The Federal Budget proposes the following tax changes for businesses.
Small Business Deduction
The Small Business Deduction (SBD) allows small businesses to benefit from a reduction in the federal corporate income tax rate from the general rate of 15% down to 9%. The SBD applies on the first $500,000 of active business income earned by a Canadian Controlled Private Corporation (CCPC), defined as the “business limit”.
The business limit must be allocated amongst corporations that are associated in a taxation year and is reduced by any portion that the CCPC assigns to another corporation. The CCPC's remaining business limit is then further reduced on a straight-line basis when:
- The combined taxable capital employed in Canada of the CCPC and any associated corporations is between $10 million and $15 million, or
- The combined adjusted aggregate investment income of the CCPC's and its associated corporations is between $50,000 and $150,000.
The budget proposes to extend the range over which the business limit is reduced based on the combined taxable capital employed in Canada of a CCPC and its associated corporations. Effective as of April 7, 2022, the maximum of the range for the taxable capital would be extended to $50 million.
This change will increase the amount of qualifying active business income that can be eligible for the SBD for companies with taxable capital up to $50 million from the current $15 million.
Canada Recovery Dividends (CRD) and additional tax on banks and life insurers
The budget proposes to introduce the CRD as a one-time 15% tax on bank and life insurer groups on taxable income exceeding $1 billion. A group would include a bank or life insurer and any other financial institution (as defined under Part VI of the Income Tax Act) that is related to the bank or life insurer. The CRD will be determined based on the corporation's taxable income for the taxation years ending in 2021, and the $1 billion taxable income exemption will be allocated amongst bank and life insurer group members.
The CRD liability will be imposed in the 2022 taxation year. Groups will be permitted to pay the CRD over five years in equal installments.
The budget also proposes an additional tax on bank and life insurer groups of 1.5% on taxable income over $100 million for taxation years that end after April 7, 2022. The $100 million taxable income exemption will be required to be allocated by agreement amongst all group members.
The additional tax will be prorated for the taxation year based on the number of days in the taxation year after April 7, 2022.
Genuine intergenerational share transfers Bill C-208
A change was made as a result of Bill C-208 to allow certain transfers of closely held small businesses, including farming and fishing businesses, to be made in a tax-efficient manner when shares were transferred to the children or grandchildren of the owners.
The budget announces a consultation process for Canadian stakeholders to share views on the existing rules and how these rules could be modified to protect the integrity of the tax system while still facilitating genuine intergenerational transfers.
Substantive CCPCs - Deferral of tax using foreign entities
The budget proposes to prevent the deferral of tax on investment income by companies controlled by Canadian residents who are using foreign entities to avoid the tax imposed on CCPCs. The proposal would prevent such deferral by aligning the taxation of investment income of such corporations to CCPCs.
The budget introduces the term ‘Substantive Canadian Controlled Private Corporation' (SCCPC). A SCCPC will expand the definition of control to deem the corporation to be controlled by Canadian individuals owning shares either directly or indirectly.
SCCPC will pay tax on investment income at a federal rate of 38 2/3% of which 30 2/3% will be refundable upon distribution to shareholders. The investment income earned will also be added to the ‘low rate income pool' of the SCCPC which will prevent shareholders from receiving access to enhanced dividend tax credits, thereby making dividend income from a SCCPC less tax efficient then under the previous rules. SCCPCs would continue to be treated as non-CCPCs for all other purposes of the ITA.
Further amendments to legislation are proposed to extend the normal reassessment period by one year for any consequential assessment of Part IV tax that arises from a corporation being assessed or reassessed a dividend refund.
These measures would apply to taxation years that end on or after April 7, 2022 unless specific exceptions apply.
Application of the General Anti-Avoidance Rule to tax attributes
The general anti-avoidance rule (GAAR) is intended to prevent abusive tax avoidance transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction. The CRA generally applies GAAR once a transaction has caused an assessment of tax. Where GAAR applies to a transaction, the CRA can utilize the rules to determine the amount of a tax attribute, such as the adjusted cost base of a property and the paid-up capital of a share, through a notice of determination.
A recent Federal Court of Appeal ruling held that GAAR did not apply to a transaction that resulted in an increase in a tax attribute that had not yet been utilized to reduce taxes. The budget proposes to allow GAAR to also apply where transactions affecting tax attributes have not yet impacted the computation of tax. This measure would apply to notices of determination issued on or after April 7, 2022.
Deferring tax using foreign resident corporations – Foreign Affiliate Passive Investment Income
Budget 2022 proposes a significant change to the way that foreign investment income from controlled foreign affiliates will be taxed when received by private corporations controlled by Canadians. The stated aim of the changes is to ensure the taxation of this investment income is consistent with the taxation of such income if received directly from the foreign affiliate by a Canadian resident individual instead of through a Canadian corporation. The immediate impact is to reduce the deferral of tax on such income.
These measures would apply to taxation years beginning on or after April 7, 2022.
Investment Tax Credit for Carbon Capture, Utilization, and Storage
The budget proposes a refundable investment tax credit for businesses that incur eligible carbon capture, utilization, and storage (CCUS) expenses, starting on Jan. 1, 2022. The CCUS Tax Credit would be available in respect of the cost of purchasing and installing eligible equipment used in an eligible CCUS, so long as the equipment was part of a project where the captured CO2 was used for an eligible use.
Eligible equipment would include equipment that will be used solely to capture, transport, store, or use CO2 as part of an eligible CCUS project. Investors in CCUS technologies would be able to claim the CCUS Tax Credit on eligible expenses in respect of the tax year in which the expenses are incurred, regardless of when the equipment becomes available for use. The CCUS Tax Credit would not be available for equipment in respect of which a previous owner has received the CCUS Tax Credit.
The following rates would apply to eligible expenses incurred after 2021 through 2030:
- 60% for eligible capture equipment used in a direct air capture project,
- 50% for all other eligible capture equipment, and
- 37.5% for eligible transportation, storage, and use equipment.
These rates will be reduced by 50% for the period from 2031 through 2040 to encourage the industry to move quickly to lower emissions.
Projects would be assessed at five-year intervals when they begin to capture CO2 to a maximum of 20 years to determine if a recovery of the CCUS Tax Credit is warranted. Assessments would be based on the total amount of CO2 going to an ineligible use over the five-year period being assessed. A recovery would be calculated if the portion of CO2 going to an ineligible use is more than five percentage points higher than set out in the initial project plans.
Specific design features of the recovery will be released at a later date.
Critical Mineral Exploration Tax Credit
Budget 2022 proposes to introduce a new 30% Critical Mineral Exploration Tax Credit (CMETC) for specified minerals consumed in the production of batteries and permanent magnets used in zero-emission vehicles, or in the production and processing of advanced materials, clean technology, or semi-conductors. The specified minerals that would be eligible for the CMETC are copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals, and uranium.
Eligible expenditures would not benefit from both the proposed CMETC and the existing Mineral Exploration Tax Credit (METC), which is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.
The CMETC would apply to expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022 and on or before March 31, 2027.
Clean technology tax incentives – Air-source heat pumps
The budget proposes several incentives to encourage investment in air-source heat pumps, a specific type of clean energy generation equipment. An air-source heat pump is a device that uses electrical energy to provide interior space heating or cooling, as an alternative to the use of fossil fuels.
The budget recommends to:
- Expand eligibility under Classes 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating, and
- Include the manufacturing of air-source heat pumps used for space or water heating as an eligible zero-emission technology manufacturing or processing activity for the purposes of the temporary corporate tax rate reduction for qualifying zero-emission technology manufacturers, previously announced as part of the 2021 Budget.
Flow through shares for oil, gas and coal activities
The budget proposes to eliminate the flow-through share regime for oil, gas, and coal activities by no longer allowing oil, gas, and coal exploration and development expenditures to be renounced under a flow-through share agreement effective under such agreements entered into after March 31, 2023.
Flow-through share agreements allow corporations to renounce both Canadian exploration expenses and Canadian development expenses to investors, who can deduct the expenses in calculating their taxable income.
Annual disbursement quota for registered charities
Registered charities are generally required to expend a minimum amount each year, referred to as the disbursement quota (DQ). The purpose of the DQ is to ensure the timely disbursement of tax-assisted funds towards charitable purposes, while allowing for reasonable asset growth to support charitable activities in the future. The DQ is currently equal to 3.5% of the registered charity's property not used directly in charitable activities or administration.
To increase expenditures by larger charities, and improve the enforcement and operation of the DQ rules, the budget proposes to:
- Increase the DQ rate from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1 million
- Amend the ITA to clarify that expenditures for administration and management are not considered qualifying expenditures for the purpose of satisfying a charity's DQ
- Amend the existing rules to allow the CRA the discretion to grant a reduction in a charity's DQ obligation for any tax year where the charity is unable to meet its DQ, and allow the CRA to publicly disclose information relating to such a decision
- Remove the accumulation of property rule allows a charity to apply to the CRA for permission to accumulate property for a specific purpose
These measures would come into force for charities' fiscal periods beginning on or after Jan. 1, 2023. The amendment removing the accumulation of property rule would not apply to approved applications submitted prior to Jan. 1, 2023.
For more information, please contact:
Dave Walsh, Managing Partner, Tax Service Line
Rachel Gervais, Tax Service Line Leader, GTA and Private Wealth Leader
Bruce Sprague, Tax Service Line Leader, Western Canada
Greg London, Tax Service Line Leader, Eastern Canada
The information in this publication is current as of April 7, 2022.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.