Federal Budget 2022 offers minor tax relief for business, funding for innovation
The federal government’s Budget 2022 contained several new proposed measures, both from a personal and corporate tax perspective, in addition to various new spending initiatives and tax credits. These measures will have some impact on the business community, but when it comes to Canada’s economic outlook as a whole—including strategies to manage runaway inflation and public debt—they are arguably more consequential. Specifically, the approximately $56 billion in new spending commitments over six years could fuel greater wage and price increases than we’ve seen to date.
Yet in the near term, rising energy and commodity prices have handed Ottawa a fiscal lifeline. As Budget 2022 explains, Finance Minister Chrystia Freeland should have an additional $85.4 million in revenue to play with over six years, as compared to a far less bountiful income projection in last fall’s fiscal update. At the same time, the federal deficit is estimated at $52.8 billion for 2022-23, a vast improvement over the $113.8 billion shortfall for 2021-22. The deficit is projected to steadily decline to $8.4 billion in 2026-27, with the federal debt-to-GDP ratio also slowly dropping to 41.5 per cent from 45.1 per cent this year. But these are hardly figures that should generate much excitement.
Observers will note that balanced books are, once again, not in the government’s sightlines. And with the Liberals and NDP recently signing a confidence-and-supply agreement that would keep the former in power through their current mandate (unless the deal collapses), we shouldn’t expect the Grits to find religion in fiscal frugality any time soon.
No new taxes
On the plus side for business owners and their organizations, Budget 2022 does not propose any direct increases to personal or corporate tax rates—as we outline in our second Budget 2022 blog featuring significant personal tax and economic spending highlights—nor does it include an increase to the capital gains inclusion rate. Speculation swirled in the lead-up to yesterday’s announcement that Ottawa was planning significant new taxes or major hikes, which didn’t materialize. However, changes to non-CCPC tax treatment and GARR application rules will have an impact on many entrepreneurs.
One of the most significant tax amendments for small to medium-sized businesses was a proposed change to the Small Business Deduction. Currently, a Canadian-controlled private corporation (CCPC) is taxed at a reduced corporate income tax rate of 9 per cent on qualifying active business income of up to $500,000 per year (the general corporate income tax rate is 15 per cent), when the taxable capital employed in Canada by the CCPC is between $10 million and $15 million, or the aggregate investment income of the CCPC is between $50,000 and $150,000.
If passed, the new range for taxable capital would be $10 million to $50 million. The objective is to encourage SMEs to invest in growth and innovation—a theme that emerged throughout the budget document.
As the budget notes:
“A CCPC with $30 million in taxable capital would have up to $250,000 of active business income eligible for the small business deduction, compared to $0 under current rules; and a CCPC with $12 million in taxable capital would have up to $475,000 of active business income eligible for the small business deduction, compared to up to $300,000 under current rules.” The measure would take effect on tax year beginning on or after budget day.
While Budget 2022 largely side-stepped measures that would directly antagonize the business community, it did commit to a broad range of new spending. Some of the most significant business-related proposals include:
- A one-time 15 per cent tax on bank and life insurance companies—known as the Canada Recovery Dividend. The levy would be based on a corporation’s taxable income exceeding $1 billion for the 2021 tax year, along with an additional (and permanent) 1.5 per cent corporate income tax increase on banks and insurance companies’ taxable income exceeding $100 million—increasing the overall federal corporate income tax rate above that threshold to 16.5 per cent
- An elimination of flow-through shares for oil and gas companies beginning March 31st, 2023
- Further consultations to refine the inter-generational tax legislation (Bill C-208) passed last year, with the goal of mitigating any abuse of new rules that allow for more favourable tax treatment of inter-generational business transfers within families
- The expected elimination of non-Canadian-controlled private corporation (CCPC) tax planning. In effect, this would ensure that investment income earned by private corporations that are, in substance, CCPCs, are taxed the same as CCPCs, preventing private corporations from opting out of CCPC status or circumventing anti-deferral rules applicable to CCPCs. There will also be changes to Canada’s FAPI regime that will prevent the deferral of taxes using foreign entities
- Enhancing the General Anti-Avoidance Rule so that it applies to transactions affecting tax attributes that have not yet been used to reduce taxes (e.g., artificial paid-up capital increases). Consultations on the changes will run through summer, with legislation to be tabled by the end of this year
- Creating a specific anti-avoidance tax rule to ensure appropriate taxes are paid when interest coupon stripping tactics are used to avoid tax liabilities on cross-border interest payments
- Establishment of a new Canada Growth Fund to increase private sector investment in areas such as emissions reduction, low-carbon technology innovation and supply chain restructuring
- $1 billion over five years for a new federal Canadian Innovation and Investment Agency to drive innovation and growth across the economy
- A full review of the Scientific Research and Experimental Development (SR&ED) program to assess its effectiveness and to explore opportunities for the program’s modernization and simplification
- $750 million in funding over six years to support the Global Innovation Cluster program
- A Labour Mobility Deduction of as much as $4,000 per year for travel and temporary relocation expenses for tradespeople and apprentices
- $272.6 million over five years to develop and implement an employment strategy for people with disabilities
- Improvements to the Temporary Foreign Worker program, including $29.3 million over three years to implement a Trusted Employer Model for organizations that repeatedly hire foreign workers and $48.2 million to develop a new foreign labour program for the agriculture and fish processing sectors
- Funding for mineral mining projects, including as much as $1.5 billion over seven years for the development of critical mineral supply chains, $79.2 million over five years for Natural Resources Canada and a new 30 per cent Critical Mineral Exploration Tax Credit for mineral exploration in Canada
- As much as $1 billion over six years for a Strategic Innovation Fund for critical minerals projects
- $603.2 million over five years to enhance Canada’s transportation infrastructure and support supply chain projects
- A commitment to develop an Employee Ownership Trust that would encourage employee ownership of businesses. The aim would be to facilitate the transition of privately-owned companies to employees if/when an owner-operator decides to exit
- An additional $1.2 billion in funding over five years, beginning in 2022-23, for Canada Revenue Agency enforcement and audits of ‘larger entities and non-residents engaged in aggressive tax planning’
Read our full technical summary of the budget here.
While the Liberals say they’re dedicated to driving the growth of Canada’s economy, there is little in the budget to promote that outcome. The array of tax credits, new spending and long-sought changes to the Small Business Deduction are encouraging, but the business investment climate remains challenging for Canadian start-ups and growth-oriented companies. Notably, our national productivity rate falls short by OECD standards.
This is yet another tax-and-spend budget from the Trudeau Liberals made possible by an inflationary revenue windfall. They should enjoy the party while it lasts. Once the treasury’s coffers empty again and debts need to be repaid, we’ll have to find ways to pick up the tab.
Armando Iannuzzi, Co-Managing Partner
For more information on how the federal budget impacts you or your business, contact a member of our team.