2023 Federal Budget

At the end of March, the government announced the Fiscal Year 2023 budget. The budget was released in the backdrop of slowly declining high levels of inflation and a looming recession in North America. The 2023 budget provides targeted inflation relief for low- and middle-income Canadians, strengthens public health and dental care and provide tax credits for the clean energy economy.

This new stimulus in the budget totals to $4.8bn in the 2023 fiscal year and $43bn over the next six years. The deficit sits at $43bn for FY 2023 is now inline with the Fiscal 2019 budget of $39bn.

The Federal Budget includes direct household transfers of $2.5 billion, curiously billed as a “grocery rebate” even though groceries have nothing to do with it. This adds to more than $10 billion of “inflation relief” already seen last year at the provincial level. Additionally, it proposes reducing “Junk Fees” (such as higher telecom roaming charges), attacking predatory lending rates, and support for students, the government introduced some relieving measures for registered plans, expanded and introduced several new green energy investment tax credits, and provided details on the anticipated share buyback tax.

While the 2023 Federal Budget did not introduce any of the rumored and more contentious policy measures such as the capital gains inclusion rate, top income tax rate and principal residence exemption, we saw significant changes to the Alternative Minimum Tax.

In conclusion, the 2023 Budget continues to push forward with policy priorities despite a more challenging and less certain economic backdrop. Please note that measures introduced are only proposals at this stage and will not be confirmed until the budget is ratified in Parliment.

 

Highlights of Major Measures

The budget contains an array of measures, covering various spending priorities, taxation for higher-income households and corporations, as well as large effort in the area of clean energy. The net additional stimulus amounts to $4.8 billion in FY23/24, or roughly 0.2% of GDP, and $43 billion over six years. Here are some of the most significant measures or proposals:

 

Affordability measures

GST rebate increase: While billed as a “grocery rebate”, it really has nothing to do with groceries. The GST credit for lower-income Canadians is increased in what amounts to a maximum of $153 per adult. This is an immediate direct cash transfer to lower-income Canadians worth $2.5 billion, with the cost booked in FY22/23.

Student affordability: The Canada Student Grant is lifted by 40%, and the interest-free loan limit is raised modestly. Total relief will amount to $814 million in FY23/24.

Taxation measures

Alternative Minimum Tax (AMT) framework: The AMT is a tax calculation run parallel to ordinary income tax rules, with the taxpayer paying whichever amount is higher. Three broad changes include lifting the AMT rate from 15% to 20.5%; raising the basic exemption level from $40k to $173k; and devaluing many exemptions and deductions. This effectively amounts to a tax reduction for a few exposed to the AMT at lower income levels, but a potential tax increase at the higher end (results will vary based on an individual’s mix of income and deductions). Key details inside the new framework include an increase in the capital gains inclusion rate from 80% to 100% for those subject to the AMT. A host of other deductions such as interest charges, moving expenses, child care, as well as most non-refundable tax credits, will be limited to 50%, broadening the AMT base. On balance, these changes lead to a net revenue increase of $150 million in FY23/24, rising to above $700 million by FY26/27.

Global Minimum Tax: Ensures that large multinational corporations are subject to a 15% effective tax rate on profits in the jurisdiction they are operating in, and is consistent with moves made in other countries. This will raise roughly $2.5 billion per year beginning in FY26/27, and has already been planned.

Taxes on financial institutions: This budget changes the tax rate paid on dividends received by financial institutions by treating the flow as ordinary income. Ottawa is expecting roughly $900 million per year from this measure, starting in FY24/25.

Tax on the share buybacks: As previously suggested, a 2% tax on share buybacks will apply to public companies as of January 1, 2024, if those buybacks exceed $1 million. The revenue impact will reach north of $600 million in two years.

Clean economy and response to the U.S. Inflation Reduction Act

The majority of Canada’s focus in this area looks to be coming in the form of tax credits to incentivize investment. The following new/expanded credits come with modest fiscal cost in FY23/24, but rising to more than $5 billion per year by FY26/27. Interestingly, full access to some of these credits is contingent on maintaining a prevailing wage, based on existing union compensation including benefits and pension contributions. At the same time, at least 10% of tradesperson hours will have to be conducted by apprentices.

Clean Electricity Investment Tax Credit: A 15% refundable tax credit on eligible investments (e.g., wind, solar, electricity storage, transmission equipment).

Clean Technology Manufacturing Investment Tax Credit: A 30% refundable tax credit on machinery and equipment in clean technology manufacturing, and to offset the cost of mining and production equipment for critical minerals.

Clean Hydrogen Investment Tax Credit: Credit ranges from 15%-to-40% on project costs related to the production of clean hydrogen.

Clean Technology Investment Tax Credit expansion: The recently-announced 30% refundable rate for those adopting clean technology will expand to include geothermal energy, and the credit will be phased out two years later in 2034.

Carbon Capture, Utilization and Storage Tax Credit expansion: The list of allowable expenses under the credit is expanded, and the credit expands to projects in B.C.

Other notable measures

Canadian Dental Care Plan: The dental plan expands to provide coverage for all Canadians with family income below $90k and without insurance. This will be administered by Heath Canada, and cost an additional $2 billion per year by FY24/25 ($1 billion more than previously budgeted).

Details on provincial health transfers: The provinces are receiving an immediate $2 billion top-up the Canada Health Transfer amount, and annual growth is set at a minimum of 5% for the next five years (the formula is normally driven by nominal GDP growth).

Various measures to monitor and limit foreign interference, money laundering and risk in the crypto space. For example, OSFI’s mandate will expand to oversee measures related to limiting foreign interference; and a federal beneficial ownership registry will be created. Amendments to the criminal code will be made to strengthen the AML/ATF regime.

 

Measures Affecting Registered Plans

Registered Educational 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, any government grants received and investment income earned can be withdrawn from the plan as (taxable) Educational Assistance Payments (“EAPs”) in order to assist with post-secondary education-related expenses.

Budget 2023 proposes to permit EAP withdrawals of up to $8,000 (from $5,000)in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs, and up to $4,000 (from $2,500) per 13-week period for beneficiaries enrolled in part-time programs.

Budget 2023 also proposes to enable divorced or separated parents to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter. Previously, only spouses or common-law partners could jointly enter into an agreement with an RESP promoter to open an RESP.

Both of these changes are effective as of Budget Day.

 

Registered Disability Savings Plans

Registered Disability Savings Plans (“RDSPs”) are designed to support the long-term financial security of a beneficiary who is eligible for the disability tax credit. The Federal government has previously expanded access to RDSPs by allowing a qualifying family member – such as a parent, a spouse, or a common-law partner – to open an RDSP and be the plan holder for an adult with mental disabilities whose ability to enter into an RDSP contract is in doubt, and who does not have a legal representative. This provision has helped many families access an RDSP, but it is currently set to expire.

Accordingly, Budget 2023 announces the government’s intention to extend the Qualifying Family Member provision until December 31, 2026 and to expand the provision to include adult siblings of an RDSP beneficiary.

Retirement Compensation Arrangements

A Retirement Compensation Arrangement (“RCA”) is a type of employer-sponsored arrangement that generally allows an employer to provide supplemental pension benefits to employees.

Employers who do not pre-fund supplemental retirement benefits through contributions to an RCA trust, and instead settle retirement benefit obligations as they become due, typically obtain a letter of credit (or a surety bond) issued by a financial institution in order to provide security to their employees. However, the annual fee or premium charged by the issuer are subject to the 50% refundable tax applicable to RCAs.

In order to provide a practical mechanism for recovery of this refundable tax, Budget 2023 proposes to amend the Income Tax Act so that fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for an RCA will not be subject to the refundable tax, effective for fees or premiums paid on or after Budget Day.

Effective for RCA retirement benefits paid after 2023, Budget 2023 also proposes to allow employers to request a refund of previously remitted refundable taxes in respect of fees or premiums paid for letters of credit (or surety bonds) by RCA trusts.

 

Proposals Affecting Canadian Private Companies

Employee Ownership Trusts

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 can also provide an additional option for succession planning.

Previous Federal budgets outlined the government’s intention to engage with stakeholders through a consultation process to address barriers that existed in the current tax legislation, which lacked a dedicated trust vehicle tailored to facilitate employee ownership and/or the transition of a privately-owned business to its employees.

Budget 2023 proposes to introduce new tax rules to facilitate the creation and use of EOTs to acquire and hold shares of a business. The new rules would define qualifying conditions to be an EOT and propose changes to other tax rules to facilitate the establishment of EOTs. These amendments would apply as of January 1, 2024.