Canada’s 2023 Budget has introduced some new proposals intended to help you and your family combat rising inflation. Issues such as a grocery rebate, changes to registered accounts, and a national dental care plan. We are here to summarize the key points that should interest you.
The federal government’s yearly budget speech marks the introduction of new policies, tax measures and fiscal updates intended to help Canadians. Here’s a summary of key points from Canada’s 2023 Budget that could impact you and your family’s personal finances during this high-inflation economic climate. You can expect most if not all of them to be implemented before the next budget is tabled.
Finance Minister Chrystia Freeland
Canada’s 2023 Budget introduces a one-time grocery rebate
Due to the current high inflation and its impact on many Canadians at grocery stores, Canada’s 2023 Budget will introduce a one-time grocery rebate that would be payable to recipients of the goods and services (GST) tax credit. The quarterly GST credit—the remaining payments for 2023 are in April, July and October—is payable to low-income and modest-income taxpayers based on their previous year’s tax return.
The new grocery rebate would be issued as soon as the legislation has passed. The rebate would provide couples with two children with up to $467, single Canadians without children up to $234, and seniors with an average of $225. Although the rebate is tax-free, it’s relatively small and only payable to current GST tax credit recipients.
Dental care for uninsured Canadians has been expanded
Canada’s 2023 Budget also has a national dental care plan which will see implementation in phases over the next fiscal years, with seniors and minor children being the first beneficiaries. Full implementation is expected by 2025. The plan will replace a temporary dental benefit, announced last year, for uninsured children under the age of 12.
Coverage under the plan will be means-tested and will apply to families with incomes below $90,000. There will be no co-pays for uninsured families with incomes below $70,000, and the Canada Revenue Agency (CRA) will share tax information with Health Canada and Employment and Social Development Canada to determine qualification. Also announced: Employers will begin reporting group dental coverage on T4 slips.
Canada’s 2023 Budget addressed post-secondary education costs with RESP enhancements
The Canadian post-secondary student’s pleas were heard as Canada’s 2023 Budget addressed Registered Savings Plans(RESPs). These are savings plans that are designed to be used to save for a child’s post-secondary education. Currently, there are restrictions on the withdrawal of Educational Assistance Payments (EAPs) from an RESP during the first 13 consecutive weeks of enrollment at a university, college or trade school.
Canada’s 2023 Budget proposes increasing the maximum initial EAP withdrawal from $5,000 to $8,000 for full-time students and from $2,500 to $4,000 for part-time students.
These increases are in recognition of the rising cost of post-secondary education, and they would take effect this year. However, there will be no changes to the annual or lifetime limits for the Canada Education Savings Grant (CESG) or the lifetime limit for RESP contributions. So, the increases relate only to withdrawals, not government grants or contributions.
Separated or divorced parents cannot become joint subscribers for an RESP account—only spouses or common-law partners can. The federal budget proposes to allow separated or divorced parents to open new RESPs as joint subscribers or to move an existing RESP to a new financial institution as joint subscribers despite their marital status.
Changes are coming to your RDSPs
The federal government’s 2023 budget also addressed Registered Disability Savings Plans(RDSPs), these are tax-deferred accounts available to taxpayers who qualify for the disability tax credit. The government matches RDSP contributions with grants and bonds.
An RDSP for a minor child can be set up with very little complexity. However, a taxpayer who has attained the age of majority and lacks the capacity to enter into a contract requires a legal representative or guardian to open an RDSP on their behalf. This arduous process can inhibit some people from benefiting from the account.
Since 2012, qualifying family members, namely a parent, spouse or common-law partner of the person with disabilities, have been able to open an RDSP for a beneficiary who lacks legal representation. This temporary measure is set to expire on Dec. 31, 2023, and the budget proposes extending the deadline to Dec. 31, 2026. The government also intends to expand the qualifying family member provision to include adult siblings of the RDSP beneficiary.
An RDSP can provide a return of up to 300% on contributions when you consider matching grants and bonds from the federal government, plus more from provincial and territorial incentives. The account also grows tax-deferred, and future withdrawals do not impact government means-tested benefit calculations. As a result, the RDSP is a fantastic savings tool for a person with disabilities. Canada’s 2023 Budget impressively addressed this situation and recognized that extending this temporary measure and expanding the number of people who can open an RDSP account could help many more Canadians take advantage of it.
Canada’s 2023 Budget hasn’t made any changes to the Capital gains tax
Some analysts had anticipated an increase in the capital gains inclusion rate, which has held steadfast at 50% for over 2 decades. Despite the speculation, the proportion of a taxable capital gain remains unchanged. Half of your capital gains will remain tax-free.
However, there is some relief for high-income earners. The alternative minimum tax (AMT) which is currently in place, applies an alternative tax calculation to a taxpayer’s income. The formula returns certain tax deductions, credits and exemptions and applies a flat tax rate to see if the actual tax payable is lower than the alternative calculation. If it is, the taxpayer must pay the AMT for the year instead.
This tax can usually be carried forward up to seven years and claimed in future years. Basically, the AMT is meant to discourage taxpayers from claiming too many tax-preferred items, especially in multiple years.
Canada’s 2023 Budget has proposed to raise the federal AMT rate from 15% to 20.5%, thus increasing the minimum tax payable. It will also expand the add-backs for certain deductions, including employment expenses, interest and carrying charges, limited partnership losses, and non-capital-loss carry-forwards. Only 50% of non-refundable tax credits will be calculated for the AMT, and 100% of the dividend tax credit will be excluded. A percentage of capital gains, stock option income, and capital gains on donated securities will be added back to income in the new AMT calculation.
Canada’s 2023 Budget also proposes an increase to the income exception from the current $40,000 to an estimated $174,000 (the commencement of the fourth income tax bracket) by 2024, so that the stricter AMT calculations will apply primarily to higher-income taxpayers with lots of tax deductions, credits and exemptions. As a result, the AMT will not apply to most taxpayers with low or modest incomes—or even most high-income taxpayers without a lot of special tax items. The government projects that 99% of the AMT paid by individuals would be paid by those who earn more than $300,000.
Tax implemented on Assignment sales to discourage flipping
Canada’s 2023 Budget highlighted the previously announced treatment of real estate assignment sales as transactions subject to the new residential property flipping rules. The anti-flipping tax treats certain real estate sales as business income as opposed to allowing the more favourable capital gains tax rate. Selling an assignment, which is selling the right to acquire a residential property before closing and taking possession of it, will be treated as fully taxable business income for the seller.
Another issue that was addressed with regard to real estate in Canada’s 2023 Budget, the government wants to establish a guideline for mortgage lenders to “protect Canadians with mortgages who are facing exceptional circumstances.” It plans to amend its foreign-buying ban (which came into effect on Jan. 1, 2023) and continue pursuing a home buyer’s bill of rights. Last but not least, the government reconfirmed the availability of a new tax-free First Home Savings Account(FHSA), launching on April 1.
The general anti-avoidance rule
The general anti-avoidance Rule (GAAR), which the government implemented in 1988, has the ability to pursue taxpayers who use transactions or a series of transactions meant primarily to avoid tax.
The federal government intends to expand the powers of the GAAR. It will hold a consultation period through May 31, 2023, to consider an economic substance test (to determine if a transaction had an economic purpose beyond tax avoidance), extend the standard reassessment period and apply a 25% penalty to the tax benefit received. Generally, the goal is to expand the CRA’s powers to question tax strategies used by taxpayers.
Multi-generational transfers get addressed
When the stakeholders in a corporation decide to raise capital by selling equity in the company, there exists the possibility that they may be eligible for a tax-free capital gain using their Lifetime Capital Gains Exemption, or a portion may be 50% tax-free as a taxable capital gain. Withdrawals of after-tax savings from within a corporation are taxable as dividends, subject to a higher tax rate than a capital gain.
Some taxpayers have been using surplus-stripping transactions to turn income otherwise taxable as dividends into capital gains, subject to a lower rate. This has been on the federal government’s radar since 2017 when significant changes were made to the taxation of private corporations.
One of those changes introduced a potential unintended consequence that could apply to multigenerational transfers of family businesses. It made it so that selling shares of a company to a family member or transferring shares (a deemed sale) to a family member, could result in more tax (a dividend instead of a capital gain) compared to selling the business to an unrelated third party, which is implausible.
Canada’s 2023 Budget has proposed a change that would apply in cases where a genuine intergenerational transfer is taking place, which may be immediate (over 3 years) or gradual (over 5 to 10 years using an estate freeze). The change would take effect in 2024, requiring a parent to give up control of the company and a child to have continued involvement and ownership in the company post-transfer or sale. More details are expected over the remainder of the year.
What effects will all these changes have on Economic Production(GDP)
The government is projecting higher deficits compared to our last federal fiscal update in the fall economic statement.
This fiscal year should show a shortfall of $43 billion, with progressively lower deficits over the next few years. As a result, Canada’s debt-to-GDP ratio is not likely to drop much over the next five years, particularly given a difficult near-term economic outlook.
Debt-to-GDP hit a high of 47.5% for the 2020–2021 fiscal year. It sits at 42.4% currently and is forecast to dip below 40% by the 2027–2028 fiscal year. Real GDP growth for 2023 is forecast at just 0.3% before rising to 1.5% in 2024 and staying above 2% for 2025 and 2026.
Unemployment is projected to peak in 2024 at 6.2%.
As a result, government deficits and increasing federal debt seem likely in the near term. The economy and stock market may still have some headwinds for 2023, but there is light at the end of the tunnel and optimism moving forward.
Prime Minister Justin Trudeau
Summarizing Canada’s 2023 Budget
Like many Canadians, the federal government is in debt and spending more than it is making. It hopes to reverse that trend in the future.
Canada’s 20232 Budget includes billions in new spending, some of it geared toward making life more affordable, especially for lower-income taxpayers. This includes the new grocery rebate, Canadian dental care plan, and enhancements to RESPs and RDSPs.
The capital gains inclusion rate has been unaffected, but the government continues to pursue residential real estate speculation by applying the anti-flipping tax to assignment sales. and tax avoidance, especially for high-income earners, continues to be a point of emphasis. And corporate owners may find it easier and less taxing to implement multigenerational transfers.