Tax Changes to Watch for in 2023

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Jamie Golombek

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Jamie Golombek, Managing Director of Tax and Estate Planning with CIBC Private Wealth.

So 2023 is going to be an interesting year in terms of tax changes. While we never know exactly what’s on the horizon, we do know a few things.

First of all, the introduction of a brand new plan, a new register plan. The First Home Savings Account, the FHSA, provides an opportunity for individuals to save $8,000 a year for five years. That’s $40,000. Those are tax deductible contributions that an individual will make to the new account to save for a first home. So to qualify, an individual has to be a first time home buyer. And the opportunity there is to save up to $40,000, tax deductible, let it grow up to 15 years inside the FHSA completely tax deferred. And then, when the money comes out of the FHSA, the entire amount is used to buy that first home within a 15-year period and it comes out tax free.

So you’re really getting the benefits of the RRSP, the tax growth, the tax deferral, and ultimately, the benefits of the TFSA as well, as the money does come out tax free. In fact, for our clients and individuals that do not have enough money to make an FHSA contribution, you’re actually allowed to take existing RSP money and move it from the RSP into the FHSA. You won’t get another deduction, but you’d be able to then take the money out tax free to buy that first home. Lots of details coming out in 2023. The earliest available date we’re told is April 1, 2023. That will, of course, depend on when financial institutions are ready to launch that particular product.

What else is new for 2023?

Well, the second thing we know about, for sure, is the new anti-flipping tax for real estate. Starting Jan 1, 2023, there is a new rule that says that you can no longer claim the principal residence exemption if you sell your principal residence within a 12-month period other than with certain exceptions, things like death, disability, employment, relocation, et cetera. So in other words, the government is concerned that people have been flipping a principal residence for under 12 months and realizing a tax-free principal gain, principal residence gain, not reporting any tax on that. The government now says, “Nope. Not only can you not claim the principal residence exemption, it’s not even a capital gain. It will be taxable as 100% business income.”

So that’s effective Jan 1, 2023. So people should pay attention if they do have to sell their home within a year and they don’t meet one of the specific exceptions.

And the third thing that we are looking to find more information about will probably be in the upcoming spring of 2023 budget, is a new regime for high income earners on the alternative minimum tax. Now, we already have an AMT. It’s been around for a while, but in the last budget, the 2022 budget, the government’s concerned that high income gains are not paying enough tax, and they produce some research to show that the effective tax rate on some of these high income people is actually quite low. Now, we did some research into that and we tried to figure out why that would be. And primarily, it’s because of things like Canadian dividends, which have a preferred rate because the dividend tax credit to avoid double taxation, capital gains, which are 50% taxable, and even charitable gifts in which people get a 50% effective donation receipt combined federal provincial.

So what is the government getting at?

We’re not sure, but we are told that even though details were supposed to come out in the November economic statement, that they have delayed that. And now we’re going to have all these details coming out in a 2023 federal budget. So for high income earners, you want to be on the lookout. You want to see what does the government have in store in terms of a redevised, perhaps a reimagined, AMT, alternative minimum tax, for high income earners.

That being said, lots of other things on the horizon. People are predicting the end of surplus stripping. In other words, the opportunity to take money out of a corporation at capital gains rates through reorganization instead of doing it through a dividend rate, that might certainly be on the chopping block. And again, we don’t know what else could be in store, but we’re going to follow those developments very, very closely as we start 2023.