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Jamie Golombek tells us about new tax cuts and crackdown

In this year's federal budget, several tax measures were introduced for individuals. In this year’s federal budget, several tax measures were introduced for individuals. Photo by Postmedia

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This year’s federal budget saw a variety of tax measures impacting individuals, businesses and charities. Here are some of the highlights.

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A new alternative minimum tax?

Currently, the highest federal tax rate of 33 percent starts at income above $221,708 for 2022. While the budget introduced no rate changes, the government expressed concern that “some high-income Canadians still pay relatively little personal income tax as a share of their income.” For example, 28 percent of filers with gross income over $400,000 pay an average federal tax rate of 15 percent or less by taking advantage of various tax deductions and tax credits.

While Canada already has an Alternative Minimum Tax (AMT), which has been around since 1986, it has not been substantially updated since its introduction. As a result, the budget said the government will examine a new minimum tax system, expected to be unveiled in the fall 2022 economic update.

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The budget included several new tax measures for homeowners. For starters, we’ve learned more about the upcoming Tax-Free First Home Savings Account (FHSA), a newly registered account to help individuals save for their first home. Contributions to an FHSA would be tax deductible, and income earned in an FHSA would not be taxable during the plan, nor taxable when withdrawn to purchase a first home.

To open an FHSA, you must be at least 18 years old and a resident of Canada. In addition, you must not have lived in a home that you owned in the year you open the account or in the previous four calendar years. Individuals can only participate once in their lifetime and, once the money is withdrawn to buy a home, the FHSA must be closed within one year of the initial withdrawal.

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There is a $40,000 lifetime membership limit and an $8,000 annual membership limit starting in 2023. Unlike RRSP or TFSA contributions, unused annual membership space is non-transferable, meaning a person who makes less than Contributing $8,000 continues to face an annual cap of $8,000 in subsequent years.

To provide more flexibility, you can transfer money from an FHSA to an RRSP or RRIF on a tax-deferred basis. Transfers to an RRSP or RRIF are not taxable at the time of transfer, but amounts are taxed when withdrawn from the RRSP or RRIF in the usual way. Wire transfers do not affect the RRSP contribution margin in any way.

If you have not used the money in your FHSA on a qualifying first home purchase within 15 years of the FHSA’s initial opening, it must be closed and any unused savings can either be transferred to an RRSP or RRIF, or can simply be be withdrawn on a taxable basis.

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You may also transfer tax-free money from an RRSP to an FHSA, subject to the $40,000 lifetime limits and $8,000 annual dues. It is expected that individuals will be able to open an FHSA and contribute sometime in 2023.

The government continues to be concerned about private individuals buying residential real estate with the intention of “turning it around” by selling it in a short period of time to make a profit. Under our tax laws, profits from real estate sales are fully taxable as business income. In other words, they do not qualify for the 50 percent capital gains withdrawal rate, nor for the primary residence exemption.

In recent years, the CRA has cracked down on the alleged abuse of the waiver, most recently with a letter-writing campaign, in which the CRA has sent letters to individuals “who may have misapplied the Primary Residence Exemption (PRE)”.

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The budget therefore proposed to introduce a new assessment rule, effective January 1, 2023, to ensure that profits from upgrading residential real estate are always fully taxed. In particular, profits from the sale of residential real estate, including rental properties, owned for less than 12 months would be considered business income.

However, the new assumption rule will not apply if the sale of the disposition is related to a life event, including: death, addition of the household, divorce, personal safety, disability or illness, change of employment, insolvency or an involuntary disposition such as expropriation .

The government also proposes doubling the homebuyer’s amount to $10,000, worth $1,500 in non-refundable credits, and doubling the home accessibility tax credit for eligible home renovations to $20,000 (versus $10,000). for change costs incurred by seniors or persons entitled to the disability allowance to make their homes more accessible. It also plans to introduce a new multi-generational home renovation tax credit that would provide a 15 percent refundable credit toward eligible expenses (up to $50,000) made on a qualifying renovation that involves creating a second home. created to allow an eligible person (a senior or a person with disabilities) to live with a relative.

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Medical expenses

The budget expands the list of medical expenses eligible for the medical expense tax credit to include a variety of costs individuals may incur in becoming parents through surrogacy, sperm, egg or embryo donation.

Businesses and Charities

On the corporate side, the budget expanded the eligibility for the lower 9 percent corporate tax rate for small businesses on the first $500,000 in active business income by increasing the range of taxable capital over which the business limit is lowered, with the new range being $10
million to $50 million (from $10 million to $15 million), allowing more medium-sized businesses to claim the lower rate.

Finally, as predicted, the government has halted the non-CCPC scheme that some taxpayers have used to avoid paying the extra refundable corporate taxes they would otherwise pay on investment income earned in those companies. It will also increase the charity payout quota to 5 percent (versus 3.5 percent), effective 2023.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the General Manager, Tax & Estate Planning at CIBC Private Wealth in Toronto.

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