opportunities may be available to older Canadians by using the FHSA as a savings tool.1 Stay tuned for updates as the rules are finalized and details become clearer.
Multigenerational Home Renovation Tax Credit. This proposed refundable tax credit offers up to $7,500 by allowing qualifying families to claim 15 percent of up to $50,000 in eligible renovation and construction costs incurred to construct a secondary suite for a senior or adult with a disability.
Residential Property Flipping Rule. Under proposed rules, property sold that is held for less than 12 months would be considered “flipping” and any profits would be subject to full taxation as business income (with certain exceptions). Where the new rule applies, the Principal Residence Exemption would not be available.
Small Business Deduction. Under current rules, access to the $500,000 small business deduction is reduced when a Canadian-controlled private corporation has taxable capital greater than $10 million, reducing to nil with taxable capital of $15 million or more. The budget proposes to change the formula such that the small business deduction will not be reduced to nil until the corporation has taxable capital of $50 million.
Minimum Tax for High Earners. The federal government announced an intention to revisit the current Alternative Minimum Tax regime with a view to ensuring high-income earning Canadians pay a minimum level of tax. Further details are expected in the 2022 fall economic update.
At the time of writing, these proposals have not been enacted into law. For greater detail, please see the Government of Canada website: https://budget.gc.ca/2022/home-accueil-en.html
- “Three ways to make the most of the new tax-free savings account for home buyers,” Erica Alini, The Globe and Mail, April 30, 2022, B15.
Luxury Vehicles: Prices Are Set to Increase
The federal government quietly released revised draft proposals in the spring to introduce a luxury tax on certain vehicles. As of September 2022, this luxury tax is set to apply to cars and aircraft with a retail sales price over $100,000 and boats over $250,000.
The tax will be based on the retail sales value of the good and is proposed to be calculated as the lesser of:
(a) 20 percent of the retail sales price that exceeds the thresholds: $100,000 for cars/aircraft, $250,000 for boats; or
(b) 10 percent of the full value of the luxury car, boat or aircraft.
For more information, see the Government of Canada website: www.canada.ca/en/department-finance/news/2022/03/government-releases-draft-legislative-proposals-to-implement-luxury-tax.html