Budget 2022 with Jason Pereira | E082
Budget 2022.
On today’s episode, Jason Pereira will be reviewing the federal budget for 2022, and the reason is that when it came out a couple of days ago, there was a lot to go through. There are 17 key personal, and corporate points that he thinks are worth accounting for.
Episode Highlights:
The first big change is the addition of the tax-free first home savings account. This new account will help Canadians over 18 who have not owned a home in the current or last four calendar years.
You can also move money from an RRSP to a first home savings account, but you cannot combine this with the existing RRPS first-time home buyer’s plan.
If you are buying your first home, you were entitled to a tax credit previously that is now increasing, so it used to be 5000, and now it is doubling to 10,000, giving you a total tax credit maximum value of $1500.
In recognition that many people are setting up suits for their loved ones, whether they are over 65 or in cases of kids over 18 or disabled and eligible for the disability tax credit, there’s a new credit called a multigenerational home renovation tax credit.
Home accessibility credit has been doubled. It used to be 10,000, but now, it’s 20,000, and this helps pay for renovations and alterations such as wheelchair ramps, walk-in bathtubs, chairlifts, or anything to help you get around the house if you physically need to.
There is a two-year ban on foreign purchasers buying homes in Canada in new amendments. In Canada, we do not have a beneficial ownership directory, which means that if people buy property in a corporation, they might be able to get around it.
There is a change in the alternative minimum tax credit. They haven’t announced what it is, but they have started setting the stage for taxing Canadians with the highest income. And to support this, they released a chart that showed that 28% of people earning 400,000 were paying less than 15% in taxes.
Previously if you sold an assignment to someone else, GST would typically not apply, but now it does, and in addition to that, it’s not capital gains. It’s fully taxable income.
You are supposed to pay about 3.5% per year of what is currently invested in your charitable fund in charities. Still, they’re going to increase it to probably about 5% with the ability to lower it if you have any issues.
There are many changes in corporate taxes, and the most impacted is the small business tax deduction. As a result, Canada’s first half-million in active business income is taxed at the lower small business rate, and then anything interactors taxed at the general rate.
There are specific credits now available for those who are using carbon capture utilization in storage.
If you are purchasing and installing clean energy equipment, there is now an increase in the capital cost allowance rules, meaning that you can basically deduct it faster than any would otherwise.
Critical mining exploration tax credit is basically targeting shares that flow through exploration expenses down into your personal tax rate.
3 Key Points:
In the new residential property flipping tax, if you hold a home by home as your principal residence and live in it for less than 12 months before selling it, the principal residence exemption does not apply and qualifies as full income.
Surrogacy is becoming more of a need in Canada. If you are using a surrogate, you will now be able to cover and claim those expenses under the medical tax revenue in Canada.
In the intergenerational shares transfers process, they are extending the consultation process to figure out how to fix this and hope to have a report by June 17th.
Tweetable Quotes
“There is a system in Canada called the alternative minimum tax, which is there to test and prevent people from gaming the system too well.” - Jason
“They are going to increase the capital tax from 10 to 15 million, and it will phase it out now over until it is 50 million.” - Jason
“One of the things that got popular since the small business tax measures of a couple of years ago was what is known as non CCPC planning.” - Jason
“If you are employing more than $10 million capital in your business, you are impacted for the better, and you are going to have better access to the small business tax rate.”
Resources Mentioned
Full Transcript:
Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning, financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Well, welcome. Today on the show we have something a little bit different. I will be reviewing, on my own, the federal budget for 2022. Reason is, is that, well, only came out a couple days ago and there was a lot to go through. In fact, there's about 17 key points, both personal and corporate, that I think are worth accounting for. So instead of having the back and forth, it'd be more effective to just tell you what they are. So let's dive in.
Jason Pereira: First we're going to start off with a personal side that impacts everyone, not just business owners. So the first, biggest change is the addition of the tax free, first home savings account, the FHSA. This is a new account, which people or Canadians over 18, who have not owned or lived a home in the current or last four calendar years will be able to contribute 8,000 a year to a lifetime limit of 40,000, and the money will be tax deductible and grow tax sheltered, and then can be taken out tax free to pay for the home, first time home that is.
Jason Pereira: Now, a couple things about this. If you don't use the amount, it can be transferred to an RSP or a refund in the future. Right now, it doesn't impact your room. However, I think those rules might change before they launch. Keep in mind these protocols can be changed prior to full launch day. The other thing that's important here is that you can also move money from an RSP to a first time home buyers, first home savings account, pardon me. And then the most important one here is, unfortunately, you cannot combine this with the existing RSPs, first time home buyers plan. It's either or, you can only use one. Of course, this is tax advantageous and the reason is because you never have to pay this back and it comes out tax free.
Jason Pereira: Now, I'm actually not a huge fan of this. And the reason is because it creates a new account and new complexity. Frankly, I feel they could have tweaked the RSP and the home buyers plan to accomplish the same thing. And not only that, it'll be a lot easier to implement, because I'll tell you right now, a lot of back offices are moaning terribly about having to set this up. Given how complicated that is, it's going to be basically, you might not be ready for January 1, when this thing launches. So in addition to that, if you are buying your first home, you were entitled to a tax credit previously that is now increasing. So it used to be 5,000, it is doubling to 10,000. So that gives you a total tax credit and maximum value of $1,500. So tax credit's important to note. A tax credit may sound like a big number, but the problem, in Canada at least, is you have to apply that credit to whatever federal rate they tell you to and what the federal tax rates.
Jason Pereira:So we have marginal tax rates, rates that go up over time. Unfortunately, the vast majority of credits apply at the lowest rate of 15%. So 10,000 times 15 equals $1,500. And it's, non-refundable, meaning you have to at least pay that in taxes in order to get that back. So that can be used to purchase any basically first home for the family.
Jason Pereira: Another interesting one, the multi-generational home renovation tax credit, basically in recognition to the fact that a lot of people are setting up suites for their loved ones, whether they be over 65 or in cases of kids over 18, who are disabled and eligible for the disability tax credit, there's a new credit. So what that means is that, if you spend up to $50,000, or you can spend whatever you want, but you add on a suite to your home and you renovate an existing dwelling. The first $50,000 of expenditure is considered to be part of this credit. And what that means is that, there's regulations as to what an existing dwelling is and how this all looks, and it has to be basically completed it and done before you fire taxes on it. But all of the eligible expenses, including labor, billing, materials, fixtures, all of that count. However, cost of some things like cost of appliances or financing for renovation, HST costs, those don't.
Jason Pereira: So basically way this works is, if you have a family member, doesn't have to be just a mother or father, it can be uncles, aunts, nieces, nephews, if they're disabled or over 65, and you renovate an existing dwelling to create a suite for them, which does include a kitchen bathroom facility, something kind of like a private apartment, then $50,000 qualifies, that saves you a maximum of $7,500 in taxes.
Jason Pereira: So the home accessibility credit, which is the fourth change. Home accessibility credit has been basically doubled yet again. So it used to be 10,000, now it's 20,000, and this helps pay for renovations and alterations such as wheelchair ramps, walk in bathtubs, little chair lifts, anything to help you get around the house if you physically need to. So that is now $20,000 limit, which means the net benefit is up to $3,000 in savings, if you basically qualify for the full amount.
Jason Pereira: Now, some policies specifically targeted some of the housing issues we have in this country. Let's start off with the first one, the new residential property flipping tax. So basically if you hold a home, buy a home as your principal residence and live in it for less than 12 months before selling it, the principal residence exemption does not apply. In fact, it's not only doesn't apply, but the gain qualifies as full income.
Jason Pereira: So here's the thing and this applies as at January 1st, 2023, but here's the thing about this. Technically this rule already existed, CRA could always disallow the principal residence exemption. Now, if you had a really logical reason for why that happened, say you lost your job or anything else that would make sense, then typically they just turned a blind eye. However, at any point, if they saw, especially if they saw a pattern of you doing this in terms of being a house flipper, then they could disallow it, and there's plenty of cases in court. This probably just makes it a little bit easier to apply, but it's more or less an existing rule.
Jason Pereira: The next one or six change is a ban on foreign purchasers. So basically a two-year ban on foreign purchasers buying homes in Canada. What does that mean? It means people who don't live here and basically are acquiring essentially investment properties in Canada. We can debate how big of an impact this has been, but you know studies have shown over $250 billion has spilled in the country in cases like this over the last 15 years. So will this make a difference? Might be a little bit too late, but better to have it than not. And two years, well, I'm not sure how effective two years is. Also, the reality is, in Canada, we do not have a beneficial ownership directory, which means that basically if people buy this in a corporation, they might be able to get around it. We'll see, we'll see what kind of rules get published in addition to this.
Jason Pereira: Something that affects a lot of us, and this is going to a lot of people, and this is a change the alternative minimum tax credit. Now, they haven't announced what it is, but they've started setting the stage for taxing "the highest income Canadians". In order to support this, they released a chart that showed that something like 28% of people earning over 400,000 are paying less than 15% in taxes. Now here's the thing. Let's take a step back for a second. Frankly, this term is, sorry, this chart or this entire point is completing pure spin. Why is that? Because if you look at the footnotes to the chart, they basically included on the top line for income things like the non-taxable portion of capital gains. So for example, you sell a business and not all of it's sheltered, you basically still pay capital gains on that and only half of the gain is taxable. They included the full amount. You sell an investment property, same thing. You sell a principle residence, so that one we don't know about. We don't know if they included that or not. They might be getting cheeky on that. But the point is that they included money in there that currently, legally, without any fault or any abuse is not taxable.
Jason Pereira: Then, on the bottom line, which is a tax paid, they just basically called it a tax bill, they ignored all the deductions, all the credits, all the things that would basically lower your tax bill, even things as simple as the dividend tax credit. Now that, frankly, is not a true reflection of what people are paying. Because simple example, for those of you who are business owners out there who have yet to incorporate, maybe you have a $500,000 top line and a $80,000 bottom line, and $420,000 is literally legitimate expenses. Technically they're saying you're offside, that you're one of these people who's treating the system. In addition to that again, if something's not taxable, why are you basically suddenly trying to spin it, that someone's creating tax at wish.
Jason Pereira: So this is the thing, there is a system in Canada called the alternative minimum tax. So basically it's there to kind of test and prevent people from gaming the system too well and help intercept them. So basically you calculate your taxes the normal way, and then there's a second way to calculate them. And if the second way equals more, then you basically pay more. Now, typically this is only the case in very, very large capital gains. But what they're saying is that they're going to now look at this and change it. Now here's my theory, they've been talking about increasing the capital gains tax rate for a long time. It is met with popular opposition in general. This is a backdoor way of doing it quite honestly, is if they change the AMT, they're spinning it as the wealthiest Canadians basically doing it. But that's not the case, there's plenty of people who've earned reasonable income for their entire lives. Let's call it sub 100,000.
Jason Pereira: And they go to sell something that they legally can and pay no tax. Like potentially principal residents, if that's what they did or a investment condo that they basically they held for 10 years, whatever it was. I mean, it was the first place they lived in and the non-taxable portion is being counted. So frankly, that to me is just nothing but political spin and rhetoric. And I really wish they would keep it out of it.
Jason Pereira: So that aside, now let's move on to the next one. Tax on real estate assignment sales, previously, if you sold an assignment to someone else, GST would typically not apply, now it does. In addition to that, it's not capital gains, it's fully taxable income. So this is hurting the margins of various people who are basically flipping these things. Hopefully they increase that even further in my opinion, because frankly, these have become nothing but speculative securities.
Jason Pereira: Nine, medical support for Canadians wanting to become parents. So to date, the credits, all your deductions that you qualify for, for expenses, for medical expenses that are pertaining to say individual fertilization or something of the sort, they qualified, but not if you use the surrogate. So surrogacy is becoming more of a need in Canada and more common. And they have now extended it to allow for those medical expenses to qualify for the person paying for it. So if you're using a surrogate, you will now be able to cover those spouted or to claim those expenses under the medical tax credit in Canada.
Jason Pereira: And moving on. Next, there's one policy affecting charities in Canada in that they did a study saying that, hey charities, you're basically supposed to pay at about 3.5% per year of what is currently invested in your charitable fund. Well, you're piling up assets faster than you're piling up expenses. So this number's going kind of gang busters. So they're going to increase it to probably about 5% with the ability to pay lower if you have any issues. But the point is that basically making that those large endowments charities have pay out more money to get to people sound sooner. Might be good, might be bad, depends on the charities' individual situation.
Jason Pereira: That covers all the personal tax changes. Quite honestly, it was not a lot. There was some boutique tax credits. The big one of course was the first time home savings account. I sincerely hope that they revisit this and simply take this into the RSP. And again, I'll tell you, it will be a lot easier for all parties to administer and probably lower cost to do so. So it is hopefully something that a sober second thought will correct. And then, the concerning thing, like I said, is basically the rhetoric around the alternative minimum tax. And one thing I didn't cover was they did mention vaguely that they're going to, kind of encouraging the otters to apply the general anti avoidance rule more frequently. But that's a highly subjective rule that says, "Oh, you've done too well. So guess what? You're offside." So I'm a little bit concerned that audits might start to become a little bit more predatory. Listen to my last podcast if you want to know what I mean by that.
Jason Pereira: On to corporate taxes, a couple of changes here. First one is the small business tax deduction. So the way this works and we discussed this in previous podcasts is that the first half million dollars of active business income in Canada is taxed at the lower small business rate and then anything in there after is taxed at the general rate. Now, depending on what province you're in, it's usually the low teens for small business rate and then the general rate somewhere around 25-ish, 26%, varies from province to province. Now here's the thing, you start to lose access to this small business rate when one of two things happens, you have capital that exceeds $10 million. And what that means is that you have more than $10 million in assets employed in your business, and then it all disappears. And then what happens is you start to lose it and it all disappears around $15 million. So at 15 million in capital, you're basically paying just the general rate, whereas between 10 and 15, there is a blend of the two, and then under 10, it's basically just the small business rate again, only on the first 500,000.
Jason Pereira: So the other way, is if your passive income or a specific calculation called adjusted aggregate investment income exceeds $50,000 and then it disappears once the small business tax rate disappears at 150. So what happens is that, when you exceed one of those thresholds, the amount 500,000 starts to reduce down to 400, 300, whatever it is, over time until it hits zero and you're left with nothing but the general rate. So the change happening here is that they're going to increase the capital test from 10 to 15 million, and it will phase it out now over until it hits 50 million. So before, if you had 10 million, if you had more than 10 million, you're starting to lose some of the small business tax rate at 15, you lost it all. Now it's going to be 15 to 50 and that'll take place as of April 7th of this year.
Jason Pereira: There are specific credits now available for those who are using carbon capture utilization storage. So if you are a business that is carbon heavy and you're looking to capture that and utilize it, there are tax credits available to you as well as clean technology tax credits. So for example, heat pumps, that's the one they've cited specifically, which will reduce taxes by up to 50% on certain tax rates. And then also things like zero emission vehicles. So again, pushing the climate agenda in the corporate sphere, which nothing wrong with that.
Jason Pereira: Capital cost allowance for clean energy equipment. If you are basically purchasing and installing clean energy equipment, there is now an increase in the capital cost allowance rules, meaning that you can basically deduct it faster than you would otherwise. Critical mining exploration tax credit. This is basically targeting what are known as flow through shares, shares that flow through exploration expenses down into your personal tax rate and give you a write off. Never been a big fan of these for various investment reasons, but basically they are going to stop letting oil exploration and carbon based stuff do them. Only mining still exists to the best of my knowledge. However, there's now rules around how that works and how much qualifies.
Jason Pereira: Intergenerational share transfers. So we've talked about this before. I had Kim Moody on, previously talking about Bill C208 and ridiculous flaws. And here's what it really comes down to. Currently, if you want to sell your business to your child versus another business coming along and buying it, you're technically disadvantaged. What do I mean by that? If I came in and wanted to buy your business and I used corporate assets to do so, I could use corporate assets to only pay the small business or the general tax rate. Now, if I sell the small business to my kids and try to use the money within the corp to pay for that, well, that doesn't count, as they flow out personally. So there's some best in general principle, Kim and I got deep into it. Bottom line is they know that there's issues with that. There's also some really big ambiguity around things surrounding this and strategy surrounding this. So they are basically extending the consultation process to figure out how to fix this and hope to have a report by June 17th. We will see. So this is another one of those of, "Hey, but we're coming back to this," just like with the AMT.
Jason Pereira: And tax deferring using foreign entity. So one of the things that got popular since these small business tax measures of a couple years ago, was what is known as non CCPC planning, Canadian Cold Controlled Private Corporations. Companies will reorganize themselves to no longer be Canadian Controlled Private Corporations, typically with some sort of offshore component in a tax preferable domicile to avoid some of these tax measures, including these small business, the one we talked about when it comes to passive income and losing more than 50 cents on a dollar when you make a dollar of passive income. So they are now targeting this. I'm not sure how they're going to do it, but they're coming after it.
Jason Pereira: So that is a quick summary of the budget. So what impacts you as a business owner? Well, if you're in the clean tech sphere, you're impacted, take a look you're better off because of tax credit. If you're employing more than $10 million in capital in your business, you're impacted for the better, you are going to have better access to the small business tax rate. You're installing clean tech in your business for energy. Well, for, I believe heating and energy generation situations, you're better off as well. If you organize your business from an CCPC to a non-CCPC, you are worse off. And the intergenerational wealth transfer aspect is still being looked at. I really hope they fix that because frankly it is not fair.
Jason Pereira: On the personal side, like I said, we have that new savings account. Again, just hope they tweak the RSP instead, but regardless, this will be a vehicle, primarily in my belief for parents to help kids save money on tax deferred basis towards buying a house. A lot of people, quite honestly, aren't going to have the extra grant regardless, so it doesn't solve much there. And then a bunch of other issues that were brought up and raised and yeah, the AMT, the alternative minimum tax. They're definitely looking at it and I do believe it to be a backdoor way of increasing capital against taxation.
Jason Pereira: So lots of stuff going on, nothing too material this time around. I expect us to hear more stuff in the summer, because they basically have some announcements coming on all these various things and we'll see how this continues to unfold. Feel free to reach out, or I would suggest speak to your accounts about how any of these measures basically impact you. And that is all for today. If you enjoyed this podcast, please leave a review on Apple podcast, Stitcher, SoundCloud, Spotify, or whatever's your podcast. And until next time, take care.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm, catering to high net worth individuals, business owners, and their families. To learn more, go to woodgate.com. You could subscribe to this podcast on Apple podcast, Stitcher, Google play, and Spotify, or find more episodes at jasonpereira.ca. You can even ask Siri, Alexa or Google Home to subscribe for you.