2022 federal budget tackles runaway housing, first-time home buying

The 2022 federal budget includes a number of measures intended to cool down an overheating housing market and keep the dream of home ownership alive for people rapidly being priced out of the market, says John Yanchus, a tax and estate planning consultant with Canada Life.

Yanchus offered his view of the federal budget, delivered yesterday by Finance Minister Chrystia Freeland in the House of Commons yesterday.

He said the budget places “a huge focus” on housing, with five distinct steps intended to alter the current trajectory of home prices.

“Combined, these efforts will address the under-supply of houses, and the over-demand which has put a strain on the economy and caused housing prices to increase out of reach of most Canadians,” Yanchus said.

The measures focus on:

• Savings: Financial help for first-time home buyers in the form of a new tax-free savings plan that makes contributions up to $40,000 tax deductible, with tax-free withdrawals to purchase a first home. Investment growth inside the tax-free first home savings account (FHSA) would also be tax-free. The annual contribution limit is $8,000, and unused annual contribution room will not be carried forward.
• Curbing house flipping: New tax rules on those who sell property they’ve held for less than 12 months. A sale would be subject to full taxation on profits as business income.
• Limiting foreign buyers: This measure would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational residential property in Canada for a period of two years.
• Tax credits: There is a new tax credit to support home renovations for multi-generational homes.
• Home building: The government has set a goal of doubling housing construction over the next decade and making more affordable housing available.

Overall, Yanchus said this year’s budget is not particularly consequential for financial advisors.

“If you look down to the advisor or the client level, there probably isn’t much here,” he said. “I mean, you might have advisors helping first-time home buyers. But there’s nothing on funds, there’s nothing on personal tax rates, there’s nothing on corporate tax rates. So, I think it’s pretty uneventful for financial advisors and for clients.”

Yanchus said he likes to track potential budget items that are widely anticipated, but are not delivered. This year’s budget notably did not address an increase in the capital gain inclusion rate, any measures that would affect the principal residence exemption for Canadian residents, any measures targeting capital gains planning, or a wealth tax.

“These are all items that the financial industry are probably happy that the government did not address,” he said.

The budget did, however, introduce a Canada Recovery Dividend to help pay for the $350 billion in pandemic relief spending in 2020 and 2021. Banks and life insurers will pay a one-time 15% tax payable over five years on taxable income above $1 billion for the 2021 taxation year. The temporary recovery dividend is followed by a permanent increase in the corporate income tax rate by 1.5% on the taxable income of banking and life insurance groups above $100 million, such that an overall federal corporate income tax rate above this threshold will increase from 15% to 16.5%.

The budget also outlines changes to the small business deduction.

“This is one of the more noteworthy elements of the budget because you’ve got business owners, you’ve got high net-worth individuals, and you have people asking questions whenever they hear ‘small business deduction.’ It garners a lot of attention,” Yanchus said.

He explained that Canadian-controlled private corporations (CCPCs) currently benefit from a reduced corporate tax rate on the first $500,000 of active business income. Under current tax legislation, the $500,000 is reduced on a straight-line basis when either the combined taxable capital employed in Canada is between $10 million and $15 million or if the combined adjusted aggregate investment income of the CCPC and its associated corporation is between $50,000 and $150,000.

The budget proposes that the small business limit be fully phased out when taxable capital reaches $50 million rather than $15 million. This measure would apply only to the federal portion of the small business tax rate, but it is expected that the provinces will follow this measure.

Yanchus said this change would allow more medium-sized CCPCs to benefit from the small business deduction.

“For example, under the new rule, a CCPC with $30 million in invested capital would have access up to $250,000 of the active business income eligible for the small business deduction, compared to $0 under the current rule, assuming no adjustment for the aggregate investment income above $50,000,” he said.

Read more from John Yanchus:

INSIGHTS: Canada’s 2022 Federal Budget

(Aussi disponible en français.)

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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