Canada: Major Canadian Tax Changes Coming In 2023

Crowe MacKay's tax experts share insight on Canadian tax changes announced by the Federal Government impacting individuals, families, and businesses.

Trust Reporting Requirements

There are new reporting requirements for trusts requiring most trusts to file a T3 return, regardless of income or activity levels (with some exceptions, see below). The new reporting requirements were first proposed in the 2018 Federal Budget and the implementation has been delayed to apply to trusts with taxation years that end on or after December 31, 2023, and will require disclosure of information about the settlor, trustees, and beneficiaries (including contingent beneficiaries), such as name, address, date of birth, jurisdiction of residence, and taxpayer identification number (e.g., SIN).

Certain trusts are excluded from these new rules including:

• Trusts that have been in existence for less than three months
• Trusts that hold assets with a maximum of $50,000 in fair market value throughout the year (these assets are limited to deposits, government debt obligations, and listed securities)
• Graduated rate estates
• Qualified disability trusts

There are significant penalties for non-compliance so you should start gathering the required information if these rules apply to you.

Residential Anti-Flipping Rules

The 2022 Budget proposes to target individuals who purchase a house (or any kind of residential property) and sell it for much more than they purchased it for if the sale occurs within 12 months of the original purchase. They intend to accomplish this by mandating that unless the home was sold in the 12 month period for the purposes of dealing with a major life event such as a death or disability of a family member, birth of a child, a new job, or a divorce, the sale would be required to be reported as business income with no ability to claim the property as either a capital property or a principal residence.

Multi-Generation Home Renovation Credit

The 2022 Federal Budget recognizes many Canadians live in multigenerational homes with grandparents, parents and children living together, and proposes the Federal Government supports these families by providing a home renovation tax credit up to $7,500 when the renovation is for the purposes of establishing a secondary suite for a senior or an adult with a disability.

Tax-Free First Home Savings Account

To assist Canadians with the increasing challenge of saving for a down payment on a first time home, the 2022 Budget proposes to introduce a new tax-free first home savings account that blend the benefits of both RRSP's and tax-free savings accounts. Specifically, contributions to the account would be tax-deductible in a similar fashion to a RRSP but the withdrawal (provided it was for the purchase of a new home), would be non-taxable, similar to the existing tax-free savings account. The maximum amount for this proposed account would be $40,000.

Digital Service Tax

Canada is working with members of the OECD and G20 to bring a multilateral agreement into effect based on a two-pillar plan for international tax reform agreed on October 8, 2021. In the interim, the Federal Government is moving forward with legislation for a Digital Service Tax (DST), which will not be imposed earlier than January 1, 2024, and only if the treaty implementing the Pillar One tax regime under the multilateral approach has not come into force. The DST would be payable as of the year that it comes into force in respect of revenues earned as of January 1, 2022.

MAJOR CANADIAN TAX CHANGES IN 2022

Luxury Goods Tax

The 2021 Federal Budget proposed a tax on certain new luxury cars, aircrafts, and boats that is expected to come into force as of January 1, 2022. The new tax will apply on the following purchases:

• The lessor of 20% of the price above $100,000 or 10% of the full price for luxury cars and aircrafts.
• The lessor of 20% of the price above $250,000 or 10% of the full price for boats.

GST/HST will still apply to applicable purchases and is applied to the final sale price, inclusive of the luxury tax. Therefore, GST/HST is being levied on the tax that is levied on the purchase cost.

Property Vacancy Tax for Non-Residents/Non-Canadians

As announced in the 2021 Federal Budget, starting in 2022, real estate that is vacant or underutilized will have a new national tax of 1% levied on the assessed value annually.

Under the proposed rules, an owner would be exempt from the tax if the residence in question is the primary place of residence of:

• the owner;
• the owner's spouse or common-law partner; or
• a child of the owner or of the owner's spouse or common-law partner, but only if the child is in Canada for the purposes of authorized study and the occupancy relates to that purpose.

Additional exemptions being proposed for vacation/recreational properties would apply to properties:

• located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents
• personally used by the owner (or the owner's spouse or common-law partner) for at least four weeks in the calendar year.

An owner eligible for either of the above exemptions would claim the exemption in the annual return that they would be required to file with the CRA in respect of the residential property.

The Underused Housing Tax would be effective for the 2022 calendar year with the first filing required on or before April 30, 2023.

Teacher & Early Childhood Educator School Supply Tax Credit

In the Federal Government's 2021 Fall Economic Statement, they propose increasing the Educator School Supply tax credit to 25%. In addition to the tax credit increase they have also broadened the definition of eligible supplies, removing the requirement that teaching supplies must be used in a school or regulated child care facility. This measure would also expand the list of eligible durable goods to include certain electronic devices. The following items would be added to the list of prescribed durable goods:

• calculators (including graphing calculators)
• external data storage devices
• web cams, microphones, and headphones
• wireless pointer devices
• electronic educational toys
• digital timers
• speakers
• video streaming devices
• multimedia projectors
• printers
• laptop, desktop, and tablet computers (provided that none of these items are made available to the eligible educator by their employer for use outside of the classroom)

Educators would be required to provide a certificate from their employer attesting to the purchase of supplies.

This measure would apply to the 2021 and subsequent tax years.

Small Businesses Air Quality Improvement Tax Credit

The Government proposes to introduce a temporary Small Businesses Air Quality Improvement Tax Credit to encourage small businesses to invest in upgrading ventilation and air filtration systems to improve indoor air quality. The refundable tax credit would apply to eligible entities' incurred expenditures dedicated to improving air quality in qualifying locations between September 1, 2021, and December 31, 2022. The tax credit rate will be 25%.

An eligible entity would receive a maximum credit of $10,000 per qualifying location and a maximum of $50,000 across all qualifying locations. The limits on qualifying expenditures would need to be shared among affiliated businesses. Credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed.

The tax credit is available to Canadian-controlled private corporations and individuals (but not trusts), and members of a partnership that are qualifying corporations or individuals (other than trusts). Specific eligibility requirements will apply to each of these groups.

Qualifying expenditures would include expenses directly attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation, and air conditioning (HVAC) systems, as well as the purchase of devices designed to filter air using high efficiency particulate air (HEPA) filters.

The taxation year for which an eligible entity would claim the tax credit would depend on when the qualifying expenditure was incurred.

• Qualifying expenditures incurred before January 1, 2022, would be claimed by an eligible entity for its first taxation year that ends on or after January 1, 2022.

• Qualifying expenditures incurred on or after January 1, 2022, would be claimed by an eligible entity for the taxation year in which the expenditure was incurred.

Fuel Charge Tax Credit for Farmers

The Government has proposed to return fuel charge proceeds directly to farming businesses in backstop jurisdictions (i.e. those who do not meet federal stringency requirements – Ontario, Manitoba, Saskatchewan, and Alberta) through a refundable tax credit, starting for the 2021-22 fuel charge year.

The return of fuel charge proceeds would be available to corporations, individuals, and trusts that:

• Are actively engaged in either the management or day-to-day activities of earning income from farming (i.e., the raising of animals and harvesting of plants in a controlled environment); and

• Incur total farming expenses of $25,000 or more attributable to backstop jurisdictions.

Businesses operating in a partnership are also eligible for this tax credit.

The credit amount would be equal to the eligible farming expenses attributable to backstop jurisdictions in the calendar year in which the fuel year starts, multiplied by a payment rate for the fuel charge year. The payment rate is per $1,000 in eligible expenses and has been set by the Minister of Finance; they are as follows:

• $1.47 in 2021

• $1.73 in 2022

Credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed. Businesses can claim these refundable tax credits through their tax returns that include the 2021 and 2022 calendar years.

Digital Service Tax

It should be noted that the Federal Government is still planning on moving forward with the implementation of a Digital Service Tax (DST) if an international agreement is not approved by January 1, 2024. If an agreement is not in effect, the DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022.

MAJOR CANADIAN TAX CHANGES IN 2021

The Federal Government announced new changes impacting employees with stocks and eligible families who receive the Canada Child Benefit. These changes come in effect in the 2021 calendar year.

Employee Stock Options

The Government recently clarified the proposed changes to limit the benefit of the employee stock option deduction. These rules will be effective for stock options granted after June 30 , 2021. An employee is subject to a taxable benefit if they acquire shares of their employer under a stock option agreement and the fair market value of the shares at the time of excise exceeds the amount paid by the employee to acquire the shares. A stock option deduction equal to 50% of the taxable benefit is available to employees if certain conditions are met. Under the new rules, a $200,000 annual limit is proposed on the amount of employee stock option grants that can qualify for the 50% stock option deduction. This restriction will apply to stock options in non-CCPCs and mutual fund trusts.

Employee stock options in CCPCs would generally not be subject to this $200,000 limit. Also, non-CCPC employers with annual gross revenues of $500M or less should also not be subject to these measures. Individuals employed by non-CCPCs should keep in mind the limited tax benefit of stock options over the $200,000 annual limit when negotiating their compensation packages.

Canada Child Benefit

The Canada Child Benefit (CCB) is a non-taxable benefit paid monthly to eligible families with children under the age of 18. For 2021, there will be additional support provided to families based on the number of children under the age of six and family net income. In total, there will be four supplementary payments calculated per child under the age of six, of either:

• $300, if family net income is, or below, $120,000, or
• $150, if family net income is above $120,000.

The first additional payment will be made after the enabling legislation has passed, and the following three payments will be made in the months of April, July, and October 2021. The family net income used to determine the 2021 first quarter and April payments will be based on family net income for 2019 while the 2021 July and October payments will be based on the family net income for 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.