May 2022 Budget Update

In addition to reflecting on what was announced in the April 2022 Federal Budget update, we at Intent Planning believe it is also worth mentioning what wasn’t. For starters, there were no increases made to personal tax rates, corporate tax rates, capital gains inclusion rates and no amendments to the principal residence exemption – all good news for Canadians. For more information on these points, click here.

Increasing Taxable Capital Threshold for Small Business Tax Rate

As professional advisors of business owners, we were pleased to see the budget address this longstanding issue. It proposed to increase the level of taxable capital at which a business can still access the small business tax rate.

For a long time, small business owners have complained about the disincentive to grow beyond the $10M capital mark. This Budget proposes that once a business hits $15M, instead of immediately falling off a cliff and suddenly having no deduction limit, there will be a progressive decline of the business income limit until it disappears at the $50M taxable capital mark.

Thinking about small and medium sized farms, this will have a positive impact. The value of farmland in many parts of Canada has seen unprecedented increases in value in the past decade, therefore limiting access to the small business tax rate. This proposal goes a long way towards alleviating some of the tax pain these capital-intensive businesses, that have little to no control over land prices, experience. For example, going from a 9% to a 20% business tax rate (which would happen at the $15M drop-off point) translates to a massive hit to their bottom line simply for having more expensive assets needed to operate.

Bill C-208

Conversely, we wish the news surrounding the contentious Bill C-208 had been better. Our office predominantly deals with business owners, so we understand this bill has been an issue for our clients the past couple of years.

Originally, this legislation was meant to address the longstanding inter-generational business transfer issues family businesses have been facing since 1985. Specifically, the tax advantages given when selling a family-owned business to a third party (arm’s length) compared to the tax inefficiencies that come with transferring between generations (non-arm’s length).

Bill C-208 was meant to address this problem and make intergenerational transfer as attractive as selling to a third party. To ensure this was done properly, the Federal government made a point of consulting professional advisors and experts across Canada as early as 2017 about how best to address the intergenerational transfer issues. When the bill was revealed in 2021, many people were shocked to find that despite the extensive consultations, the bill largely ignored the input of Canadian professionals.

Acknowledging the shortcomings of Bill C-208, the April update proposed another round of consultation and draft legislation will be released in the Fall. The problem is that in the interim, the flawed bill will remain in effect and therefore, intergenerational transfer for family businesses remains tax inefficient. Like so many of our clients, we are also frustrated this has not been handled with more intention and efficiency.

New “Boutique Tax Credits”

Despite our collective dissatisfaction with Bill C-208, there were certainly big wins for Canadians worth acknowledging, including:

• The introduction of a Tax-free First Home Savings Account (FHSA) intended to help people save for their first home. Qualifying withdrawals for the purchase of a first home would be non-taxable.
• Changes to the Home Buyers’ Tax Credit (HBTC) which include doubling the tax credit amount from $5,000 to $10,000 and providing tax relief up to the amount of $1,500 for eligible home buyers. Applicable to qualifying home purchase made on or after January 1, 2022. 
• The introduction of a Multigenerational Home Renovation Tax Credit which is aimed to provide tax relief to households undergoing qualifying renovations to make space for an elderly or disabled dependent. The value of the credit would be 15% of the lesser of the eligible expenses and $50,000. This could mean up to $7,500 in tax credit. It is set to take affect after January 1, 2023.

Things You May Have Missed

And finally, tucked between some of the major and headline grabbing elements of this proposal are some smaller (but mighty) odds and ends you may have missed. We’re particularly fond of plans to:

• Get rid of ‘ghost gear’ – $10M dedicated to cleaning up the lost/discarded fishing gear that ends up impacting habitats and sea life in Canadian waterways.
• Fix up Canadian trails – $55M dedicated to enhancing the Trans Canada Trail in the next 5 years.
• Expand the veteran homelessness program – an additional $62.2M to create a new permanent program targeted towards “providing services and rent supplements to veterans experiencing [houselessness] in partnership with community organizations.”

For any questions about how the 2022 Federal Budget might impact you or your business, connect with us.