Tax Changes from the 2023 Federal Budget
WEDNESDAY, MARCH 29, 2023
Let’s start with the big picture: no changes in personal tax rates, corporate tax rates, the capital gains inclusion rate or the use of the capital gains exemption. So, for many business owners the budget will cause little to no change in tax planning.
However, if you are considering a sale of your business to your children or to employees there are important changes to existing rules.
On the personal tax front there are changes to minimum taxes that may impact high income individuals starting in 2024.
Corporate Tax Measures
Intergenerational business transfers
Legislation was introduced in 2021 to allow a family business to transfer to the next generation at favourable capital gains rates instead of higher dividend tax rates. The existing rules did not address a number of issues surrounding the level of involvement in the business required of the next generation in order to have the capital gains rate apply. Budget 2023 provides additional clarity on the level of activity by providing two different transfer options, an immediate transfer option and a gradual transfer option. These rules are complex and for those planning to transfer their business to the next generation the rules will need to carefully navigated.
Employee Ownership Trusts (“EOT”)
An employee ownership trust is a mechanism that facilitates a business owner selling a business to employees. The concept was first announced in the 2022 Budget. This budget proposes to introduce tax changes to facilitate the creation of EOTs. EOTs will be required to hold a controlling interest in the shares of the qualifying businesses, the assets must be used in active business carried on in Canada and the trust beneficiaries must include only qualified employees. For owners contemplating an employee buy-out the structure is worth considering as the rules permit a tax efficient sale that can be funded over 10 years (prior to these rules the tax on a gain had to paid over no more than 5 years) and will permit the corporation to loan money to the EOT to help facilitate the sale.
New Corporate tax credits
Canada continues to support a clean economy with the introduction of investment tax credits that look to compete with measures taken by the US. Highlights of these new tax credits include:
• Clean hydrogen refundable investment tax credit - A refundable credit of up to 40% of eligible project costs
• Clean technology investment tax credit – Geothermal Energy - Expanded rules to include capital assets that meet the criteria of CCA classes 43.1 and 43.2
• Clean technology manufacturing investment tax credit - 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies
• Zero-emission technology manufacturers - Proposes extending availability of the reduced tax rates (4.5% for small business and 7.5% for other businesses), with these being phased out by 2034.
• Enhancing the carbon capture, utilization, and storage investment tax credit -
GAAR changes
General Anti-Avoidance Rule (“GAAR”) is a general measure in the Income Tax Act with the goal of preventing abusive tax avoidance. Budget 2023 proposes significant amendments to GAAR which broadens it applications. The significant amendments begin with a period of consultation until May 31, 2023. Some of the proposed changes include:
determining whether the transaction is lacking in economic substance and whether the transaction is entirely or almost entirely tax motivated
broadening the application to capture transactions where one of the main purposes is to avoid tax. This contrasts with the current test which only captures transactions where the primary purpose is to avoid tax.
lengthening the reassessment period from the existing 3 years to 6 years to allow a review of transactions for GAAR purposes.
Personal Tax Measures
Alternative Minimum Tax
The alternative minimum tax (AMT) is a tax similar to the regular tax calculation but allows few deductions, exemptions and tax credits as a way to ensure some level of tax will be applicable where income is earned. Individuals pay the higher of regular tax or AMT. In general, AMT applies to high income individuals who are paying a low rate of rate. The changes in the budget are designed to broaden the base of individuals that will be impacted by AMT.The changes will impact taxes in 2024 and include:
The AMT exemption limit was previously $40,000 and will be increased to $173,000.
The AMT rate was previously 15%, this will increase to 20.5%. (note that the provinces piggy back on the AMT so that the effective minimum tax is increasing from approximately 23% to 30%)
The calculation of AMT will increase the amount of certain income items, like capital gains, included in the calculation, while reducing the portion of some deductions allowed, in other words in many cases the total income to which the AMT is applied will be higher for many taxpayers.
These changes will increase the likelihood of needing to pay the tax. Note that amounts of AMT paid can be carried forward seven years and applied against tax amounts greater than AMT.
Odds and ends
No one loves a good rebate title like a politician – so the budget proposes a Grocery Rebate! This is just an increase to the annual GST credit which are paid out in 4 quarterly payments. It is focused at lower income families as the GST credit claw back for a family begins at income of about $40,000 The increase is $150 for an individual and up to approximately $400 for a couple with two children.
For our manufacturing clients you may want to consider letting employees know that the deduction available for tradespeople’s tools has increased to $1,000. That could save your employee $400 or so in tax.
Some changes have been made to allow additional family members to help manage Registered Disability Savings Plans – this will be helpful to families with members who are unable to manage their finances.
There is also an increase to RESP withdrawals from $5,000 to $8,000 for students enrolled in a full time program.
Please reach out if you have any questions.