2023 Federal Budget Highlights
MARCH 29, 2023
Below you will find some of the notable highlights from the 2023 Federal Budget “A Made-In-Canada Plan”, released on March 28, 2023. For more details on any of the proposals listed below, please refer to the full release of the federal budget by following the link at the end.
• Amendments to the Alternative Minimum Tax (AMT): With this first overhaul since 1986, the AMT will now apply largely to Canadians in the top income tax bracket (over $173,000) and will see their capital gains inclusion rate jump to 100 per cent and a host of eligible tax deductions, like moving or employment expenses, dropped to 50 per cent. There is also a proposed increase to the federal AMT rate from 15% to 20.5% and an increase to the exemption amount for all individuals (including graduated rate estates) from $40,000 to the start of the fourth federal tax bracket, which is approximately $173,000 for the 2024 taxation year. The exemption will be indexed annually to inflation. The government expects to rake in an additional
$3 billion in tax revenue over five years. The budget says over 99 per cent of AMT revenue would come from Canadians earning over $300,000 per year. A big change would be the 30% inclusion for capital gains on donations of public securities.
• Changes to Bill C-208 Intergenerational Business Transfers: significant changes proposed in Budget 2023 that would come into effect for transfers that occur on or after January 1, 2024. To ensure a bona fide transfer of the business occurs, new conditions regarding the control of the business are proposed and one of two tests must be met. There must be either: An immediate transfer of both voting and economic control with a full transition of all voting shares within 36 months of the initial transaction; or an immediate transfer of voting control with a full transition of all voting shares within 36 months, along with transfer of certain economic control criteria within 10 years of the initial transaction. The proposed rules also expand the qualifying recipients of the business to include grandchildren, stepchildren, children-in-law, nieces, nephews, grandnieces, and grandnephews. However, the new rules also provide for a joint election between the transferor and the transferee, making the transferee jointly and severely liable for any taxes resulting from the transfer that do not meet the future conditions. Finally, the new rules also propose to provide a 10-year capital gains reserve for all share transfers that meet the 10-year conditions. The proposals would prevent the conversion of dividends to capital gains to take advantage of the lower tax rate — also known as surplus stripping — without a genuine transfer of a business between family members taking place.
• Strengthening the General Anti-Avoidance Rule (GAAR): Proposes to release for consultation draft legislative proposals to strengthen the GAAR. Changes to the purpose test “Primary purpose” vs “One of the Main purposes” and will consider the economic substance. The normal reassessment period would also be extended by three years.
• Employee Ownership Trusts (EOT): Introduce tax changes to facilitate the creation of Employee Ownership Trusts. Selling the business to employees would become a more attractive proposition for owners looking to exit, and employee-owned businesses would be able to re-invest more of their profits in growth. The existing five-year capital gains reserve will be extended to up to ten years for qualifying business transfers. The repayment period to avoid an income inclusion under the shareholder loan rules will be extended from one year to 15 years for amounts loaned to an EOT from a qualifying business to purchase shares in a qualifying business transfer. The EOT will also be exempt from the 21-year deemed disposition rule while it qualifies as an EOT. The EOT rules will apply as of January 1, 2024.
• Federal Underused Housing Tax (UHT): UHT filing may be required for your corporation or trust that owns residential rental properties or other residential real estate.
• 2% Tax on the Net Value of Share Repurchases for Public Corporations: Announces that the proposed tax would apply as of January 1, 2024 to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada. A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million.
• Grocery Rebate: A one-time hike to the GST rebate which will provide up to $467 for families, $234 for singles and up to $255 for seniors, at a cost of $2.5 billion.
• Reduction in Visa and Mastercard Interchange fees: The government is also using the budget to announce that it has negotiated a 27 per cent reduction in the interchange fees Visa and Mastercard charge small businesses. It says this measure will save eligible small businesses in Canada approximately $1 billion over five years.
• Increased Student Loan Limits and Grant Values: The budget also offers about $814 million in 2023-24 to help students starting their academic year on Aug. 1, 2023. The measures include increasing the student loan limit from $210 to $300 a week; increasing student grants by 40 per cent, providing up to $4200 for full-time students.
• Dental Care Plan: Provide $13.0 billion over five years, starting in 2023-24, and $4.4 billion ongoing to Health Canada to implement the Canadian Dental Care Plan. The plan will 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. The plan would begin providing coverage by the end of 2023 and will be administered by Health Canada, with support from a third-party benefits administrator. Details on eligible coverage will be released later this year.
• Implementing the 988 Suicide Prevention Line: As of November 30, 2023, Canadians will be able to call or text 988 at any time to access quality, effective, and immediate suicide prevention and mental health crisis support. Budget 2023 proposes to provide $158.4 million over three years, starting in 2023-24, to the Public Health Agency of Canada to support the implementation and operation of 988.
• A focus on Green Investments and Clean Electricity: A 15% refundable tax credit for eligible investments in clean energy technologies that generate electricity. A new 30% refundable Investment Tax Credit is proposed for clean technology manufacturing and processing as well as critical mineral extraction and processing, in respect of the capital cost of eligible property associated with eligible activities. The credit rates for the Clean Hydrogen ITC vary from 15% to 40% depending on the carbon intensity of the hydrogen that is produced. This is a refundable credit that could be claimed when eligible equipment is acquired and becomes available for use on or after March 28, 2023.
• Deduction for Tradespeople: Tradespeople are also being offered a deduction of $500 to $1,000 to help with the cost of new equipment.
• Anti-Scab Law: Table amendments to the Canada Labour Code, before the end of 2023, that would prohibit the use of replacement workers during a strike or lockout and improve the process to review activities that must be maintained to ensure the health and safety of the public during a work stoppage.
• Amendment to the Income Tax Act: proposing to increase revenues by $3.5 billion over five years by amending the Income Tax Act to treat dividend received on Canadian shares held by financial institutions as business income.
• Cap on the Alcohol Excise Tax: the government has capped the tax this year only at two per cent instead of the expected 6.9 percent. That’s because the excise tax normally increases at the rate of inflation, which has been exceptionally high over the last year.
• Auto-Tax File for Low Income Canadians: Up to 12 per cent of Canadians currently do not file their tax returns—the majority of whom are low-income and would pay little to no income tax. In fact, many of these low-income Canadians are missing out on valuable benefits and support to which they are entitled, such as the Canada Child Benefit and the Guaranteed Income Supplement. This will increase the number of eligible Canadians for File My Return to two million by 2025—almost triple the current number. The government will report on its progress in 2024.
• Expansion to Flow-Through Shares: Proposal to include lithium from brines as a mineral resource and to expand the eligibility of the CMETC (Critical Mineral Exploration Tax Credit) to lithium from brines. This will apply to eligible expenses related to lithium from brines made after March 28, 2023, and will allow them to qualify as Canadian exploration expenses and Canadian development expenses. The expansion of the eligibility for the CMETC to lithium from brines would apply to flow-through share agreements entered into after March 28, 2023, and before April 2027.
• Increased RESP Withdrawal Limit: The terms of an RESP may permit educational assistance payment (EAP) withdrawals of up to: $8,000 (increased from $5,000) in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs; or $4,000 (increased from $2,500) per 13-week period for beneficiaries enrolled in part-time programs. Changes will also allow divorced or separated parents to open a joint RESP for their children, which will make it easier and more affordable for parents to save for their children’s education.
• Retirement Compensation Arrangement (RCA): The budget proposes to amend the ITA so that fees or premiums paid for the purposes of securing a letter of credit (or surety bond) by an RCA trust that is supplemental to a registered pension plan will not be subject to the refundable tax under Part XI.3 of the ITA. This change will apply to fees or premiums paid on or after March 28, 2023.
• Registered Disability Savings Plan (RDSP): The budget proposes to extend a temporary measure that allows a qualifying family member (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) 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. 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 will apply as of royal assent of the enabling legislation and be in 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.
• Tax Treatment of Credit Unions: Credit unions are subject to specific income tax and Goods and Services Tax/Harmonized Sales Tax (GST/HST) rules. The current definition of a “credit union” excludes an entity that earns more than 10% of its revenue from sources other than certain specified sources (e.g., interest income from lending activities). The budget proposes to amend the credit union definition by eliminating this revenue test; and by reflecting the way that credit unions currently operate (i.e., as full-service financial institutions). These amendments will apply to taxation years ending after 2016.
• Cracking Down on Predatory Lending: Introduce changes to the Criminal Code to lower the criminal rate of interest from the equivalent of 47% APR to 35% APR, and to launch consultations on whether the criminal rate should be further reduced.
• Expansion to Flow-Through Shares: Proposal to include lithium from brines as a mineral resource and to expand the eligibility of the CMETC (Critical Mineral Exploration Tax Credit) to lithium from brines. This will apply to eligible expenses related to lithium from brines made after March 28, 2023
• Supporting Your Right to Repair: Government will work to implement a right to repair, with the aim of introducing targeted framework for home appliances and electronics by 2024. This will cut down on the number of devices that are thrown out, making life more affordable and protecting our environment.
• Common Charges for Your Devices: The federal government will work with international partners and other stakeholders to explore implementing a standard charging port in Canada, with the aim of lowering costs for Canadians and reducing electronic waste.
• Supporting First Nations Children: Provide $171 million in 2022-23 to Indigenous Services Canada to ensure First Nations children continue to receive the support they need through Jordan’s Principle.
• Support of Reconciliation: The federal government signed an agreement to compensate the 325 bands that opted into the Gottfriedson Band Class Litigation to address the collective harms caused by the loss of language, culture and heritage through the residential school system. This provides $2.8 billion as part of the Band Class settlement, to establish a trust to support healing, wellness, education, heritage, language, and commemoration activities. The government will also propose legislative amendments to exclude the income and gains of the trust from taxation.
• Protecting Passenger Rights: Proposes to amend the Canada Transportation Act to strengthen airline obligations to compensate passengers for delays and cancellations. These changes will align Canada’s air passenger rights regime with those of leading international approaches and ensure that Canadians are fairly compensated for travel delays that are within airlines’ control.
Government of Canada – https://www.budget.canada.ca/2023/home-accueil-en.html
DISCLAIMER: The above commentary was provided for information purposes and is not intended to provide legal or tax advice.
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