Aside from two new taxes on banks and life insurers, the budget proposes no changes to the federal corporate income tax rates or the $500,000 small business limit. However, the government proposes to expand eligibility for the small business deduction, allowing more midsize businesses to benefit from the lower rate.
Small business deduction
The small business deduction (SBD) provides eligible Canadian-controlled private corporations (CCPCs) with a reduced corporate income tax of 9%. Currently, the limit is reduced on a straight-line basis when:
- The combined taxable capital employed in Canada of the CCPC and its associated corporations is between $10 million and $15 million; or
- The combined adjusted aggregate investment income of the CCPC and its associated corporations is between $50,000 and $150,000
Budget 2022 proposes to extend the range over which the business limit is reduced based on the combined taxable capital employed in Canada of the CCPC and its associated corporations: the taxable capital range is between $10 million and $50 million. Applying to taxation years that begin on or after April 7, 2022, this proposed change will allow more medium-sized CCPCs to benefit from the SBD.
Additional taxes on banks and life insurers
First, Budget 2022 proposes the Canada Recovery Dividend (CRD), which is a one-time 15% tax on banks and life insurers (as determined under Part VI of the ITA). The 15% tax would apply on an entity’s taxable income over $1 billion as determined for taxation years ending in 2021. The CRD liability would be imposed for the 2022 taxation year and is payable in equal amounts over a five-year period.
Second, the budget proposes a permanent increase to corporate tax rates for banks and life insurers (as determined in the same manner as the CRD) by introducing an additional tax of 1.5% on taxable income above $100 million. The proposed additional tax applies to taxation years that end after April 7, 2022.
Introduction of substantive CCPCs to counter deferral of tax
Some taxpayers interpose foreign entities into their corporate structure to avoid being designated as a CCPC. Although CCPCs enjoy beneficial tax treatment in some instances, they are subject to a temporary tax on investment income that, in effect, is double the tax rate that a non-CCPC pays on its investment income. Loss of CCPC status in many instances results in the elimination of an additional layer of refundable taxes that would otherwise apply on investment income. Notwithstanding that such taxes would eventually be payable upon a distribution of the investment income to individual shareholders, the elimination of CCPC status would provide for a deferral advantage until such time.
To curb such tax planning, the budget introduces the concept of “substantive CCPCs” to capture corporations that would otherwise not be CCPCs and subject them to CCPC taxation on investment income. However, the substantive CCPCs would continue to be treated as non-CCPCs for all other purposes of the ITA.
The budget defines substantive CCPCs as private corporations resident in Canada (other than CCPCs) that are ultimately controlled (in law or fact) by Canadian-resident individuals. Similar to the CCPC criteria, the test would contain an extended definition of control that would aggregate the shares owned, directly or indirectly, by Canadian resident individuals, and would therefore deem a corporation to be controlled by a Canadian resident individual where Canadian individuals own, in aggregate, sufficient shares to control the corporation.
The budget aligns the taxation rules of investment income earned and distributed by substantive CCPCs with the rules that apply to CCPCs. However, the budget provides an exception to genuine commercial transactions entered into before April 7, 2022, where the share sale occurs before the end of 2022.
The budget aims to ensure that the investment income earned and distributed by substantive CCPCs is taxed in the same manner as CCPCs. These rules are intended to ensure that private corporations cannot effectively avoid CCPC status and applicable anti-deferral rules. They also capture arm’s-length transactions where a non-resident buyer has a right to acquire shares of a CCPC.
Elimination of the flow-through share regime for oil, gas and coal activities
To phase out inefficient fossil fuel subsidies, the government proposes to eliminate the flow-through share regime for fossil fuel sector activities.
In general, flow-through shares provide certain companies with greater access to financing by forgoing the tax benefit of Canadian exploration expenses and Canadian development expenses to investors. The investors who hold the flow-through shares are permitted to deduct the expenses that the corporation has renounced to them in calculating their taxable income.
Budget 2022 proposes to eliminate the flow-through share regime for oil, gas and coal activities by no longer allowing oil, gas and coal exploration or development expenditures to be renounced to a flow-through share investor.
This measure will apply to flow-through share agreements entered into after March 31 2023.
Critical mineral exploration tax credit
Although the budget proposes to phase out flow-through shares for inefficient fossil fuel subsidies, it introduces a 30% tax credit for individuals who invest in specified minerals that are used in the production of zero-emission vehicles and other clean technologies.
Expansion of clean energy tax benefits
Building on previous measures introduced for investments in clean energy, Budget 2022 proposes to expand these benefits to include air-source heat pumps.
Under the CCA regime, Classes 43.1 and 43.2 provide accelerated CCA rates (30% and 50%, respectively) for investments in specified clean energy generation and energy conservation equipment. On Nov. 21, 2018, the government introduced immediate expensing for Class 43.1 and 43.2 assets. Budget 2022 proposes to expand the list for eligible property to include air-source heat pumps primarily used for space or water heating.
Corporate tax rate reduction for zero-emission technology manufacturers
In Budget 2021, the government reduced the corporate income tax rate on eligible zero-emission technology manufacturing and processing income as follows:
- From 15% to 7.5%, where the income is subject to the general corporate tax rate; and
- From 9% to 4.5%, where the income is subject to the small business tax rate.
Budget 2022 proposes to include the manufacturing of air-source heat pumps as an eligible activity for purposes of the temporary corporate tax rate reduction for qualifying zero-emission technology manufacturers.