On April 7, 2022 (Budget Day), Canada's Finance Minister (and Deputy Prime Minister), Chrystia Freeland, delivered her second budget in the House of Commons (Budget 2022).

The stated focus of Budget 2022 is a growth agenda focusing on three "pillars" (presumably an expression borrowed from the OECD): (i) "modern" supply-side economics; (ii) the green transition; and (iii) tackling the "Achilles heel" of Canada's economy, productivity and innovation.

The good news for all individual taxpayers is no increase in tax rates and, for those whose beverage of choice is lowalcohol beer, the elimination of excise duty on that product! For some high-income Canadians, the bad news is that the Government is committed to changing the alternative minimum tax (AMT) so that "wealthy" Canadians pay their "fair" share. Details will be forthcoming in the fall 2022 economic and fiscal update. Measures are also proposed to address the manipulation of Canadian-controlled private corporation (CCPC) status to avoid additional refundable corporate income tax on investment income, as well as a residential property flipping rule.

Given pre-Budget speculation, banks, life insurers and other financial institutions are, not surprisingly, targets for rate increases and a number of specific anti-avoidance rules. Moreover, the Government "expects federally regulated financial institutions to demonstrate an exemplary level of corporate behaviour" and "proposes to examine potential changes to the financial transaction approval process to limit the ability of federally regulated financial institutions to use corporate structures in tax havens to engage in aggressive tax avoidance". No details are provided.

In fact, Budget 2022 is noteworthy for its lack of detail on a number of significant proposals. Unlike previous budgets, there is little in the way of proposed legislation. There will be consultations on a number of proposals including "modernizing" the general anti-avoidance rule.

On the compliance side, the Canada Revenue Agency (CRA) is to be provided with an additional $1.2 billion over five years to expand audits of larger entities and non-residents engaged in aggressive tax planning, increase the investigation and prosecution of those engaged in criminal tax evasion, and expand its educational outreach.

Our commentary, which focuses on the tax measures in Budget 2022 that are most relevant to businesses, is provided below.

Unless otherwise stated, all statutory references are to the Income Tax Act (Canada) (Tax Act).




No surprise here. Budget 2022 proposes to introduce a one-time 15% tax (CRD) on bank and life insurer groups.

No draft legislation accompanied the Budget proposal. Budget 2022 states that a group would include a bank or life insurer and any other financial institution (for the purposes of Part VI of the Tax Act) that is related to the bank or life insurer.

The term "financial institution" in Part VI refers to a corporation that: (i) is a bank; (ii) is authorized under the laws of Canada or a province to carry on the business of offering its services as a trustee to the public; (iii) is authorized under the laws of Canada or a province to accept deposits from the public and carries on the business of lending money on the security of real property or investing in mortgages on real property; or (iv) is a life insurance corporation that carries on business in Canada. It also includes a corporation all or substantially all of the assets of which are shares or indebtedness of such corporations to which the corporation is related.

The term "bank" is defined in the Tax Act to mean "a bank within the meaning assigned by section 2 of the Bank Act (other than a federal credit union) or an 'authorized foreign bank' ". Thus, Canadian chartered banks, Canadian subsidiaries of foreign banks and Canadian branches of foreign banks would appear to be within the scope of the CRD.

Interestingly, a subsidiary of a "financial institution" that is not itself a financial institution (e.g., an investment dealer) would not be within the scope of the CRD.

The tax is to be imposed for a corporation's 2022 taxation year but based on its taxable income for taxation years ending in 2021. It is proposed that there will be an exemption for $1 billion of taxable income that must be allocated by agreement amongst group members.

The tax will be payable in equal amounts over five years.


Budget 2022 proposes to introduce an additional tax of 1.5% of taxable income for members of bank and life insurer groups (determined in the same manner as the CRD). Again, no draft legislation accompanied this Budget proposal.

It is proposed that there will be an exemption for $100 million of taxable income that must be allocated by agreement amongst group members.

The proposed additional tax is to apply to taxation years that end after Budget Day. For a taxation year that includes Budget Day, the tax will be pro-rated based on the number of days in the taxation year after Budget Day.

The CRD and the additional 1.5% tax are expected to raise $6.1 billion over the next five years, with the 1.5% additional tax expected to raise $445 million ongoing.


Budget 2022 proposes amendments to the definition of "dividend rental arrangement" in subsection 248(1) (relevant to the inter-corporate dividend deduction (DRD) under section 112) and the securities lending arrangement rules in section 260. The amendments target certain transactions undertaken by financial institution groups.

The particular types of transactions targeted are ones in which

  • a Canadian taxpayer (generally a financial institution) (Can FI Taxpayer) owns shares of a Canadian public corporation that pays dividends (Can Pubco Shares);
  • a registered securities dealer (Can Dealer) in Can FI Taxpayer's corporate group separately borrows Can Pubco Shares under a securities lending arrangement; and
  • Can Dealer sells the borrowed Can Pubco Shares to another person (this is referred to as a short position because Can Dealer must return to the lender at a future date shares identical to the Can Pubco Shares borrowed under the securities lending arrangement).

Budget 2022 states that this arrangement results in Can FI Taxpayer's corporate group eliminating its economic exposure to the Can Pubco Shares, as Can FI Taxpayer would continue to hold the Can Pubco Shares but Can Dealer would be obligated to deliver Can Pubco Shares to the lender under the securities lending arrangement. The concern expressed by Budget 2022 is that Can FI Taxpayer's corporate group also creates an artificial tax deduction:

  • Can FI Taxpayer would receive dividends on the Can Pubco Shares but would be entitled to the DRD under subsection 112(1) for the dividends received such that these dividends are received on a tax-free basis; and
  • Can Dealer would be required to make dividend compensation payments in respect of dividends on the Can Pubco Shares to the lender under the securities lending arrangement and, as a result, Can Dealer would be entitled to deduct 2/3rds of such dividend compensation payments because of subsection 260(6).

The net effect, according to the Government, is an artificial tax deduction equal to 2/3rds of the dividend compensation payments.

Budget 2022 proposes to add a definition of "specified hedging transaction" to subsection 248(1) that is intended to capture the type of arrangement described above. If an arrangement is a specified hedging transaction, it will be a dividend rental arrangement, the DRD under subsection 112(1) will be denied, and the registered securities dealer will be permitted to deduct 100% of the dividend compensation payments.

In general terms, a specified hedging transaction is a transaction (including an arrangement or event) or series of transactions by a registered securities dealer in respect of a "DRA share" that is owned by it or by a person (Other NAL Owner) that does not deal at arm's length with, or is affiliated with, the registered securities dealer, where:

  • the transaction or series has the effect, or would have the effect if the transaction or series were entered into by the Other NAL Owner instead of the registered securities dealer, of eliminating all or substantially all of the risk of loss and opportunity for gain or profit in respect of the DRA share; and
  • if the DRA share is held by the Other NAL Owner, the transaction can reasonably be considered to have been entered into with the knowledge, or where there ought to have been the knowledge, that the effect described above would result.

In addition, the following amendments are proposed:

  • an amendment to the definition of "dividend rental arrangement" in subsection 248(1) to include a specified hedging arrangement (the DRD under subsection 112(1) is denied for dividend rental arrangements); and
  • amendments to paragraph 260(6)(a) and subsection 260(6.2) to permit Can Dealer (the registered securities dealer) to deduct the lesser of (i) 100% of the dividend compensation payment and (ii) the amount of the denied DRD.

Budget 2022 makes the comment that it is believed that these arrangements could be challenged under the existing legislation, but states that these challenges are time consuming.

The proposed amendments would apply to dividends and related dividend compensation payments that are paid, or become payable, on or after Budget Day, unless the relevant hedging transactions or related securities lending arrangements were in place before Budget Day, in which case the amendment would apply to dividends and related dividend compensation payments that are paid after September 2022.

The proposed amendments are expected to raise $635 million over the next five years.

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