2023 Federal Budget Highlights
On March 28, 2023, Deputy Prime Minister and Minister of Finance, Chrystia Freeland, tabled Budget 2023, A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future, which focuses on making life more affordable, creating stronger public health and dental care and growing a green economy.
The 2023 Budget reports a deficit of $43 billion for the year and forecast deficits of $40 billion for 2023/2024 and $35 billion for 2024/2025.
For Canadian tax payers, the 2023 budget highlighted three topics worth noting:
- Further measures are being taken to expand the scope of the Alternative Minimum Tax (AMT),
- New tax incentives are being launched to encourage businesses to invest in green energy initiatives, and
- New rules are being implemented for intergenerational sales of shares of a qualified small business corporation and farm or fishing corporations.
Continue reading for a deeper dive into these topics and how the 2023 Federal Budget will impact you.
Significant Business Tax Changes
General Anti-avoidance Rule (GAAR)
The Budget provides draft legislation to strengthen and broaden the application of GAAR.
- A preamble to the rule states that the GAAR can apply regardless of whether a tax strategy is foreseen;
- The definition of avoidance transaction has been reduced from “a primary purpose” test to “one of the main purposes” test that expand the range of transactions that are exposed to GAAR; and
- An economic substance test has been added which must now be considered in determining whether a misuse or abuse of the Income Tax Act has occurred with a lack of economic substance tending to indicate abusive tax avoidance.
Draft legislation also includes:
- A penalty equal to 25% of the tax benefit where the GAAR applies
- The penalty can be reduced where the transaction or series is disclosed to the CRA either under the mandatory disclosure rules or voluntarily
- Extending the reassessment period for the GAAR by a further 3 years (from the normal period of 3 or 4 years) unless the transaction has been disclosed to the CRA
No effective date has been announced for when these changes will come into force.
Tax on Repurchases of Equity by Public Listed Entities in Canada
The Budget provides details on the proposed 2% tax on the net value of equity repurchased in a taxation year by Canadian resident public corporations, real estate investment trusts (REITs), specified investment flow through trusts (SIFTs) and partnerships but not to mutual fund corporations.
The tax is equal to 2% of the net entity repurchased during the year (fair market value of the equity repurchased less the fair market value of equity issued from treasury for cash or to an employee in the course of employment). There is a de minimis rule to exempt equity repurchases where the total value of gross issuances is less than $1 million for the taxation year.
There are also exceptions provided for shares/units that are similar to debt (i.e. fixed dividend and redemption entitlement), cancellation of shares in certain reorganizations and acquisitions including amalgamations, liquidations and share-for-share exchanges. There are anti-avoidance provisions including deeming an acquisition of equity by certain affiliates of an entity to be a repurchase by the entity itself.
These rules apply for repurchases and issuances of equity after December 31, 2023.
Budget 2023 introduces new tax credits and provides additional details on previously announced green credits in Budget 2021 and Budget 2022. These include:
- Clean Hydrogen Investment Tax Credit – Refundable
- Clean Technology Investment Tax Credit – Refundable
- Clean Technology Manufacturing Investment Tax Credit – Refundable
- Clean Electricity Investment Tax Credit – Refundable
- Carbon Capture, Utilization and Storage (CCUS) Investment Tax Credit – Refundable
- Zero Emission Technology Manufacturers – 50% reduction in corporate income tax rates
- Expansion of Flow Through Shares and Critical Mineral Exploration Tax Credit
For a detailed overview of these initiatives, read our article, Go for Green: 2023 Federal Budget adds more incentives for green energy.
Significant Personal Tax Changes
Broadening the Alternative Minimum Tax (AMT)
The AMT applies to high income earners who reduce their regular tax by tax preference items such as special exemptions, deductions and credits and subjects them to a minimum amount of tax.
The AMT uses an alternative calculation of taxable income and taxes it at a minimum federal tax rate of 15% with limited exemptions, deductions and credits. An individual pays the greater of tax calculated under the regular rules and the AMT rules (thus a “minimum tax”) with the excess if any being carried forward to the individual’s subsequent 7 years to potentially reduce tax if the tax under the regular rules is greater than tax under the AMT rules for the succeeding 7 years.
Budget 2023 increases the AMT by:
- Increasing the Federal AMT rate from 15% to 20.5%
- Broadening the AMT Base by:
- increasing the capital gains inclusion rate from 80% to 100% (although the government intends to maintain the inclusion rate of 80% for capital gains eligible for the lifetime capital gains exemption)
- by including 100% of the benefit associated with employee stock options,
- by including 30% of capital gains on donations of publicly listed securities where the capital gain is sheltered by donation of the underlying securities.
- Limiting the application of capital loss carry forwards and allowable business investment loss deductions to 50% of the carry forward amount
- Disallowing 50% of the following deductions:
- employment expenses, moving expenses, child care expenses, disability supports deductions, deductions for worker compensation payments, deduction for social assistance payments, deduction for guaranteed income supplement allowances, interest and carrying charges incurred to earn income from property, limited partnership losses from other years and non-capital losses.
- Only allowing 50% of most non-refundable tax credits to reduce AMT but maintaining the existing foreign tax credit and dividend tax credit.
These new AMT rules apply for taxation years that begin after 2023.
Intergenerational Business Transfers
Budget 2023 introduces further amendments to the rules introduced in Bill C-208 in June 2021 that provided an exception to the anti-avoidance rule in section 84.1 of the Income Tax Act.
Section 84.1 recharacterizes capital gains as taxable dividends on sales of shares of a Canadian corporation to a non-arm’s length Canadian corporation (i.e. a parent selling shares of a family company to a company owned by their daughter). If Section 84.1 applies, the gain on sale is reclassified as a taxable dividend and is (i) not eligible for the lifetime capital gains exemption and (ii) taxed at higher tax rates than a capital gain.
The Budget introduces several new conditions to ensure that this exception only applies to a genuine intergenerational transfer of shares to a “child” with a number of conditions to qualify for the exception to the section 84.1 recharacterization rule. The Budget extends the definition of “child” to include grandchildren, step-children, children-in-law, nieces, nephews, grandnieces and grandnephews.
For a detailed overview of these changes, read our article, Keep it in the Family: Updated Tax Rules for the Transfer of a Family Business.
Article written by Ken Chong, CPA, CA
Contact your DMCL advisor for more information on the details outlined in the 2023 Federal Budget and how their measures might apply to you and your business.