Budget 2023 could target wealthy Canadians, experts suggest

Revenue-generating measures in the 2023 federal budget will probably target the wealthy to offset spending meant to mitigate the effects of inflation, tax experts suggest.

“We’re going to be watching very carefully how this budget might go after higher-income Canadians, [perhaps] even by introducing a higher income tax bracket for those making over a certain amount,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management in Toronto.

A Grant Thornton tax insights bulletin, published Feb. 8, suggested that “wealthy individuals and large corporations may see their taxes increase” to support tax measures in Budget 2023 meant to help Canadians “cope with the high cost of living, housing affordability, and the uncertain economic landscape” and “pay down the debt incurred from programs launched during the pandemic.”

In the fall economic statement, the government said it would provide details in Budget 2023 about a new 2% tax on share buybacks of the shares of public corporations as well as a new minimum tax on high earners, first proposed in Budget 2022.

The existing alternative minimum tax “has not been substantially updated since its introduction [in 1986] and there are still thousands of wealthy Canadians who pay little to no personal income tax each year,” the government said in last year’s budget.

Kevin Wark, a tax consultant with the Conference for Advanced Life Underwriting (CALU), said he’s unsure how the government will revamp the minimum tax regime without unintended tax consequences.

“They need, I think, better data as to what people are actually relying on to reduce their income — it could be the [lifetime] capital gains exemption, it could be interest expense deductions for bona fide business expense purposes,” said Wark, who is also managing partner with Integrated Estate Solutions in Toronto. “Once you start challenging those kinds of things, you challenge the underlying policy reasons for those deductions and benefits.”

In its pre-budget submission, CALU urged the government “to support the successful transition of small businesses to family members” when considering any changes to the Income Tax Act in response to the passage of Bill C-208 in June 2021.

Bill C-208 was a private member’s bill meant to facilitate “genuine” intergenerational transfers of small businesses, farms and fishing corporations. The government, which didn’t support the bill, said in the 2022 federal budget that it would like to determine “how the existing rules could be modified to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers.”

Said Wark: “We’re hoping something comes out [on intergenerational transfers of small businesses] and that it achieves that twin objective.”

Golombek said that the government might tackle the broader issue of “surplus stripping” in Budget 2023. Surplus stripping involves using a corporate reorganization to effectively extract retained earnings as tax-preferred capital gains rather than dividends.

“We know that the government has really tried to focus on the issue for the last number of years,” Golombek said. In 2017, the federal government targeted surplus stripping as part of draft legislation addressing the taxation of small businesses, but ultimately set aside the initiative.

The Grant Thornton report suggested the budget could include changes to the general anti-avoidance rule, which the government has expressed an interest in updating, as well as tax changes meant to help the Liberal government keep the support of the New Democratic Party. Such changes could include a wealth tax — an initiative included in the NDP’s 2021 campaign platform.

Golombek said he’ll be looking to see if the government will raise the capital gains inclusion rate, another initiative included in the NDP’s campaign platform. However, Wark said he doesn’t believe the government will introduce such a measure in the 2023 budget.

Wark said he’s expecting the government to publish draft legislation on the new mandatory disclosure regime on reportable transactions and notifiable transactions soon: “It may not be part of the budget, it may be introduced before the budget.”

Deputy Prime Minister and Minister of Finance Chrystia Freeland indicated earlier this month that the government is looking for ways to support Canadians affected most by inflation while limiting the overall impact to Canada’s finances.

In remarks made at a Feb. 3 meeting of federal, provincial and territorial finance ministers, Freeland said that “this is a time of real fiscal constraint” and that the government would be wary of pouring “fuel on the fire of inflation” at the same time as the Bank of Canada was trying to tackle it via higher interest rates.

“Any new spending has to be targeted and focused on building an economy that is more sustainable and more prosperous,” Freeland said.