Federal Budget 2023 – Part I: Summary of Measures of Interest to Private Corporations
Canada’s latest federal budget was released on March 28, 2023 (the “Budget”). The McLennan Ross tax team is publishing a three-part series over the next few weeks, to highlight conditions of the budget most likely to impact our clients. These will consist of:
- A summary of measures of interest to private corporations;
- Employee Ownership Trusts; and
- Further changes to section 84.1 (following up on Bill C-208 which deals with transfers of shares, and wealth to the next generation).
In Part I, we provide some brief high-level summaries of measures in the Budget.
Summary of Important Budget 2023 Tax Items
- Draft amendments strengthening the General Anti-Avoidance Rule (“GAAR”)
Proposed changes to strengthen the GAAR were previously announced, and underwent consultation in 2022. We discussed the original changes previously here. The proposed changes in this Budget have evolved, and are undergoing further consultation, with comments invited by May 31, 2023.
While the current proposals are largely in the same vein, an interesting addition to the new proposal in the Budget is that a penalty equal to 25% of the tax benefit, and an extended reassessment period are proposed only to apply if the transactions were not previously disclosed to the Canada Revenue Agency (the “CRA”) via the reportable transactions rules (also currently in the works), or through a newly proposed optional disclosure rule.
This would appear to address the concern with having a penalty associated with the application of a provision which, by definition, only arises in circumstances where the taxpayer had no way to know it would apply. Taxpayers will be able to effectively protect themselves from these penalties, and the longer reassessment period by disclosing the transactions to the CRA up front. Given a traditional strategy in tax planning has been to try to stay under the CRA’s radar, it will be interesting to see how this develops. Will proceeding with optional disclosure become the norm?
On the other hand, disclosure will give the CRA an early heads up for transactions that tax practitioners recognize could be at risk of the application of the GAAR. This will give the CRA a tremendous amount of useful information, not just in terms of finding transactions to which the GAAR could apply, but even when they choose not to assess the GAAR, identifying changes they could make to the Income Tax Act in the future to increase tax revenue.
- Changes to the Alternative Minimum Tax (“AMT”) rules starting in years after 2023
AMT is a parallel calculation to ordinary tax rules with fewer deductions, exemptions, and tax credits. AMT currently applies a flat 15% tax rate with standard a $40,000 exemption amount. Budget 2023 proposes three major changes: broadening the AMT base, increasing the AMT Rate, and raising the exemption amount.
The AMT base will be broadened by:
- Increasing the capital gains inclusion rate from 80% to 100%;
- Including 100% of benefit associated with employee stock options;
- Including 30% of capital gains on donations of publicly listed securities;
- Disallowing 50% of various deductions, including employment expenses, CPP deductions, childcare expenses, and non-capital loss carryovers; and
- Only allowing 50% of most non-refundable tax credits to reduce the AMT.
Also, the AMT Rate is to be increased from 15% to 20.5%. However, this will be offset by having the AMT Exemption increased from $40,000 to $173,000, and indexed annually to inflation.
Practically, these changes could benefit taxpayers with amounts around $500,000 or less subject to AMT. This is because the higher exemption amount has a larger effect on lower amounts than the higher AMT rate. However, once amounts subject to AMT exceed $500,000, the new rules will result in increasingly more AMT.
- Changes to Registered Education Savings Plans
The current withdrawal limit for beneficiaries enrolled full-time is $5,000 in respect of the first 13 consecutive weeks of enrollment in a 12-month period. For beneficiaries enrolled part-time, the limit is $2,500 per 13-week period. These limits are now increased to $8,000 in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs, and to $4,000 per 13-week period for beneficiaries enrolled in part-time programs.
Also, divorced or separated parents are now able to open joint RESPs for their children.
- Introduction and expansion of various clean energy investment tax credits for businesses
There are a lot of these credits, and the potential tax benefits could be HUGE, especially if combined with previously announced incentives for green expenditures.
If you are considering making investments that will lower your business’s carbon emissions, you will want to investigate these, and we would be happy to assist.
- Provision of $53.8 million to Employment and Social Development Canada to support integrity activities relating to overpayments of COVID-19 emergency income supports
This means we can expect significant audit activity. If you received COVID-19 benefits, it would be prudent to ensure your supporting documentation is in order, as auditors usually only give taxpayers 30 days to produce the requested documents.
- Proposed rules for new Employee Ownership Trusts with anticipated effective date of January 1, 2024
Currently, there are significant complications associated with giving shares of private corporations to employees. We are hopeful these proposed changes may at least assist in some circumstances. We will discuss Employee Ownership Trusts in detail in Part II, next week.
- Proposed additional changes to section 84.1 of the Income Tax Act, effective January 1, 2024
These changes are following up on amendments made by Bill C-208 which opened tax advantages previously denied when transferring private businesses to children and grandchildren. These rules could impact many owners of small businesses corporations. We will discuss them in detail in Part III, in a few weeks.
Feel free to reach out to a member of our Tax Team if you have any questions regarding any of these measures. Stay tuned for next week’s alert where we will discuss the proposed Employee Ownership Trust.