Written by Mackenzie Tax and Estate Planning Team
The 2023 federal budget, tabled by Finance Minister Chrystia Freeland on March 28, 2023, contained several proposals that will impact the financial, tax and estate plans of Canadians. The following is a summary of the most relevant budget proposals that may impact financial advisors and their clients.
Personal tax measures
Federal income tax rates
There are no changes to personal federal income tax rates or income brackets for 2023. Please see Mackenzie Investments’ suite of tax cards for the latest tax facts and figures for 2023.
Alternative minimum tax (AMT) for high-income earners
The alternative minimum tax (AMT) is a parallel tax calculation that allows fewer deductions, exemptions and tax credits than under the regular method of calculating income tax. AMT currently applies a flat 15% tax rate with a standard $40,000 exemption amount instead of the usual progressive rate structure. The taxpayer pays the greater of the AMT and regular tax. However, any additional tax paid as a result of AMT can be carried forward for seven years and credited against regular tax to the extent regular tax exceeds AMT in those years.
To better target the AMT to high-income individuals, the 2023 budget proposes several changes to the tax preferences (exemptions, deductions and credits) resulting in more high-income taxpayers being exposed to AMT. Some of the key design features of the new AMT regime are summarized below, with more details becoming available later this year.
- AMT capital gains inclusion rate will increase to 100% (from 80%), while capital loss carry-forwards and allowable business investment losses would apply at 50%.
- 100% inclusion of any stock option benefit will be included in the AMT base.
- Donation of publicly listed securities will include 30% of capital gains from those donations.
- Several deductions applied to AMT will be reduced from 100% to 50%.
- Only 50% of most non-refundable tax credits would be allowed to reduce the AMT (from 100%).
- The AMT exemption will increase from $40,000 to the start of the fourth federal tax bracket (approximately $173,000 for 2024) and indexed to inflation.
- The AMT rate will increase from 15% to 20.5%.
- AMT carry-forward will remain at seven years.
- No announcement yet as to whether certain trusts will be subject to AMT.
These changes would come into effect for taxation years beginning after 2023.
The impact of these changes will be that more high-income earners will be subject to the new AMT regime.
Registered Disability Savings Plans (RDSPs)
Registered Disability Savings Plans (RDSPs) are designed to support the long-term financial security of a beneficiary who is eligible for the disability tax credit. Where the contractual competence of an individual who is 18 years of age or older is in doubt, the RDSP plan holder must be that individual’s guardian or legal representative as recognized under provincial or territorial law.
As a result of the challenges in appointing a legal representative, the Finance Department introduced a temporary measure, which is set to expire on December 31, 2023, allowing a qualifying family member (QFM), who is a parent, spouse or common-law partner, to open an RDSP and be the plan holder for an adult whose capacity is in doubt, and who does not have a legal representative.
Budget 2023 proposes to extend the qualifying family member measure by three years, to December 31, 2026. A qualifying family member who becomes a plan holder before the end of 2026 could remain the plan holder after 2026.
In addition, the budget also proposes to broaden the definition of “qualifying family member” to include a brother or sister of the beneficiary who is 18 years of age or older. This proposed expansion would apply as of royal assent of the enabling legislation and be in effect until December 31, 2026. Like other QFMs, a sibling who becomes a QFM and plan holder before the end of 2026 could remain the plan holder after 2026.
Stakeholders have been advocating for these changes and it is great to see Finance include these proposals in the budget.
a) Educational Assistance Payments (EAPs)
Registered Education Savings Plans (RESPs) are tax-assisted savings vehicles designed to help families accumulate savings for the post-secondary education of their children. Contributions to RESPs may be eligible for government matching grants, such as the Canada Education Savings Grant (CESG).
When a RESP beneficiary is enrolled in an eligible post-secondary program, government grants and investment income can be withdrawn from the plan as Educational Assistance Payments (EAPs) in order to assist with post-secondary education-related expenses. EAPs are taxable income for the RESP beneficiary.
Currently, the tax rules place limits on the amount of EAPs that can be withdrawn from the RESP. For beneficiaries enrolled full-time (in a program of at least three consecutive weeks’ duration requiring at least 10 hours per week of courses or work in the program), the limit is $5,000 in respect of the first 13 consecutive weeks of enrollment in a 12-month period. For beneficiaries enrolled part-time (in a program of at least three consecutive weeks’ duration requiring at least 12 hours per month of courses in the program), the limit is $2,500 per 13-week period.
The 2023 budget proposes to allow EAP withdrawals of up to $8,000 in respect of the first 13 consecutive weeks of enrollment for full time students, and up to $4,000 per 13-week period for beneficiaries enrolled part-time.
Given the rising tuition costs, this provides families with greater flexibility in accessing RESPs to fund post-secondary education.
b) Divorced and separated couples
Currently, only spouses or common-law partners (CLPs) can jointly enter into an agreement to open an RESP. Parents who opened a joint RESP prior to their divorce or separation can maintain this plan afterwards but are unable to open a new joint RESP with a different promoter.
Budget 2023 proposes to enable divorced or separated parents to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter.
Both RESP changes come into force on the day the budget was tabled, March 28, 2023.
The new grocery rebate
The Goods and Services Tax Credit (GSTC) helps to offset the impact of the GST on low- and modest-income individuals and families. The GSTC is non-taxable, income-tested and indexed to inflation.
Budget 2023 proposes to introduce an increase to the maximum GSTC amount for January 2023 that would be known as the grocery rebate. Eligible individuals would receive an additional GSTC amount equivalent to twice the amount received for January 2023. The grocery rebate would be paid as soon as possible following the passage of legislation, through the GSTC system. The maximum amount under the grocery rebate would be $153 per adult, $81 per child and $81 for the single supplement. The phase-in and phase-out rates would be tripled to ensure that the grocery rebate is fully phased in and phased out at the same income levels as under the current GSTC rules for 2022-2023 benefit year.
A little bit of relief for rising costs of food is positive for Canadians.
Employee ownership trusts (EOT)
An employee ownership trust (EOT) is a form of employee ownership where a trust holds shares of a corporation for the benefit of the corporation’s employees. EOTs can be used to facilitate the purchase of a business by its employees, without requiring them to pay directly to acquire shares. For business owners, an EOT provides an additional option for succession planning.
Budget 2023 proposes new rules to facilitate the use of EOTs to acquire and hold shares of a business. The new rules would define qualifying conditions to be an EOT and propose changes to tax rules to facilitate the establishment of EOTs. These changes would extend the capital gains reserve to 10 years for qualifying sales to an EOT, create an exception to the current shareholder loan rule and allow repayment over 15 years (instead of 1 year), and exempt EOTs from the 21-year deemed disposition rule applicable to many trusts.
Some of the requirements and features of an EOT include:
- The trust must be Canadian resident holding shares of qualifying business and the employees are beneficiaries.
- The trust must hold a controlling interest in the qualifying business.
- Distributions to beneficiaries are based on length of service, remuneration and hours worked.
- Trustees are Canadian residents.
- Trust is taxed at top marginal tax rates, similar to other personal trusts.
- Dividends paid through the trust retain their character when taxed at the beneficiary level.
This provides business owners with additional incentives and features in preparing for succession and a purposeful retirement. These proposals would apply as of January 1, 2024.
Retirement compensation arrangements (RCAs)
A retirement compensation arrangement (RCA) is a type of employer-sponsored arrangement that generally allows an employer to provide supplemental pension benefits to employees. Employers typically contribute funds to the RCA and those funds, as well as any investment income earned on funds in the RCA, are subject to a 50% tax, refundable when the RCA distributes funds to the beneficiaries.
Some employers choose not to “pre-fund” the RCA with contributions, but instead settle retirement obligations as they become due, through a letter of credit or a surety bond. Employers pay an annual fee or premium for the credit/bond and, as such, are subject to the 50% refundable tax on the fee/premium charged by the financial institution. In this scenario, retirement benefits are funded directly from corporate revenues and thus, employers have no practical way of recovering the 50% tax.
As a result, the budget proposes that fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for an RCA will not be subject to the 50% refundable tax, beginning on or after March 28, 2023.
For retirement benefits paid after 2023 from employer’s corporate revenues to employees that had RCA benefits secured by letters of credit (or surety bonds), the budget proposes to allow employers to request a refund of 50% of retirement benefits paid up to the amount of refundable taxes previously remitted.
Deduction for tradespeople’s tool expenses
Under the deduction for tradespeople’s tool expenses, a tradesperson can claim a deduction of up to $500 of the amount by which the total cost of eligible new tools acquired in a taxation year as a condition of employment exceeds the amount of the Canada Employment Credit ($1,368 in 2023).
Budget 2023 proposes to double the maximum employment deduction for tradespeople’s tools from $500 to $1,000, effective for 2023 and subsequent taxation years.
Corporate tax measures
Intergenerational share transfers
Section 84.1 of the Income Tax Act is an anti-avoidance provision that would generally tax the difference between the value of the non-share consideration received (such as cash or promissory note) and the paid-up capital or adjusted cost basis of the shares (whichever is greater) as a dividend instead of a capital gain and has been problematic for business owners selling shares to a corporation owned by children or grandchildren. The application of 84.1 would result in a higher tax liability for the small business owner and no access to the lifetime capital gains exemption (LCGE).
A private member’s bill (C-208) introduced an exception to section 84.1, effective June 29, 2021, for certain share transfers from parents to corporations owned by their children or grandchildren, allowing the parent to benefit from capital gains treatment and access the LCGE. Finance has expressed concern around the application of Bill C-208, citing insufficient safeguards that can be used where no legitimate transfer of a business to the next generation takes place.
Therefore, the budget proposes to amend the rules introduced by Bill C-208 to include appropriate safeguards to ensure they only apply where a genuine intergenerational business transfer takes place. To provide flexibility, it is proposed that taxpayers who wish to undertake a genuine intergenerational share transfer (such as a parent to child’s corporation) may choose to rely on one of two transfer options:
- An immediate intergenerational business transfer (three-year test) based on arm’s length sale terms; or
- A gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing the value of their shares and allowing future growth to accrue to their children while the parent’s fixed economic interest is then gradually diminished by the corporation repurchasing the parent’s interest).
Both transfer options would reflect the hallmarks of a genuine intergenerational business transfer with specific conditions around:
- Transfer of legal (and in certain cases factual) control from parent to child.
- Transfer of economic interests in the business.
- Transfer of management of the business within a reasonable time frame.
- Legal control retained by the child for certain period.
- Active involvement in the business by the child for certain length of time.
Budget 2023 also proposes to provide a 10-year capital gains reserve for genuine intergenerational share transfers that satisfy the proposed conditions.
These measures would apply to transactions that occur on or after January 1, 2024.
The proposed amendments to Bill C-208 end many years of uncertainty for business owners trying to facilitate a succession plan to their children, while providing them further incentive to pass on the family business to the children.
Clean energy initiatives for businesses
Budget 2023 has introduced a number of tax incentives for businesses that produce and manufacture clean energy. The following is a summarized list of new incentives available for businesses.
- Introduction of clean hydrogen investment refundable tax credit available for eligible projects that produce all, or substantially all (90% or more), hydrogen through the production process.
- The 2022 Fall Economic Statement proposed the Clean Technology Investment Tax Credit. A 30% refundable credit would be available to businesses investing in eligible property that is acquired and that becomes available for use on or after budget day. Budget 2023 proposes to expand eligibility to include geothermal energy systems.
- Budget 2023 proposes to introduce a refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing, equal to 30% of the capital cost of eligible property associated with certain activities.
- Budget 2023 proposes to reduce tax rates on business income from certain nuclear manufacturing and processing activities for taxation years beginning after 2023.
- Budget 2023 proposes to amend the Income Tax Act to include lithium from brines as a mineral resource and allow businesses to issue flow through shares and renounce expenses to their investors, and claim the Mineral Exploration Tax Credit.
Tax on equity repurchases
The 2022 Fall Economic Statement announced the government’s intention to introduce a 2% tax on share repurchases by public corporations in Canada. Budget 2023 provides further details around the design and implementation.
The tax applies to Canadian resident public corporations whose shares are listed on a designated stock exchange but excludes mutual fund corporations. It will also apply to real estate investment trusts (REITs), specific investment flow-through (SIFT) trusts and SIFT partnerships. The tax is equal to 2% of the net value of equity (the fair market value (FMV) of equity repurchased less the FMV issued from treasury). The tax would not apply if the entity repurchased less than $1 million of equity during the tax year (prorated for short taxation years).
This new tax measure will apply for repurchases and issuances of equity that occur on or after January 1, 2024.
General anti-avoidance rule (GAAR)
The general anti-avoidance rule (GAAR) in the Income Tax Act is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, GAAR applies to deny the tax benefit created by the abusive transaction.
Budget 2023 proposes to amend the GAAR by:
- Introducing a preamble, designed to clarify whether GAAR is intended to apply regardless of whether or not the tax planning strategy used to obtain the tax benefit was foreseen.
- Changing the avoidance transaction standard by reducing the threshold for applying GAAR from a “primary purpose” to a “one of the main purposes” test.
- Introducing an economic substance rule so that it better meets its initial objective of requiring economic substance in addition to literal compliance with the words of the Income Tax Act.
- Introducing a penalty equal to 25% of the amount of the tax benefit.
- Extending the reassessment period in certain circumstances to three years beyond the normal reassessment period.
Other measures proposed in the budget include the following:
- Budget 2023 confirms that financial institutions will be able to start offering First Home Savings Accounts (FHSA) beginning April 1, 2023.
- Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2%, for one year only, as of April 1, 2023.
- The number of eligible Canadians that may auto-file their tax returns will triple to approximately 2 million by 2025.
- Canada Student Grants will increase by 40%, up to $4,200 for full-time students.
- Raising the interest-free Canada Student Loan limit from $210 to $300 per week of study.
- Increase the number of students eligible for federal aid by 1,000 by waiving the requirement for students aged 22 or older to undergo credit screening to qualify for federal student grants and loans.
- Budget 2023 commits funding to modernize the OAS IT infrastructure.
- Introduction of the new Dental Care Plan, providing dental coverage for uninsured Canadians with annual income of less than $90,000 by the end of 2023.
- Budget 2023 announced that the government has secured commitments from Visa and Mastercard to lower fees for small businesses.
- Budget 2023 announced the government’s intention to reduce junk fees for Canadians, including higher telecom roaming charges, event and concert fees, excessive baggage fees and unjustified shipping and freight fees.
Previously announced measures
Budget 2023 confirms the government’s intention to proceed with a number of previously announced tax and related measures, as modified to take into account consultations and deliberations since their release.
This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of March 28, 2023. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.
This should not be construed as legal, tax or accounting advice. This material has been prepared for information purposes only. The tax information provided in this document is general in nature and each client should consult with their own tax advisor, accountant and lawyer before pursuing any strategy described herein as each client’s individual circumstances are unique. We have endeavored to ensure the accuracy of the information provided at the time that it was written, however, should the information in this document be incorrect or incomplete or should the law or its interpretation change after the date of this document, the advice provided may be incorrect or inappropriate. There should be no expectation that the information will be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. We are not responsible for errors contained in this document or to anyone who relies on the information contained in this document. Please consult your own legal and tax advisor.