Wealth Strategies: 2023 Federal Budget Highlights

On March 28^th, Deputy Prime Minister and Minister of Finance, Chrystia Freeland announced the 2023-2024 budget to mixed reviews. For this post, we will provide some context to the more complicated details in this year’s budget, and highlight a few areas that may affect individual finances. The primary focuses for the budget are to plan for a mild recession in 2023, to provide incentives for a transition to a green energy focused economy, and to implement higher spending for services. Much of the negative sentiment towards this budget has to do with the Liberal government no longer planning for a future surplus, and instead opting for an annually reduced deficit. Federal debt is also projected to rise to 39.9% as a ratio of GDP compared to the fall 2022 projection of 37.3% by 2027. Lowered growth due to a forecasted recession in 2023 has a considerable effect on government revenues, with an increase in the amount of debt needed to cover the added spending.

Exclusions From the Budget:

Before moving onto some of the major announcements and changes, there were some topics that were previously discussed but were not included in this year’s budget. This budget did not include any changes to:

• Tax brackets or tax rates with one exception that will be discussed next.
• Capital gains inclusions rates or dividends.
• Taxation of principle residences.

There was also no inclusion of a wealth tax for the ultra-wealthy.

Focused Changes or Inclusions:

The budget did focus on changes to the Alternative Minimum Tax (AMT) that could affect those claiming multiple tax deductions and credits and who have an income over $300,000. AMT is intended to ensure that individuals who would otherwise pay little or no tax (because they have a significant number of tax preferred items) pay at least a minimum amount of tax for the year. Essentially, when filing taxes, the CRA will review the return details and apply the data to the standard tax method and then to the AMT method with the higher of the two being the assessed amount. The new budget will increase the exemption amount under the AMT method to include more income for higher income earners being taxed, and limit the amount of tax deductions and credits that can be applied. For more information on the changes to AMT, please click here.

The budget includes changes to the Registered Disability Savings Plans (RDSPs) and the Registered Education Savings Plans (RESPs).

• RDSP changes:
  • Extended the deadline for Qualifying Family Member (QFM) to open a RDSP on behalf of an adult (over 18) family member who does not have a legal representative to Dec. 31, 2026.
  • Expanded the definition of QFM to include siblings (previously it was just parents).
• RESP changes:
  • Increasing the maximum Educational Assistance Payment (EAPs) withdrawal limit for the first 13 weeks of enrollment in a post-secondary program to $8,000 from $5,000 for full-time students and $4,000 from $2,500 for part-time students.
  • Allowing divorced or separated parents to open joint RESP accounts for children.

For those collecting GST credits, the budget includes a one-time payment through the Goods & Services Tax Credit system of a non-taxable and income-tested amount equal to 2x the January 2023 benefit. The so called “Grocery Rebate” is expected to be paid out to 11 million low- and modest-income Canadians.

The 2023 Budget includes changes to Employee Ownership Trusts (EOTs) that are designed to make it easier and more beneficial for corporations to transfer ownership to employees as part of a succession planning tool. The changes focus on qualifying conditions and more favourable tax rules. For more information on EOTs, please click here.

The budget includes changes to the taxation of fees related to Retirement Compensation Arrangements (RCAs). For more information on changes to RCAs, please click here.

The Tradespeople’s Tool Expense Deduction is set to double from $500 to $1,000 for the cost of new tools.

The budget also introduces new safeguards to the Intergenerational Business Transfer program to help prevent the conversion of retained earnings to capital gains which greatly reduces taxes paid. The specific changes to the existing Intergenerational Business Transfer rules include:

• Criteria to be considered “genuine intergenerational transfer”:
  • Must be a Qualified Small Business Corporation (QSBC) or family farm/fishing corporation.
  • Seller must be an individual.
  • Purchaser must be a corporation controlled by seller’s child(ren).
  • Joint election required to qualify under one of two transfer options:
    • Immediate intergenerational business transfer.
      • Full details on Page 18 of the link below.
    • Gradual intergenerational business transfer.
      • Full details on Page 18 of the link below.
• Ten-year capital gains reserve allowed where conditions met.
• Joint and several liability for any additional taxes.
• For more information changes to Intergenerational Business Transfer rules, please click here.

Other Measures:

• Tax on equity repurchases of 2% after Dec. 31, 2023, for gross purchases over $1 million.
• The previously announced First Home Savings Account (FHSA) becomes available on April 1^st, 2023; however, many financial institutions will be making the accounts available later in the year. For more information the new FHSA and how it will help first time home buyers, please click here.
• CRA will be expanding eligibility for the “File my Return” Service which is an automated phone service that allows you to file a tax return over the phone.
• The government plans to expand the New Canadian Dental Care Plan for uninsured Canadians with further information being provided later in the year.
• In an agreement with Visa and Mastercard, credit card transaction fees for small businesses will be lowered. For more information on this click here.