2023 Federal Budget Tax Highlights

Introduced in Budget 2022, the Tax-Free First Home Savings Account gives Canadians the ability to save $40,000 on a tax-free basis. Similar to an RRSP, individuals' contributions will be tax-deductible, and withdrawals to purchase a first home will be non-taxable.

Budget 2023 addresses financial stresses faced by post-secondary students and proposes to enhance financial assistance starting August 1, 2023. This will include:

• Increasing Canada Student Grants by 40% - providing full-time students up to $4,200 in aid.

• Raising the interest-free weekly Canada Student Loan limit from $210 to $300.

• Forgoing the required credit screening for mature student applicants, aged 22 years or older, to qualify for federal student grants.

Budget 2023 proposes to increase the limit on certain Registered Education Savings Plan (RESP) withdrawals. These increases are as follows:

• Full-time students can now withdraw $8,000 (formerly $5,000)

• Part-time students can now withdraw $4,000 (formerly $2,500)

Separated or divorce parents now also have the option to open a joint RESP account, or to transfer to another promoter,  to save for their children’s education.

To continue to allow qualifying family members to open a Registered Disability Savings Plan (RDSP) account and be the plan holder for an adult whose capacity to enter into an RDSP contract is in doubt, Budget 2023 announces the intention to extend the Qualifying Family Member provisions until December 31, 2026. In addition, the Federal Government intends to expand the terms to include adult siblings of an RDSP beneficiary.

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

To continue to support low-income Canadians, the Federal Government is expanding their free File My Return service, the automatic tax filing system which allows eligible individuals to file their tax return over the phone after answering a series of questions. The program will expand to support two million people by 2025 and starting in 2024 the Government will pilot a new filing service that will automatically match eligible Canadians with the benefits they are entitled to receive.

Budget 2023 introduces the proposed Canadian Dental Care Plan, providing dental coverage for uninsured individuals with an annual family income of less than $90,000, with no co-pays for those with family incomes under $70,000. Coverage would start to be administered by the end of 2023. Amendments will be addressed to allow for the CRA to share taxpayer information with other Departments to get this benefit to those in need.

The Alternative Minimum Tax (AMT) is a form of tax that is levied when taxes payable are less than what is termed “base tax”. The purpose of the minimum tax is to ensure that certain unique transactions and events do not inadvertently lead to a situation where someone is paying far less tax than would be the case under a “normal” filing. 

Currently this minimum “base tax rate” is applied at 15% of the adjusted taxable income. The starting place for adjusted taxable income is regular taxable income, to which a variety of modifications are made, including a basic exemption of $40,000. Budget 2023 proposes to increase the AMT rate from 15% to 20.5%,  and also increase the basic exemption amount from $40,000 to approximately $173,000, indexed annually to inflation. 

Budget 2023 proposed to increase the minimum tax rate applied to this base amount 15% to 20.5% as well as increasing the basic exemption from $40,000 to $173,000. This will have the effect of raising the threshold on what gets taxed by AMT, presumably lowering the chances of having to pay this tax, but with the actual tax amount to be paid increased by 5.5%. 

Other changes that will broaden the AMT:

• inclusion of  100% of capital gains into the base calculation (currently at 80%) 

• Inclusion of 30% of capital gains on donated securities

• Disallowing 50% of certain deductions to the base AMT calculation including but not limited to:

• Employment expenses

• CPP deductions

• Interest and bank charges incurred to earn income from property

• Non-capital loss carryovers

• Moving expenses and childcare expenses

• Allowing 50% of certain non-refundable tax credits to be utilized to reduce the AMT

The net effect of these changes is to increase the amount of adjusted taxable income that will be subject to the AMT.

These AMT changes are proposed to come into effect for taxation years that begin after 2023.

Budget 2023 proposes to amend the Income Tax Act to include lithium from brines as a mineral resource, and to expand the eligibility of the Critical Mineral Exploration Tax Credit (CMETC) to lithium from brines. Eligible expenses related to lithium from brines made after March 28, 2023, would qualify as Canadian exploration expenses and Canadian development expenses. The expansion of the eligibility for the CMETC to lithium from brines would apply to flow-through share agreements entered into after March 28, 2023 and before April 2027.

The Budget introduces new rules to facilitate the use of Employee Ownership Trusts (EOTs) that hold shares for the benefit of a corporation’s employees. EOTs can allow employees to purchase a business without requiring them to pay directly to acquire the shares. An EOT provides owner-managers with another option for business succession planning.

A trust is an EOT if it is a Canadian resident trust and has only two purposes:

1) To hold a controlling interest (i.e. more than 50%) in shares of one or more qualifying businesses for the benefit of the employee beneficiaries of the trust.

AND

2) To make distributions to employee beneficiaries under a distribution formula that could only consider an employee’s length of service, remuneration, and hours worked.

All or substantially all (i.e. 90% or more) of an EOT’s assets must be shares of qualifying businesses. A qualifying business must be a Canadian Controlled Private Corporation (CCPC), having all or substantially all of the fair market value of its assets attributable to assets used in an active business carried on in Canada. If the corporation carries on its business as a partner to a partnership, it will not be considered a qualifying business.

The trustees must all be Canadian residents and are to be elected by the trust beneficiaries at least once every five years. Individuals and related persons who held a significant economic interest in the existing business prior to sale are not able to account for more than 40% of the trustees of the EOT, the directors of a corporation serving as a trustee of the EOT, or directors of any qualifying business of the EOT.

Beneficiaries of the EOT must consist solely of qualifying employees, which does not include employees and their related persons who are significant economic interest holders in the qualifying business.

To accommodate the establishment and use of EOTs, the following existing tax rules are proposed to be modified:

• The five-year capital gains reserve is extended to a ten-year reserve for qualifying business transfers to an EOT.

• An exception to extend the one-year repayment period to 15 years for loans to the EOT from a qualifying business to purchase shares in a qualifying business transfer.

• An exemption to the 21-year deemed disposition rule for EOTs so long that it meets the EOT conditions to qualify as an EOT.

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

The 2022 Fall Economic Statement announced the Government's intention to introduce a 2% tax on the net value of all types of stock repurchases by public corporations in Canada. Budget 2023 provides details on this proposed measure.

The stock repurchase tax would apply to public corporations (i.e. Canadian-resident corporations whose shares are listed on a designated stock exchange), real estate investment trusts, specified investment flow-through (SIFT) trusts*, and SIFT partnerships*.

*Publicly traded entities that would be SIFT trusts or SIFT partnerships if their assets were located in Canada would be subject to the tax.

The tax would be equal to 2% of the net value of an entity's repurchase of equity (meaning shares of the corporation or units of the trust or partnership), defined as the fair market value of equity repurchased less the fair market value of equity issued from treasury. This "netting rule" would apply on an annual basis, corresponding with the entity's taxation year, and would generally take into account all transactions undertaken by an entity that involve the repurchase of equity or the issuance of equity from treasury. Both normal course issuer bids and substantial issuer bids would constitute the repurchase of equity for purposes of the rule.

Certain exceptions to the netting rule are proposed:

• The issuance and cancellation of debt-like preferred shares and units.

• The issuance and cancellation of shares or units in certain corporate reorganizations and acquisitions, including certain amalgamations, liquidations, and share-for-share exchanges.

There is a de minimis rule as the tax would not apply to an entity in a taxation year if it repurchased less than $1 million of equity during that taxation year (prorated for short taxation years). Furthermore, the acquisition of equity by certain affiliates of an entity would be deemed to have been a repurchase of equity by the entity itself. Certain exceptions to this rule are proposed, including those intended to facilitate certain equity-based compensation arrangements, and acquisitions made by registered securities dealers in the ordinary course of business.

The tax would apply in respect of repurchases and issuances of equity that occur on or after January 1, 2024.

Eligible small businesses will see interchange fees from Visa and Mastercard reduced by up to 27% from the existing average rate.

Following recent consultation on various approaches to modernizing and strengthening the General Anti-Avoidance Rule (GAAR) in the Income Tax Act, Budget 2023 proposes to amend the GAAR by introducing the following:

1) Preamble – A preamble would be added to the GAAR in order to help address interpretative issues and ensure that the GAAR applies as intended.

2) Avoidance Transaction – The threshold for the avoidance transaction test in the GAAR would be reduced from a “primary purpose” test to a “one of the main purposes” test.

3) Economic Substance – The proposed amendments would provide that economic substance is to be considered at the “misuse or abuse” stage of the GAAR analysis and that a lack of economic substance tends to indicate abusive tax avoidance. The amendments would also provide indicators for determining whether a transaction or series of transactions is lacking in economic substance.

4) Penalty – A penalty would be introduced for transactions subject to the GAAR, equal to 25% of the amount of the tax benefit. The penalty could be avoided if the transaction is disclosed to the CRA, either as part of the proposed mandatory disclosure rules or voluntarily disclosed to the CRA.

5) Reassessment Period – In consideration of the complexity of many GAAR transactions and the difficulties in detecting them, a three-year extension to the normal reassessment period would be provided for GAAR assessments, unless the transaction had been disclosed to the CRA.

Interested parties are invited to send written representations to the Department of Finance Canada to express their views on these proposals by May 31, 2023.

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 operator are excluded from that definition to ensure that such services generally continue to be subject to the GST/HST.

This measure would apply to a service rendered under an agreement for a supply if any consideration for the supply becomes due, or is paid without becoming due, after March 28, 2023. This measure would also apply to a service rendered under an agreement for a supply if all of the consideration for the supply became due, or was paid, on or before March 28, 2023, except in certain situations, generally being where the following two conditions were both met:

• The supplier did not, on or before March 28, 2023, charge, collect or remit any amount as or on account of tax in respect of the supply.

AND

• The supplier did not, on or before March 28, 2023, charge, collect or remit any amount as or on account of tax in respect of any other supply that is made under the agreement and that includes the provision of a payment card clearing service.

Budget 2023 proposes amendments to the previously enacted Bill C-208 which generally allows for intergenerational transfer of a business. The proposed amendments will restrict the rules in section 84.1 of the Income Tax Act to ensure only genuine intergenerational transfers take place. These are additional conditions that must be met to qualify for the private member’s bill than was enacted previously.

A genuine intergenerational transfer would include a transfer of shares of a corporation (the “Transferred Corporation”) by an individual (other than a trust) (the ”Transferor”) to another corporation (the “Purchaser Corporation”) where the following conditions are met: 

• The shares of the Transferred Corporation are “qualified small business corporation share" or a "share of the capital stock of a family farm or fishing corporation" (both as defined in the Income Tax Act), at the time of the transfer.

AND

• The Purchaser Corporation must be controlled by one or more persons each of whom is an adult child of the Transferor.

Budget 2023 also proposes two alternatives that taxpayers may choose between to implement a genuine intergenerational transfer:

1) An immediate transfer (three-year test) based on arm’s length sale terms.

OR

2) A gradual transfer (five to ten-year test) based on traditional estate freeze characteristics.

Both alternatives would reflect the hallmarks of a genuine intergenerational business transfer. Outlined below are the relevant condition required under each alternative.

Immediate Business Transfer (Three-Year Test)

1. Transfer of Control of the Business: Parent immediately transfers majority of voting shares and factual control, and a transfer of the balance of voting shares within 36 months.

2. Transfer of Economic Interests in the Business: Parent immediately transfers a majority of the common growth shares, and transfer the balance of common growth shares within 36 months

3. Transfer of Management of the Business: Parent transfers management of the business to their child within a reasonable time based on the particular circumstances (with a 36-month safe harbour).

4. Child Retains Control of the Business: Child (or children) retains legal control for a 36-month period following the share transfer.

5. Child Works in the Business: At least one child remains actively involved in the business for the 36-month period following the share transfer.

Gradual Business Transfer (Ten-Year Test)

1. Transfer of Control of the Business: Parent immediately transfers the majority of voting shares and a transfer of the balance of voting shares within 36 months.

2. Transfer of Economic Interests in the Business: Parent immediately transfers a majority of the common growth shares, and transfers the balance of common growth shares within 36 months. In addition, within 10 years of the initial sale, parent reduces the economic value of their debt and equity interests in the business to:

a. 50% of the value of their interest in a farm or fishing corporation at the initial sale time, or

b. 30% of the value of their interest in a small business corporation at the initial sale time.

3. Transfer of Management of the Business: Parents transfer management of the business to their children within a reasonable time based on the particular circumstances (with a 36-month safe harbour).

4. Child Retains Control of the Business: Child (or children) retains legal control for the greater of 60 months or until the business transfer is completed.

5. Child Works in the Business: At least one child remains actively involved in the business for the greater of 60 months or until the business transfer is completed.

Common growth shares are defined to include any shares other than shares of a specified class as defined in subsection 256(1.1) of the Income Tax Act. The meaning of "child" for these purposes would include grandchildren, step-children, children-in-law, nieces and nephews, and grandnieces and grandnephews.

Where the above proposed conditions are met, an extended ten-year capital gains reserve is available to the Transferor.

Budget 2023 also proposes relieving rules for subsequent arm's length share transfers or upon the death or disability of a child as well as to remove the limit on the value of the shares transferred.  

The Transferor and child (or children) would be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child (or children) would be jointly and severally liable for any additional taxes payable under section 84.1 of the Income Tax Act by the Transferor. The limitation period for reassessing the Transferor's liability for tax that may arise on the transfer is extended by three years for an immediate business transfer and by ten years for a gradual business transfer.

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

Budget 2023 proposes to introduce various measures to encourage a clean economy.  Some of these measures include expanding eligible activities for the various credits or introducing new refundable investment tax credits equal to 30% of the capital cost of eligible property associated with eligible activities related to clean technology manufacturing and processing and critical mineral extraction and processing.

Eligible property includes depreciable property, such as machinery and equipment and industrial vehicles, that is used all or substantially all for Eligible Activities.

Examples of eligible activities include:

• Manufacturing certain renewable energy equipment, nuclear energy equipment, nuclear fuel rods, electrical energy storage equipment, zero-emissions vehicles.

• Processing or recycling nuclear fuels and heavy rods.

• Extracting and certain processing activities related to six critical minerals (i.e., lithium, cobalt, nickel, etc.) essential for clean technology supply chains.

This investment tax credit will apply to property that is acquired and becomes available for use on or after January 1, 2024, and will be gradually phased out starting with property that becomes available for use after 2031 as follows: 20% in 2032, 10% in 2033, and 5% in 2034.

Businesses that claim the Investment Tax Credit for Clean Technology Manufacturing cannot claim the other investment tax credits (i.e. Clean Hydron Investment Tax Credit CHITC, Clean Technology Investment Tax Credit, etc.) on property that is eligible for more than one of these credits.

Budget 2023 proposes to introduce the Clean Hydrogen Investment Tax Credit (CHITC) based on a previous announcement in the 2022 Fall Economic Statement. This measure would apply to property available for use on or after March 28, 2023.

Businesses that claim the CHITC cannot claim other investment tax credits (i.e. Clean Technology Investment Tax Credit, Carbon Capture Utilization Storage Tax Credit, etc.) on property that is eligible for more than one of these credits.

Credit Rates

The CHITC will be a refundable tax credit at a credit rate that varies based on the assessed carbon intensity (CI) of the hydrogen that is produced as follows:

• 40% for a CI of less than 0.75kg

• 25% for a CI greater than or equal to 0.75kg, but less than 2kg

• 15% for a CI greater than or equal to 2kg, but less than 4kg

The CHITC that can be claimed will be at the applicable credit rate when the Eligible Equipment becomes available for use before 2034. The applicable credit rate will be reduced by 50% for Eligible Equipment that becomes available for use in 2034 and will be fully phased out after 2034.

Eligible Projects

To be eligible for the CHITC, projects must produce all, or substantially all, hydrogen through their production process (determined without reference to any produced CO2, that is captured and stored or used, or excess electricity that may be sold).

The CHITC will be available on the cost of purchasing and installing Eligible Equipment (see section below) for projects that produce hydrogen from electrolysis or natural gas if the emissions are abated using carbon capture, utilization, and storage (CCUS).

The Government will continue to review the eligibility of other low-carbon hydrogen production pathways for this tax credit on a going-forward basis.

The taxpayer needs to assess the project’s carbon intensity, and the assessment must be submitted to the government for verification. The budget advises that more specific guidance on how to assess the carbon intensity of a project will be available in the future. 

Eligible Equipment

Eligible Equipment must be made available for use in Canada and includes, but is not limited to:

Equipment used all, or substantially all, to produce hydrogen through electrolysis of water

Equipment used all, or substantially all, to produce hydrogen through natural gas reformation with emissions abated using CCUS (excluding equipment described in Class 57 or Class 58 that is eligible for the CCUS Tax Credit).

Oxygen production equipment used for hydrogen production with emissions abated using CCUS.

Equipment that produces heat and/or power from natural gas or oxygen.

Other expenses related to a hydrogen production project, including feasibility studies, front-end engineering design studies, and operating expenses would not be eligible for the CHITC.

Equipment required to convert clean hydrogen to clean ammonia may be eligible for the CHITC at the lowest credit rate (15%). The Government will provide a description of eligible clean ammonia equipment and specific conditions in the future.

To learn more about CHITC regulations including verification and labour requirements and compliance, refer to the 2023 Federal Budget Supplementary Information.

Budget 2023 provides more details with respect to the “Labour Requirements” announced in the 2022 Fall Economic Statement to qualify for certain investment tax credits. The Government also proposes to have these requirements apply to the proposed Clean Electricity Investment Tax Credit.

The Labour Requirement consists of two requirements:

1. A prevailing wage

2. An apprenticeship

It applies to workers whose duties are primarily manual or physical in nature (i.e. labourers and tradespeople), and engaged in project elements subsidized by the respective investment tax credit (i.e. CHITC, CTITC, etc.).

The prevailing wage requirement requires all covered workers to be compensated at a level equal to or greater than the relevant wage plus the substantially similar monetary value of benefits and pension contributions, (converted into an hourly wage format) as specified in an “eligible collective agreement.”

An example of an eligible collective agreement would be the most recent multi-employer collective bargaining agreement between a trade union and a group of employers who are accredited to bargain together and be bound by the same agreement.

The apprenticeship requirement requires at least 10% of the total labour hours performed by covered workers engaged in subsidized project elements in a given taxation year to be performed by registered apprentices, subject to restrictions imposed by applicable labour laws and collective agreements.

Businesses pay corrective remuneration to workers (including interest) and penalties to the Receiver General to resolve non-compliance and be deemed to have satisfied these requirements. The Government will announce further details of this mechanism in the future.

These requirements would apply to work performed on or after October 1, 2023. However, an exemption from this requirement may be available under the Clean Technology Investment Tax Credit in respect of acquisitions of zero-emissions vehicles and low-carbon heat equipment.

Budget 2022 proposed a refundable investment tax credit for businesses that incur eligible CCUS expenses starting on January 1, 2022. As a result of consultations held during the summer of 2022, Budget 2023 proposes additional design details for the CCUS Tax Credit, which will be included in legislative proposals to be released in the coming months.

The Government also intends to apply the Labour Requirements to the CCUS Tax Credit and will announce further details in the future.

The new measures below will apply to eligible expenses incurred after 2021 and before 2041.

Dual Use Equipment

Budget 2023 proposes to allow dual-use equipment that produces heat and/or power or uses water that is primarily used for CCUS to be eligible for the CCUS Tax Credit. This equipment would be treated as capture equipment and the cost of the equipment would be eligible on a pro-rated basis in proportion to the expected energy balance or material balance supporting the CCUS process over the first 20 years of the project.

Addition of British Columbia as an Eligible Jurisdiction

Budget 2023 also proposes to add British Columbia to the list of eligible jurisdictions for dedicated geological storage, applicable to expenses incurred on or after January 1, 2022.

Validating Concrete Storage Requirement

Budget 2022 required the process for using and storing CO2 in concrete to be approved by Environment and Climate Change Canada before it would be considered an eligible use. Budget 2023 proposes to require taxpayers to have their technology validated by a qualified third-party, such as a professional or organization accredited as a “verification body”, instead of seeking approval from Environment and Climate Change Canada. A third-party validation statement must be received before any investment tax credits relating to CO2 storage in concrete can be claimed.

Interactions with Other Federal Tax Credits

Businesses that claim the CCUS Tax Credit cannot claim the other investment tax credits (i.e. CHITC, CTITC, etc.) on property that is eligible for more than one of these credits.

Refurbishment Costs

Budget 2023 proposes that CCUS Tax Credits related to eligible refurbishment costs (Refurbishment ITCs) incurred once the project is operating to be calculated based on an average of the expected eligible use ratio for the five-year period in which the costs are incurred and each subsequent period over which they contribute to the useful life of the project. Total eligible refurbishment costs over the first 20 years of the project would be limited to a maximum of 10% of the total pre-operational costs eligible for the CCUS Tax Credit and would not be eligible for costs incurred after the end of the 20-year period.

Recovery of Refurbishment ITCs

Refurbishment ITCs would generally be recovered in the same manner as credits claimed during the construction phase of the project, with some adjustments to reflect a shortened recovery period.

The Refurbishment ITCs amount paid will re-calculated if the portion of CO2 going to ineligible uses in a period is 5% higher than the weighted average set out in the project plan for that period. Refurbishment ITCs may also need to be recovered if the 10% minimum eligible use threshold was not met in any year during a period, such that these ITCs could not be claimed in any subsequent period.

The 2022 Fall Economic Statement proposed the Clean Technology Investment Tax Credit (CTITC) as a refundable tax credit equal to 30% of the capital cost of eligible property that has been acquired and becomes available for use on or after the March 28, 2023.

Budget 2023 proposes to expand eligibility of the CTITC to include geothermal energy systems that are eligible for Class 43.1, such as equipment used primarily for the purpose of generating electrical or heat energy solely from geothermal energy. Equipment used for geothermal energy projects that co-produce oil, gas or other fossil fuels will not be eligible.

Budget 2023 also proposes to modify the phase out of the CTITC. It will remain at 30% for eligible property that becomes available for use in 2032 and 2033 before being reduced to 15% for 2034 and being unavailable after 2034.

Budget 2021 introduced temporary measures to reduce corporate income tax rates for qualifying zero-emission technology manufacturers by 50% with the reduced tax rate to be gradually phased out starting in taxation years that begin in 2029 and fully phased out for taxation years that begin after 2031.]

For taxation years beginning after 2023, Budget 2023 proposes to expand the eligible activities for this measure to include the following nuclear manufacturing and processing activities:

• Manufacturing of nuclear energy equipment

• Processing or recycling nuclear fuels and heavy water

• Manufacturing of nuclear fuel rods.

Budget 2023 also proposes to extend the availability of the reduced rates by three years, so the phase-out would start in taxation years that begin in 2032 and be fully phased out for taxation years that begin after 2034.

Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2%, for one year only, as of April 1, 2023. The excise duty rates on these products as of April 1, 2023, are summarized below.

• Beer $35.516¹

• Spirits $13.303²

• Wine $0.0702³

^{1 Rate per hectolitre of beer. Reduced rates apply for domestic brewers to the first 75,000 hectolitres of beer brewed in Canada each calendar year.}

^{2 Rate per litre of absolute ethyl alcohol. Reduced rates apply to spirits containing not more than 7 per cent alcohol by volume.}

^{3 Rate per litre of wine. Reduced rates apply to wine containing not more than 7 per cent alcohol by volume.}

Excise duty on cannabis products is generally remittable on a monthly basis. Budget 2023 proposes to allow all licensed cannabis producers to remit excise duties on a quarterly basis instead, starting from the quarter beginning on April 1, 2023.

Budget 2023 proposes to increase Air Travellers Security Charge (ATSC) rates by 32.8%. The proposed rates will apply to air transportation services that include a chargeable enplanement on or after May 1, 2024, for which any payment is made on or after that date. The proposed rates are summarized below: