Upcoming tax changes for 2023

Tax-Free First Home Savings Account (FHSA) [ITA 146.6]

The Tax-Free First Home Savings Account (FHSA) is a new registered account that gives prospective first-time home buyers the ability to save for the purchase of a home. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home - including from investment income - would be non-taxable like a Tax-Free Savings Account (TFSA). Eligible individuals will be able to create an account as of 2023.

For an in-depth look on this measure, please consult this blog article.

Residential Property Flipping Rule [ITA 12(12)]

Profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months would be deemed to be business income [ITA 12(12)(a)]. The flipped property is deemed to be inventory in the taxpayer’s business [ITA 12(12)(b)]. The flipped property is deemed not to be a capital property of the taxpayer [ITA 12(12)(c)].

Because of the deeming of the property as inventory, and not a capital property, the principal residence exemption [ITA 40(2)(b)] does not apply for these dispositions.

This rule applies for residential properties sold on or after January 1, 2023.

There are exceptions to this rule [ITA 12(13)]:

a)      Death: a disposition due to, or in anticipation of, the death of the taxpayer or a related person.

b)     Household addition: a disposition due to, or in anticipation of, a related person joining the taxpayer’s household or the taxpayer joining a related person’s household (e.g., birth of a child, adoption, care of an elderly parent).

c)      Separation: a disposition due to the breakdown of a marriage or common-law partnership, where the taxpayer has been living separate and apart from their spouse or common-law partner because of a breakdown in the relationship for a period of at least 90 days.

d)     Personal safety: a disposition due to a threat to the personal safety of the taxpayer or a related person, such as the threat of domestic violence.

e)     Disability or illness: a disposition due to a taxpayer or a related person suffering from a serious disability or illness.

f)       Employment change: a disposition for the taxpayer or their spouse or common-law partner to work at a new location or due to an involuntary termination of employment. In the case of work at a new location, the taxpayer’s new home must be at least 40 kilometres closer to the new work location (eligible relocation).

g)      An involuntary termination of the employment of the taxpayer or the taxpayer's spouse or common-law partner.

h)     Insolvency: a disposition due to insolvency or to avoid insolvency (i.e., due to an accumulation of debts).

i)       Involuntary disposition: a disposition against someone’s will, for example, due to, expropriation or the destruction or condemnation of the taxpayer’s residence due to a natural or man-made disaster.

This rule does not apply to a capital loss on a flipped property. Neither can you create a business loss through an inventory loss on a flipped property [ITA 12(14)].

Multigenerational Home Renovation Tax Credit [ITA 122.92]

This is a refundable credit that would provide recognition of eligible expenses for a qualifying renovation. A qualifying renovation would be one that creates a secondary dwelling unit to permit an eligible person (a senior or a person with a disability) to live with a qualifying relation.

Eligible Individual

An individual who ordinarily resides, or intends to ordinarily reside, in the eligible dwelling within twelve months after the end of the renovation period and who is [ITA 122.92(1) “Eligible individual”]:

a)      a qualifying individual (see below);

b)     the cohabiting spouse or common-law partner of a qualifying individual at any time in the renovation period taxation year;

c)      a qualifying relation of a qualifying individual (see below).

A qualifying individual is either [ITA 122.92(1) “Qualifying individual”]:

a)      Seniors who are 65 years of age or older at the end of the taxation year that includes the end of the renovation period; or

b)     Adults with disabilities who are 18 years of age or older at the end of the taxation year that includes the end of the renovation period, and who are eligible for the Disability Tax Credit at any time in that year.

A qualifying relation of a qualifying individual for a renovation period taxation year, means an individual who [ITA 122.92(1) “Qualifying relation”]:

a)      has attained the age of 18 years before the end of the renovation period taxation year; and

b)     at any time in the renovation period taxation year, is a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of either the qualifying individual or the “cohabiting spouse or common-law partner” (as defined in section 122.6) of the qualifying individual.

Eligible dwelling

Defined as a housing unit that is (including the land subjacent to the housing unit and the immediately contiguous land, but not including the portion of that land that exceeds the greater of ½ hectare and the portion of that land that is necessary for the use and enjoyment of the housing unit as a residence) located in Canada if [ITA 122.92(1) “Eligible dwelling”]:

a)      the qualifying individual or a qualifying relation of the qualifying individual (or a trust under which the qualifying individual or a qualifying relation is a beneficiary) owns - whether jointly with another person or otherwise - at any time in the renovation period taxation year, the housing unit; and

b)     the housing unit is ordinarily inhabited, or is reasonably expected to be ordinarily inhabited, within twelve months after the end of the renovation period

                 i.          by the qualifying individual, or

                ii.          by a qualifying relation of the qualifying individual.

Qualifying renovation

A renovation or alteration of, or addition to, an eligible dwelling that is [ITA 122.92(1) “Qualifying renovation”]:

a)      of an enduring nature and integral to the eligible dwelling; and

b)     is undertaken to enable the qualifying individual to reside in the dwelling with a qualifying relation of the qualifying individual, by establishing a secondary unit within the dwelling for occupancy by the qualifying individual or the qualifying relation.

A secondary unit would be defined as a self-contained dwelling unit with a private entrance, kitchen, bathroom facilities and sleeping area [ITA 122.92(1) “Secondary unit”].

Qualifying expenditure

Means a reasonable outlay or expense that enables an eligible person to reside in the dwelling with a qualifying relation [ITA 122.92(1) “Qualifying expenditure”].

Eligible expenses would include the cost of labour and professional services, building materials, fixtures, equipment rentals and permits [ITA 122.92(1) “Qualifying expenditure”].

NOT eligible [ITA 122.92(1) “Qualifying expenditure”]:

a)      the cost of annual, recurring or routine repair or maintenance;

b)     expenses for household appliances and devices, such as audiovisual electronics;

c)      payments for services such as outdoor maintenance and gardening, housekeeping or security;

d)     the costs of financing a renovation (e.g., mortgage interest costs);

e)     goods or services provided by a person not dealing at arm’s length with the claimant;

f)       any expenses not supported by receipts.

Renovation period

Means a period in respect of a qualifying renovation [ITA 122.92(1) “Renovation period”] that:

a)      begins at the time that an application for a building permit for a qualifying renovation is submitted; and

b)     ends at the time when the qualifying renovation passes a final inspection, or proof of completion of the project according to all legal requirements of the jurisdiction in which the renovation was undertaken is otherwise obtained.

Credit amount

The value of the credit would be 15 per cent of the lesser of eligible expenses and $50,000 [ITA 122.92(3)].

One qualifying renovation would be permitted to be claimed in respect of a qualifying individual over their lifetime [ITA 122.92(4)].

Canada Worker’s Benefit (CWB) [ITA 122.7]

The CRA will automatically provide individuals who received the CWB for the previous taxation year an entitlement for the current taxation year through quarterly advance payments, so long as their income tax return for the previous year is received and assessed by the CRA prior to November 1 of the current year.

Half of an individual's estimated CWB entitlement for a year, determined on the basis of their prior-year tax return (and where applicable, that of their spouse), would be delivered through advance payments in July, October and January. Any residual entitlement would be calculated and paid through the individual's tax return for the year.

Advance payments would be issued automatically starting in July 2023 for the 2023 taxation year, and the option to apply for an advance payment under the existing provision would no longer be available after January 1, 2023.

Tradespeople’s tools expenses [ITA 8(1)(s)]

Increase of the maximum deduction claimable from $500 to $1,000.

Registered Education Savings Plan (RESP) [ITA 146.1]

Increase in the withdrawal limits in educational assistance payments (EAP) [ITA 146.1(1)]:

·        qualifying educational program (full-time studies) - withdrawal limit increases from $5,000 to $8,000.

·        specified educational program (part-time studies) - withdrawal limit increases from $2,500 to $5,000.

Separated couples will also be able to create joint RESP accounts for their children.

These changes are effective as of the budget announcement date (March 28, 2023).