2023 Federal budget

Measures impacting individuals

Goods and Services Tax Credit (Grocery Rebate)

Budget 2023 proposes a one-time increase to the goods and services tax credit (GST credit) for January 2023. Referred to as the grocery rebate in the budget documents, this proposal would allow eligible individuals to receive an amount added to their GST credit up to the following maximums:

• $153 per adult
• $81 per child
• $81 for the single supplement

For this January 2023 payment only, the phase-in and phase-out rates would be increased to ensure that the grocery rebate would be fully phased in and phased out at the same income levels as under the current GST credit rules for the 2022-23 benefit year. There would be no change to the income thresholds at which the single supplement phases in and GST credit entitlement phases out.

The grocery rebate would be paid as soon as possible following the passage of legislation through the GST credit system.

Registered Education Savings Plans

Registered Education Savings Plans (RESPs) are tax-assisted savings vehicles designed to help families accumulate savings for the post-secondary education of their children.

When an RESP beneficiary is enrolled in an eligible post-secondary program, government grants and investment income can be paid to the beneficiary as educational assistance payments (EAPs), but during the first 13 weeks of a program, limits apply to the amount of EAPs that can be paid to a student. The budget proposes to increase these limits from $5,000 to $8,000 for full-time students, and from $2,500 to $4,000 for part-time students. These changes are proposed to take effect as of March 28, 2023, but RESP promoters may need to amend the terms of existing plans in order to apply the new EAP withdrawal limits.

At present, only spouses or common-law partners can open a joint RESP account. Parents who opened a joint RESP prior to their divorce or separation can maintain this plan afterwards but are unable to open a new joint RESP with a different promoter. Budget 2023 proposes to permit divorced or separated parents to open a joint RESP for their children or to move an existing joint RESP to another promoter. This change would be effective as of March 28, 2023.

Registered Disability Savings Plans

Registered Disability Savings Plans (RDSPs) are tax-assisted savings vehicles designed to help families accumulate savings to support the long-term financial security of people with disabilities who are eligible for the disability tax credit.

A temporary measure, set to expire on December 31, 2023, 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. This proposed expansion of the existing qualifying family member definition would 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.

Tradespeople’s tool expense

Budget 2023 proposes to double the maximum employment deduction for tradespeople’s tool expenses from $500 to $1,000, effective for 2023 and subsequent taxation years. 

Alternative minimum tax

The alternative minimum tax (AMT) is a parallel tax calculation that allows fewer deductions, exemptions and tax credits than under the ordinary income tax rules. The taxpayer pays the AMT or their regular income tax, whichever is highest. 

Budget 2023 proposes to increase the AMT rate from 15% to 20.5% of AMT taxable income and raise the AMT exemption from $40,000 to the start of the fourth federal tax bracket (approximately $173,000 for the 2024 tax year). The AMT exemption would be indexed to inflation annually.

Budget 2023 proposes to broaden the base to which AMT applies by:

• Increasing the AMT inclusion rate on capital gains from 80% to 100%. Capital loss carry-forwards and allowable business investment losses would apply at a 50% rate.
• Including 100% of employee stock option benefits.
• Including 30% of capital gains on donations of publicly listed securities. The 30% inclusion rate would also apply to the full benefit associated with employee stock options, to the extent that a deduction is available because the underlying publicly traded securities were donated.

Currently, 30% of any capital gains eligible for the lifetime capital gains exemption must be included in the AMT base and this would remain unchanged.

The new rules would also broaden the AMT base by disallowing 50% of several deductions, including:

• Employment expenses, other than those to earn commission income.
• Deductions for Canada Pension Plan, Quebec Pension Plan and provincial parental insurance plan contributions.
• Moving expenses.
• Child care expenses.
• Disability supports deduction.
• Deduction for workers' compensation payments.
• Deduction for social assistance payments.
• Deduction for Guaranteed Income Supplement and Allowance payments.
• Canadian armed forces personnel and police deduction.
• Interest and carrying charges incurred to earn income from property.
• Deduction for limited partnership losses of other years.
• Non-capital loss carry-overs.
• Northern residents deductions.

Expenses that are limited under the current AMT rules would continue to be limited. 

Budget 2023 proposes that only 50% of non-refundable tax credits will be allowed to reduce the AMT, subject to limited exceptions. The proposed AMT calculation would use the cash value of dividends and fully disallow the dividend tax credit. Some non-refundable credits that are currently disallowed would continue to be disallowed in full.

The existing carry-forward period for the utilization of AMT credits remains at seven years.

These changes are proposed to apply for taxation years that begin after 2023.

General anti-avoidance rules

The Income Tax Act contains general anti-avoidance rules (GAAR) to prevent abusive tax avoidance. Under the existing framework, GAAR can be applied to deny the tax benefit where a taxpayer enters a transaction that produces a tax benefit, is an avoidance transaction and is a misuse or abuse of the object, spirit and purpose of the tax provisions relied upon. 

Budget 2023 proposes to strengthen these anti-avoidance rules by making five changes:

• Include a preamble that clarifies that GAAR can apply whether the tax benefit was foreseen or not.
• Reduce the threshold for the avoidance transaction test from a “primary purpose” test to “one of the main purposes” test.
• Add an economic substance test to the “misuse or abuse” test.
• Add a penalty equal to 25% of the tax benefit. The penalty can be avoided if the transaction is reported under the mandatory disclosure rules or voluntarily.
• Extend the normal reassessment period by another three years, unless the transaction was disclosed to the CRA.

The proposed legislation is subject to consultation until May 31, 2023. After the consultation period, the legislation will be released with an effective date.

Measures impacting businesses

Intergenerational share transfers (update on Bill C-208)

Bill C-208 was introduced in June 2021 to allow a child to utilize a corporation to purchase the shares of another corporation owned and controlled by a parent or grandparent whilst allowing that parent or grandparent to utilize their lifetime capital gains exemption. This was to put such intergenerational sales on a level playing field with third party sales.

However, the legislation related to Bill C-208 contained insufficient safeguards, resulting in a potential application of the rules without a genuine transfer of the business to the next generation.

Budget 2023 proposes to amend the exceptions to section 84.1 of the Income Tax Act, introduced by Bill C-208, to ensure only a genuine transfer takes place. Under these amendments, an intergenerational transfer is a transfer from a parent or grandparent (“the transferor”) to a child (child would also include step-children, grandchildren, children-in-law, nieces and nephews, and grandnieces and grandnephews). The transfer of shares of the “transferred corporation” (which must be a qualified small business corporation share or a share of the capital stock of a family farm or fishing corporation) to a purchaser corporation controlled by one or more persons, each of whom is an adult child of the transferor, can apply under the following two options:

• An immediate intergenerational business transfer (three-year test) based on arm’s length sale terms.
• A gradual intergenerational business transfer (five-to-10-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing their value in a corporation, allowing future growth to accrue to their children while the parent’s fixed interest is then gradually diminished by the corporation repurchasing the parent’s interest).

Existing rules applicable to subsequent share transfers by the purchaser corporation and the lifetime capital gains exemption would be replaced by rules that would apply upon a subsequent arm’s length share transfer or upon the death or disability of a child, without limitation.

The transferor and child (or children) must jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child (or children) would be jointly and severally liable for any additional taxes payable by the transferor, because of section 84.1 applying, in respect of a transfer that does not meet the above conditions. The limitation period for reassessing the transferor’s liability for tax that may arise on the transfer is proposed to be extended by three years for an immediate business transfer and by 10 years for a gradual business transfer.

The budget also proposes to provide a 10-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions.

The above measures would apply to transactions that occur on or after January 1, 2024.

Employee ownership trusts

Budget 2023 proposes to introduce new rules to facilitate the use of employee ownership trusts (EOTs) to acquire and hold shares of a qualifying business. An EOT can be used as an option for succession planning or to provide employees with ownership without needing to pay for the shares directly.

The trust must only serve two purposes: to hold a controlling interest in the shares of one or more qualifying businesses for employees and, where relevant, make distributions to employees in a formulaic manner that only considers length of service, remuneration and hours worked. Generally, the qualifying business must be a Canadian controlled private corporation (CCPC) with all or substantially all of its assets used in carrying on an active business in Canada.  

A qualifying business transfer occurs when a taxpayer disposes of shares for no more than fair market value, either to the trust itself or to a corporation wholly owned by the EOT. Budget 2023 proposes to extend the five-year capital gains reserve to a 10-year reserve for qualifying transfers to an EOT.

In order for a trust to qualify as an EOT, additional criteria must also be met, including:

• The trust must be a resident of Canada for tax purposes (deemed resident trusts are excluded).
• The trustees of the trust should be Canadian residents, which are elected by the trust beneficiaries at least once every five years (if an existing business was sold to an EOT there are further trustee restrictions).
• The trust must not distribute shares to the beneficiaries.
• Beneficiaries of the trust must be employees of the qualifying business and meet certain conditions; employees who are significant economic interest holders or who have not completed a reasonable probationary period of up to 12 months would not qualify.

EOTs are, generally speaking, taxable trusts. Where income is taxed in the trust’s hands, it will be taxed at the top marginal rate, however, where income is distributed to the beneficiaries, it should retain its character.

Budget 2023 proposes to exempt EOTs from the 21-year deemed disposition rule. Additionally, where amounts were lent to an EOT from a qualifying business to purchase shares in a qualifying business transfer, the repayment period is proposed to increase from one year to 15 years.

These amendments would apply as of January 1, 2024.

Clean energy initiatives

Budget 2023 introduces and expands a number of clean energy initiatives for businesses, including:

• Clean hydrogen investment tax credit
  • New refundable credit up to a maximum rate of 40% on eligible expenses.
• Clean technology investment tax credit
  • Expansion of existing 30% refundable credit to include qualifying geothermal energy systems.
• Investment tax credit for clean technology manufacturing
  • New refundable credit for up to 30% of the capital cost of eligible depreciable property associated with eligible activities.
• Investment tax credit for carbon capture, utilization and storage
  • Expansion and changes in certain conditions of eligibility for this refundable tax credit.
• Clean electricity investment tax credit
  • New refundable credit of 15% for eligible investments.