On April 7, Deputy Prime Minister and Minister of Finance, Chrystia Freeland, delivered the 2022 federal budget titled ‘A Plan to Grow Our Economy and Make Life More Affordable’. The primary elements of this proposed budget address housing affordability, climate change, employment, the cost of living, rural communities, extended families and defense spending.
The budget is in draft form and subject to parliamentary approval. Below are the highlights that we anticipate could directly impact clients and businesses if approved, and our perspective on the potential impact to the economy and the markets.
- Proposals for individuals
- Proposals for businesses and charities
- Our perspective
1. Proposals for individuals
- First Home Savings Account (FHSA)
The First Home Savings Account (FHSA) is being introduced to help Canadians save up to $40,000 towards the purchase of their first home. To qualify, a prospective homeowner must be over 18 and not have lived in a home they owned in the year that the account is opened, or the previous four years. The maximum annual contribution would be $8,000 starting in 2023. If approved, contributions will be tax deductible, income earned inside the FHSA will not be subject to tax and withdrawals for home purchases will be tax free. Couples purchasing a home together could each withdraw from an FHSA for the purchase of a home. Unused funds in a FHSA can be transferred to a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) without being limited by RRSP contribution room.
Note: The FHSA cannot be combined with the existing Home Buyers' Plan (HBP).
- Multi-generational Home Renovation Tax Credit
The new refundable Multi-generational Home Renovation Tax Credit will allow families to claim 15% of up to $50,000 in total eligible renovation costs for qualifying renovations and its related expenses, including creating a secondary dwelling unit for seniors or disabled persons to live with a qualifying relation.
- Home Accessibility Tax Credit (HATC)
The Home Accessibility Tax Credit (HATC), first introduced in Budget 2015, is a non-refundable tax credit for qualifying home renovations for disabled or senior individuals. To better support independent living, the annual limit of eligible expenses is proposed to increase from $10,000 to $20,000.
- Ban on foreign ownership
To address concerns regarding the impact of foreign investment on residential real estate prices, Budget 2022 proposes restrictions to prohibit certain foreign commercial enterprises and non-Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a period of two years. Some exemptions will apply.
- Residential property-flipping rule
To improve housing affordability, a new rule to ensure gains from flipping residential real estate will be subject to full taxation. The proposal states that profit from the sale of residential property owned for less than 12 months would be considered business income and would not be eligible for the 50% capital gains inclusion rate unless the sale occurs following specific life events.
- Assignment sales
Proposal to apply Government Sales Tax (GST)/Harmonized Sales Tax (HST) to all assignment sales of newly constructed or substantially renovated residential housing, effective May 7, 2022.
- Foreign-trained health care workers
The pandemic highlighted (and increased) the shortage of health care providers and emphasized the fact that many internationally-trained health care professionals were unable to fill these gaps due to barriers in recognizing foreign credentials. A proposal to expand the Foreign Credential Recognition Program would assist up to 11,000 internationally-trained health care professionals per year to have their credentials recognized and find work in their field.
- Employment for persons with disabilities
Proposed expansion of the Opportunities Fund will help address labour shortages through increased participation by persons with disabilities and more inclusive and accessible workplaces for persons with Autism Spectrum Disorder or intellectual disabilities.
- Labour mobility for trades
Proposed a tax deduction of up to $4,000 per year, beginning in 2022, for travel and temporary relocation expenses incurred by eligible tradespersons and apprentices who travel or relocate for jobs.
- Help for Canadians who want to become parents
To assist those who wish to become parents, a new Medical Expense Tax Credit will cover costs related to a surrogate mother, sperm, ova or embryo donor, in vitro fertilization or fees paid to fertility or donor clinics incurred in Canada for 2022 and future tax years.
The budget commits to enable provinces and territories to make additional childcare investments. As most provinces are moving ahead faster than anticipated, an average childcare fee of $10-a-day for all regulated childcare spaces across Canada is anticipated to be in place by 2025-2026.
- Dental care
To strengthen Canada’s Health care plan, the budget intends to provide dental care for Canadians under 12-years-old in 2022. It will expand to those under 18-years-old, seniors, and persons living with a disability in 2023 and then full implementation by 2025. This proposal is restricted to families with an annual income less than $90,000, with no co-pays for those under $70,000 annually in income.
Because rural communities are a driver for economic growth, more support could be provided to Canada’s rural communities through a wide range of industries, including health care, agriculture, communications, mining, and tourism. A variety of programs and spending are proposed to support Canadians living and working in rural communities. Examples include: (1) Increasing Loan Forgiveness for Doctors (up to $60,000) and for Nurses (up to $30,000), (2) Expenditures to improve high-speed internet access, (3) Support for local businesses as part of the Recovery Fund, (4) Compensation to farmers and dairy, poultry, and egg processors, (5) Help for farmers to reduce emissions through the Climate Action Fund and the Agricultural Clean Technology Program, (6) Support for Canada's wine sector, and (7) funding for the Housing Accelerator Fund to build 100,000 new homes.
To help make post-secondary education more accessible, the budget proposes doubling the Canada Student Grants amount until July 2023. This will result in up to an additional $6,000 per year in non-repayable aid for full-time students in need. There are also plans to waive interest on Canada Student Loans until March of 2023. In addition, enhanced repayment assistance on student loans is being made available to ensure those individuals making $40,000 or less will not need to make payments on their federal student loans.
2. Proposals for businesses and charities
Change to the small business tax rate
Qualifying businesses currently benefit from the small business 9% federal tax rate as well as their respective provincial small business tax rate. The small business rate increases to become the higher general tax rate once the taxable capital reaches $15,000,000.
Budget 2022 proposes to extend the taxable capital threshold from $15,000,000 up to $50,000,000 to encourage business growth and commercial investment.
A proposed Canada Recovery Dividend, which is a one-time 15% tax on 2021 taxable income, in excess of $1 billion for banks and life insurance companies, will be payable over 5 years starting in the 2022 tax year.
The budget also proposes an additional tax on banks and life insurance companies of 1.5% on taxable income in excess of $100 million, starting in the 2022 tax year and continuing in future tax years.
An immediate expensing proposal would provide temporary and immediate expensing of certain property acquired by a Canadian-Controlled Private Corporation (CCPC). This immediate expensing would be available for “eligible property” (generally assets with a shorter lifespan subject to Capital Cost Allowance (CCA) rules) acquired by a CCPC and that becomes available for use before January 1, 2024, up to a maximum amount. The immediate expensing would only be available for the year in which the property becomes available for use.
Budget 2022 would expand immediate expensing to unincorporated businesses and certain partnerships.
New automobile purchases
For vehicles purchased after January 1, 2022, the cost of the passenger vehicle for Capital Cost Allowance (CCA) purposes has increased from $30,000 to $34,000, before applicable sales taxes. The limit for zero-emission passenger vehicles has increased from $55,000 to $59,000, before applicable sales taxes.
The limit to deducting leasing costs for leases entered after January 1, 2022 would also be increased from $800 to $900, before tax, per month.
Credit card transaction fees
The budget addresses the costs of credit card transaction fees that small businesses pay on customer purchases, by stating that the government is committed to lowering the cost of credit card fees, while protecting reward points for consumers. Conversations are ongoing.
Employee Ownership Trusts
To support employee ownership and facilitate the transition of privately-owned businesses to employees, the budget proposes to create the Employee Ownership Trust—a new, dedicated type of trust under the Income Tax Act. The government will continue to engage with stakeholders to finalize the development of rules for the Employee Ownership Trust.
In an effort to boost support for the charitable sector, beginning on or after January 1, 2023, the budget proposes an increase in the disbursement quota for charities with investment assets exceeding $1 million from 3.5% to 5%.
3. Our perspective
The net new spending of C$30 billion came in lower than many estimates and the budget deficit is projected to fall to C$8.4 billion by 2026. In addition to a falling deficit, the debt-to-GDP ratio is also forecasted to fall to 41.5% by 2026.
The budget largely conforms to the promises made during the last election. Chrystia Freeland referred to the national daycare spending plan as an opportunity to bring women back to the workforce following the retreat of working women resulting from the pandemic. Of note, in addition to funding a new dental insurance program and increasing defense spending, Canada has allocated fresh fiscal support for the Ukrainian government in the form of military and non-military assistance.
Although the current debt-to-GDP ratio is elevated due to pandemic-era spending, it is still low compared to many other developed nations such as the United States and, in our view, does not pose a threat to economic growth in the long run. We think the lower spending goals and targeted government deficit reduction will marginally reduce pressures on inflation as COVID-19 fiscal stimulus fades and the Bank of Canada (BoC) moves to aggressively raise rates.
We anticipate the decrease in the federal deficit will act as a fiscal drag in 2022 as the extraordinary pandemic-era easing fades. However, the Canadian economy entered the year in a position of relative strength, with low unemployment and high economic growth, momentum that is unlikely to be meaningfully undermined by the fiscal drag. Near term, the domestic economy should also continue to benefit from higher oil and gas prices.
In our view, this budget appears to acknowledge inflation as the primary risk to the longevity and health of the economic expansion, and we don’t see it playing a significant role in altering the Bank of Canada’s monetary policy tightening campaign this year. The BoC has already raised rates once this year, and markets are broadly expecting a 50-basis point (0.50%) rate hike at the next meeting. Both the BoC and the U.S. Federal Reserve are moving aggressively to curb inflationary pressures that have remained persistently high as the global economy recovers from the COVID-19 pandemic. Government policy and spending can address certain inflationary factors such as easing the cost of living and gradually improving supply chains, but the ongoing conflict in Ukraine and uncertainty around Chinese supply chains may cause commodity and food shortages to persist.
Nevertheless, we believe that economic growth will remain above the pre-pandemic trend this year before moderating in 2023 and 2024 as sound economic fundamentals help offset the headwinds from aggressive central bank policy domestically and in the U.S.
History has shown that markets tend to look past fiscal policy changes unless they have meaningful economic spillovers. In this case, we believe the Canadian economy can still grow in the 3.5% range this year, despite any drag from the fiscal budget. More broadly, the TSX is one of only a handful of major indexes posting gains this year, up almost 3% YTD and up more than 14% in the last 12 months, supported by outsized exposure to energy prices. While volatility may remain elevated, market returns may be in-line with earnings growth this year, which we continue to expect to be in the high single-digit range.
This budget is a proposal only and is awaiting parliamentary approval. If you have any questions regarding any aspects of the budget and how these proposed changes may affect your financial strategy, please contact your Edward Jones financial advisor.
The federal budget as released is subject to parliamentary approval. To read the government’s full proposed budget, go to the Government of Canada’s website.
Commentary from Edward Jones does not consider your specific situation but provides a general summary of the 2022 federal budget release. Commentary is provided in relation to the released information available on the date of publication.
Edward Jones, its employees, and financial advisors are not estate planners and cannot provide tax or legal advice. Please consult a qualified tax specialist or lawyer for professional advice regarding your specific situation.