On March 28, 2023, the Honourable Chrystia Freeland tabled her third budget as Deputy Prime Minister and Finance Minister: A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future.
This commentary summarizes the highlights of the new budget focusing on tax changes and other measures affecting individuals, businesses and not-for-profit organizations. The full budget document is available on this link.
Canada continues to bounce back from the COVID-19 pandemic with some of the following encouraging statistics:
- Canada’s economic growth was the strongest in the G7 over the last year;
- 830,000 more Canadians are employed than before the pandemic;
- Canada’s unemployment rate is 5 per cent (a hair above our record low of 4.9 per cent);
- Women aged 25 to 54 in the labour force reached a record high of 85.7 per cent in February (compared to just 77 per cent in the U.S.);
- Canadian consumer price inflation has fallen for the last eight months since its June 2022 peak. The February rate of 5.2 per cent is below the rates seen in many peer economies.
There are no increases to personal or corporate income tax rates, nor to the federal minimum wage which remains at $15.55 per hour.
Debt, Deficit and the Government’s Economic Predictions
Compared to our international G7 peers, Canada continues to have the lowest net debt and deficit as a share of gross domestic product (GDP) in the G7. Canada is also forecasted to post one of the largest improvements in its fiscal balance among G7 countries since the beginning of the COVID-19 pandemic, resulting in Canada having the smallest deficit in the G7, both this year and next. Still the budget expects a deficit of $43 billion for 2022-23 and forecasts deficits of $40.1 billion for 2023-24, and $35 billion for 2024-25.
The government has consulted a variety of private sector economists who expect the Canadian economy to enter a shallow recession in 2023 which could range from a soft landing to a more pronounced downturn.
Highlights of Personal Tax Measures
Alternative Minimum Tax (AMT) for High Income Individuals
To better target the Alternative Minimum Tax (AMT) to high-income individuals, Budget 2023 proposes several changes to its calculation:
- Increasing the AMT exemption from $40,000 to the start of the fourth federal tax bracket. Based on expected indexation for the 2024 taxation year, this would be approximately $173,000. The exemption amount would be indexed annually to inflation;
- Increasing the AMT rate from 15 per cent to 20.5 per cent, corresponding to the rates applicable to the first and second federal income tax brackets, respectively;
- Increases to income inclusions including:
- capital gains inclusion rate increases from 80% to 100%
- capital loss carry forwards and allowable business investment losses (ABILs) would be reduced to 50%
- stock option benefits would be included at 100% even if they qualified for the 50% stock option deduction
- inclusion of 30% of capital gains on donations of publicly listed securities
- inclusion of 30% of the benefit related to the donation of employee stock options.
- Eliminating 50% of certain deductions and expenses including:
- employment expenses (other than those to earn commission income),
- CPP and QPP contribution deductions
- moving expenses
- child-care expenses
- interest and carrying charges incurred to earn income from property
- deductions for limited partnership losses of other years
- non-capital loss carryovers.
The proposed changes would be effective for taxation years that begin after 2023.
The length of the AMT carry forward would be maintained at seven years. Trusts that are currently exempt from the AMT would continue to be exempt.
Additional details will be released later this year.
Intergenerational Business Transfers
A private members bill (Bill C-208) was passed in 2021 to allow for qualifying intergenerational transfers of small business corporations (SBC) without section 84.1 of the Income Tax Act applying to recharacterize a capital gain on the transfer to be a dividend. Capital gains are generally taxed at more favourable rates.
The Department of Finance was concerned that, based on the way the private members bill was written, it could be used for non-genuine intergenerational transfers. After consultation, Budget 2023 proposes to amend the rules introduced by Bill C-208 to ensure that they apply only where a genuine intergenerational business transfer takes place. It is proposed that taxpayers who wish to undertake a genuine intergenerational share transfer 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.
The table* below outlines the proposed conditions to qualify as a genuine intergenerational business transfer under both options. The Transferor (e.g. parent) and child (or children) would be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The election should be filed on or before the Transferor’s filing-due date for the taxation year that includes the disposition time.
*Table of proposed conditions to qualify as a genuine intergenerational business transfer
|Proposed Conditions||Immediate Business Transfer (three-year test)||Gradual Business Transfer (five to ten-year test)|
|1) Transfer of Control of the Business||Parents immediately and permanently transfer both legal and factual* control, including an immediate transfer of a majority of voting shares, and a transfer of the balance of voting shares within 36 months.
*Factual control means economic and other influence that allows for effective control of a corporation (for example, economic dependence on a person who also acts as the controlling mind).
|Parents immediately and permanently transfer only legal** control, including an immediate transfer of a majority of voting shares (no transfer of factual control), and a transfer of the balance of voting shares within 36 months.
**Legal control generally means the right to elect a majority of the directors of a corporation.
|2) Transfer of Economic Interests in the Business||Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months.
(It is expected that the transfers of legal and factual control as well as future growth of the business are sufficient to ensure the parents have transferred a substantial economic interest in the business to their child(ren).)
|Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months.
In addition, within 10 years of the initial sale, parents reduce the economic value of their debt and equity interests in the business to:
(a) 50% of the value of their interest in a farm or fishing corporation at the initial sale time, or
(b) 30% of the value of their interest in a small business corporation at the initial sale time.
|3) Transfer of Management of the Business||Parents transfer management of the business to their child within a reasonable time based on the particular circumstances (with a 36-month safe harbour).||Parents transfer management of the business to their children within a reasonable time based on the particular circumstances (with a 36-month safe harbour).|
|4) Child Retains Control of the Business||Child(ren) retains legal (not factual) control for a 36-month period following the share transfer.||Child(ren) retains legal (not factual) control for the greater of 60 months or until the business transfer is completed.|
|5) Child Works in the Business||At least one child remains actively involved in the business for the 36-month period following the share transfer.||At least one child remains actively involved in the business for the greater of 60 months or until the business transfer is completed.|
The rules introduced by Bill C-208 that apply to subsequent share transfers by the Purchaser Corporation and the lifetime capital gains exemption are proposed to be replaced by relieving rules that would apply upon a subsequent arm’s length share transfer or upon the death or disability of a child. There would be no limit on the value of shares transferred in reliance upon this rule.
Budget 2023 also proposes to provide a ten-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions.
These measures would apply to transactions that occur on or after January 1, 2024.
Registered Education Savings Plan Changes
Registered Education Savings Plans (RESP) help families save for their children’s post-secondary education. Changes in the budget will now permit Educational Assistance Payments (EAPs) withdrawals of up to $8,000 (up from $5,000) for the first 13 consecutive weeks of enrollment for beneficiaries in full-time programs; and up to $4,000 (up from $2,500) per 13-week period for beneficiaries in part-time programs. Individuals who withdrew EAPs prior to March 28, 2023 may be able to withdraw an additional EAP amount, subject to the new plan limits and terms.
For divorced and separated parents, the budget will now enable them to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter. These changes will be effective as of March 28, 2023.
Registered Disability Savings Plan (RDSP) Changes
A temporary measure allows a qualifying family member, who is a parent, spouse or common-law partner, to open an RDSP and be the plan holder for an adult whose capacity to enter into an RDSP contract 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. Budget 2023 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. Once the legislation containing the change is passed, it would take effect until December 31, 2026. A sibling who becomes a qualifying family member and plan holder before the end of 2026 could remain the plan holder after 2026.
Deduction for Tradespeople’s Tool Expenses
The budget doubles the employment deduction for tradespeople’s tools from $500 to $1,000 effective 2023.
The Grocery Rebate
To help with inflation, the Budget promises a one-time boost for the January 2023 Goods and Services Tax Credit (GSTC) to $153 per adult, $81 per child and $81 for the single supplement. The rebate would be paid through the GSTC system once the legislation is passed.
Canadian Dental Care Plan
The Budget introduces a plan to provide dental coverage for uninsured Canadians with annual family income of less than $90,000, with no co-pays for those with family incomes under $70,000. Details on eligible coverage will be released later this year.
Tax-Free First Home Savings Account (FHSA)
The government announced that financial institutions can start offering the Tax-Free First Home Savings Account to Canadians starting April 1, 2023. The FHSA was introduced in Budget 2022. This new registered account is intended to help Canadians save for their first home. The lifetime limit on contributions will be $40,000 subject to an annual contribution limit of $8,000. The full annual contribution limit would be available starting in 2023. Like an RRSP, contributions to the FHSA are tax deductible. Withdrawals used to purchase a first home, including on the investment income earned in the FHSA, are non-taxable, like a TFSA.
Highlights of Corporate and Business Tax Changes
Green Tax Incentives
The Budget has put a strong emphasis on building Canada’s green economy. We have included a brief explanation for the following clean tax credits that have been introduced:
1. Clean Hydrogen Investment Tax Credit (CHTC)
This proposed refundable tax credit applies to expenses incurred for the purchase and set up of equipment in projects generating hydrogen through electrolysis or natural gas. The tax credit can equal 15 to 40 per cent of the cost of eligible equipment that becomes available for use on or after March 28, 2023, based on carbon intensity.
2. Clean Technology Investment Tax Credit – Geothermal Energy (CTITC)
This proposed refundable 30 per cent tax credit is available to businesses investing in eligible property acquired after March 28, 2023. Qualified equipment is used to generate electricity from solar, wind and water energy, non-fossil fuel stationary electricity storage equipment, active solar heating equipment, air-source heat pumps, and ground-source heat pumps.
3. Investment Tax Credit for Clean Technology Manufacturing (CTMTC)
This proposed refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing would be equal to 30 per cent of the capital cost of eligible property like machinery, equipment and industrial vehicles.
4. Investment Tax Credit for Carbon Capture, Utilization and Storage (CCTC)
This refundable tax credit was originally proposed in 2022 for carbon capture, utilization, and storage and would be available to businesses with qualifying expenses beginning on January 1, 2022. The new Budget proposes additional details to be released in the coming months.
Employee Ownership Trusts
To support employee ownership of a business, the budget introduces new rules, effective January 1, 2024, to facilitate employee ownership trusts (EOTs) to acquire and hold shares of a business.
An EOT must be a Canadian resident trust (excluding deemed resident trusts) with only the following two purposes:
- To hold shares of qualifying businesses for the benefit of the employee beneficiaries of the trust; and
- To make distributions to employee beneficiaries, where reasonable, under a distribution formula that could only consider an employee’s length of service, remuneration, and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.
Other requirements to be an EOT include:
- EOT must hold a controlling interest in the shares of one or more qualifying businesses.
- All or substantially all of an EOT’s assets must be shares of qualifying businesses.
A qualifying business would need to meet certain conditions including that all or substantially all of the fair market value of its assets are attributable to assets used in an active business carried on in Canada. A qualifying business must not carry on its business as a partner to a partnership.
Beneficiaries of the trust must consist exclusively of qualifying employees. Qualifying employees would include all individuals employed by a qualifying business and any other qualifying businesses it controls, with the exclusion of employees who are significant economic interest holders, or have not completed a reasonable probationary period of up to 12 months. Individuals and their related persons who hold, or held prior to the sale to an EOT, a significant economic interest in a qualifying business of the EOT would also be excluded from being qualifying employees.
The shares of a qualifying business must be disposed for no more than fair market value of to either a trust that qualifies as an EOT immediately after the sale or a corporation wholly-owned by the EOT.
Budget 2023 would extend the capital gains reserve from five to ten years for qualifying sales to an EOT, creating an exception to the current shareholder loan rule, to extend the repayment period from one to 15 years for amounts loaned to the EOT, and exempt them from the 21-year deemed disposition rule that applies to certain trusts.
Retirement Compensation Arrangements
A retirement compensation arrangement (RCA) is a type of employer-sponsored arrangement that allows an employer to provide supplemental pension benefits to employees.
Employers can choose to pre-fund supplemental retirement benefits through contributions to a trust established under an RCA (RCA trust). Under Part XI.3 of the Income Tax Act, a refundable tax is imposed at a rate of 50 per cent on contributions to an RCA trust, as well as on income and gains earned or realized by the trust. The tax is generally refunded as the retirement benefits are paid from the RCA trust to the employee.
Budget 2023 proposes that fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for an RCA that is supplemental to a registered pension plan will not be subject to the refundable tax. This change would apply to fees or premiums paid on or after March 28, 2023.
Budget 2023 also proposes to allow employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit (or surety bonds) by RCA trusts, based on the retirement benefits that are paid out of the employer’s corporate revenues to employees that had RCA benefits secured by letters of credit (or surety bonds). Employers would be eligible for a refund of 50 per cent of the retirement benefits paid, up to the amount of refundable tax previously paid. This change would apply to retirement benefits paid after 2023.
Tax on Share Buybacks by Canadian Public Corporations
A 2% tax will apply in respect of buybacks that occur on or after January 1, 2024. The tax will apply to Canadian-resident entities listed on a designated stock includes and includes real estate investment trusts (REITS) but excluded mutual fund corporations.
Beneficial Ownership Registry
The budget announces further legislative changes required to implement a public, searchable beneficial ownership registry of federal corporations.
Scientific Research and Experimental Development Tax Incentive Program
The government will continue its review of the SR&ED program to ensure that it is effective in encouraging research and development.
Highlights for Charities and Non-Profit Organizations
While last year’s 2022 Federal Budget introduced several changes for the not-for-profit sector, legislative changes for this industry are absent from the 2023 Budget.
Instead, the budget does focus on new measures and increased funding to improve access to health, mental health, and dental care, to address First Nations’ priorities, as well as fight systemic racism and discrimination.
To address widespread concerns about health care access, Budget 2023 delivers an urgent, needed investment of $198.3 billion over the next ten years to strengthen our public health care system.
This includes a 9.3 per cent increase in 2023-24 for the Canada Health Transfer to provide $49.4 billion in health care funding to provinces and territories.
Disclaimer: This summary is intended to inform readers in general terms. It is not intended to provide any tax or business advice. Please consult your Stern Cohen advisor if you have any questions about your unique situation and how these proposed changes might impact you or your business or not-for-profit organization. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.