2023 federal budget

The grocery rebate

The Goods and Services Tax Credit (GSTC) helps to offset the cost of paying GST on purchases of goods and services for low- and modest-income Canadians. The credit is paid quarterly in January, April, July and October, and is indexed to inflation each benefit year, which runs from July through June. The GSTC is nontaxable and income-tested.

The amount of GSTC you receive depends on your income and family size. For the current benefit year, which began July 2022 and runs through June 2023, single Canadians without kids receive a total of $306 (ignoring the November 2022 top-up). Married or common-law couples receive $612 while single parents receive $467. Recipients with kids get $161 for each child under age 19.

That said, only those with lower incomes get the full GSTC. To receive the full amount for the 2022-23 benefit year, your family income must have been less than $39,826 in 2021. Above this income level, the GSTC is gradually reduced as income rises and the full phase-out depends on family type.

The GSTC is indexed to inflation, but it’s done on a lagging basis. For the current benefit year, the value of the GSTC grew by 2.4% based on the average consumer price index during October 2020 to September 2021. As a result, the sharp rise in inflation in 2022 is not yet reflected in the GSTC payments currently being distributed.

To help lower-income Canadians with increasing costs, particularly with the rising cost of food, the Budget proposed an increase to the maximum GSTC amount for January 2023, to be known as the "grocery rebate." Eligible individuals will receive an additional GSTC amount equal to twice the amount received for January 2023, which would be paid "as soon as possible following the passage of legislation." The maximum additional amount under the grocery rebate would be $153 per adult, $81 per child, and $81 for the single supplement.

Alternative minimum tax

The Alternative Minimum Tax (AMT) system imposes a minimum level of tax on taxpayers who claim certain tax deductions, exemptions or credits to reduce the tax that they owe to very low levels. Under the AMT system, there is a parallel tax calculation that allows fewer deductions, exemptions, and credits than under the ordinary income tax calculation.

An individual pays the AMT or regular tax, whichever is higher. Additional tax paid as a result of the AMT can be carried forward for 7 years to be used to offset regular tax to the extent that regular tax exceeds AMT in those 7 years.

The current AMT calculation applies a flat 15% tax rate with a standard $40,000 exemption amount instead of the usual progressive tax rates.

In the 2022 federal budget ("2022 Budget"), the government expressed concern that, although it bumped up the top federal bracket to 33% (from 29%) in 2016, “some high-income Canadians still pay relatively little in personal income tax as a share of their income.” For example, according to the 2022 Budget materials, 28% of filers with gross income above $400,000 pay an average federal tax rate of 15% or less by using a variety of tax deductions and tax credits. The government, therefore, promised in the 2022 Budget to update the AMT and the proposed changes were announced today.

In the Budget, the government announced that "to better target the AMT to high-income individuals," several changes would be made to the calculation of AMT, beginning in 2024. The changes include broadening the AMT base by further limiting tax preferences (such as exemptions, deductions, and credits), increasing the AMT exemption and raising the AMT rate.

Broadening the AMT base

Capital gains and stock options

Under the ordinary tax system, only 50% of capital gains are taxable. While no widespread changes to the capital gains inclusion rate were proposed, the government is increasing the inclusion rate for AMT purposes to 100%, from 80%. There is no change for capital losses and Allowable Business Investment Losses, which are only 50% deductible in the AMT calculation. The Budget also proposed that 100% of the benefit associated with the exercise of employee stock options will be included in the AMT base.

Donations of publicly-listed securities

Under the regular tax system, donors who make in-kind donations to a registered charity of publicly-listed shares and units or shares of mutual funds or segregated funds not only get a tax receipt equal to the fair market value (FMV) of the securities being donated, but they also avoid paying capital gains tax on any accrued gain. A similar rule applies to the donation of securities obtained through the exercise of employee stock options.

Under the AMT system, the Budget proposed to include 30% of capital gains on donations of publicly-listed securities in the AMT base. This 30% inclusion rate would also apply to an employee stock option benefit when the underlying publicly-listed securities are donated to charity.

Deductions and expenses

Under the updated rules, the AMT base will be broadened by disallowing 50% of various deductions, including: employment expenses (other than those incurred to earn commission income), moving expenses, child care expenses, interest and carrying charges incurred to earn income from property, limited partnership losses of other years, and non-capital loss carryovers.

Non-refundable credits

Currently, most non-refundable federal tax credits can be applied against the AMT. The Budget proposed that only 50% of non-refundable tax credits would be allowed to reduce the AMT, subject to a few exceptions. Most notably, the proposed AMT would continue to use the cash (not grossed-up) value of Canadian dividends and fully disallow the dividend tax credit.

Raising the AMT exemption

The exemption amount is the amount of income below which AMT will not apply. It is available to all individuals and is intended to protect lower and middle-income individuals from being subject to the AMT. The Budget proposed to increase the exemption from $40,000 to the start of the fourth federal tax bracket. That bracket is $165,430 for 2023, but based on expected indexation for the 2024 taxation year, that bracket, and thus the new AMT exemption amount, would be approximately $173,000 for 2024, indexed annually to inflation.

Increasing the AMT rate

Finally, the Budget proposed to increase the AMT rate to 20.5%, up from 15%, corresponding to the rate applicable to the second federal income tax bracket.

The amendments to the AMT are expected to generate an estimated $3 billion in revenues over 5 years, beginning in 2024. With these changes, more than 99% of the AMT paid by individuals will be paid by those who earn more than $300,000 per year, with 80% of the AMT being paid by those earning over $1 million annually.

Automatic tax filing

Up to 12% of Canadians currently don’t file income tax returns. The majority of these individuals have low income and, while they would pay little or no income tax, they may be missing out on valuable benefits and support, such as the Canada Child Benefit and the Guaranteed Income Supplement.

Since 2018, the Canada Revenue Agency (CRA) has provided a free, simplified "File My Return" service, which allows eligible Canadians to auto-file their tax return over the phone after answering a series of short questions. Canadians with simple tax situations and lower incomes received an invitation letter from the CRA to use File My Return, and in 2022, approximately 53,000 tax returns were filed using this service.

The Budget announced the government's intention to increase the number of Canadians eligible to use the File My Return service to 2 million by the year 2025. It also announced that, starting next year, the CRA will pilot a new automatic filing service that will help vulnerable Canadians who don't currently file returns to still be able to receive the benefits to which they are entitled.

Registered plans

First Home Savings Account

The tax-free First Home Savings Account (“FHSA”) was introduced in the 2022 Budget and will give prospective first-time home buyers the ability to save up to $40,000 on a tax-free basis towards the purchase of a first home in Canada. Like a Registered Retirement Savings Plan (RRSP), contributions to an FHSA are tax deductible and withdrawals to purchase a first home, including withdrawals of any investment income or growth earned in the account, are non-taxable, just like Tax-Free Savings Accounts (TFSAs). As the government stated, "Tax-free in; tax-free out."

The Budget confirmed that financial institutions may start offering the new FHSA as of April 1, 2023. Most financial institutions are currently working towards launching FHSA offerings later in 2023.

Registered Education Savings Plans

Registered Education Savings Plans (RESPs) are tax-assisted savings vehicles designed to help families save money for their kids' post-secondary education. Contributions to RESPs may be eligible for government matching grants, such as the Canada Education Savings Grant (CESG) generally equal to 20% of the first $2,500 of annual contributions per RESP beneficiary for each year, up to a lifetime maximum of $7,200 in CESGs per beneficiary.

Once an RESP beneficiary is enrolled in a qualifying post-secondary program, the CESGs and investment income and growth can generally be withdrawn from the plan as Educational Assistance Payments (EAPs), to assist with post-secondary education-related expenses. These EAPs are taxable to the RESP beneficiary - the student - who often won't pay any federal tax on the EAPs, given the basic personal amount ($15,000 in 2023) and the federal tuition credit.

Under the current rules, the Income Tax Act limits the amount of EAPs that can be withdrawn during the first 13 consecutive weeks of enrolment to $5,000 for full-time students, and only $2,500 for students enrolled part-time. The Budget proposed to increase these limits, effective immediately, to $8,000 for students enrolled in full-time programs, and up to $4,000 for students enrolled in part-time programs. Individuals who withdrew EAPs prior to March 28, 2023 will be able to withdraw additional EAPs up to the new limits. Note that RESP promoters may need to amend the terms of their existing RESP specimen plans to apply the new EAP withdrawal limits.

The Budget also proposed to change the rules for joint subscribers. Under the current rules, only spouses or common-law partners can be joint subscribers for an RESP. While parents who had opened an RESP as joint subscribers prior to a divorce or separation can maintain this plan afterwards, currently they are unable to open a new RESP as joint subscribers. The Budget proposed to enable divorced or separated parents to open RESPs as joint subscribers for one or more of their children, or to jointly move an existing RESP to another financial institution, effective immediately.

Registered Disability Savings Plans

If you or someone in your family is living with a disability, then the Registered Disability Savings Plan (RDSP) can be an excellent way to save, tax-deferred, for the future as well as potentially collect valuable government grants and bonds. Launched in 2008, the RDSP is a tax-deferred registered savings plan open to Canadians eligible for the disability tax credit (DTC.) Up to $200,000 can be contributed to the plan and, while contributions are not tax-deductible, all earnings and growth accrue tax-deferred until withdrawn from the plan.

The main allure of the more well-known registered plans, such as the RRSP, TFSA or Registered Retirement Income Fund, is the ability to earn tax-deferred or tax-free investment income. While this holds true for the RDSP, its main advantage is the ability to supplement the plan with government funds: Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) that are both potentially available for RDSP beneficiaries age 49 and under.

While many RDSPs are set up by parents for their minor children, challenges arise when an RDSP is to be set up by an individual who has reached the age of majority but whose contractual competence is in doubt. In these situations, the RDSP plan holder must be that individual’s guardian or legal representative as recognized under provincial or territorial law. Practically, however, establishing the authority of a legal representative can be a lengthy and expensive process that can have significant repercussions.

A temporary measure, which is set to expire on December 31, 2023, allows a "qualifying family member" (parent, spouse or common-law partner) to open an RDSP and be the plan holder for an adult who doesn't have capacity to enter into an RDSP contract and who does not have a legal representative. The Budget proposed to extend this qualifying family member rule by 3 years, to December 31, 2026.

In addition, the Budget also proposed 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 will allow a sibling to establish an RDSP for an adult with a disability who does not have the capacity to enter into an RDSP contract and who doesn't have a legal representative.

Corporations

Intergenerational share transfers

A surplus strip is a corporate transaction designed to distribute corporate surplus (essentially, taxed-retained earnings) from a corporation at capital gains rates, rather than at the higher rates for Canadian dividends, or via the payment of a salary or bonus. The government tried to shut down this type of planning as part of its private corporation tax reforms in 2017, but those proposals were ultimately abandoned after significant public criticism.

Surplus stripping rules did, however, discourage a shareholder from selling shares to a family member. Under these rules, when a business owner sold shares of an incorporated business to a non-arm’s length corporation (typically owned by a family member), the seller was treated as if they received a dividend rather than realizing a capital gain. These rules discriminated against sales to family members, since the seller ended up paying more tax than if the shares were sold to an arm’s length, third party.

In June 2021, a private member's bill (Bill C-208) was passed, which introduced an exception to the surplus stripping rules to facilitate legitimate intergenerational business transfers.¹ The government noted, however, that this exception could “unintentionally permit surplus stripping without requiring that a genuine intergenerational business transfer takes place.” To this end, the 2022 Budget announced a consultation process to explore how the existing rules could be modified “to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers.” The consultation process was open until June 17, 2022.

While some have speculated that the government would reattempt to shut down surplus stripping generally, the Budget focused solely on the amendments introduced by Bill C-208.

The Budget proposed to further amend the rules introduced by Bill C-208 to ensure that they apply only where a genuine intergenerational business transfer takes place. The proposed rules require that a parent cease to control the underlying business of the corporation, that the child have a continued involvement in the business, and that the child retains an interest in the business after the transfer. The new rules would come into effect for transactions that occur starting in 2024.

Employee Ownership Trusts

The United States and the United Kingdom each have measures supporting employee ownership arrangements. 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.

In order to facilitate the launch of EOTs in Canada, amendments to the Income Tax Act are required.

The Budget defines an EOT, and sets out proposed rules on how an EOT will operate, and the tax consequences to both the operating corporation and the employees getting the ownership interest.

Among the notable rules are a 10-year capital gains reserve to permit a business owner who sells their shares to the EOT to recognize only 10% of the gain each year. In addition, the normal 21-year rule which deems a trust to dispose of its property every 21 years will not apply to EOTs.

The EOT amendments are to be effective as of January 1, 2024.

General Anti-Avoidance Rule (GAAR)

The General Anti-Avoidance Rule (GAAR) was added to the Income Tax Act in 1988 to prevent abusive tax avoidance. If abusive tax avoidance has occurred, the GAAR could apply to deny the taxpayer the tax benefit that was unfairly created. In December 2021, the government announced that GAAR reform was a priority and, last summer, followed up with a consultation paper outlining significant possible changes and invited comments up to September 30, 2022.

The Budget introduced legislative proposals to strengthen the GAAR. Specifically, the GAAR will be amended to help address interpretive issues and try to ensure that the GAAR will apply as intended. The government is also proposing to introduce a GAAR penalty equal to 25% of the amount of the tax benefit, as well as extending the normal reassessment period by 3 years for GAAR assessments (unless the transaction has been previously disclosed to the CRA).

The government has invited stakeholders to provide comments on these proposed amendments by May 31, 2023. Following this consultation period, revised proposals will be introduced, along with the date the new proposals will become effective.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto. jamie.golombek@cibc.com