Canadian Parliament Building at Dusk

The 2022 federal budget will probably include initiatives to curb speculation in real estate, boost productivity through targeted tax incentives and promote overall tax fairness, tax policy experts suggest.

But the Liberal government is unlikely to introduce significant broad-based tax increases.

“I sense a reluctance to raise the top rates further, because capital is mobile –— it leaves the country,” said Carol Sadler, founder and tax leader with Achen Henderson LLP in Calgary, adding that she doesn’t expect tax rates to increase for middle-income earners, either.

Growing concerns over the effects of inflation “would certainly make any introduction of new personal tax measures a bit surprising at this point,” said Joseph Micallef, partner and national leader of financial services with KPMG in Toronto.

And with the Department of Finance busy implementing several previously announced initiatives, “I can’t imagine Finance has got the bandwidth for a lot of major changes this year,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management in Toronto.

Instead, the 2022 budget will probably be focused on jobs, economic growth and the greening of the economy, said Elliot Hughes, senior advisor with Ottawa-based Summa Strategies Canada Inc.

“You’re going to see more on housing by the federal government, and I think you’re going to see a lot of talk and action and money put into this idea of climate transition,” said Hughes, who served as deputy director of tax policy under former finance minister Bill Morneau.

Earlier this month, the government introduced draft legislation and launched consultations to implement a host of proposals from previous budgets.

Housing proposals

The Liberals’ 2021 campaign platform promised to help Canadians with housing affordability. Pledges included doubling the First-Time Home Buyers’ Tax Credit to $10,000 from $5,000 and introducing the First Home Savings Account (FHSA), which would feature tax-free contributions and withdrawals with the goal of helping Canadians under 40 to save up to $40,000 toward a first home.

“I expect they will flesh out the details [regarding FHSA rules] in the budget, although I don’t think [the plan] will be effective until 2023,” Golombek said.

The Liberals also promised to introduce tax-related initiatives to “cool excessive price growth” in housing, including requiring that homes be held for at least 12 months in order to access the principal residence exemption. 

Mark Chan, vice-president of wealth planning with Gluskin Sheff + Associates in Toronto, said the government may take more time to consider how the tax is structured, despite indicating that it would be effective for 2022.

“It’s a very grey area in terms of whether you’re actually flipping a home versus whether it’s a principal residence,” Chan said. Existing rules in the Income Tax Act compel home flippers to report sales of properties as business income, he pointed out. “[The anti-flipping proposal] has to be discussed a little further, just given the complexity.”

In December, the government introduced legislation to impose an annual tax of 1% on the value of vacant or underused residential property owned by non-resident non-Canadians, which had been promised in the 2021 budget. That legislation, Bill C-8, passed second reading on Feb. 10 and is now being considered in committee.

In the upcoming budget, the government could proceed with other initiatives geared at lowering home prices overall, including reviewing the tax treatment of REITs and the down payment requirements for investment properties, both of which were directives included in Prime Minister Justin Trudeau’s mandate letter to Finance Minister and Deputy Prime Minister Chrystia Freeland.

“They’re looking at some measures to crack down on housing investors,” said Carol Bezaire, senior vice-president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto. Bezaire suggested the government could exclude home equity lines of credit as a source of funding for a down payment on a rental property, for example.

“As an advisor, if you have clients that you know are investing in rental properties, stay tuned, because they might not be able to continue to do that [in the same way],” Bezaire said.

Tax fairness

The government said in the 2021 fall economic update that draft legislation and details on the promised luxury tax on cars, boats and planes would be released this year.

Other tax promises may also be addressed in the budget.

Golombek said he believes the upcoming budget will address concerns around the surprise passage last year of Bill C-208, which allows for intergenerational transfers of farms and fishing corporations between family members. The government contends the legislation contains loopholes, such as allowing for the “surplus stripping” of dividends into capital gains to take advantage of lower tax rates.

Proposals to address Bill C-208 might be part of a bigger package of proposals, Golombek said: “We know the government has been trying for years to eliminate surplus strip transactions [more broadly].”

The government also promised a 15% minimum tax for top-bracket earners. However, “no one really understands [that proposal] because there’s already an alternative minimum tax,” Golombek said. “It remains to be seen how [the proposed tax] will differ and what it’s really getting after.”

Mahmood Nanji, a fellow with the Lawrence National Centre for Policy and Management with Ivey Business School at Western University in London, Ont., said he expects the government will press ahead with the 15% minimum tax proposal in the budget: “This is a tax fairness issue; it’s one most Canadians will support.”

Nanji, a former associate deputy minister in Ontario’s Ministry of Finance, said he also suspects the government will move ahead with a 3% surtax on bank and insurer earnings over $1 billion and have those firms contribute to a Canada Recovery Dividend fund. However, he said the feds may ultimately water down the proposals or delay them.

“They’re certainly not going to bring down something draconian when they release their budget, which will sort of hurt the banks and insurers, because there will be a big backlash,” Nanji said. “But my sense is that they won’t ignore [the proposals] either.”

Nanji said he would prefer the government consider more ambitious ways to foster growth and tackle the deficit, such as by raising the GST rate, targeting the tax gap created by the underground economy and initiating a long-overdue review of Canada’s tax regime.

“You can’t be taxing in the same way you were taxing in the 1960s,” Nanji said. “If we don’t do something [on tax competitiveness], we’re going to lose a lot of knowledge workers.”

Nonetheless, Hughes said the government is more likely to proceed with more targeted measures to foster economic growth and boost productivity. For example, last year’s campaign included promises to introduce a career extension tax credit, a labour mobility tax credit and a multigenerational home renovation tax credit, and to double the home accessibility tax credit.

“The shock to the broader [economic] system that the pandemic has had is immense,” Hughes said. “It’s not all going to be addressed and solved in one budget.”

The 2022 budget is widely expected to be tabled in late March or early April. The government’s pre-budget consultations end on Friday.