The article “Canada’s Budget 2023: What it means for you and your family” was originally published in MoneySense on March 31, 2023. Photo by Nabil Saleh from Unsplash.
The federal government’s 2023 budget proposes a national dental care plan, a grocery rebate, changes to registered accounts, and much more. Here’s what you need to know.
The annual budget speech marks the introduction of new policies, tax measures and fiscal updates from the federal government. Here’s a roundup of key items from the 2023 budget that could impact your personal finances. Most of them will likely become law over the coming year.
A new one-time grocery rebate
In recognition of inflation’s high impact on food prices, the budget proposes 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.
Expansion of dental care for uninsured Canadians
A national dental care plan will be rolled out in stages over the next two years, with seniors and minor children being the first to benefit, likely before the end of 2023. 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.
RESP enhancements to tackle the rising costs of post-secondary education
Registered education savings plans (RESPs) are 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.
The 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 currently become joint subscribers for an RESP account—only spouses or common-law partners can. The 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 RDSPs, too
Registered disability savings plans (RDSPs) are tax-deferred accounts available to taxpayers who qualify for the disability tax credit. The government matches RDSP contributions with grants and bonds.
It is relatively easy to open an RDSP for a minor child. 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 onerous 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. Extending the temporary measure and expanding the people who can open an RDSP account could help many more people take advantage of it.
Capital gains tax reforms? Not this year
Yet again, some commentators expected an increase in the capital gains inclusion rate, which has remained at 50% since 2000. Despite the speculation, the proportion of a capital gain that is taxable remains unchanged. Half of a capital gain therefore remains tax-free.
But, some changes to the alternative minimum tax for high earners
The alternative minimum tax (AMT) regime currently in place in Canada applies an alternative tax calculation to a taxpayer’s income. The formula adds back 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 instead pay the AMT for the year.
The tax can generally be carried forward up to seven years and claimed in a future year. Basically, the AMT is meant to discourage taxpayers from claiming too many tax-preferred items, especially in multiple years.
The 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.
The budget also proposes an increase to the income exception from the current $40,000 to an estimated $174,000 (the start of the fourth federal 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.
Assignment sales to get the anti-flipping tax
The budget reconfirmed the previously announced treatment of real estate assignment sales as transactions that are 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—basically, 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.
Also on the real estate front, 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. Lastly, the government reconfirmed the availability of a new tax-free first home savings account (FHSA), launching April 1.
Seeking input on the general anti-avoidance rule
Established in 1988, the general anti-avoidance rule (GAAR) provides the government with the ability to pursue taxpayers who use transactions or a series of transactions meant primarily to avoid tax.
The 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 normal 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.
Intergenerational business transfers to kids
When a business owner sells shares of their corporation, 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 typically taxable as dividends, which are 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 intergenerational transfers of family businesses. It made it so that selling shares of a business 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 counterintuitive.
The 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, and it would require 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.
Employee ownership trusts to resemble U.S. and U.K. models
The budget proposes a new mechanism to allow business owners to sell their company to its employees, beginning in 2024. This model is similar to those used for business transitions in the U.S. and the U.K.
An ownership trust would allow the transfer of ownership without employees having to pay directly or immediately for the shares. It would also allow a business owner to claim a 10-year capital gain reserve to bring 10% of the capital gain into their income each year.
The government believes this proposal would make it more attractive for owners to sell their firm to employees and allow employee-owned companies to reinvest more of their profits in their business.
How much will all this cost? Notes on the deficit, GDP and unemployment
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.
Takeaways from the 2023 budget
Like many Canadians, the federal government is in debt and currently spending more than it is making. It hopes to see a turnaround in the next few years.
The 2023 federal 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 and Canadian dental care plan, as well as enhancements to RESPs and RDSPs.
The capital gains inclusion rate has been left intact, but the government continues to pursue residential real estate speculation by applying the anti-flipping tax to assignment sales. Tax avoidance, especially for high-income taxpayers, continues to be scrutinized. And business owners may find it easier and less taxing to transfer or sell their business to their children or their employees.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.