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On April 13, 2022, McCarthy Tétrault hosted a panel (which can be viewed here) reflecting on the regulatory and policy impacts on doing business in Canada after Finance Minister Chrystia Freeland tabled the Liberal Government’s federal budget, A Plan to Grow Our Economy and Make Life More Affordable (Budget 2022). 

In short, the Federal government presents Canadians with a balanced “plan of attack” by improving social investment, increasing access to Canadian borders, developing a green economy, leveraging innovation, and distributing the tax burden.

The talk, moderated by McCarthy Tétrault’s Awi Sinha, included insights from panellists Derek Burleton, VP and Deputy Chief Economist at TD Bank; Brittney Kerr, Business Performance Lead at Earnscliffe Strategies; and Paul Zed, Strategic Advisor and Counsel at McCarthy Tétrault.

This blog post is highly relevant to both Canadian and international businesses. It provides concise pinpoints on Budget 2022’s commitments while underscoring five key takeaways from the panel. Here’s what you need to know:

1. Prepare for Unprecedented Social Investment

Budget 2022 makes it clear that investments in health, housing, immigration, and child care are more than just social policies - they are also economic policies.

The proposed changes are substantial. Beginning in 2022-2023, Canadians can expect more federal contributions to affordable housing, doubling of the First-Time Home Buyers’ Tax Credit to $10,000 and the introduction of a Tax-Free First Home Savings Account, while freezing foreign investment.^[1] In addition, Canadians will soon have access to federal dental coverage and can expect further reductions to childcare fees. Finally, the Federal government proposes to increase its immigration target to 451,000 by 2024. 

For businesses, key areas of opportunity include the increase in immigration. After nearly two years of backlogs associated with the COVID-19 pandemic, there is pent up demand for immigration, especially in sectors with labour shortages (e.g. retail). Businesses may also see value in recent changes made to the Temporary Foreign Worker Program (TFWP), which extends the labour market impact assessment validity period to 18 months and extends the maximum duration for employment for global talent from two years to three years.

2. Non-Renewable Energy Remains at Odds with the Green Transition

Budget 2022 recognizes the importance of green energy and reducing Canada’s dependence on non-renewable energy.

Since 2015, Canada has begun an ambitious green transformation of its energy sector, which now represents 7.6% of the country’s GDP and 257,000 jobs for Canadians. Budget 2022’s green energy plan proposes a refundable investment tax credit for businesses that incur eligible Carbon Capture, Utilization, and Storage (CCUS) expenses.^[2] Budget 2022 also sets out funding for a net-zero electricity system, including over $850 million to Natural Resources Canada for pre-development activities and funding for the Smart Renewables and Electrification Pathways Program under the Emissions Reductions Plan.

For businesses, the green transition presents both ambiguity and opportunity. Budget 2022 comes amidst the Russian invasion of Ukraine. With Russia’s invasion, numerous countries including Canada, imposed sanctions on Russian petroleum products. In the short term, these sanctions raised domestic oil prices and underscored Canada’s need for cheap, reliable access to energy. Today, oil and gas prices remain high, but it is unclear whether expectations will be high enough to trigger investment. The federal government, for example, recently approved the $12 billion Bay du Nord offshore oil mega-project in Newfoundland and Labrador. On the other hand, Budget 2022 contemplates a grim outlook for the oil and gas sector. In Details of Economic and Fiscal Projections, Budget 2022 suggests that “while higher commodity prices should trigger investment in the oil and gas sector, the response is unlikely to be as strong as in past commodity booms given that supply disruptions – not stronger global demand – are behind the run-up in prices”. For those in the oil and gas industry, Budget 2022 also proposes actions that will increase operating costs, including the pollution pricing system^[3] and the elimination of phase out flow-through share regimes for oil, gas, and coal activities.

On the other hand, increased interest in carbon capture and alternative forms of energy present opportunity. For example, businesses may consider Budget 2022’s proposed investments in Canada’s small modular reactor (SMR) market. SMRs are less complex, easier to operate, and more cost effective than current nuclear technology. Provincial interest in this space is growing as well; in March 2022, four Canadian provinces signed an initiative to develop a cross-provincial SMR/ low carbon energy plan.

3. Pay Attention to Critical Mineral Exploration and Low Carbon Energy Generation

Budget 2022 recognizes a commitment to investing in agriculture, critical minerals, and semiconductors.

In the coming years, Canadians can expect renewed commitments to the Canadian Agricultural Partnership, $1.5 billion over seven years for developing critical mineral supply chains, a 30% tax credit on critical mineral exploration (including nickel, lithium, cobalt, graphite, copper, rare earth elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum), and over $120 million in small nuclear waste minimization.

For businesses, these investments signal areas of future growth. With the global demand for critical and rare earth minerals rising for use in a variety of products including batteries, cell phones, energy storage cells and electric vehicles, there is unprecedented opportunity in this space.

4. Productivity and Innovation

Budget 2022 recognizes a need for innovation to face the challenges of climate change, technological change, and a changing global economy.

Budget 2022 proposes to establish the Canada Growth Fund, a $15 billion investment vehicle for innovation. In addition, Budget 2022 announces the government’s intention to create an operationally independent Innovation and Investment Agency, funded by $1 billion over five years, starting in 2022-23. Finally, Budget 2022 proposes to expand access to the small business tax rate (9% on the first $500,000) more gradually, with access to be fully phased out when taxable capital reaches $50 million, rather than at $15 million.

For businesses, the increased innovation spending suggests a willingness to embrace change. For example, the COVID-19 pandemic affected a number of industries, and underscored the attractiveness of gig economies and agile supply chains. Companies may consider utilizing innovation funds to adapt to a changing business landscape.

5. Financial institutions face higher taxes

Budget 2022 proposes additional taxes on Canadian financial institutions and closing tax loopholes.

Budget 2022 seeks to raise over $6 billion in five years through tax changes. Notably, Budget 2022 proposes a temporary Canada Recovery Dividend, under which banking and life insurers’ groups (as determined under Part VI of the Income Tax Act) will pay a one-time 15% tax on taxable income above $1 billion for the 2021 tax year and a permanent 1.5% sur-tax on the taxable income of banking and life insurance groups (as determined under Part VI of the Income Tax Act) above $100 million. In addition, Budget 2022 proposes a number of amendments related to the use of foreign corporations as tax shelters and expanding anti-tax avoidance rules. For a detailed breakdown on this topic, see our Federal Budget Commentary - Tax Measures.

For Canadian banks, the tax rate increases are met with disappointment as the proposed changes are targeted to the banking sector. On the other hand, the 2022 Budget uses the sur-tax as a revenue generator. Both companies and the average Canadian may benefit from reinvestment of tax revenue into social services and innovation funding.

To conclude, Budget 2022 balances existing social challenges with a need to innovate and grow the Canadian economy. For further information on Budget 2022 and Canada’s business outlook, please contact your McCarthy Tétrault trusted advisor.

 

[1]       Specifically, Budget 2022 announces the government’s intention to propose restrictions that 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.

[2]       Credits are set at 60% for investment in equipment to capture CO2 in direct air capture projects; 50% for investment in equipment to capture CO2 in all other CCUS projects; and 37.5% for investment in equipment for transportation, storage and use. The tax credit is expected to cost $2.6 billion over five years starting in 2022-23, with an annual cost of about $1.5 billion in 2026-27.

[3]       Includes the use of a federal backstop in provinces that do not meet the federal benchmark.