This article was reviewed by Chris Singer, CFP®.
The 2023 federal budget brought forward by Finance Minister Chrystia Freeland on March 28th contained a number of proposals that will impact Canadians. The following is a summary of the most relevant budget proposals that may impact you. The good news is that no changes were made to personal federal tax rates!
The budget focuses on three main themes: affordability, healthcare, and a clean economy. This is a pretty simple budget that is built for a recession.
Tax-Free First Home Savings Account (FHSA)
Financial institutions will be able to start offering the Tax-Free Home Savings Account, first announced in the 2022 federal budget, to Canadians as of April 1st, 2023. Although most financial institutions will not have this account type available until Q3 2023. Essentially, you can save tax-sheltered money and withdraw it tax-free without having to repay the plan. Some highlights include:
- Eligibility
- A Canadian resident at least 18 years old
- Not lived in a home they have owned in the year the account was opened, or in any of the preceding four calendar years
- Contributions
- Contributions are tax-deductible and grow tax-sheltered
- Annual limit: $8,000 (Lifetime limit: $40,000)
- Annual contribution room can be carried forward up to $8,000
- Carry-forward amounts do not start accumulating until after opening an FHSA
- You can also transfer RRSPs to an FHSA on a tax-free basis up to your FHSA contribution limit
- Withdrawals
- Non-taxable withdrawals may be made only for the purpose of purchasing a qualifying first home
- Any other withdrawals will be taxed as income
- Important Note
- Individuals will not be able to make a Home Buyers’ Plan and an FHSA withdrawal for the same home purchase
- Unused FHSA amounts can be transferred to an RRSP without reducing RRSP room
Grocery Rebate
The Goods and Services Tax Credit (GSTC) helps to offset the impact of the GST on low-and-modest income individuals and families. Budget 2023 proposes to introduce an increase to the maximum GSTC amount for January 2023 that would be known as the Grocery Rebate. The Grocery Rebate will be paid out as soon as possible. The maximum amount under the rebate would be:
$153 per adult
$81 per child
Registered Education Savings Plan (RESP)
The budget introduces the increasing of the withdrawal limits. Currently, when an RESP beneficiary is enrolled in an eligible post-secondary program, government grants and investment income can be withdrawn from the plan as Educational Assistance Payments (EAPs) in order to assist with post-secondary related expenses. EAPs are taxable income for the RESP beneficiary.
For beneficiaries enrolled in a full-time program, the current limit is $5,000 in respect of the first 13 consecutive weeks enrolment in a 12-month period. The budget is proposing to increase this amount to $8,000.
Also, the budget proposes to allow divorced or separated parents to open a joint RESP account. Currently only common-law partners or spouses can enter into an agreement to open an RESP.
Health & Dental Care
By far the largest amount of money in the budget is for health and dental care with $3.6 billion in new spending for 2023-2024.
The government will introduce legislation to support the implementation of the new Canadian Dental Care Plan, which will provide dental care to uninsured Canadians with family income less than $90,000 annually. Last year, the government opened the program to low-income Canadians under the age of 12. This year, the program is being expanded to people under 18, persons living with a disability, and seniors. It is set to be fully implemented by 2025.
Health care is getting a boost of more than $3 billion in 2023-2024 as a part of the federal government’s multi-year deal with the provinces.
Clean Economy
The government has prioritized building Canada’s clean economy so Canadian companies can be competitive in global markets. The budget introduces new tax credits to encourage the development of renewable power sources like wind and solar. Highlights include a new refundable Clean Hydrogen Investment Tax Credit, a Clean Technology Investment Tax Credit, and a Clean Electricity Investment Tax Credit.
Alternate Minimum Tax (AMT)
The Alternate 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.
The taxpayer pays the AMT or regular tax, whichever is higher. Additional tax paid as a result of the AMT can generally be carried forward for seven years and can be credited against regular tax to the extent regular tax exceeds AMT in those years.
To better target the AMT to high-income individuals, Budget 2023 proposes several changes to its calculation that cover a broad scope. AMT has not been touched since its introduction in 1986.
Business Succession Planning
The government made two proposals to assist with succession planning for businesses.
The first proposal is to introduce some safeguards to the existing Bill C-208 enacted in June 2021. These rules came into effect in 2021 to provide tax relief for transfers of shares of “qualified small business corporation shares” from one generation to another. The new rules are meant to ensure fair treatment and to avoid abuse of the rules.
Budget 2023 also proposes new rules to enable the use of an employee ownership trust (EOT) to purchase and hold shares of a business. An EOT is a trust that will hold shares of a corporation pursuant to a qualifying business transfer for the benefit of the corporation’s employees. Where employees are interested in acquiring a business, an EOT provides them with an option to do so without having to buy shares directly.