On March 28, 2023, the Federal Government presented the 2023 Federal Budget. While Budget 2023 did not change the federal personal or corporate income tax rates, there are a number of significant measures that will affect both individuals and businesses.
Areas of changes include the broadening of the Alternative Minimum Tax (AMT) by disallowing certain deductions and increasing the AMT rate on certain transactions, important changes to the general anti-avoidance rule (GAAR), introduces rules to allow Employee Ownership Trusts (EOTs) to acquire and hold shares of a business, and revisions to the rules for intergenerational business transfers (originally introduced in Bill C-208 back in 2021).
Other major focuses of the Budget included a number of both new and revised corporate tax credits to encourage green energy investment and development.
Full details of Budget 2023 can be found by clicking here. Summarized below are a few of the items we believe are most relevant to private companies and individuals.
Business Tax Measures
Corporate income tax rates
No changes to the corporate income tax rates are proposed. As such, the income tax rates as of January 1, 2023, will remain as follows:
| BC | Combined (Federal and BC) | |
| General | 12% | 27% |
| Small business1 | 2% | 11% |
General anti-avoidance rule (GAAR)
The GAAR is intended to prevent abuse tax avoidance transactions, and applies to deny the tax benefit created by the abusive transactions. Budget 2023 proposes a number of ways to strengthen perceived issues with the existing GAAR, including a potential penalty equal to 25% of the tax benefit on the abusive transactions. However, no penalty would apply where the tax benefit is a tax attribute that has not been used to reduce tax. Furthermore, a penalty would not apply if the transaction is disclosed to the Canada Revenue Agency (CRA) under the mandatory disclosure rules, including a new option for voluntary reporting under those rules. The proposed revised rules are complex and will heighten the importance of having a proper review conducted by a qualified tax professional before any potential tax planning is carried out.
A consultation will be held on the proposed legislation until May 31, 2023. Following this, the government will release revised proposed legislation with an effective date.
Green Incentives
Investment Tax Credit for Clean Electricity
A new refundable 15% Investment Tax Credit for Clean Electricity for eligible investments in new projects and the refurbishment of existing facilities has been introduced. Eligible investments include:
- Non-emitting electricity generation: wind, concentrated solar, solar photovoltaic, hydro, wave, tidal, nuclear;
- Abated natural gas-fired electricity generation;
- Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and
- Equipment for the transmission of electricity between provinces and territories.
This credit is available as of the day of the 2024 federal budget for projects that did not begin construction before March 28, 2023, and the credit will not be available after 2034.
Investment Tax Credit for Clean Technology Manufacturing
A new Investment Tax Credit for Clean Technology Manufacturing has been introduced for up to 30% of the capital cost of eligible depreciable property that is used all (or substantially all) for eligible activities. This includes machinery and equipment, including certain industrial vehicles, used in manufacturing, processing, or critical mineral extraction, as well as related systems to control the processes. The Investment Tax Credit for Clean Technology Manufacturing applies to property that is acquired and becomes available for use on or after January 1, 2024.
Investment Tax Credit for Carbon Capture, Utilization and Storage
The budget expands on and changes certain conditions for the refundable Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS). Eligible equipment has been expanded to include equipment that produces heat and/or power or uses water, that is also used for CCUS as well as another process provided that the other requirements for the credit are met.
These measures would apply to eligible expenses incurred after 2021 and before 2041.
Clean Technology Investment Tax Credit – Geothermal Energy
The refundable 30% Clean Technology Investment Tax Credit will be expanded to include geothermal energy systems that are eligible for Class 43.1 of the capital cost allowance (CCA) regime. This includes an expanded list of eligible property including equipment used primarily for the purpose of generating electric energy or heat energy solely from geothermal energy.
The expansion of this tax credit applies to property that is acquired or becomes available for use on or after March 28, 2023.
Clean Hydrogen Investment Tax Credit
The Clean Hydrogen Investment Tax Credit will offer tax incentives for hydrogen production, with credits ranging from 15-40% depending on the project’s carbon intensity. The credit is available for the cost of purchasing and installing eligible equipment for eligible projects. Maximum tax credits under the program include:
- 40% credit when expected life cycle emissions from the production of clean hydrogen are less than 0.75 kg of carbon dioxide equivalent (CO2e) per kg of hydrogen produced;
- 25% tax credit when emissions are between 0.75 – 2 kg of CO2e per kg of hydrogen produced; and
- 15% tax credit when emissions are between 2 – 4 kg of CO2e per kg of hydrogen produced.
This tax credit applies to property that is acquired or becomes available for use on or after March 28, 2023.
Personal Tax Measures
Personal Income Tax Rates
No changes to the personal income tax rates are proposed. As such, BC’s top personal income tax rates for 2023 will be as follows:
| Personal Top Marginal Rates (Income > $240,717) | |
| Interest and regular income | 53.50% |
| Capital gains | 26.75% |
| Eligible dividends | 36.54% |
| Non-eligible dividends | 48.89% |
Alternative Minimum Tax (AMT)
The AMT calculation is an income tax calculation that allows fewer deductions, exemptions and tax credits than under the ordinary tax rules, and is calculated at the same time as the ordinary rules. A taxpayer pays the higher of the AMT or regular income tax. The AMT targets high income individuals that pay a low income tax base compared to where various deductions and credits are not available for the same income level.
The 2023 Budget proposes an increase to the federal AMT rate from 15% to 20.5%, and to increase the exemption from $40,000 base to $173,000 for the 2024 taxation year. The exemption will be indexed to inflation.
The AMT base will be expanded with a number of proposed changes. The capital gains inclusion rate will be increased to 100% (previously 80%), however the current inclusion rate of 30% for capital gains eligible for the lifetime capital gains exemption will be maintained. Capital losses carryforward and allowable business investment loss deductions would apply at a 50% rate. Employee stock option benefits will be included at 100%, as well as 30% of capital gains on donations of publicly listed securities.
The AMT base will be broadened by disallowing 50% of the following deductions:
- employment expenses, other than those to earn commission income;
- deductions for Canada Pension Plan, Quebec Pension Plan, and Provincial Parental Insurance Plan contributions;
- moving expenses;
- child care expenses;
- disability supports deduction;
- deduction for workers’ compensation payments;
- deduction for social assistance payments;
- deduction for Guaranteed Income Supplement and Allowance payments;
- Canadian armed forces personnel and police deduction;
- interest and carrying charges incurred to earn income from property;
- deduction for limited partnership losses of other years;
- non-capital loss carryovers; and
- Northern residents deductions.
The proposed changes will apply to taxation years that begin after 2023.
Intergenerational Business Transfers
Bill C-208 that became effective June 29, 2021 introduced exceptions to certain tax avoidance rules and was intended to facilitate intergenerational business transfers. The rules introduced by Bill C-208 contained a number of issues that gave rise to various consultations and discussions with the tax community to ensure that these new rules would not be misused and that they would apply in the intended manner for proper transfers of businesses to the next generation.
The budget amends the rules introduced in Bill C-208 to require additional conditions to qualify for the exceptions, and provides two new options to transfer businesses:
- An immediate transfer based on arm’s length sale terms (three-year test), or
- A gradual transfer (five-to-ten year test) based on estate freeze characteristics.
The conditions which must be satisfied for the above two options are as follows:
Three-Year Test (arm’s length sale – generally more stringent conditions)
- Control – The parent must transfer control of the business, including an immediate transfer of majority voting interest, and the remainder over 36 months
- Transfer of economic interest – The parent must transfer a majority of the shares holding entitlement to the dividends and value of the business immediately, and the remainder over 36 months
- Transfer of Management – The parent must transfer the management of the business within a reasonable time frame depending on the circumstances (and with a 36 month safe harbor)
- Retaining Control – The child/grandchild is required to retain legal control for a 36 month period following the initial share transfer
- Active in Business – At least one of the children/grandchildren that received the shares is required to remain actively involved in the business for a 36 month period following the initial share transfer
Five-to-ten Year Test (where the parent crystalizes the value of shares held into fixed value preferred shares, and the parent’s interest is gradually reduced by the corporation repurchasing the parent’s shares)
- Control – The parent must transfer control of the business, including an immediate transfer of majority voting interest, and the remainder over 36 months
- Transfer of economic interest – The parent must transfer a majority of the shares holding entitlement to the dividends and value of the business immediately, and the remainder over 36 months. In addition, within 10 years of the original transfer, parents must reduce the value of their debt and equity interest in the business to 30% or less of the original value.
- Transfer of Management – The parent must transfer the management of the business within a reasonable time frame depending on the circumstances (and with a 36 month safe harbor)
- Retaining Control – The child/grandchild is required to retain legal control for a 60 month period following the initial share transfer
- Active in Business – At least one of the children/grandchildren that received the shares is required to remain actively involved in the business for a 60 month period following the initial share transfer
The rules have also been expanded to include stepchildren, children-in-law, nieces, nephews, grandnieces, and grandnephews.
These changes apply to transactions that are effective on or after January 1, 2024.
Other Tax Measures
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. This is a form of employee ownership where trusts 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 provides an additional option for succession planning.
The new rules would define qualifying conditions to be an EOT. These changes would extend the capital gains reserve to ten years for qualifying sales to an EOT, create an exception to the shareholder loan rule (providing a 15 year repayment period), and exempt EOTs from the 21-year deemed disposition rule.
Given the potential benefits of EOTs, there are a number of strict qualifying conditions and general rules that apply:
- The EOT must hold a controlling interest in the shares of one or more qualifying businesses;
- All or substantially all of the trust’s assets must be shares of qualifying businesses;
- The trustees of the trust must meet various conditions;
- The interest of each employee beneficiary of the trust must be based, under a particular formula, on that employee’s length of service, remuneration, and hours worked, and all beneficiaries must generally be treated in a similar manner;
- The trust must hold shares of a qualifying business exclusively for the benefit of certain qualifying employees;
- Certain restrictions on individuals and related persons who hold a significant interest in the business prior to the sale of shares to the trust; and
- The trust must not distribute any shares of qualifying businesses to its beneficiaries.
A qualifying business is a Canadian-Controlled Private Corporation that meets certain conditions, including that all or substantially all of the fair market value of its assets are attributable to assets used in an active business carried on in Canada.
These measures would apply as of January 1, 2024.
Deduction for tradespeople’s tool expenses
An increase in the employment deduction for tradespeople’s tools to $1,000 (from $500) effective for 2023 and subsequent taxation years.
Registered Education Savings Plans — Educational Assistance Payments
Registered Education Savings Plans (RESP) will be allowed to permit Educational Assistance Payments (EAPs) withdrawals of up to $8,000 in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs, and up to $4,000 per 13-week period for beneficiaries enrolled in part-time programs (increased from $5,000 and $2,500, respectively). These changes come into force on March 28, 2023.
Registered Education Savings Plans — Divorced and separated parents
The budget enables 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, effective March 28, 2023.
For more information on how any of the proposed changes may have on your business or you, contact your Rise Advisor.
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