The 2023 Federal Budget (the “Budget”) was delivered on March 28, 2023, and the 2023 Ontario Budget was announced on March 23, 2023. This article provides our summary of some of the tax measures proposed in the two recently announced budgets. Stay tuned for future articles with a more in-depth analysis of some of the proposed changes.
Overall, the federal budget does not change the federal personal or corporate tax rates. One major focus of the Budget is to encourage investment in clean energy. The Budget also proposed to amend the alternative minimum tax rules as well as the intergenerational business transfers introduced in Bill C-208.
Moreover, the Ontario budget also does not change the Ontario personal or corporate tax rates and proposed a new Ontario Made Manufacturing Investment Tax Credit.
2023 Federal Budget – Corporate/Business Tax Measures
General Anti-Avoidance Rule (“GAAR”)
The Budget proposed to strengthen GAAR to limit aggressive tax planning and avoidance transactions implemented by individuals and businesses. The amendments include addressing mixed purpose transactions to prevent abusive avoidance and the introduction of the economic substance test which considers the spirit and purpose of the transactions for GAAR analysis.
Clean Energy Incentives
The Budget proposed several incentives to encourage the use of clean energy (discussed below). In a situation where a particular property is eligible for more than one of the clean energy and technology tax credits, businesses are only allowed to claim one credit between the clean hydrogen investment tax credit, the investment tax credit for clean technologies, or the investment tax credit for clean technology manufacturing. However, multiple tax credits may be available for the same project in a situation where the project includes different types of eligible property.
Zero-emission Technology Manufacturing
The Budget proposed to expand the eligible activities that qualify for the tax rate reduction for zero-emission technology manufacturers. The eligible activities will be amended to include certain nuclear manufacturing and processing activities such as the manufacturing of nuclear energy equipment or the processing of nuclear fuels and heavy water. Those activities will qualify for a 50% reduction on the corporate income tax rate for taxation years beginning after 2023. The rate reduction will be phased out starting in 2032 (instead of 2029) and will be fully eliminated in 2034.
Investment Tax Credit for Clean Electricity
The Budget has introduced a refundable clean electricity investment tax credit of 15% for eligible investments in certain electricity generation activities and equipment. Both new projects and the refurbishment of existing facilities will be eligible.
Clean Hydrogen Investment Tax Credit
The Budget also introduced a new refundable clean hydrogen investment tax credit up to a maximum rate of 40% for the eligible project costs that generate all or principally all hydrogen through their production process. This investment tax credit would apply to property that is purchased and becomes available for use on or after March 28, 2023.
Clean Technology Investment Tax Credit – Geothermal Energy
The Budget also expands the refundable 30% clean technology investment tax credit to include geothermal energy systems that are eligible for the capital cost allowance Class 43.1. The modification of the clean technology investment tax credit applies to property that is acquired and becomes available for use on or after March 28, 2023 where the property has not been used for any purpose before its acquisition.
Investment Tax Credit for Clean Technology Manufacturing
The Budget introduced a new refundable investment tax credit for machinery and equipment used in clean technology manufacturing and processing, and critical mineral extraction and processing, for up to 30% of the capital cost of eligible depreciable property that is used all or substantially all for eligible activities. The credit applies to property that is acquired and becomes available for use on or after January 1, 2024, and will be phased out starting in 2032 and will be fully eliminated in 2034.
2023 Federal Budget – Personal Tax Measures
Employee Ownership Trusts (“EOTs”)
The Budget introduced several new rules to make EOTs more attractive and give retiring employers more incentive to sell to their employees. The Budget defines a qualifying business transfer to be a disposition of shares of a corporation to an EOT, or to a CCPC that is controlled and wholly owned by an EOT, where the EOT acquires control of the corporation at the time of acquisition.
The Budget proposed that on a qualifying business transfer, the five-year capital gain reserve will be extended to a ten-year reserve for qualifying business transfers to an EOT. The 21-year deemed deposition rule on trust will be exempt for EOTs. Moreover, if an amount is loaned from a qualifying business to an EOT to purchase shares in a qualifying business transfer, the repayment period for such a shareholder loan will be extended from 1 year to 15 years.
To qualify as an EOT, the trust must hold a controlling interest in the shares of one or more qualifying businesses, all or substantially all of the trust’s assets must be shares of qualifying businesses, and individuals and their related persons who held a significant economic interest in the existing business prior to the sale must not account for more than 40% of the trustees of the trust.
Bill C-208 Intergenerational Transfer of Business
The Budget introduced additional conditions to ensure that only genuine intergenerational business transfers are eligible for the intergenerational transfer rules introduced through Bill C-208. Taxpayers may choose to rely on one of two transfer options provided they meet certain conditions:
- an immediate intergenerational business transfer (three-year test) based on arm’s length sale hallmarks, including requirements on the timeline for the transfer of legal and factual control, transfer of common shares, transfer of the management of the business, as well as the requirement for the child to remain actively involved in the business; or
- a gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics, including requirements on the timeline for the transfer of legal control, transfer of common shares and reduction of the parent’s economic interest in the business, transfer of the management of the business, as well as the requirement for the child to remain actively involved in the business
The transferor and the child (or children) will be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child (or children) will be jointly and severally liable for any additional taxes payable if the transfer does not meet the conditions.
Budget 2023 also proposes to expand the definition of “child” for these purposes to include nieces, nephews, grandnieces, and grandnephews in addition to children, grandchildren, stepchildren, and children-in-law. Additionally, the Budget provides a ten-year capital gains reserve for share transfers that qualify under the immediate or gradual business transfer tests. These measures are proposed to apply to transactions that occur on or after January 1, 2024.
Alternative Minimum Tax (“AMT”) for High-Income Individuals
The AMT provision prevents high-income individuals from taking advantage of tax incentives and paying little or no tax. Theoretically, the tax liability is calculated under the regular method and AMT method, and AMT will be triggered if the amount is higher than the result from the regular method.
The Budget has proposed the below changes which will impact the calculation of AMT:
- Increase to the AMT exemption from $40,000 to approximately $173,000.
- Increase the AMT rate from 15% to 20.5%.
- Broaden the base on which the AMT is calculated, including the increase of AMT capital gains inclusion rate from 80% to 100%, the inclusion of 30% of the AMT capital gains on donations of publicly listed securities, and the denial of 50% of certain deductions and expenses.
- Only 50% of non-refundable tax credits would be allowed to reduce the AMT, subject to certain exceptions.
The grocery rebate would provide eligible couples with two children up to an extra $467 delivered through the Canada Revenue Agency as soon as possible after the legislation passes. Single Canadians without children can qualify for an extra $234, while seniors can get an average of $225.
The benefit will be rolled out through the GST rebate system by doubling of GST rebate extended for lower-income Canadians.
Registered Education Savings Plan (RESP)
The Budget will allow RESP to permit Educational Assistance Payments withdrawals of up to $8,000 (previously $5,000) in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs, and up to $4,000 (previously $2,500) per 13-week period for beneficiaries enrolled in part-time programs.
Deduction for Tradespeople
The Budget proposed to increase the employment deduction for tradespeople’s tools from $500 to $1,000.
2023 Ontario Budget – Corporate/Business Tax Measures
Ontario Made Manufacturing Investment Tax Credit
The Ontario Budget announced a new 10% refundable corporate tax credit available to CCPCs that have a permanent establishment in Ontario and make qualifying capital investments in certain buildings, machinery and equipment for use in manufacturing or processing.
The investment limit is up to a limit of $20 million in a taxation year for an associated group. As a result, the eligible corporation may receive a tax credit of up to $2 million a year.
The credit will apply for qualifying investments that are available for use on or after March 23, 2023.
For a more detailed discussion surrounding the changes proposed by the 2023 Budget and 2023 Ontario Budget and how they impact you or your business, please reach out to our team of tax experts.
Mandeep Khosa, CPA, CA
Partner – Tax
Direct: (905) 780-3117
Elise Liu, CPA, CA, MMPA, TEP
Senior Manager – Taxation