The 2023 Federal Budget: Key Tax Changes

Budget 2023 Summary

On March 28, 2023, Deputy Prime Minister and Federal Finance Minister, Chrystia Freeland, tabled the federal budget for 2023-2024. The budget announced that deficits of $43 billion for the fiscal year 2022 – 2023 and $40.1 billion for 2023 – 2024 with reducing deficits for each of the following 4 years.

The budget also made no changes to the corporate or personal income tax rates but did have several other tax measures that affect individuals and corporations. Some of the key tax changes are summarized below.

Corporate Tax Changes

General Anti-avoidance Rule (“GAAR”): The budget released draft legislation, for consultation, proposals that will strengthen the GAAR rules. These are:

• Add a preamble that will help to address interpretive issues so GAAR can be applied as intended,
• Changing the currently used, “primary purpose” test to a “one of the main purposes” test which would ultimately change the avoidance transaction standard all together,
• Adding a rule that would review the economic substance of a transaction in applying the “abuse or misuse” analysis,
• Adding a penalty of 25% of the tax benefit, or nil where the benefit involves a tax attribute that hasn’t been previous used,
• And, extending the reassessment period (in some cases up to 3 years) beyond the normal reassessment period unless the transaction has been disclosed to the CRA

Employee Ownership Trusts (EOT): These trusts are designed to hold the shares of a corporation for the benefit of the employees in the purchase of a business without the employee having to pay directly for the shares. The proposals related to the establishment of the EOT rules relate to qualifying conditions for these trusts and changes to the current approved rules to help facilitate the trust’s establishment as well as better define measure to provide efficacy to the new regime.

Clean Energy Incentives: Budget 2023 proposes to continue to review the current Scientific Research and Experimental Development program to ensure it meets the needs of taxpayers and the taxation system in Canada. It also proposes to include several new tax incentives, which include but are not limited to:

• Clean Electricity Investment Tax Credit – A 15% refundable tax credit for investments in specific electricity generating activities and equipment for the transmission between provinces. This is open to new and ongoing projects, where construction was not started until after March 28, 2023, and will cease in 2034,
• Clean Technology Manufacturing Credit – A 30% refundable tax credit from January 1, 2024, to 2034. This will be a credit available for the cost of investment in new machinery and equipment used to manufacture or process clean technology in the extraction, processing, or recycling of critical minerals,

Personal Tax Changes

Intergenerational Business Transfers – Bill C-208: This bill provides an exception from 84.1 applying on intergenerational business transfers which allowed for tax relief on farm and small business transfers to children. Budget 2023 proposes to add conditions to these transfers that more clearly define a intergenerational share transfer qualifies as. It further proposes to use 2 different options that allow for this transfer, these are:

• An immediate intergenerational business transfer. This would use a three-year test, and is based on arm’s length sales terms,
• A Gradual intergenerational business transfer. This would use a five-to-ten-year test, which is based on traditional estate freeze characteristics,
• Budget 2023 is also proposing changes to the current provisions of the intergenerational transfer exemption that deals with subsequent transfer of the previously transferred shares, as well as the lifetime capital gains exemption formula used specific to the purpose of these provisions,
• Under these proposed rules the transferor and the purchasing child(ren) are jointly required to elect for the transfer exemption and will be jointly and severally liable for any additional taxes payable if the transfer is deemed not to qualify as an Intergenerational transfer exemption,
• And the budget proposes to increase the limitation period for reassessing the transferors liability for tax by the following:
  • Three years for a Immediate Intergenerational Business Transfer
  • 10 years for a Gradual Intergenerational Business Transfer

Alternative Minimum Tax (AMT): Budget 2023 is proposing to raise the AMT amount from 15% to 20.5%, and the related exemption from $40,000 to $173,000. Further measures that were proposed include:

• Increase the capital gains inclusion rate from 80% to 100%, except those that are eligible to use the lifetime capital gains exemption,
• Capital gains realized on the donation of publicly listed securities are to be included at 30%,
• Stock option benefits would be included in the AMT calculation at 100%,
• Capital loss and Allowable Business Investment Losses would be included at a 50% inclusion rate,
• Disallowing 50% of employment expenses, moving expenses, childcare expenses, and other deductions and expenses,
• And, reducing the allowance of non-refundable tax credits that are currently allowed to reduce the AMT from 100% to 50% inclusion

Improving Registered Plans: Changes were announced that are intended to affect and strengthen a number of registered plans. These include:

• Registered Education Savings Plan (RESP) – the budget proposal is to increase particular limits on the plans withdrawals to assist with post-secondary education expenses. The new proposed withdrawal limit would see this increase from $5,000 to $8,000 for full time students, and from $2,500 to $4,000 for part time students. It is also proposed to allow separated/divorced parents to jointly open a RESP for their child(ren).
• Registered Disability Savings Plan (RDSP) – The budget proposal is to extend the deadline of December 31, 2023 to allow a qualifying family member of an adult beneficiary to open a RDSP account on their behalf. The extension requested on this measure would be to December 31, 2026. The budget is also proposing to add a sister or brother to the definition of “qualifying family member

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