Budget 2022: How it may affect Canadians’ finances and investments

Pandemics can be expensive, especially for taxpayers. It may be too soon to say how it will all play out, but investors and high-income taxpayers were anticipating worse. There are some good things for a few of us, including those looking to buy a home for the first time. What does it all mean for you, your money and your investments? 

The deficit is there, of course

The deficit is top of mind. The Canadian Taxpayers Federation called the 2022 budget a “credit card budget” for its strategy of borrowing and spending. The deficit is expected to be $52.8 billion this year. The federal government’s spending is projected to be $452.3 billion in 2022, which is $89.4 billion above pre-pandemic spending in 2019. 

The national debt is projected to grow to $1.2 trillion by the end of the fiscal year. Budget 2022 is adding another $148 billion to the debt by 2027. Interest on the debt is projected to cost taxpayers $26.9 billion this year. Budget 2022 does not include a plan to balance the books. 

Read on for more about the budget numbers and how they may affect you. 

On the home-ownership front 

Budget 2022 gives first-time home buyers a little help. It introduced the tax-free first home savings account (FHSA), a new type of registered account for home buyers to grow their down payment and avoid raiding their registered retirement savings plans (RRSPs). That said, Canadians can transfer up to $8,000 annually from their RRSP to an FHSA. Note, however, that they can’t use both an FHSA and the existing Home Buyers’ Plan, which allows for RRSP withdrawals up to $35,000 (or $70,000 per couple) and payback over 15 years. 

The FHSA will be available in 2023, and home buyers can contribute up to $40,000. Account holders will get RRSP-style tax rebates when they contribute, and their money will be able to grow tax-free and be withdrawn tax-free. Unlike with an RRSP, though, if account holders miss a year of contributions, they can’t carry forward the contribution room. FHSA accounts can stay open for 15 years; if the account holder doesn’t buy a home, they can transfer the funds into an RRSP or a registered retirement income fund (RRIF).

Budget 2022 also allocates $10 billion to address the housing crisis: 

• $4 billion to help municipalities update their zoning and permit systems to allow for speedier construction of residential properties 
• $1 billion for the construction of affordable housing units
• $1.5 billion in loans and funding for co-op housing

The $4 billion allocated to municipalities is a pledge to move ahead with the Housing Accelerator Fund, which is designed to incentivize housing construction by cutting red tape related to municipal planning, zoning and permitting systems.

The budget also includes:

• Doubling support provided through the First-Time Home Buyers’ Tax Credit from $750 to $1,500 
• Introducing a Multigenerational Home Renovation Tax Credit, which provides up to $7,500 in support for constructing a secondary suite
• $475 million in 2022–23 to provide a one-time $500 payment to those facing housing affordability challenges 

Moving towards universal dental coverage

Canada is taking the first steps towards universal dental coverage. The government will launch a new dental program in 2022, starting with children under age 12, at an initial cost of $300 million. The dental program is a major plank of the Liberals’ confidence-and-supply agreement with the NDP to keep the government in power until 2025. 

The new dental program will be restricted to families with an income of less than $90,000, with no copays for those who make under $70,000 per year. In 2023, eligibility will expand to include children under 18, seniors and persons with disabilities. The government expects full implementation by 2025. The cost will be $5.3 billion over five years. 

The budget was light on any other healthcare spending or policy announcements. The Liberals committed to passing a legislative framework for a national pharmacare plan by the end of 2023 as part of their deal with the NDP. 

For lower- to middle-income retirees, the dental and pharmacare programs will remove some financial burdens. The programs will also benefit lower- and middle-income families, potentially freeing up funds for other expenses or investments. 

Taxing the banks, too

Some argue that taxing banks more could affect loans and the buck could be passed along to bank clients through fees. We will have to wait and see. A planned tax (applied to banks and insurance companies) was altered from an initial proposal outlined in the Liberal Party’s 2021 election platform. In place of a three-percentage-point surtax on financial institutions’ earnings over $1 billion, the budget includes a 1.5-percentage-point increase on taxable income over $100 million. That brings the tax rate on those earnings from 15% to 16.5%. 

The budget also includes the Canada Recovery Dividend: a one-time 15% tax on financial institutions’ taxable income above $1 billion for the 2021 tax year, payable over five years. The two budgeted tax hikes are projected to bring in a little over $6 billion, down from the roughly $11 billion estimated in the Liberal platform. 

The banks and other financial institutions are in a very strong position. These companies benefited greatly from Canadians’ increased savings during the pandemic). In their current state, they should be able to easily absorb these additional taxes, but there may be modest pressure on the potential of future dividend increases. 

Add on $8 billion for defence 

Under our NATO obligations, Canada should be spending 2% of its GDP on defence. Last year, it spent 1.36%. To meet its NATO obligation,  the government would have to set aside $20 to $25 billion per year, according to the Parliamentary Budget Officer. Budget 2022 has allocated $8 billion, to be spread over many years, and there is no plan to meet our NATO spending obligations. 

If Canada does eventually spend 2% of its GDP on defence, significant tax revenues would be required. That could include an increase in personal income tax rates or even HST. 

Investing in the Canada Growth Fund

Canada is in line with the global trend of supporting electric vehicles and clean energy development, which should raise the eyebrows of Canadian investors. Sustainable companies were a common investment theme in my Making Sense of the Markets columns. There are opportunities to take advantage of these powerful long-term trends. I continue to add to my green energy supercycle ETF (GMET), plus uranium (HURA) and lithium (HLIT), and the EV ecosystem (BATT). 

Budget 2022 proposes to establish the Canada Growth Fund to attract private-sector investment. The fund will be initially capitalized at $15 billion over the next five years, and it will target $3 of private capital for every $1 invested. 

The fund will help meet these national economic policy goals:

• To reduce emissions and contribute to achieving Canada’s climate goals
• To diversify the economy and bolster exports by investing in the growth of low-carbon industries and new technologies across new and traditional sectors of Canada’s industrial base 
• To support the restructuring of critical supply chains in areas important to Canada’s future prosperity, including its natural resources sector 

Investors emerge largely unscathed, for now 

Fortunately, the capital gains tax inclusion rate remains at 50%, and we still have the principal residence exemption, meaning you don’t have to pay tax on the capital gain realized from selling the property where you live. Federal personal income tax rates remain unchanged. Matt Poyner wrote about the budget from the perspective of the self-directed investor for his site dividendstrategy.ca. 

That said, high-income earners have been put on notice. They might soon have to pay their “fair share” of income taxes. 

A major risk to taxpayers and investors is slow growth in Canada, which would put a lid on tax revenues. Inflation and the rising-rate environment might greatly increase our debt servicing costs. Critics suggest that the budget could stoke even more inflation. 

Also, recessions are a normal part of the economic cycle. A recession would put incredible strain on government revenues. In the recession caused by the financial crisis (2008–09), revenues fell by 35%. The drop was greater in the brief COVID-related recession. 

Annual government revenues in millions: 

So much has to go right for the debt and deficit projections to play out as planned. If there are growing budget shortfalls, the feds may be forced to look for increased tax revenues beyond the special bank taxes. 

You can bet that government agencies will follow or chase the money from individuals and profitable sectors. When Willie Sutton was asked why he robs banks, he replied, “Because that’s where the money is.” 

Dale Roberts is a MoneySense contributor. He is a proponent of low-fee investing, and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge for market updates and commentary, every morning. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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