Federal Budget 2023: A Familiar Pattern
Consistent with the last few years, in the weeks leading up to the Federal government’s 2023 budget (“Budget 2023”), clients and practitioners alike expressed trepidation about anticipated changes that would target successful individuals and families, including a possible increase to the capital gains inclusion rate or the introduction of a wealth tax. Although we are relieved to see no such measures in Budget 2023, released on Tuesday, March 28th, we are not surprised by the government’s now-familiar pattern of releasing draft legislation that is high on scare factor and low on detail. In particular, it appears that the underlying intention of the proposed amendments to the general anti-avoidance rule (“GAAR”), described below, is to dissuade taxpayers from undertaking any form of tax planning, no matter how legitimate. We oppose this treatment of Canadian citizens by their own government and remain committed to servicing our clients’ tax needs, both in the implementation of planning that is well within the boundaries of the Income Tax Act (Canada) (the “Act”) and in the resolution of disputes with the Canada Revenue Agency (“CRA”).
Tax proposals that may be of particular interest to our clients include the following:
- Alternative Minimum Tax (“AMT”) for High-Income Individuals: The purpose of the AMT regime is to apply an alternate calculation of tax in circumstances where taxpayers would otherwise have minimal taxable income for a particular year due to the availability of certain deductions and credits under the ordinary provisions of the Act. For instance, AMT may apply to a taxpayer who claims their lifetime capital gains exemption (“LCGE”) on the sale of a business or family farm or to a taxpayer who receives most of their income in the form of dividends.
Budget 2023 proposes a number of changes to the AMT regime, specifically targeting higher-income individuals. A laundry list of deductions and credits will now be subject to a 50% reduction, or disallowed entirely, in calculating income for AMT. For the purposes of AMT, capital gains currently have an 80% inclusion rate; under the proposals, this will increase to 100%. By contrast, capital losses and allowable business investment losses have a 50% inclusion rate. Further, the calculation of income for AMT will now include 100% of the benefit associated with employee stock options and 30% of capital gains realized on donations of publicly listed securities. The latter is subject to a 0% inclusion rate under the ordinary provisions of the Act, thereby encouraging taxpayers to make charitable donations—apparently the option for taxpayers to contribute to our society through personal philanthropy and to offset their tax burden accordingly is now offensive in the government’s estimation.
In addition to the above changes in calculating income for AMT purposes, Budget 2023 proposes to raise the AMT exemption amount to approximately $173,000, indexed to inflation, and to increase the AMT rate from 15% to 20.5%. These changes to the AMT regime are proposed to come into effect in 2024.
Follow-up to Bill C-208: Bill C-208 was introduced in the summer of 2021, with the aim of ensuring that the sale of a business to family members qualified for the same beneficial tax treatment as a sale to unrelated third parties. In particular, Bill C-208 allowed a parent to claim their LCGE on any gains arising on the transfer of a business to an adult child. However, rather than limiting this beneficial tax treatment to genuine intergenerational business transfers, the imprecise wording of the Bill created unanticipated planning opportunities whereby taxpayers could transfer shares to their children and claim the LCGE without relinquishing control of the business. The CRA has conceded that these opportunities are available under the Act, as amended by Bill C-208, until such time as the Act is further amended to restrict such planning.
Budget 2023 seeks to do just that. The proposed legislation imposes further requirements on intergenerational business transfers occurring after January 1, 2024, including a requirement for either immediate or staged transfers of control of the business, in order to be able to claim the LCGE. As a result, the opportunities introduced by Bill C-208 almost two years ago will be limited to the genuine intergenerational business transfers to which they were originally intended to apply.
Tax On Repurchases of Equity by Public Corporations: In the 2022 Fall Economic Statement, the government announced a proposed tax on all types of share repurchases by public corporations in Canada. Budget 2023 provides additional details: the proposed 2% tax applies on the net value of shares repurchased by an entity listed on a designated stock exchange (including real estate investment trusts, specified investment flow-through trusts, and specified investment flow-through partnerships) after January 1, 2024. Certain exceptions are provided with respect to debt-like preferred shares, units with a fixed dividend or redemption entitlement, and the issuance and repurchase of shares in the course of certain reorganizations (e.g., amalgamations, liquidations, and share-for-share exchanges). The 2% tax also does not apply to repurchases of equity totaling less than $1 million in a taxation year.
Amendments to the General Anti-Avoidance Rule: Following up on an August 9, 2022 consultation paper on modernizing and strengthening the GAAR, Budget 2023 includes draft legislation detailing the proposed amendments. The government is seeking public comments on the draft legislation until May 31, 2023, following which revised legislation and the date of application will be released.
In general, the GAAR is intended to prevent abusive tax avoidance transactions but is not supposed to interfere with legitimate transactions. Under the current provisions of the Act, when the GAAR is found to apply, any tax benefit created through the impugned planning is denied—tax avoided is required to be paid, generally with assessed interest. The proposed legislation intends to broaden the GAAR’s application through various means, including by lowering the threshold for the GAAR to apply, extending the period in which the CRA can reassess a tax return for purposes of the GAAR by an additional 3 years, and introducing a significant automatic penalty where the GAAR is found to apply.
Although the draft legislation expressly acknowledges “taxpayers’ need for certainty in planning their affairs,” which must be balanced with the government’s “responsibility to protect the tax base and the fairness of the tax system,” these amendments to the GAAR introduce much less certainty for taxpayers. The proposed legislation, together with the confirmation in Budget 2023 of the government’s intention to proceed with various previously announced tax measures, is nothing short of an attempt to discourage tax planning of any kind. Despite these efforts, we are unwavering in our belief that every Canadian citizen is entitled to lawfully organize their affairs to reduce their tax payable. We will continue to assist our clients in this regard, so they can continue to contribute to our economy and society through entrepreneurship, investment, philanthropy, and countless other ways.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.