2023 Federal Budget: Personal Tax Measures

Alternative minimum tax (AMT) for high‑income individuals

The AMT calculation is a parallel tax calculation that allows fewer deductions, exemptions and tax credits than under the ordinary tax rules. A taxpayer pays the higher of the AMT or regular income tax. To better target high‑income individuals, the budget proposes to increase the federal AMT rate from 15% to 20.5% and to increase the exemption amount for all individuals (including graduated rate estates) from $40,000 to the start of the fourth federal tax bracket, which is approximately $173,000 for the 2024 taxation year. The exemption will be indexed annually to inflation.

The budget proposes to broaden the AMT base by:

  • increasing the capital gains inclusion rate from 80% to 100%; capital loss carryforward and allowable business investment loss deductions would apply at a 50% rate
  • including 100% of the benefit associated with employee stock options, and
  • including 30% of capital gains on donations of publicly listed securities; the 30% inclusion would also apply to the full benefit associated with employee stock options to the extent that a deduction is available for ordinary tax purposes because the underlying securities are donated

The AMT base will also be broadened by disallowing 50% of the following deductions:

  • employment expenses, other than those incurred 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
  • deductions for limited partnership losses of other years
  • non-capital loss carryovers, and
  • Northern residents deductions

Only 50% of most non-refundable tax credits will be allowed to reduce the AMT. The existing AMT foreign tax credit, treatment of taxable dividends, and denial of certain non-refundable credits will be maintained. The existing carryforward period for AMT credits to reduce ordinary tax will also be maintained at seven years.

The proposed changes will apply to taxation years that begin after 2023.

Intergenerational business transfers

Private Member’s Bill C-208 introduced an exception to the anti-surplus stripping rules in section 84.1 of the Income Tax Act (ITA) that became effective June 29, 2021. Although the purpose was to facilitate intergenerational business transfers in circumstances where section 84.1 inappropriately applied, the rules introduced by Bill C-208 contain insufficient safeguards and are available where no transfer of a business to the next generation has taken place.

The budget introduces additional conditions to ensure that only genuine intergenerational share transfers are excluded from the application of section 84.1 of the ITA. Taxpayers may choose to rely on one of two transfer options provided they meet certain conditions:

  • an immediate intergenerational business transfer (three-year test) based on arm’s length sale hallmarks, 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 common shares of a corporation into fixed value preference shares to allow future growth to accrue to their children while the value of the parent’s interest is gradually reduced by the corporation repurchasing the parent’s preference shares)

Existing rules that apply to subsequent share transfers by the purchaser corporation and the lifetime capital gains exemption will be replaced by relieving rules that apply on a subsequent arm’s length disposition or on the death or disability of a child.   

The transferor and the child (or children) must jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child (or children) will be jointly and severally liable for any additional taxes payable by the transferor because of section 84.1 applying if the transfer does not meet the conditions to qualify as an immediate or gradual intergenerational business transfer.

To allow the CRA to monitor compliance with the requirements under the new tests, the limitation period for assessing a transferer’s liability for tax that arose on the transfer will be extended by three years for an immediate business transfer and ten years for a gradual business transfer.

The budget also provides a ten-year capital gains reserve for share transfers that qualify under the immediate or gradual business transfer tests.

These measures will apply to transactions that occur on or after January 1, 2024.

Employee Ownership Trusts

The budget introduces rules to define and facilitate the use of Employee Ownership Trusts (EOT), which are Canadian resident trusts (excluding deemed resident trusts) that hold shares for the benefit of a corporation’s employees. A trust will be considered an EOT if it has only two purposes. First, it holds shares of a qualifying business for the benefit of employee beneficiaries of the trust. Second, it makes distributions to employee beneficiaries, where reasonable, under a distribution formula that can only consider any combination of an employee’s length of service, remuneration and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.

An EOT will be required to hold a controlling interest in the shares of one or more qualifying businesses.  A qualifying business is one where 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. A qualifying business must not carry on its business as a partner in a partnership. All or substantially all of the EOTs assets must be shares of qualifying businesses.

The EOT will be taxable and generally treated the same as other personal trusts. Income distributed from the trust to the beneficiaries will be taxed at the beneficiary level whereas trust income not distributed will be taxed in the EOT at the top personal marginal tax rate.

The trustees of the EOT must be either Canadian-resident corporations licensed or otherwise authorized in Canada to offer to the public their services as a trustee, or individuals (other than trusts). Trust beneficiaries will elect the trustees at least once every five years. Individuals and their related persons who held a significant economic interest in the business prior to a sale to the EOT will not be able to account for more than 40 percent of the trustees of the EOT, directors of the board of a corporate trustee or directors of any qualifying business of the EOT.

Beneficiaries of the EOT must consist exclusively of qualifying employees, which includes all individuals employed by a qualifying business and any other qualifying businesses it controls other than employees who are significant economic interest holders, or who have not completed a reasonable probationary period of up to 12 months. Individuals and their related persons who hold, or held prior to the sale to an EOT, a significant economic interest in a qualifying business of the EOT will also be excluded from being qualifying employees. The EOT will not be permitted to distribute shares of qualifying businesses to individual beneficiaries.  

The budget also introduces rules to facilitate the acquisition of shares by an EOT. A qualifying business transfer would occur when a taxpayer disposes of shares of a qualifying business, for proceeds not exceeding fair market value, to a trust that, immediately after the sale qualifies as an EOT (or to a corporation wholly owned by an EOT) and the EOT has a controlling interest in the qualifying business immediately after the transfer.

The existing five-year capital gains reserve will be extended to up to ten years for qualifying business transfers. The repayment period to avoid an income inclusion under the shareholder loan rules will be extended from one year to 15 years for amounts loaned to an EOT from a qualifying business to purchase shares in a qualifying business transfer. The EOT will also be exempt from the 21-year deemed disposition rule while it qualifies as an EOT.

The EOT rules will apply as of January 1, 2024.

The Grocery Rebate

The budget proposes to increase the maximum Goods and Services Tax credit (GSTC) amount for January 2023, to be known as the Grocery Rebate. Eligible individuals will receive a Grocery Rebate equivalent to twice the regular GSTC amount received for January. The Grocery Rebate would be paid through the GSTC system, as soon as possible following the passing of enabling legislation.

Deduction for tradespeople’s tool expenses

The budget proposes to double the maximum employment deduction for tradespeople’s tools, from $500 to $1,000, effective for 2023 and subsequent taxation years.

Registered Education Savings Plans (RESP)

The budget proposes to amend the ITA so that, effective March 28, 2023, the terms of an RESP may permit educational assistance payment (EAP) withdrawals of up to:

  • $8,000 (increased from $5,000) in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs
  • $4,000 (increased from $2,500) per 13-week period for beneficiaries enrolled in part-time programs

EAPs are comprised of government grants and investment income and are taxable income for the RESP beneficiary. RESP promoters may need to amend the terms of existing plans to apply the new EAP withdrawal limits. Individuals who withdrew EAPs prior to March 28, 2023 may be able to withdraw an additional EAP amount, subject to the new limits and the terms of the plan.

The budget also proposes, effective March 28, 2023, to enable 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.

Retirement Compensation Arrangements (RCA)

The budget proposes to amend the ITA so that fees or premiums paid for the purposes of securing a letter of credit (or surety bond) by an RCA trust that is supplemental to a registered pension plan will not be subject to the refundable tax under Part XI.3 of the ITA. This change will apply to fees or premiums paid on or after March 28, 2023.

The budget also proposes to permit employers to 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 retirement benefits that are paid by the corporation to employees that had RCA benefits secured by letters of credit (or surety bonds).  The employer will be eligible for a refund for 50% of retirement benefits paid, up to the refundable tax previously paid in respect of the fees or premiums. This change would apply to retirement benefits paid after 2023.

Registered Disability Savings Plans (RDSP)

The budget proposes to extend a temporary measure that allows a qualifying family member (parent, spouse or common-law partner) to open an RDSP and be the plan holder for an adult whose capacity to enter into an RDSP contract is in doubt (and who does not have a legal representative) by three years, to December 31, 2026. A qualifying family member who becomes a plan holder before the end of 2026 could remain the plan holder after 2026.

The budget also proposes to broaden the definition of “qualifying family member” to include a brother or sister of the beneficiary who is 18 years of age or older. This proposed expansion will apply as of royal assent of the enabling legislation and be in effect until December 31, 2026. A sibling who becomes a qualifying family member and plan holder before the end of 2026 could remain the plan holder after 2026.