Golombek’s 2023 Budget Highlights

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Jamie Golombek

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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.

So today’s 2023 federal budget had a number of changes for individuals, for the general population, but also for high-net-worth individuals, and as well as some changes for small business owners, which I think will be very, very important. So what I’d like to do is highlight some of these changes that might affect many of our Canadian investors.

So let’s begin with the easy stuff. The grocery rebate. People know that inflation has been a big issue, and in particular the cost of food. The government has responded by increasing the GST credit, which helps offset the cost of paying GST on the purchases of various goods and services.

Now, of course, GST doesn’t typically apply to groceries because those are typically zero-rated. That being said, the government is introducing something called the grocery rebate, and when it’s done, effectively it is going to pay out an amount as soon as the budget passes and becomes law, depending on your particular family situation, that is tied to the GST credit. In other words, only those with lower incomes get the full GST credit currently. In other words, that would kick in with family income under about $40,000. And above that, it is reduced, and ultimately there’s a complete phase out.

So the bottom line is the grocery rebate will be basically based on the amount of the GST credit that you would have gotten in January 2023, and it will be equal to twice that amount. So effectively, the maximum additional grocery rebate would be $153 per adult, $81 per child, and an additional $81 if you qualify for the single supplement.

Going on to the big news for higher-income Canadians, of course, is the tweaking of the alternative minimum tax. Now, the government followed through on its promise in last year’s federal budget to update the AMT. Now, for those who are not familiar, the AMT is a parallel tax calculation that effectively allows fewer deductions, exemption, and credit than the ordinarily tax rules, and also applies an exemption as well as a flat rate of tax.

Under the current AMT system, it applies a flat 15% tax rate with a $40,000 exemption. And effectively what’s happening now is starting next year, a new AMT regime will be taking over, and this is in response to the fact that the government’s concerned that despite raising taxes on the highest-income Canadians, they found that, at least in last year’s budget material, they concluded that 28% of filers who had gross income of more than $400,000 paid an average federal rate of only 15% or less by using a variety of deductions and credits. Having analyzed that personally, a lot of that relates to things like the capital gains inclusion rate, the Canadian dividend tax credit, charitable donations, and employee stock options.

So what are they doing? They’re broadening the AMT base. So starting next year, the capital gains inclusion rate for the purpose of AMT will jump up to 100% from 80%. Now remember, under the normal system, only 50% are taxable. That’s going into 100% under the AMT system.

Similarly, if you currently donate publicly listed securities, mutual funds, or seg funds to a charity, we know the tax rate is zero. Under the AMT system, that inclusion rate will jump from zero to 30%. In terms of deductions and expenses, they’re going to broaden the AMT base by disallowing 50% of various deductions, including things like employment expenses other than those incurred during commission income, moving expenses, childcare expenses, deductible interest in carrying charges, and carryforward of limited partnership losses and non-capital losses from prior years.

In addition, while under the current system, most non-refundable federal credits can be used against AMT, under the new 2024 system, only 50% of the non-refundable credits will be allowed to reduce AMT subject to a number of exceptions. Most notably, the dividend tax credit will not be allowed at all. In other words, people would continue to use the cash method, the non-grossed-up method to include Canadian dividends for AMT purposes.

On top of all this, what they’re doing is they’re actually tweaking the system itself. What the government is doing is raising the AMT exemption for 2024 to approximately 173,000, which is the start of the fourth federal tax bracket based on projected inflation for next year. That’s a jump from $40,000 under the current AMT system. And it will also increase the AMT rate from the current rate of 15% to the second tax bracket of 20.5%.

Now, these amendments to the AMT are expected to generate $3 billion of additional revenue over five years starting in 2024. And with these changes, almost 99% of the AMT will be paid by those making over $300,000 a year, and in fact, 80% of the AMT will be paid by those earning over $1 million annually.

A few other quick changes, automatic tax filing. So 12% of Canadians currently don’t file tax returns. The government wants to expand its simple File my Return service, allowing certain eligible Canadians to file their return on the telephone.

In addition, some changes to registered plans, positive on the RESP side. Education savings plans, you’re now going to be able to take out $8,000 of EAPs, Educational Assistance Payments, in the first semester of education. That’s up from 5,000, which is very helpful. In addition, under the current rules, there are restrictions on who can open up an RESP. In order to open up an RESP as a joint subscriber, you’ve got to be married or common law. Under the new changes in the budget, the budget will propose to allow a divorced or separated parent to open up a joint RESP with their ex-spouse or partner for one or more of their children, which is a positive change.

On the RDSP side, the Registered Disability Savings Plan, what they’ve done is they’ve expanded the number of years which allow a qualifying family member, could defined as a parent, a spouse, or a common law partner, to be able to open up an RDSP for an adult child who doesn’t have the capacity to enter into their own RDSP contract. That’s now been extended by three more years to December 31, 2026. In addition to also expanding the definition of qualifying family member to include a sibling of the beneficiary who’s at least 18 years of age or older.

On the corporate side, a couple of positive changes there. Certainly, when we look at the ability to transfer shares to the next generation, they’re going to introduce employee ownership trusts starting next year, which is a way to effectively facilitate an intergenerational transfer by having a business owner being able to transfer it to employees with very relaxed tax rules on that. They’ve also confirmed their intention to continue to allow intergenerational share transfers as a result of the Private Members Bill, Bill C-208, which passed in 2021, but clamping down a little bit to make sure that it’s not used inappropriately by people who aren’t doing a genuine transfer to affect a surplus strip.

There are more strict rules and tightening the GAAR, the General Anti-Avoidance Rule, including a new GAAR penalty equal to 25% of the amount of the tax benefit, as well as extending the normal reassessment period by three years for GAAR assessments.

All of this information is contained in our latest report, Budget 2023.