By Sightline Wealth Management’s Warren Gerow and Tanios Sadaka, CFA
The 2023 Canadian Federal Budget includes several significant funding initiatives as follows:
- $43 billion in net new spending over six years, with three main priorities: health care/dental, affordability, and the clean economy.
- $13 billion over five years to implement a dental care plan for families earning less than $90,000.
- $20 billion over six years is allocated for tax credits to promote investment in green technologies and $4 billion over five years for an Indigenous housing strategy.
- A one-time “grocery rebate,” which will provide eligible families with up to $467. Single people with no kids could get up to $234.
- Tax credits for clean energy.
- Cuts to government spending.
- Alternative Minimum Tax which will raise the rate to 20.5% from 15%.
- Financial institutions’ treatment of dividends.
- Surtax on banks and insurers.
- 2% proposed share buyback tax dividend tax on corporations.
The deficit for 2022-23 is expected to be $43 billion, higher than projected in the fall, with higher-than-expected deficits projected for the next five years. The federal debt is estimated to reach $1.18 trillion, and the debt-to-GDP ratio will rise slightly over the next two years.
Addressing Consumer’s Concerns:
In addition, the budget addresses several consumer concerns, such as the impending excise tax hike on beer, wine, and spirits, which the government will reduce to two percent for this year. The budget also targets “predatory lending” by capping rates at 35 percent and eliminating loopholes that allow payday lenders to charge excessive fees. Finally, the government has struck a deal with major credit companies to reduce interchange fees by about 27 percent for about 90 percent of businesses that accept credit cards. The Canadian government has set aside an additional $1.8 billion in the budget to address the travel chaos experienced at airports lately, but this will come at a considerable cost for consumers.
New Travel Tax/Fee:
The Air Travel Security Charge will rise by almost 33% next year, resulting in an approximate additional fee of $9.94 for a one-way ticket within Canada, $16.89 for a flight to the US, and $34.42 for an overseas trip.
Green Economy Funding Initiatives:
The budget offers three investment tax credits to encourage investments in the green economy. The first credit amounts to 30% of the cost of investments in new machinery and equipment used for producing key clean technologies and extracting, processing, or recycling critical minerals. It is estimated to cost $4.5 billion over five years. The Clean Hydrogen Investment Tax Credit will cover 15-40% of eligible project costs and offer higher rebates for projects that produce the cleanest hydrogen. This credit is worth approximately $5.6 billion over five years. Additionally, the Investment Tax Credit for Clean Energy will provide a 15% credit for investments in non-emitting electricity, natural gas-fired electricity generation, and energy storage, amounting to $6.3 billion over five years. Finally, the Investment Tax Credit for Carbon Capture, Utilization and Storage will cost about $520 million over five years. It will be available to businesses investing in storing carbon dioxide or using it in other industrial processes.
The budget also allocates $650 million over ten years for monitoring, assessment, and environmental restoration work in significant bodies of water like the Great Lakes, Lake Winnipeg, and the St. Lawrence River.
To advance reconciliation, the budget will provide $2.8 billion as part of the Band Class settlement, compensating 325 bands that chose to opt into the Gottfriedson Band Class litigation to address the collective harms caused by residential schools. Additionally, $171 million has been allotted to ensure that First Nations children can access healthcare services under Jordan’s Principle.
Funding Space Projects:
The Canadian Space Agency is set to receive $1.4 billion to participate in the International Space Station until 2030, an additional $1.2 billion over 13 years to contribute to building a lunar utility vehicle, $150 million over five years to fund new technologies, and $76 million over eight years to support Canada’s participation in the Lunar Gateway station.
Employee Ownership Trust:
The Employee Ownership Trust (EOT) is a form of employee ownership where a trust holds shares of a corporation for the benefit of its employees. It can be used for business succession planning. Budget 2023 proposes new rules to facilitate the use of EOTs to acquire and hold shares of a business, which include defining qualifying conditions, extending the capital gains reserve to ten years for qualifying sales to an EOT, creating an exception to the current shareholder loan rule, and exempting EOTs from the 21-year deemed disposition rule. EOTs must meet certain qualifying conditions, including holding a controlling interest in the shares of one or more qualifying businesses, having Canadian resident trustees, and having beneficiaries consisting exclusively of qualifying employees. The EOT would be a taxable trust subject to the same rules as other personal trusts.
2023 Budget expands the definition of “qualifying family member” to include an adult brother or sister. This will enable a sibling to establish an RDSP for an adult with mental disabilities whose ability to enter into an RDSP contract is in doubt and who does not have a legal representative.
The federal government is proposing to allow withdrawals of up to $8,000 in educational assistance payments (EAPs) from an RESP for beneficiaries enrolled as full-time students during the first 13 weeks of enrolment, and up to $4,000 for part-time students.
Alternative Minimum Tax:
According to the budget, the Alternative Minimum Tax (AMT) in Canada has not undergone significant reform since its implementation in 1986, resulting in many wealthy Canadians paying very little income tax. To address this disparity, the budget proposes several changes to the AMT, including increasing the rate from 15% to 20.5% and raising the exemption amount to approximately $173,000. The proposed changes would result in the AMT being applied to approximately 32,000 Canadians but would bring in almost $3 billion in revenue over five years, starting in the 2024 tax year.
The reforms are aimed at creating a more equitable tax system, with higher-income earners paying at least a minimum amount of tax. It is estimated that more than 99% of the total AMT paid by individual Canadians would be paid by those who earn more than $300,000, and about 80% would be paid by those who earn more than $1 million. The proposed changes also target deductions, credits, and other tax strategies, such as raising the AMT capital gains inclusion rate from 80% to 100% and including 100% of the benefit of employee stock options in the AMT base. Capital-loss carry-forwards and allowable business investment losses would apply at a 50% rate, with the same limitation applying to business losses.
More Efficient Government Spending:
The budget proposes several programs and initiatives to improve skills and working conditions, including work placements for students, a deduction for tradespeople, and an anti-scab law prohibiting the use of replacement workers during a strike or lockout in federally regulated industries.
The budget also aims to increase revenues by cutting spending on consultants, travel, and professional services, departmental spending, and ensuring that the wealthiest Canadians pay their fair share of taxes.
Corporation / Financial Institutions Tax & Reporting:
Additionally, the proposed tax on share buybacks by public corporations will apply from January 1, 2024, and generate $2.5 billion in revenue over five years. The budget also suggests treating dividends received on Canadian shares held by financial institutions as business income, increasing revenues by $3.5 billion over five years.
Surtax on banks and insurers of 1.5% for taxable income over $100 million. Banks and insurers also have to pay a one-time Canada Recovery Dividend: a 15% tax on the average of 2021 and 2020 taxable income above $1 billion, payable over five years beginning in the 2022 tax year.
Security and Defense Spending:
The 2023 Budget proposal includes measures to enhance defense and security against foreign interference. The RCMP will receive $49 million over three years to safeguard Canadians from harassment and intimidation by foreign governments, while Public Safety Canada will be granted $13.5 million over five years, beginning in 2023-24, and $3.1 million annually thereafter to establish a National Counter-Foreign Interference Office. Additionally, Ukraine will receive an extra $2.4 billion loan in 2023 through the International Monetary Fund.
To address the backlog and provide support services to veterans, the Budget will allocate $156.7 million over five years, along with $14.4 million annually to Veterans Affairs Canada, the Royal Canadian Mounted Police, and the Veterans Review and Appeal Board.
The Budget also includes initiatives to increase revenue, such as a two percent tax on stock buybacks, a higher “alternative minimum tax” to make the wealthy pay more, and a tax on dividends received by financial institutions. These measures are anticipated to generate $11.6 billion over the next five years.
Warren Gerow is an independent investment wealth consultant at Sightline Wealth Management.
Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.
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