2023 Federal Budget Highlights

Contents

• Corporate / business tax measures
• Personal tax measures
• International tax measures
• Indirect tax measures
• Scientific Research and Experimental Development (SR&ED)
• Tax administration and other tax measures

The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance, delivered the 2023 Federal Budget (Budget 2023), entitled A Made-In-Canada Plan, on March 28, 2023.

The measures announced focus on economic growth, public healthcare, and significant investments to incentivize businesses to reduce their emissions and become leaders in the global clean economy. 

There were a significant number of tax measures included in this budget, as well as items for future review or consultation. Below are the tax highlights from this year’s announcements.

Employee Ownership Trusts

An Employee Ownership Trust (EOT) can be used to facilitate the purchase of a business by its employees without requiring them to pay the business owner directly to acquire shares. For business owners, an EOT provides an additional option for succession planning. Budget 2023 proposes new rules as of January 1, 2024, to facilitate the use of an EOT to acquire and hold shares of a business.

A qualifying business transfer would occur when a taxpayer disposes of shares of a qualifying business for no more than fair market value. The shares must be disposed of to either a trust that qualifies as an EOT immediately after the sale, or a corporation wholly owned by the EOT. The EOT must own a controlling interest in the qualifying business immediately after the qualifying business transfer.

A trust would be considered an EOT if it is a Canadian resident trust (excluding deemed resident trusts) and has only two purposes. First, it would hold shares of qualifying businesses for the benefit of the employee beneficiaries of the trust. Second, it would make distributions to employee beneficiaries, where reasonable, under a distribution formula that could only consider an employee’s length of service, remuneration, and hours worked. Otherwise, all beneficiaries must generally be treated in a similar manner.

Budget 2023 proposes to extend the five-year capital gains reserve to a 10-year reserve for qualifying business transfers to an EOT. A minimum of 10 percent of the gain would be required to be brought into income each year, creating a maximum 10-year deferral period.

Taxpayers who receive a shareholder loan from a corporation are generally required to include the loaned amount in income in the year the loan is received — unless the loan is repaid within a year. Budget 2023 proposes to introduce a new exception to extend the repayment period from one to 15 years for amounts loaned to the EOT from a qualifying business to purchase shares in a qualifying business transfer.

To prevent the indefinite deferral of tax on accrued capital gains, certain trusts are deemed to dispose of their capital property at 21-year intervals. Budget 2023 proposes to exempt EOTs from the 21-year rule so that shares can be held indefinitely for the benefit of employees. If a trust no longer meets the conditions to be considered an EOT, the 21-year rule would be reinstated until the trust next meets the EOT conditions.

Clean energy initiatives

Budget 2023 introduces a number of business tax incentives to encourage the use of clean energy:

Clean Electricity Investment Tax Credit

A 15 percent refundable tax credit for investments in specific electricity generating activities and equipment for the transmission of electricity between provinces. Both new projects and refurbishment of existing projects will be eligible. The credit will be available for projects that begin after March 28, 2023 (Budget Day) and will cease to be available after 2034.

Clean Technology Manufacturing Credit

A 30 percent refundable tax credit for the cost of investments in new machinery and equipment used to manufacture or process key clean technologies and extract, process, or recycle key critical minerals. The credit would apply to property that is acquired and becomes available for use on or after January 1, 2024. The credit will be phased out starting in 2032 and will be fully eliminated in 2034.

Clean Hydrogen Investment Tax Credit

A refundable tax credit of between 15 percent and 40 percent of eligible project costs that produce clean hydrogen and a 15 percent tax credit for certain equipment.

Clean Technology Investment Tax Credit

Eligibility for the existing 30 percent credit is expanded to include geothermal systems eligible for capital cost allowance under Classes 43.1 and 43.2. In addition, the phase-out will begin in 2034 (previously 2032) and will not be available thereafter.

Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS)

The existing credit is enhanced to apply to additional equipment; further legislation detailing the credit and certain labour requirements will be released later. 

Reduced rates for zero-emission technology manufacturers

The reduced tax rates of 4.5 percent and 7.5 percent for zero-emission technology manufacturers will be extended by three years to 2034, with phase-out beginning in 2032. In addition, eligibility will also be expanded to include manufacturing of nuclear energy equipment, and processing and recycling of nuclear fuels and heavy water for taxation years beginning after 2023.

Lithium from brines

Budget 2023 proposes to allow producers of lithium from brines to issue flow-through shares, and to expand the eligibility of the Critical Mineral Exploration Tax Credit to lithium from brines.

General Anti-Avoidance Rule (GAAR)

In 2022, the government released a consultation paper on modernizing the GAAR. Budget 2023 proposes to release draft legislation in response to the issues raised in the consultation process. This would include introducing a preamble, an economic substance rule, and a penalty; changing the avoidance transaction standard; and extending the reassessment period in certain circumstances.

The government has expressed interest in receiving stakeholders’ and interested parties’ views on the GAAR proposals by May 31, 2023. Following this consultation period, the government intends to publish revised legislative proposals and announce the application date of the amendments.

Tax on public share buybacks

Budget 2023 introduces legislation regarding tax on repurchases of equity previously announced in the 2022 Fall Economic Statement. This legislation applies to entities whose shares are listed on a designated stock exchange, including real estate investment trusts, specified investments flow-through (SIFT) trusts, and SIFT partnerships. A two percent tax would apply on the net value of an entity’s share buybacks. The tax would apply to issuances and repurchases of equity that occur on or after January 1, 2024.

Income tax and GST/HST treatment of credit unions

Under current legislation, a credit union would not meet the definition of a “credit union” for income tax and GST/HST rules specific to credit unions if it earns more than 10 percent of its revenue from sources other than certain specified sources (e.g., interest income from lending activities).

Recognizing that most credit unions are full-service financial institutions which offer a wide range of financial products and services, the budget proposes to eliminate the revenue test from the definition of a “credit union” to better accommodate how credit unions currently operate. To prevent unintended consequences, the proposed change would apply to taxation years ending after 2016.

Bill C-208 intergenerational transfers

Budget 2023 proposes to amend the rules introduced through Bill C-208 to ensure that they apply only where a genuine intergenerational business transfer takes place. The original framework of the legislation remains in place, applying to intergenerational share transfers of qualified small business corporation shares — or shares of a family farm or fishing corporation — from a parent to a corporation controlled by one or more adult child of the transferring parent.

Budget 2023 proposes to expand the definition of “child” for these purposes to include nieces, nephews, grandnieces, and grandnephews in addition to children, stepchildren, and children-in-law.

Additionally, Budget 2023 proposes additional conditions on intergenerational share transfers to be eligible for the rules introduced through Bill C-208. Specifically, taxpayers must now rely on one of two transfer options, where all criteria are met.

1. Immediate Business Transfer (3-year test) – based on arm’s length terms
   • Parents transfer both legal and factual control over three years, including an immediate transfer of the majority of voting shares, with the balance to be transferred within 36 months.
   • Parents immediately transfer a majority of the common shares with the balance to be transferred within 36 months.
   • Parents transfer management of the business to their child within a reasonable time based on the particular circumstances (with a 36-month safe harbour).
   • Child(ren) retains legal (not factual) control for at least 36 months following the share transfer.
   • At least one child remains actively involved in the business for 36 months following the share transfer.
2. Gradual Business Transfer (5- to 10-year test) – based on traditional estate freeze characteristics
   • Parents immediately transfer only legal control, including an immediate transfer of the majority of voting shares with the balance needing to transfer within 36 months.
   • Parents immediately transfer a majority of the common shares, with the balance to be transferred within 36 months.
     • In addition, within 10 years of the initial sale, the parents must reduce the value of their economic interest (amounts owed and equity) in the business to:
       • 50 percent of the value of their interest in the family farm or fishing corporation at the initial sale time, or
       • 30 percent of the value of their interest in the small business corporation at the initial sale time.
   • Parents transfer management of the business to their child within a reasonable timeframe based on the particular circumstances (with a 36-month safe harbour).
   • Child(ren) retains legal (not factual) control for at least 60 months following the share transfer.
   • At least one child remains actively involved in the business for at least 60 months following the share transfer.

The parent(s) and children would be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child(ren) would be jointly and severally liable for any additional taxes payable by the transferring parent(s) in respect of a transfer that does not meet the above conditions. Furthermore, Budget 2023 proposes to extend the limitation period for reassessing the tax liability of the transferring parent(s) by three years for an immediate business transfer and by 10 years for a gradual business transfer.

Budget 2023 proposes additional amendments to Bill C-208 including:

• Providing the transferring parent(s) with the option for a 10-year capital gains reserve for genuine intergenerational share transfers.
• Relieving provisions that would apply upon a subsequent arm’s length share transfer or upon the death or disability of a child.

Alternative Minimum Tax

Budget 2023 proposes to amend the Alternative Minimum Tax (AMT) applied to individuals. The AMT is a flat 15 percent tax based on a parallel calculation of an individual’s income (assuming a $40,000 exemption amount) that allows fewer deductions, exemptions, and tax credits than would otherwise be applicable under existing income tax rules. The AMT is applicable in instances where the 15 percent tax exceeds the tax calculated when all deductions, exemptions, and credits are allowed under existing income tax rules.

Budget 2023 proposes to broaden the application of the AMT by limiting tax preferences (i.e., exemptions, deductions, and credits) in the AMT calculation as follows:

• The inclusion rate of capital gains will be increased from the current 80 percent to 100 percent. Capital losses and allowable business investment losses would apply at a 50 percent rate.
• The inclusion rate for benefits associated with employee stock options will be changed to 100 percent.
• The inclusion rate for capital gains resulting from the donation of publicly listed securities will be changed to 30 percent.
• The 30 percent inclusion rate would also apply to the employee stock option benefit to the extent any deduction is available because underlying shares are also publicly listed securities that were donated.
• Certain deductions and expenses will now be limited to 50 percent.
• Only 50 percent of non-refundable credits (except a special foreign tax credit) will be allowed to reduce the AMT.

Budget 2023 proposes the following additional changes:

• The AMT tax rate will increase from 15 percent to 20.5 percent.
• The AMT exemption will increase from the current allowable deduction of $40,000 for individuals to an amount indexed to the fourth tax bracket, estimated to be $173,000 in 2024.

The AMT carryforward period will remain unchanged at seven years.

The proposed changes will come in to force for taxation years that begin after 2023.

Improving Registered Educations Savings Plans (RESPs)

Budget 2023 proposes to increase limits of Education Assistance Payment withdrawals from RESPs from $5,000 to $8,000 for full-time students, and from $2,500 to $4,000 for part-time students. New rules will allow divorced or separated parents to open a joint RESP for their children. The new rules come into force on Budget Day.

Registered Disability Savings Plans (RDSPs)

Budget 2023 proposes a three-year extension for temporary measures allowing a qualifying family member who is a parent, spouse, or common-law partner to open RDSPs for an adult in situations where that adult cannot do so in their own capacity and does not have a legal representative. These measures will remain in place through December 31, 2026.

Budget 2023 also proposes to expand current rules to include siblings as a qualifying family member for these purposes when the enabling legislation receives royal assent.

Grocery Rebate

Budget 2023 introduces the Grocery Rebate, a one-time payment administered through the Goods and Services Tax Credit (GSTC) system. The maximum amount under the Grocery Rebate would be $153 per adult, $81 per child and $81 for the single supplement. The Grocery Rebate would be phased in and phased out at the same income levels as under the current GSTC rules.

Deduction for tradespeople’s tool expenses

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

International tax reform

Canada is one of the 138 members of the Organisation for Economic Co-operation and Development (OECD) and G20 Inclusive Framework on Base Erosion and Profit Shifting that joined a two-pillar plan for international tax reform agreed to in October 2021.

Pillar One - Digital Services Tax

The aim of Pillar One is to ensure that large multinational enterprises are taxed in the jurisdictions of their customers, and not just according to the residency of their businesses. The government previously released draft legislative proposals for a Digital Services Tax (DST) in December 2021. It now intends to release a revised draft of the proposals for public comment before introducing a bill in Parliament.

The DST would take effect January 1, 2024, if the multilateral convention implementing the Pillar One framework has not come into force. In that event, the DST would be payable as of 2024 in respect of revenues earned as of January 1, 2022.

Pillar Two - Global Minimum Tax

The aim of Pillar Two is to ensure that large multinational enterprises are subject to a minimum global effective tax rate of 15 percent on their profits in every jurisdiction in which they operate. This can include the income earned by affiliates of Canadian companies that are domiciled in lower tax jurisdictions and will involve a “top-up” Canadian tax where the global minimum tax rate is not met in the other jurisdiction — this is known as the Income Inclusion Rule (IIR).

Budget 2023 announces the government’s intention to introduce legislation implementing the IIR that would apply to Canadian entities of large multinational enterprises for fiscal years beginning on or after December 31, 2023. The government also intends to implement the Undertaxed Profits Rule, which is intended to allocate the top-up tax among different jurisdictions where the parent jurisdiction has not implemented the IIR for fiscal years beginning on or after December 31, 2024.

Sharing of pillar revenues

The government announced its intention to share a portion of the revenues earned from the international tax reform with the provinces and the territories. The government will engage in discussion with provincial and territorial governments in the coming months.

GST/HST treatment of payment card clearing services

Budget 2023 proposes to amend the GST/HST definition of “financial service” to clarify that payment card clearing services rendered by a payment card network are subject to the GST/HST. The measure will generally apply to services for which consideration becomes due or is paid after Budget Day.

Alcohol excise duty

Alcohol excise duties are automatically indexed to inflation on April 1 of each year. Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits, and wine at two percent for one year, as of April 1, 2023.

Quarterly duty remittances on cannabis taxation

Budget 2023 proposes to allow all licensed cannabis producers to remit excise duties on a quarterly basis (vs. monthly) starting from the quarter beginning on April 1, 2023.

In Budget 2022, the government announced its intention to review the SR&ED program to ensure it is providing adequate support and improving the development, retention, and commercialization of intellectual property. While no new measures were announced as part of Budget 2023, the Department of Finance indicated it will continue to engage with stakeholders in the coming months.

Automatic tax filing

The Canada Revenue Agency (CRA) will pilot a new automatic filing service for Canadians who currently do not file their taxes to help them receive certain benefits to which they are entitled. Following consultations, the CRA will present a plan in 2024 to expand this service. The CRA also plans to expand taxpayer eligibility for the File My Return service, which allows taxpayers to file their tax returns by telephone.

Previously announced measures

Budget 2023 confirms the government’s intent to proceed with previously announced tax and related measures, as modified to account for consultations and deliberations since their release, including the following:

• Legislative proposals released on November 3, 2022, with respect to Excessive Interest and Financing Expenses Limitations and Reporting Rules for Digital Platform Operators.
• Legislative proposals released on August 9, 2022, including the following measures:
  • Substantive Canadian-Controlled Private Corporations
  • Mandatory Disclosure Rules