When Finance Minister Chrystia Freeland delivered her second federal budget in April, the good news for taxpayers was twofold.
First, no personal tax increases were announced. Second, the capital gains inclusion rate didn’t change. (This wasn’t a surprise, however; even before the budget, the Finance Minister stated the government wouldn’t alter the position of capital gains on principal residences or equity markets.)
While there were no changes to these tax measures, it’s also not surprising that governments in Canada and elsewhere are exploring revenue-generating taxes and stepping up efforts to combat aggressive tax avoidance.
This need to find new revenue is due, in part, to cover spending during the pandemic crisis. This year’s budget put the federal deficit at nearly $114 billion in 2021-2022 (though that’s less than the approximately $300 billion the previous year) and included $57 billion in proposed new spending.
Restarting the economy
In crafting this latest budget, the government needed to strike a delicate balance by restarting key parts of the economy that have struggled over the past two years without further triggering inflation.
Although Canada’s economy continues to be resilient overall, scratch beneath the surface and the challenges facing taxpayers and businesses are evident. Inflationary pressures are showing up at the gas pump and in the grocery cart, amid rising interest rates and continuing supply chain disruptions. The global impacts of climate change and pervasive uncertainty have also added to the complexity.
The new luxury goods tax applies to cars and personal use aircraft that cost more than $100,000 and boats or yachts over $250,000.
So how does this all shake out in terms of you and your taxes? Consider some of these notable federal budget tax changes and measures, many of which are moving forward this fall.
New minimum tax regime for HNW individuals
The government is looking at a new minimum tax regime for high-net-worth Canadians. It’s still at the concept stage, and details on a proposed approach are expected in this fall’s economic update. Currently, the top federal tax rate of 33 per cent kicks in on income of about $220,000.
There’s also an alternative minimum tax that may apply, depending on the deductions and credits claimed and type of income. This second “alternative” tax measure hasn’t been substantially updated since it was first introduced in 1986, and the government has voiced concerns that the rules need to be strengthened. This review aims to ensure a minimum tax is paid by certain high-net-worth individuals who pay relatively little personal income tax as a share of their income. Stay tuned for future developments.
The new luxury goods tax – coming Sept. 1
The new luxury goods tax, which was first announced in the 2021 federal budget, is expected to come into effect on Sept. 1. The one-time tax applies to cars and personal use aircraft that cost more than $100,000 and boats or yachts over $250,000 (manufactured after 2018), unless a specific exemption applies.
Here’s how the tax is calculated:
- Twenty per cent of the retail sale price above the price threshold ($100,000 for cars/planes and $250,000 for boats/yachts); or
- Ten per cent of the retail sale price of the car, aircraft, or boat/yacht – whichever is less.
Businesses will be required to calculate the tax at importation and remit the tax after the sale. Generally, if you want to modify or improve your new car, plane or boat, this tax may also apply.
Overall, this new consumption tax is one of the government’s latest revenue-generating measures. It’s also something to think about if you’re fortunate enough to be in the market for one of these big-ticket items.
Getting more Canadians into electric vehicles
Speaking of cars, the budget committed to extend the existing consumer rebate program of $5,000 for fully electric vehicles ($2,500 for hybrid vehicles) until March 2025 and expand the program to include more models. To support this green initiative, the government is also investing in thousands of new EV charging stations to power these vehicles.
Keeping businesses in the family
Finally, if you’re thinking about passing on the family business to your children or grandchildren, take note: The budget announced a consultation process for new tax rules that are intended to help business owners avoid being penalized with a higher tax bill when transferring shares of the family business to the next generation These new rules came into force in June 2021 with the passage of a Private Member’s Bill (C-208).
Historically, a parent who operated a family business through a company was unintentionally penalized if they sold shares of that company to a company controlled by their adult child or adult grandchild. The reason? Any gain on those shares would have been taxed in the parent’s hands as a dividend. In contrast, any gain on a similar sale of shares to an arm’s length third party would have been taxed as a capital gain.
As a result many business owners were unable to use their lifetime capital gains exemption and were taxed at a higher rate (dividends are taxed at a higher rate than capital gains).
The difference in the tax treatment was a source of real concern for many owners who wanted to keep the business in the family. The passage of Bill C-208 made it possible to level the tax playing field in certain cases; however, the Finance department indicated it would tighten up the new rules to make sure they only apply to genuine intergenerational transfers.
Focus on housing
A particular budget announcement that garnered a lot of attention is the new tax-free home savings account for first-time home buyers. Starting in 2023, Canadians will be able to contribute up to $8,000 a year to the account that is tax-deductible, up to a maximum of $40,000 in contributions.
The budget also introduced new “anti-flipping” tax rules for residential properties. These rules deem the profits from the sale of a house or condo as business income if it’s not held for at least 12 months before it’s sold. In other words, no capital gains treatment or principal residence exemption. Certain exceptions would apply, based on personal life circumstances (e.g. divorce, death or disability).
There were also some enhancements and new tax credits for multigenerational home renovations and to improve the accessibility of homes for seniors and people living with disabilities.
Keep an eye out for these and other upcoming tax measures and be sure to take advantage of any potential tax savings.
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