Personal tax measures

Alternative Minimum Tax (AMT)

There are no changes to personal or corporate income tax rates or capital gain inclusion rates. However, the budget focuses on wealthy taxpayers and has revised the Alternative Minimum Tax (AMT). AMT is a parallel tax calculation that prevents high-income earners and trusts from paying little or no tax as a result of certain tax incentives, such as claiming tax deductions and credits. You pay the AMT or regular tax, whichever is highest.

The AMT changes that stood out to us:

• Increase the AMT exemption from $40,000 to the start of the fourth federal tax bracket. In 2023, that bracket is $165, 430 and expected to be about $173,000 in 2024. The exemption amount would be indexed annually.

• The current AMT tax rate is 15% and the budget is proposing to increase to 20.5%.

• Increase the capital gains inclusion rate only for AMT purposes from 80 percent to 100 percent. Currently, the capital gains inclusion rate under the regular tax system is 50 percent.

• Include 30 percent of capital gains realized on the donation of publicly listed securities that are eligible for the zero percent inclusion rate under the regular tax system.

• Disallowing 50 percent of the following deductions (this list is not exhaustive):

  • Interest and carrying charges incurred to earn income from property

  • Deduction for limited partnership losses of other years

  • Non-capital loss carryovers

  • Employment expenses, other than those incurred to earn commission income

  • Deductions for Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Provincial Parental Insurance Plan contributions

  • Moving expenses

  • Child-care expenses

“The Grocery Rebate” (GST rebate)

Since many Canadians are worried about higher prices on essential groceries, the Budget proposes to introduce a one-time GST rebate. For low-and modest-income Canadians and families, the GST rebate will provide eligible couples with two children with up to an extra $467, single Canadians without children with up to an extra $234, and seniors with an extra $225, on average.

To receive the full amount for the 2022-23 benefit year, your family income must be less than $39,826 in 2021. Above this income level, the rebate is gradually reduced to a full phase-out.

The GST rebate will be delivered through a one-time payment from the Canada Revenue Agency (CRA) as soon as the legislation passes.

Canadian Dental Care Plan

The Budget proposes a new Canadian Dental Care Plan to provide dental coverage for uninsured Canadians with annual family income of less than $90,000, with no co-pays for those with family incomes under $70,000. The plan would begin providing coverage by the end of 2023. Details on eligible coverage will be released later this year.

The Budget also proposes to introduce legislation to compel employers and employer pension plans to report dental coverage offered to their employees and plan members through T4/T4A reporting. This requirement would ensure the new Dental Care Plan is limited to Canadians with an unmet need for dental care who don’t have access to private insurance.

Registered Plans

The First Home Savings Account (FHSA) was announced in the 2022 Budget and will provide first-time home buyers the ability to save up to $40,000 on a tax-free basis towards the purchase of a home. Contributions are tax-deductible and withdrawals, including investment income are non-taxable.

The Budget confirmed institutions may be able to offer the new FHSA as of April 1, 2023. These new accounts are available at RBC Dominion Securities April 3, 2023.

Registered Education Savings Plans (RESPs)

Increasing Educational Assistance Payment withdrawal limits

• An RESP is a tax-deferred savings vehicle designed to help families save for the post-secondary education of their children.

• When an RESP beneficiary is enrolled in an eligible post-secondary program, government grants and investment income can be withdrawn from the plan as an Educational Assistance Payment (EAP) in order to assist with education-related expenses. EAPs are taxable income for the beneficiary.

• There are limits on the amount of EAPs that can be withdrawn in the first 13 consecutive weeks of a program, which for many students is the first term of enrollment. These withdrawal limits have not increased in 25 years. The budget proposes to increase limits on these RESP withdrawals from $5,000 to $8,000 for full-time students, and from $2,500 to $4,000 for part-time students.

Allowing divorced or separated parents to open joint RESPs

• Currently, only spouses or common-law partners can open an RESP as joint subscribers. Parents who opened a joint RESP prior to their divorce or separation can maintain this plan afterwards, but they are unable to open a new joint RESP with a different promoter.

• The Budget proposes to allow divorced or separated parents to open joint RESPs for one or more of their children, or to move an existing joint RESP to another promoter.

Registered Disability Savings Plans

RDSPs are designed to support the long-term financial security of a beneficiary who is eligible for the disability tax credit. Up to $200,000 can be contributed to the plan and tax sheltered until withdrawn.

Many RDSPs are established by parents for their minor children, challenges arise when the child reaches the age of majority and whose contractual competence is in doubt. The RDSP plan holder must be that individual’s guardian or legal representative as recognized under provincial or territorial law. However, establishing a legal representative can be a lengthy and expensive process.

A temporary measure, which is set to expire on Dec. 31, 2023, the government has allowed a ‘qualifying family member’—such as a parent, a spouse or a common-law partner—to open an RDSP and to be the plan holder for an adult whose capacity to enter into an RDSP contract is in doubt, and who does not have a legal representative.

The Budget proposes to extend this ‘qualifying family member’ measure by three years, to Dec. 31, 2026. A QFM who becomes a plan holder before the end of 2026 can remain the plan holder after 2026.

The Budget also proposes to broaden the definition of a ‘qualifying family member’ to a brother or sister of the beneficiary who is 18 years of age or older.

Tradespeople’s tool expenses

To help tradespeople such as electricians, painters and plumbers invest in the equipment they need, the Budget proposes to double the maximum employment deduction for tradespeople’s tools from $500 to $1,000, effective for 2023 and subsequent taxation years.

Corporations
 

Intergenerational share transfers

A surplus strip is designed to distribute corporate surplus from a corporation at capital gains rates, rather than at the higher rates for Canadian dividends.

This discourages a shareholder from selling shares to a family member. When a business owner sold shares of an incorporated business to a non-arm’s length corporation, the seller was taxed as if they received a dividend rather than a capital gain. The seller ended up paying more tax than if the shares were sold to an arm’s length third party.

In June 2021, Bill C-208 was passed which introduced an exception to the surplus stripping rules to facilitate genuine intergenerational business transfers.

The proposed conditions to qualify as a genuine transfer include the following:

1. Transfer of control of the business

2. Transfer of economic interest in the business

3. Transfer of management of the business

4. Child retains control of the business

5. Child works in the business

 

The new rules would come into effect for transactions that occur starting in 2024.

 

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