Federal budget gets personal
Focus on residential real estate
The year 2022 sure has been eventful, for markets, for investors, and not least for taxpayers. In the tax world, we got hit on Feb. 4 with updated tax rules, which included updated disclosure announcements (but no actual legislation). Then on April 7 the government tabled its 2022 federal budget. Unlike previous years, there was quite a lot to unpack between the personal and corporate measures that were announced. So, in this article I will focus solely on new proposed personal tax measures in the 2022 budget.
Personal income tax measures
Despite concerns that we would be hit with increased taxes, the 2022 budget did not actually increase the capital gains rates (the threat of which has been hanging over us for a couple of years), and the tax rates themselves did not change. In fact, there were some interesting new measures aimed at the housing market (and potential buyers) as well as some new tax credits.
Tax-Free First Home Savings Account
The budget proposes a “Tax-Free First Home Savings Account” (FHSA). It’s a new registered account to help individuals save for their first home. Similar to other registered accounts, contributions to an FHSA would be deductible, and income earned in an FHSA would not be subject to tax. Qualifying withdrawals made to purchase a first home would be tax-free (any withdrawals for any other purpose would be subject to tax).
Although the specific proposals are not yet released, some key design features of the FHSA were highlighted:
* An individual must be a resident of Canada, at least 18 years of age, and must not have lived in a home that they owned either (1) at any time in the year the account is opened or (2) during the preceding four calendar years.
* You are limited to making non-taxable withdrawals in respect of a single property in your lifetime.
* Once a non-taxable withdrawal has been made to purchase a home, you must close the FHSA within a year from the first withdrawal, and are not eligible to open another FHSA.
* The lifetime limit on contributions would be $40,000, subject to an annual contribution limit of $8,000 (the full annual contribution limit would start in 2023).
* Unused annual contribution room cannot be carried forward (unlike an RRSP or TFSA). So if you don’t contribute the full $8,000 in a given year, you are still limited to an annual limit of $8,000 in subsequent years.
* You can hold more than one FHSA, but the total amount contributed to all FHSAs can’t exceed the annual and lifetime contribution limits.
To provide flexibility, you can transfer funds from an FHSA to an RRSP (before the year you turn 71) or to a RRIF. Such transfers would not be taxable at the time of transfer, but amounts would be taxed when eventually withdrawn from the RRSP or RRIF in the usual manner. Transfers would not reduce, or be limited by, the individual’s available RRSP room.
Withdrawals and transfers would not replenish FHSA contribution limits. And vice versa, you can transfer funds from an RRSP to an FHSA on a tax-free basis (subject to the $40,000 lifetime and $8,000 annual limits), although these transfers do not restore your RRSP contribution room.
It should be noted that if you don’t use the funds in your FHSA for first home purchase within 15 years of first opening an FHSA, you have to close your FHSA. Any unused savings could be transferred into an RRSP or RRIF, or would otherwise have to be withdrawn on a taxable basis.
The original Home Buyers’ Plan (HBP) is still available, so that you can also withdraw up to $35,000 from an RRSP to purchase or build a home without having to pay tax on the withdrawal. However, you cannot make both an FHSA withdrawal and an HBP withdrawal in respect of the same qualifying home purchase.
Home Buyers’ Tax Credit
And the good news keeps on coming for first-time home buyers, as the $750 in tax relief available under the First-Time Home Buyers’ Tax Credit (HBTC) is doubling to $1,500 as of Jan. 1, 2022. The value of this increased non- refundable credit would be calculated by multiplying the credit amount of $10,000 by the lowest personal income tax rate (15% in 2022). Any unused portion of the HBTC may be claimed by an individual’s spouse or common-law partner as long as the combined total does not exceed $1500 in tax relief.
Multigenerational Home Renovation Tax Credit
Budget 2022 proposes to introduce a new Multigenerational Home Renovation Tax Credit, which would provide recognition of eligible expenses for a qualifying renovation. That is defined as a renovation that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a qualifying relation (i.e, parent, grandparent, child sibling aunt, uncles or niece/nephew who is 18 years of age or older). The value of the credit would be 15% of the lesser of eligible expenses and $50,000.
Where one or more eligible claimants make a claim in respect of an eligible renovation, the total of all amounts claimed in respect of the qualifying renovation must not exceed $50,000. This would come into effect for expenses incurred as of Jan. 1, 2023 and onwards.
Home Accessibility Tax Credit
To better support independent living, the budget proposes to increase the annual expense limit of the Home Accessibility Tax Credit to $20,000 (from $10,000). This enhancement would provide additional tax support for more significant renovations undertaken to improve accessibility, such as building a bedroom and/or a bathroom to permit first-floor occupancy for a qualifying person who has difficulty accessing living spaces on other floors. This would apply for expenses incurred in 2022 and subsequent taxation years.
Ban on foreign investment in Canadian housing
The budget proposes restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring nonrecreational, residential property in Canada for a period of two years. Exemptions would apply for refugees, international students on the path to permanent residency, and individuals on work permits who are residing in Canada.
Residential property flipping rule
The government proposes to introduce a new deeming rule to ensure profits from flipping residential real estate are always subject to full taxation (and not as capital gains or sheltered under the principal residence exemption). Specifically, profits arising from sales of residential property (including a rental property) that was owned for less than 12 months would be deemed to be business income, unless the disposition occurred as a result of death, an addition to your family (i.e., birth, care of an elderly parent), separation, personal safety, disability or illness, change of employment to work at a new location (or due to an involuntary termination of employment), insolvency or involuntary sale (i.e., expropriation or due to a natural or man-made disaster).
Where the new deeming rule does not apply because of a life event listed above or because the property was owned for 12 months or more, it would remain a question of fact whether profits from the disposition are taxed as business income. The measure would apply in respect of residential properties sold on or after Jan. 1, 2023.
Labour Mobility Deduction for Tradespeople
The proposed Labour Mobility Deduction for Tradespeople will recognize certain travel and relocation expenses of workers in the construction industry, for whom such relocations are relatively common. This measure would allow eligible workers (i.e., tradesperson or apprentice) to deduct up to $4,000 in eligible expenses per year. The eligible worker must be making a temporary relocation (for a minimum of 36 months and at least 150 km closer to the particular work location in Canada) for purposes of a construction activity. The particular work location must not be in the locality in which the tradesperson principally works, so they cannot deduct travel expenses for commuting.
The expenses would include temporary lodging, transportation for one round trip from the location where the individual ordinarily resides to the temporary lodging. Also included are meals in the course of travel while making one round trip to and from the temporary lodging (but no expenses are allowed for financial assistance from an employer that is not included in income, such as reimbursements).
The maximum amount of expenses that could be claimed is capped at 50% of the worker’s employment income at the particular work location in the year (with some flexibility for expenses in the preceding or following year). This measure would apply to the 2022 and subsequent taxation years.
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-author of Tax and Family Business Succession Planning, 3rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. A version of this article first appeared in The TaxLetter, © 2022 by MPL Communications Ltd. Used with permission.
Content copyright © 2022 by Samantha Prasad. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.