Federal Budget 2023: A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future (“Budget 2023”) has finally arrived, and with it many newly announced tax measures. This tax briefing briefly summarizes the key tax announcements from Budget 2023. Notable announcements in Budget 2023 include: amendments in response to Bill C-208, modifying the alternative minimum tax, and many measures for incentives pertaining to clean energy.
You can access in-depth technical commentary from the experts at Dentons Canada LLP in the 2023 Federal Budget Special Report. AnswerConnect subscribers can access the Special Report and the Federal Budget documents on the main page of AnswerConnect, and links to these documents in the nightly “Tax News Headlines” email.
Personal Income Tax Measures
Strengthening the Intergenerational Business Transfer Framework: Budget 2023 proposes to amend the rules introduced by Bill C-208 to ensure that they apply only where a genuine intergenerational business transfer takes place. To provide flexibility, it is proposed that taxpayers who wish to undertake a genuine intergenerational share transfer may choose to rely on one of two transfer options:
- an immediate intergenerational business transfer (three-year test) based on arm’s length sale terms; or
- a gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing the value of their economic interest in a corporation to allow future growth to accrue to their children while the parent’s fixed economic interest is then gradually diminished by the corporation repurchasing the parent’s interest).
Budget 2023 also proposes to provide a ten-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions.
These measures would apply to transactions that occur on or after January 1, 2024.
Alternative Minimum Tax for High-Income Individuals: The federal government proposes to:
- increase the Alternative Minimum Tax (“AMT”) capital gains inclusion rate from 80% to 100%. Capital loss carry forwards and allowable business investment losses would apply at a 50% rate;
- include 100% of the benefit associated with employee stock options in the AMT base;
- include 30% of capital gains on donations of publicly listed securities in the AMT base, mirroring the AMT treatment of capital gains eligible for the lifetime capital gains exemption. The 30% inclusion would also apply to the full benefit associated with employee stock options to the extent that a deduction is available because the underlying securities are publicly listed securities that have been donated;
- disallow 50% of certain personal deductions;
- allow only 50% of non-refundable tax credits to reduce the AMT, although the Special Foreign Tax Credit would continue to be allowed in full, and would be based on the new AMT tax rate, the proposed AMT would continue to use the cash (i.e., not grossed-up) value of dividends and fully disallow the Dividend Tax Credit, and some non-refundable credits that are currently disallowed would continue to be disallowed in full;
- increase the exemption from $40,000 to the start of the fourth federal tax bracket. Based on expected indexation for the 2024 taxation year, this would be approximately $173,000. The exemption amount would be indexed annually to inflation; and
- increase the AMT rate from 15% to 20.5%, corresponding to the rates applicable to the first and second federal income tax brackets, respectively.
The proposed changes would come into force for taxation years that begin after 2023.
Grocery Rebate: Budget 2023 proposes to introduce an increase to the maximum GST/HST tax credit (“GSTC”) amount for January 2023 that would be known as the Grocery Rebate. Eligible individuals would receive an additional GSTC amount equivalent to twice the amount received for January. The Grocery Rebate would be paid as soon as possible following the passage of legislation, through the GSTC system. The maximum amount under the Grocery Rebate would be:
- $153 per adult;
- $81 per child; and
- $81 for the single supplement.
To implement this change, the maximum GSTC amount for January 2023 would be replaced with an amount that is triple the maximum for that month under the current rules. For this January 2023 replacement payment only, the phase-in and phase-out rates would be tripled to 6% from 2% and to 15% from 5%, respectively. This ensures that the Grocery Rebate would be fully phased in and phased out at the same income levels as under the current GSTC rules for the 2022-23 benefit year.
Automatic Tax Filing: The CRA’s automatic tax filing service called “File My Return”, which reached some 53,000 Canadians in 2022, will be expanded to reach more than 2 million Canadians by 2025. The government will report on the progress of this initiative in 2024. The government also announced that, starting in 2024, there will be a new automatic filing service to help vulnerable Canadians who currently do not receive certain tax benefits because they do not file their tax returns. The CRA will also consult with certain community organizations and present a plan in 2024 to expand this service even further.
Employee Ownership Trusts: Budget 2023 proposes new rules to facilitate the use of Employee Ownership Trusts (“EOTs”) to acquire and hold shares of a business. These changes would extend the capital gains reserve to ten years for qualifying sales to an EOT, create an exception to the current shareholder loan rule, and exempt EOTs from the 21-year deemed disposition rule that applies to certain trusts. These amendments would apply as of January 1, 2024.
Deduction for Tradespeople’s Tool Expenses: Budget 2023 proposes to double the maximum employment deduction for tradespeople’s and apprentice mechanics’ tools from $500 to $1,000, effective for 2023 and subsequent taxation years.
Registered Education Savings Plans: Budget 2023 proposes to increase limits on certain RESP withdrawals from $5,000 to $8,000 for full-time students, and from $2,500 to $4,000 for part-time students. Budget 2023 also proposes to allow divorced or separated parents to open a joint RESP for their children. These changes would come into force on March 28, 2023.
Retirement Compensation Arrangements: Budget 2023 proposes that, effective for fees or premiums paid on or after March 28, 2023, fees or premiums paid for the purposes of securing or renewing a letter of credit (or a surety bond) for an RCA that is supplemental to a registered pension plan will not be subject to the 50% refundable tax. Employers would be able 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, based on the retirement benefits that are paid out of the employer’s corporate revenues to employees that had RCA benefits secured by letters of credit (or surety bonds). Employers would be eligible for a refund of 50% of the retirement benefits paid, up to the amount of refundable tax previously paid. This change would apply to retirement benefits paid after 2023.
Registered Disability Savings Plans: Budget 2023 proposes to extend the qualifying family member measure (which allows a family member to open an RDSP for an adult relative) by three years, to December 31, 2026. Siblings will also be qualified family members, as of Royal Assent.
Business Income Tax Measures
Investment Tax Credit for Clean Hydrogen: Budget 2023 proposes to introduce the refundable Clean Hydrogen Investment Tax Credit (“CH Tax Credit”). The following credit rates would apply, based on assessed carbon intensity (CI) of the hydrogen that is produced (i.e., kilogram (kg) of carbon dioxide equivalent (CO2 e) per kg of hydrogen), to eligible property that becomes available for use before 2034:
- 40% for a CI of less than 0.75 kg;
- 25% for a CI greater than or equal to 0.75 kg, but less than 2 kg; and
- 15% for a CI greater than or equal to 2 kg, but less than 4 kg.
The CH Tax Credit would be fully phased out for property that becomes available for use after 2034 and would apply to property that is acquired and that becomes available for use on or after March 28, 2023.
Clean Technology Investment Tax Credit – Geothermal Energy: Budget 2023 proposes to expand eligibility of the credit to include geothermal energy systems that are eligible for Class 43.1 of Schedule II of the Income Tax Regulations. The expansion of the credit would apply in respect of property that is acquired and becomes available for use on or after March 28, 2023, where it has not been used for any purpose before its acquisition.
Budget 2023 also proposes to modify the phase-out schedule of the Clean Technology Investment Tax Credit announced in the 2022 Fall Economic Statement. Rather than starting the phase-out in 2032, the credit rate would remain at 30% for property that becomes available for use in 2032 and 2033 and would be reduced to 15% in 2034. The credit would be unavailable after 2034.
Labour Requirements Related to Certain Investment Tax Credits: The 2022 Fall Economic Statement announced the government’s intention to attach prevailing wage and apprenticeship requirements to the proposed Clean Technology and Clean Hydrogen Investment Tax Credits. The government also proposes to have these requirements apply to the proposed Clean Electricity Investment Tax Credit. The government also intends to apply labour requirements to the Investment Tax Credit for Carbon Capture, Utilization, and Storage. The requirements would apply to work that is performed on or after October 1, 2023.
Investment Tax Credit for Clean Technology Manufacturing: Budget 2023 proposes to introduce a refundable investment tax credit for clean technology manufacturing and processing, and critical mineral extraction and processing, equal to 30% of the capital cost of eligible property associated with eligible activities. The credit would apply to property that is acquired and becomes available for use on or after January 1, 2024, and would be gradually phased out starting with property that becomes available for use in 2032 and would no longer be in effect for property that becomes available for use after 2034.
Reduced Rate for Zero-Emission Technology Manufacturers: Budget 2023 proposes that income from certain nuclear manufacturing and processing activities would qualify for the reduced tax rates for zero-emission technology manufacturers, effective for taxation years beginning after 2023. Budget 2023 also proposes to extend the availability of these reduced rates by three years, such that the planned phase-out would start in taxation years that begin in 2032. The measure would be fully phased out for taxation years that begin after 2034.
Investment Tax Credit for Carbon Capture, Utilization, and Storage: Budget 2023 proposes that dual use equipment that produces heat and/or power or uses water, that is used for carbon capture, utilization, and storage as well as another process, be eligible for the CCUS Tax Credit. It is also proposed that British Columbia be added to the list of eligible jurisdictions for dedicated geological storage, applicable to expenses incurred on or after January 1, 2022.
Budget 2023 proposes that, rather than obtaining approval from Environment and Climate Change Canada for the process for using and storing CO2 in concrete, taxpayers would need to have their technology validated by a qualified third-party, which would confirm that the process meets the minimum 60% mineralization requirement.
Budget 2023 proposes that CCUS Tax Credits related to eligible refurbishment costs incurred once the project is operating would be calculated based on the average of the expected eligible use ratio for the five-year period in which they are incurred, and each subsequent period (i.e., the periods over which they contribute to the useful life of the project). These periods would be the same as those used to calculate the CCUS Tax Credit during construction.
These measures would apply to eligible expenses incurred after 2021 and before 2041.
Flow-Through Shares and Critical Mineral Exploration: Budget 2023 proposes to add lithium from brines as a mineral resource for the purposes of the Critical Mineral Exploration Tax Credit (“CMETC”). Eligible expenses related to lithium from brines made after March 28, 2023 would qualify as Canadian exploration expenses and Canadian development expenses. The expansion of the eligibility for the CMETC to lithium from brines would apply to flow-through share agreements entered into after March 28, 2023 and before April 2027.
Tax on Repurchases of Equity: The 2022 Fall Economic Statement announced the government’s intention to introduce a 2% tax on the net value of all types of share repurchases by public corporations in Canada. Budget 2023 provides the design and implementation details of the proposed measure. The tax would apply in respect of repurchases and issuances of equity that occur on or after January 1, 2024.
General Anti-Avoidance Rule (“GAAR”): Budget 2023 proposes to amend the GAAR by: introducing a preamble; changing the avoidance transaction standard; introducing an economic substance rule; introducing a penalty; and extending the reassessment period in certain circumstances.
Dividend Received Deduction by Financial Institutions: To align the treatment of dividends and gains on portfolio shares under the mark-to-market rules, Budget 2023 proposes to deny the dividend received deduction in respect of dividends received by financial institutions on shares that are mark-to-market property. This measure would apply to dividends received after 2023.
International Tax Reform
Budget 2023 provided a brief update on Canada’s participation in the Base Erosion and Profit Shifting (“BEPS”) two-pillar plan for international tax reform, dated October 8, 2021.
For Pillar One – Reallocation of Taxing Rights, the federal government continues to work with international partners to develop and implement a multilateral framework.
Budget 2023 announced the government's intention to introduce legislation implementing the Income Inclusion rule (“IIR”) and a domestic minimum top-up tax applicable to Canadian entities of MNEs that are within scope of Pillar Two – Global Minimum Tax, with effect for fiscal years of MNEs that begin on or after December 31, 2023. The government also intends to implement the Untaxed Profits Rule (“UTPR”) with effect for fiscal years of MNEs that begin on or after December 31, 2024. The government intends to release draft legislative proposals for the IIR and domestic minimum top-up tax for public consultation in the coming months, with draft legislative proposals for the UTPR to follow at a later time.
Sales Tax Measures
GST/HST Treatment of Payment Card Clearing Services: In response to a recent court decision found that the GST/HST does not apply to supplies of these services, Budget 2023 proposes to amend the GST/HST definition of “financial service” to clarify that payment card clearing services rendered by a payment card network operator are excluded from the definition to ensure that such services generally continue to be subject to the GST/HST.
Alcohol Excise Duty: Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at two per cent, for one year only, as of April 1, 2023.