What investors need to know about the 2023 federal budget

On Tuesday March 28, 2023, Finance Minister Chrystia Freeland tabled the 2023-24 Federal Budget in Parliament, subtitled: “A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future”.  The summary below highlights some of the provisions relevant to savings and retirement, investment and financial planning. You can find the full Budget details at the Government of Canada website.

• Education and students
• Savings and retirement
• Tax compliance

Please note: A Budget is a statement of the governing party’s intentions and are considered proposals until they are passed into law.

Education and students

Making Life More Affordable for Students

When COVID-19 disrupted students’ lives, the government doubled the amount of income-tested support through Canada Student Grants. This support is set to expire on July 31, 2023.

Proposal – $813.6 million is to be made available in 2023-24 to enhance student financial assistance for the school year starting August 1, 2023, including:

• Increasing Canada Student Grants by 40%—providing up to $4,200 for full-time students.
• Raising the interest-free Canada Student Loan limit from $210 to $300 per week of study.
• Waiving the requirement for mature students, aged 22 years or older, to undergo credit screening to qualify for federal student grants and loans for the first time, allowing up to 1,000 additional students to benefit from federal aid in the coming year.

Improving Registered Education Savings Plans

Registered Education Savings Plans (RESPs) are an important part of saving for post-secondary education. At present, withdrawals in the early stage of education are limited to $5,000 for full-time students, and $2,500 for part-time students

Proposal – Rules for an RESP will be amended to permit education assistance payment (EAP) withdrawals of up to $8,000 in respect of the first 13 consecutive weeks of enrollment for beneficiaries enrolled in full-time programs, and up to $4,000 per 13-week period for beneficiaries enrolled in part-time programs. These changes would come into force on Budget Day.

At present, only spouses or common-law partners can jointly enter into an agreement with an RESP promoter to open an RESP. Parents who opened a joint RESP prior to their divorce or separation can maintain this plan afterwards, but are unable to open a new joint RESP with a different promoter.

Proposal – Divorced or separated parents will be allowed to open a joint RESP for one or more of their children, or to move an existing joint RESP to another promoter. This change would come into force on Budget Day.

Savings and retirement

Registered Disability Savings Plans

Where the contractual competence of an individual who is 18 years of age or older is in doubt, the RDSP plan holder must be that individual’s guardian or legal representative as recognized under provincial or territorial law. A temporary measure, which is legislated to expire on December 31, 2023, allows a qualifying family member, who is a parent, spouse or common-law partner, to open an RDSP and be the plan holder for an adult.

Proposal – The temporary measure for a qualifying family member to be a plan holder is to extended by three years, to December 31, 2026. A qualifying family member who becomes a plan holder before the end of 2026 could remain the plan holder after 2026. As well, the definition of ‘qualifying family member’ will be broadened to include a brother or sister of the beneficiary who is 18 years of age or older.

Retirement Saving – Personal Support Workers

Personal support workers perform jobs that are mentally and physically exhausting, but they often do not enjoy the same job protections, compensation, and benefits as their peers in the health care sector.

Proposal – Starting in 2023-24 and continuing over five years, up to $50 million will be provided to Employment and Social Development Canada to develop and test innovative solutions to strengthen the retirement savings of personal support workers without workplace retirement security coverage.

Tax compliance

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer deductions, exemptions, and tax credits than under the ordinary income tax rules, and that currently applies a flat 15% tax rate with a standard $40,000 exemption amount instead of the usual progressive rate structure.

Proposals – To better target the AMT to high-income individuals, Budget 2023 proposes several changes, all to come into force for taxation years that begin after 2023.

Broadening the AMT base

• Increase the AMT capital gains inclusion rate from 80% to 100%. Capital loss carry forwards and allowable business investment losses would apply at a 50% rate.
• 100% of the benefit associated with employee stock options would be included in the AMT base.
• 30% of capital gains on donations of publicly listed securities in the AMT base, mirroring the AMT treatment of capital gains eligible for the lifetime capital gains exemption.
• Currently, most non-refundable tax credits can be credited against the AMT. The government proposes that only 50% of non-refundable tax credits would be allowed to reduce the AMT, with some exceptions.

Raising the AMT exemption

The exemption amount is a deduction available to all individuals (excluding trusts, other than graduated rate estates) that is intended to protect lower and middle-income individuals from the AMT.

The government proposes to increase the exemption from $40,000 to the start of the fourth federal tax bracket. Based on expected indexation for the 2024 taxation year, this would be approximately $173,000. The exemption amount would be indexed annually to inflation.

Increasing the AMT rate

The government proposes to increase the AMT rate from 15% to 20.5%, corresponding to the rates applicable to the first and second federal income tax brackets, respectively.

General Anti-Avoidance Rule

The general anti-avoidance rule (GAAR) in the Income Tax Act is intended to prevent abusive tax avoidance transactions while not interfering with legitimate commercial and family transactions. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit created by the abusive transaction. The government recently conducted a consultation on various approaches to modernizing and strengthening the GAAR.

Proposal – To respond to the issues raised during the consultation, Budget 2023 proposes to amend the GAAR by: introducing a preamble to help address interpretive issues; changing the avoidance transaction standard from a “primary purpose” test to a “one of the main purposes” test; introducing an economic substance rule; introducing a new penalty; and extending the reassessment period in certain circumstances. Interested parties are invited to express their views to the Department of Finance Canada by May 31, 2023.