Navigating 2022 tax filing changes and gearing up for what’s coming in 2023

The tax filing season is upon us, and the first thing to note is the 2022 filing deadline. Typically, the deadline for filing is April 30, however, it has been extended to Monday, May 1 since April 30 falls on a weekend. For business owners and their spouses, the tax return due date is Thursday, June 15. That said, any tax payments are due by the May 1 individual filing deadline.

New limits and rates (2022 & 2023)

Below are the 2023 federal income tax brackets:

2022 income tax brackets (federal)

1^st tier: taxable income from $0 to $50,197 @ 15%; plus

2^nd tier: taxable income from $50,198 to $100,392 @ 20.50%; plus

3^rd tier: taxable income from $100,393 to $155,625 @ 26%; plus

4^th tier: taxable income from $155,626 to $221,708 @ 29%; plus

5^th tier: taxable income over $221,708 @ 33%

2023 income tax brackets (federal)

1^st tier: taxable income from $0 to $53,359 @ 15%; plus

2^nd tier: taxable income from $53,360 to $106,717 @ 20.50%; plus

3^rd tier: taxable income from $106,718 to $165,430 @ 26%; plus

4^th tier: taxable income from $165,431 to $235,675 @ 29%; plus

5^th tier: taxable income over $235,675 @ 33%

Tax-Free Savings Account (TFSA) limit (2023)

The TFSA contribution limit has increased to $6,500 for 2023, largely due to the adjustment based on the previous year’s inflation rate. Total cumulative annual TFSA contribution room allocated since 2009 is $88,000.

Annual TFSA dollar limit

2009 to 2012               $5,000

2013 and 2014            $5,500

2015                            $10,000

2016 to 2018               $5,500

2019 to 2022               $6,000

2023                            $6,500

It took four years for the annual inflation rate adjustment to increase the TFSA limit from $6,000 to $6,500.

Registered Retirement Savings Plans (RRSPs) (2023)

The RRSP dollar limit is set at $30,780 for 2023. As a refresher, an individual’s 2023 RRSP contribution room is the lesser of 18% of their prior year’s earned income and the RRSP dollar limit for 2023 ($30,780). The RRSP deduction room for 2023 can be found on the 2022 Notice of Assessment or online by logging into the “CRA My Account” portal. Finally, the 2022 1^st 60-day RRSP contribution deadline was Monday March 1, 2023. These are contributions that can be made in the first 60 days of the year that are eligible for deduction against income taxable in the previous taxation year. 

Canada Pension Plan (CPP) enhancement and OAS updates (2023)

Seniors will get a 6.50% increase in CPP retirement benefit payments and a 0.30% increase in OAS payments in 2023.

Separately, the 2018 Federal Budget enhancements have been phased-in beginning in 2019 and ending in 2025. The crux of the enhancements was an increase in CPP premiums payable. In 2023, each employee will be contributing at a rate of 5.95% with matching employer contributions for total premium contributions of 11.90% on actual pensionable earnings up to the Yearly Maximum Pensionable Earnings Limit (YMPE) for the year ($66,600 for 2023). Maximum annual employee and employer contribution will equal $3,754.45, whereas the maximum annual self-employed contribution will equal $7,508.90.

Disability tax credit (2021+)

Recall some positive changes that occurred in 2021 and later tax years with respect to access to the disability tax credit (DTC). Changes were made to “deem” individuals diagnosed with type 1 diabetes to have met the DTC conditions, namely for meeting the life-sustaining therapy condition in that therapy is needed at least two times per week and on average for at least 14 hour per week requirement (generally). The DTC provides a credit of 15% multiplied by the sum of two amounts: the base amount and, where applicable, a supplemental amount. The base amount is available to any individual who is an eligible person with a disability. It is a fixed amount that is indexed each year. The federal base amount for 2022 is $8,870.

The supplemental amount is available to an eligible person with a disability who is under 18 years of age at the end of the tax year. The maximum supplemental amount is a fixed amount that is indexed each year. The supplemental amount may be reduced if childcare or attendant care expense deductions exceed a threshold amount. The federal maximum supplement amount for children with disabilities is currently $5,174. The combined base and supplemental amount that may be claimed is $14,044, representing a total tax savings of up to $2,107. The value of the credit (i.e., total tax savings) is calculated by multiplying the lowest personal income tax rate (15% in 2022) to $14,044.

An individual is eligible for the DTC for a tax year where the following conditions are met:

• The individual has one or more severe and prolonged impairments in physical or mental functions;
• The effects of the impairment or impairments are such that the individual is either:
  • Markedly restricted in the ability to perform a basic activity of daily living or would be markedly restricted but for life-sustaining therapy;  or
  • Significantly restricted in the ability to perform more than one basic activity of daily living and the cumulative effect of the significant restrictions is equivalent to being markedly restricted in the ability to perform a basic activity of daily living; and
• A medical practitioner certifies the individual meets the above requirements on CRA form T2201, Disability Tax Credit Certificate

A “severe and prolonged impairment” exists when it has lasted, or may reasonably be expected to last, for a continuous period of at least 12 months and the impairment is present all or substantially all the time (at least 90% of the time).

“Markedly restricted” means:

• An individual is unable to do an activity of daily living, or it takes three times longer than someone of similar age without the impairment, even with the use of appropriate therapy, medication, and devices.
• The restriction is present all or almost all of the time (generally at least 90%).
• The restriction has lasted or is expected to last for a continuous period of at least 12 months.

“Life-sustaining therapy” is described as therapy that:

• is essential to sustain a vital function of the individual;
• is required to be administered at least three times each week for a total duration averaging not less than 14 hours a week; and
• cannot reasonably be expected to be of significant benefit to persons who are not so impaired.

A “medical practitioner” must either be a medical doctor, nurse practitioner, optometrist, speech-language pathologist, audiologist, occupational therapist, physiotherapist, or psychologist, as the case may be, must be authorized to practice as such under the laws of the jurisdiction in which the individual being certified resides or under the laws of a province.

The CRA has produced a user-friendly eligibility criteria checklist to help determine if the individual may qualify for the DTC. The CRA centres eligibility for the DTC on the information given by the medical practitioner. Applicants and medical practitioners have two options to complete the DTC application: apply with the digital form or apply with the paper form.

Certain criteria for mental functions and life sustaining therapy have changed requiring the submission of Form T2201, Disability Tax Credit Certificate to be filed in the paper format. Submission of the form may be made on CRA’s My Account portal, navigating to “Submit documents” or mailed to the individual’s local tax centre in Jonquiere, Sudbury or Winnipeg. Approval (or denial) of the DTC application may take up to 8 weeks.

Once approved, the CRA will send a “notice of determination” and identify the years for which the individual can claim the DTC. The notice of determination will also show which year or years the individual is eligible for the DTC. Reapplication in subsequent years is not necessary unless the CRA has indicated otherwise. 

If the qualifying disability arose in the year of the DTC application (as validated by the medical practitioner) and the DTC application is approved, the individual may claim the federal and provincial base amount and up to the maximum supplemental amount (if applicable) on the current year’s tax return.

If the qualifying disability has existed for prior taxation years and was duly indicated and certified on the DTC application by medical practitioner, a T1-Adjustment request may be necessary to amend prior year’s tax returns to claim the DTC for the applicable years. Alternatively, the individual may request on a cover letter to amend prior year’s tax returns upon approval of the DTC application. The CRA may indicate on the notice of determination that a T1 adjustment request was sent to the appropriate department on the individual’s behalf, and a notice of reassessment will be processed at a later date along with the payment of any refund (if applicable).     

Detailed information can be obtained by referring to the following Canada Revenue Agency Guide, RC4064, Disability-Related Information.

Prescribed spousal loan rates for (2022+)

The prescribed rate increased as of January 1, 2023, to 4% (from 3% for Q4 of 2022) and is set to rise to 5% as of April 1, 2023, through to June 2023. The prescribed rates are indexed on the Government of Canada three-month T-bill yield. This represents the fourth consecutive rise in rates and markedly reduces the ability to effectively income split with a lower income earning spouse or common-law partner.

To recap, a spousal loan permits a higher income earning spouse to transfer wealth to the lower income spouse for investment use. Investment income earned will not be subject to the spousal attribution rules provided the loan carries at least the prescribed rate of interest. The interest income payments are included as income and the payment of interest (due by Jan 30^th each year) is deductible from income provided the loan is put to an eligible use.

Below is a snapshot of the spousal prescribed rate loan rates over the last few years.

2023

January – March         4%

April – June                 5%

July – September        ?

October – December ?

2022

January – March         1%

April – June                 1%

July – September        2%

October – December 3%

2021

January – December 1% (no changes to the quarterly rate for the year)

Medical expense tax credit for surrogacy and other expenses (2022+)

Through the 2022 Federal Budget, amendments allow access to the medical expense tax credit (METC) for costs related to a surrogate mother or a sperm, ova, or embryo donor. The amendment expands access to the credit for individuals other than the intended parents. The changes allow fees paid to fertility clinics and donor banks in Canada to obtain donor sperm and ova to be eligible under the METC. The changes are effective for 2022 and subsequent years.

As a brief overview, the METC is available on qualifying medical expenses in excess of the lesser of $2,479 and 3% of the individual net income. The expenses must be in respect of products and services received by the taxpayer, their spouse or common-law partner, or certain dependents of the taxpayer. Budget 2022 has broadened access to the METC in respect of these above targeted amendments.

Canada Dental Benefit (2022+)

Parents and guardians who are unable to access private dental insurance and have children under the age of 12 receiving dental care may be eligible for the interim Canada Dental Benefit. The purpose of this benefit is to reduce dental costs for eligible families with an adjusted net income of less than $90,000 per year. Depending on the parent or guardian's adjusted family net income, a tax-free payment of $260, $390, or $650 is available for each qualifying child.

At the time of writing, the interim Canada Dental Benefit has two benefit periods. The first period runs from October 1, 2022, to June 30, 2023, while the second period runs from July 1, 2023, to June 30, 2024. The eligibility criteria are specific to the period in which the child receives dental care. To benefit from the Canada Dental Benefit during the first period, the following conditions below must be satisfied.

The child must:

• Have been born on or after December 2, 2010, and be under 12 years old as of December 1, 2022
• Receive dental care services in Canada between October 1, 2022, and June 30, 2023, and not have access to a private dental insurance plan. Dental care services include oral health services provided by a licensed dentist, denturist, or dental hygienist, which may include orthodontic services, oral surgery, diagnostic services, or restorative services
• Not have their dental costs fully covered by another dental program provided by any level of government

Additionally, the parent or guardian must:

• Be the only parent or caregiver receiving the CCB for their child as of December 1, 2022
• Have filed their 2021 taxes, and if they have a spouse or common-law partner, they too must have filed their 2021 taxes
• Have had an adjusted family net income of less than $90,000 in 2021. The applicant does not need to calculate this amount, as the CRA will automatically compute the parent or guardian's adjusted family net income for this benefit based on their 2021 income information

To apply for the benefit, applicants may use their CRA My Account to apply online or apply by phone. To ensure that the parent or guardian's eligibility can be validated, it is recommended that they keep their receipts for at least six years.

First-time home buyers’ tax credit (2022+)

Per the 2022 Federal Budget, the first-time home buyer’s tax credit is a non-refundable credit for eligible first-time homebuyers and provides a $10,000 claim (up from $5,000 in previous years) for tax credits worth $1,500 ($10,000 @ 15%) towards the purchase of a qualifying home acquired in the year.

Home Accessibility Tax Credit (HATC) (2022+)

The federal HATC is a non-refundable credit for eligible expenses for a qualifying renovation of an eligible dwelling. Federal Budget 2022 has increased the annual expense limit of the HATC from $10,000 to $20,000. The measure applies to expenses incurred in 2022 and subsequent tax years. The HATC can be claimed on eligible expenses up to $20,000 in a given taxation year, which equates to up to $3,000 in tax credits. The value of the credit is calculated by applying the lowest personal income tax rate (15% in 2022) to the eligible expenses.  

New Multigenerational Home Renovation Tax Credit (2023+)

A new refundable tax credit, known as the Multigenerational Home Renovation Tax Credit, is applicable to the 2023 and subsequent tax years. The tax credit is in respect of work performed and paid for and/or goods acquired on or after January 1, 2023.

The credit is targeted for renovations expenses, of up to $50,000, which equates to up to $7,500 in tax credits. Generally, a qualifying expenditure is a renovation or alteration of, or addition to, an eligible dwelling that is of an enduring nature and integral to the home and is undertaken to enable the individual to reside in the dwelling with a relative by establishing a secondary unit for occupancy.

Property flipping and deeming provisions (2023+)

Property flipping is the act of buying real estate for the purpose of reselling it at a profit a short time later. Existing tax rules may treat profits from property flipping as fully taxable income, as opposed to capital gains. As well, existing rules also prohibit property flippers from claiming the principal residence exemption (PRE) on the sale of a flipped property.

The Department of Finance had concerns that some property flippers are incorrectly reporting sales as capital gains and/or claiming the PRE. As a result, the 2022 Budget introduced amendments that automatically deems profits from the resale of residential properties within 12 months of purchase as fully taxable income. Further, the rules preclude the seller from claiming the PRE. This rule will apply to the sale of residential properties on or after January 1, 2023.

There will be exceptions to the deeming rule if a property is sold within 12 months for any of the following reasons: death, additions of members to the same household, separation, personal safety concerns, disability or illness, employment change, insolvency, or involuntary dispositions (for example, if a natural disaster were to force the owner to relocate).

Ban on housing ownership by foreign investors (2022+)

As part of the effort to curb housing speculation, the Canadian government introduced the Prohibition on the Purchase of Residential Property by Non-Canadian Act in 2022 (Act). The Act bans foreign investors, both commercial and individual, from purchasing Canadian residential real estate for a two-year period.

The definition of non-Canadian means anyone who is neither a Canadian citizen, a permanent resident, or a person registered as an Indian under the Indian Act. A non-Canadian is also a corporation that is incorporated outside of Canada or a Canadian incorporated corporation that does not trade on a listed exchange within Canada. A variety of individuals who do not hold Canadian citizenship will be exempted from the ban, including refugees, permanent residents, certain international students on track to obtain permanent residency, and individuals residing in Canada on a work permit.

Underused housing tax (2022+)

This is a new federal tax assessed annually starting in January 2022 on the ownership of vacant or underused housing in Canada. Generally, the tax will apply to non-residents or non-Canadian owners. However, in some limited situations the rules could apply to Canadian owners.

The tax levied is 1% of the residential market value of the property via a tax return due by December 31^st for each calendar year in question. Exemptions to the tax is available depending on the ownership classification, the availability of the property in question, the location and use of the property and the occupancy status of the individual for the property in question. A minimum penalty of $5,000 for individual or $10,000 for corporations is payable for non-compliance, even where no tax is payable.

Note also that Canadian municipalities and provinces/territories have introduced their own underused house tax and reporting regimes. For instance, British Columbia, Vancouver, Toronto and Ottawa have their own version of empty home or underused vacancy tax.

New AMT (202?)

Budget 2022 proposes to introduce details on a new alternative minimum tax measure that will ensure high-income earners pay their fair share of income taxes. The government released information in the 2022 Budget indicating that some high-income Canadians continue to pay relatively little in taxes including some 28% of filers with gross income above $400,000 paying an average federal income tax rate of 15% or less in 2019.

The government further informs that more than one in 10 of top income earners pay less than 5% in federal income taxes. This rate is often less in federal taxes than the lowest income-earners in Canada. These Canadians make use of various tax incentives, deductions, and credits, enabling to reduce their overall taxes payable.

As part of the introduction to establish a minimum tax for high income earners, the government will review the Alternative Minimum Tax (AMT) rules. The AMT has been in place since 1986 and was designed to prevent individuals from making disproportionate use of preferential tax treatments and ensuring a certain amount of tax remains payable despite targeted tax benefits claimed.

AMT requires a separate tax calculation conducted along with an individual’s regular income tax calculations by taking into consideration certain tax preferred treatments or deductions that an individual claimed in the tax year. In other words, the regular taxable income is recalculated based on a different set of assumptions to arrive at an adjusted taxable income for AMT purposes. This alternative calculation involves the add-back of specific targeted deductions to the taxable income otherwise determined and the exclusion of certain tax credits otherwise available.

It is important to note that an individual (other than a trust) is entitled to a basic exemption of $40,000 when determining the adjusted taxable income under the AMT calculation. Instead of the progressive tax rates used in regular tax calculations, a flat rate of 15% is used to calculate the minimum tax payable. If the calculated AMT is greater than the regular tax otherwise payable, the individual must pay the AMT. The excess of AMT over the regular tax otherwise payable may be carried forward for up to seven years and recovered against regular taxes, subject to certain limitations.

Technically, an AMT calculation should be done for every individual each year in addition to the regular federal tax calculation. However, in most cases the regular federal tax payable would be greater than the AMT; therefore, in practice the AMT usually only applies to a small number of individuals. The review of AMT indicates that thousands of Canadian still pay little to no personal income tax each year and Budget 2022 suggests a review of the AMT along with substantive changes.

Tax-free first home savings account (FHSA) (2023+)

Commencing April 1, 2023, this new registered plan will give eligible first-time homebuyers the ability to contribute (and deduct) up to $8,000 annually into an FHSA. A lifetime limit of $40,000 in contributions is set with the ability to carry-froward up to $8,000 unused contribution room. There is a maximum holding period of 15 years and certain eligible requirements to hold and redeem from an FHSA.

Stay tuned for further information on the FHSA from Invesco’s Tax & Estate InfoService.

FATCA/CRS enhanced compliance regime (2023+)

The last several years have seen some significant changes to the CRA guidance on the Foreign Account Tax Compliant Act (FATCA) and Common Reporting Standards (CRS). The increased compliance will likely materialize in more frequent correspondences across financial institutions in respect to the client’s tax residency status as it pertains to their non-registered investments. Reporting institutions in particular, will be looking for a status confirmation (either “non-reportable” or “reportable”) in respect to all new non-registered accounts in client name, including pre-existing account that have experienced a change in circumstances.