In the latest budget, the Canadian government announced several changes to certain personal tax measures. We outline the proposed measures and what you need to know about them moving forward.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is an alternative method to calculate the amount of taxes individuals (and certain trusts) owe on their income. It is designed to ensure all individuals that benefit from items receiving preferential tax treatment pay a minimum amount of personal tax. AMT applies only if the amount computed under the AMT rules exceeds the individual's tax calculated using regular personal tax rates on their taxable income.
Currently, AMT = A*(B-C)-D
- A = 15%
- B = The individual's adjusted taxable income
- C = $40,000, the AMT exemption amount
- D = Allowable non-refundable tax credits
Under current AMT rules, the calculation requires that certain amounts that receive preferential tax treatment be added back into income, to determine “adjusted taxable income.” Tax preference items include tax shelter deductions, interest expenses and/or carrying charges related to tax shelter loans, employee stock option deductions, a deduction for the lifetime capital gains exemption, and the non-taxable portion of realized capital gains.
This budget proposes several changes to the AMT calculation including increasing the exemption amount from $40,000 to the start of the fourth federal tax bracket, indexed annually to inflation. Based on expected indexation for 2024, this would be approximately $173,000. In addition, the government is proposing to increase the AMT rate from 15% to 20.5% corresponding to the rates applicable to the first and second federal tax brackets, respectively.
To limit tax preferences and broaden the AMT base, this budget also proposes the following changes:
Capital gains and stock options – An increase to the AMT capital gains inclusion rate from 80% to 100%. Capital loss carry forwards and allowable business investment losses would apply at a rate of 50%. It is also provided that 100% of the benefit associated with employee stock options would be included in the AMT base.
Donations of publicly listed securities – A 30% inclusion rate of capital gains on donations of publicly listed securities would be included in the AMT base. The 30% inclusion rate would also apply to the full benefit associated with employee-stock options to the extent that a deduction is available because the underlying securities are publicly listed securities that have been donated.
Deductions and expenses – The AMT based would be broadened by disallowing 50% of specific deductions.
Non-refundable credits – The amount of non-refundable tax credits allowed to reduce the AMT will be reduced from 100% to 50%, subject to certain exceptions including continuing to fully disallow the Dividend Tax Credit.
The amount by which AMT exceeds the tax otherwise payable will continue to be carried forward for up to seven years to reduce tax in a future year, to the extent that AMT is less than the regular tax in that year. Trusts that are currently exempt from the AMT would continue to be exempt from AMT. However, the government has committed to examining whether additional types of trusts should be exempt from the AMT.
While the proposed changes are set to come into force for taxation years that begin after 2023, further details will be released later this year.
Employee Ownership Trusts
An Employee Ownership Trust (EOT) is a trust that holds shares of a corporation for the benefit of the corporation's employees. An EOT can be used to facilitate a purchase of a corporation by its employees, as an additional option for business owners when planning for succession. To facilitate the use of EOTs, this budget proposes to amend the Income Tax Act (ITA) to:
- Extend the five-year capital gains reserve to a 10-year reserve for “qualifying business transfers” to an EOT, thereby allowing for an extension of the period that an individual may defer recognition of a capital gain realized on the disposition of shares in a qualifying business transfer by an additional five years. A minimum of 10% of the gain would be required to be brought into income each year.
- Introduce an exception that will allow an EOT to repay amounts borrowed from a qualifying business from one year of the qualifying business' year-end to 15 years, where the amounts were loaned from a qualifying business to an EOT to purchase shares in a qualifying business transfer.
- Exempt EOTs from the requirement to dispose of its capital property after 21 years (i.e., 'the 21-year rule') that generally applies to certain trusts. Where the EOT ceases to meet the conditions to be considered an EOT, the 21-year rule will be reinstated until the trust next meets the conditions required to be an EOT.
These amendments will apply as of Jan. 1, 2024.
Retirement Compensation Arrangements
A Retirement Compensation Arrangement (RCA) is typically utilized by an employer as a means of providing supplement pension benefits to employees. An RCA can be pre-funded by an employer through contributions to an RCA trust, which is a trust established under an RCA. In such cases, the ITA imposes a 50% refundable tax on these contributions (as well as on income and gains earned or realized by the trust).
Where an employer chooses not to pre-fund an RCA, and instead pay retirement benefits as they become due, the employer must obtain a letter of credit (or surety bond) from the financial institution as a means of providing security to their employees. To obtain or renew a letter of credit, an employer pays an annual fee or premium, which is subject to a 50% refundable tax. However, there are no practical mechanisms that ensure the recovery of the refundable tax balance when retirement amounts become due from an unfunded plan.
To rectify this, this budget proposes to exempt fees or premiums paid on or after March 28, 2023, to secure or renew a letter of credit (or surety bond) for an RCA that is supplemental to a registered pension plan from the refundable tax.
This budget also proposes to allow employers to request a refund of previously remitted refundable taxes on fees or premiums paid for such letters of credit (or surety bonds) of 50% of the retirement benefits paid out of the employer's corporate revenues to employees who had RCA benefits secured by letters of credit (or surety bonds), up to the amount of refundable taxes previously paid. This measure applies to retirement benefits paid after 2023.
Registered Disability Savings Plans
A Registered Retirement Disability Savings Plan (RDSP) is available to support the long-term financial security of a disabled person who is eligible for the Disability Tax Credit. Generally, the plan holder of an RDSP for an adult beneficiary must either be the beneficiary or, where the beneficiary lacks the mental capacity to enter a contract, that person's guardian or legal representative. The government previously expanded access to RDSPs by allowing a qualifying family member who is a parent, spouse, or common-law partner, to open an RDSP and be the plan holder for a disabled individual over the age of 18 whose competency is in doubt, and who does not have a legal representative. This measure was set to expire on Dec. 31, 2023. The budget proposes to extend this measure by an additional three years, to Dec. 31, 2026, and to broaden the definition of a qualifying member for this purpose to include siblings.
Registered Education Savings Plans
Where a post-secondary student is a beneficiary of a Registered Education Savings Plan (RESP), they are limited in the amount that can be withdrawn from the plan as Educational Assistance Payments (EAPs). To assist students with affording the rising costs of post-secondary education, this budget proposes to increase the limits on the amount of EAPs that can be withdrawn from a RESP from $5,000 to $8,000 in respect of the first 13 consecutive weeks of enrollment in a 12-month period for full-time students, and from $2,500 to $4,000 for part-time students, effective on March 28, 2023.
This budget also proposes to expand the rules to allow divorced or separated parents to open a joint RESP for their children, effective on March 28, 2023.
Other personal tax measures
This budget proposes several other measures, including:
- Increasing the maximum Goods and Services Tax Credit (GSTC) amount for Jan. 2023, to be known as the Grocery Rebate, paid to low- and modest-income individuals and families
- Doubling the maximum employment deduction for tradespeople's tools expenses from $500 to $1,000, effective for 2023 and subsequent taxation years
- Amending the ITA to provide legislative authority to Canada Revenue Agency to share taxpayer information with Health Canada and Social Development Canada to facilitate the delivery of Canadian Dental Care Plan, and introduce new legislation that will compel employers and employer pension plans to report dental coverage offered to their employees and plan members on T4s and T4As
- Increasing the number of low-income Canadians eligible for File My Return, a service that auto-files simple tax returns, and announcing a new pilot that would provide an automatic filing service to assist vulnerable Canadians with filing returns so that they can access the benefits they're entitled to. More information on automatic filing will be made available in 2024.
For more information, please contact:
Rachel Gervais, Managing Partner, Tax Service Line
Harry Chana, International Tax Service Line Leader
Greg London, Domestic Tax Service Line Leader
The information in this publication is current as of March 28, 2023
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.