Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive, and powered by Canada Life. For today’s Soundbites, we’re talking about the 2023 federal budget with John Yanchus, director of tax and estate planning with Canada Life. We talked about some notable changes, and we started by asking how he would sum up this year’s budget.

John Yanchus (JY): The 2023 federal budget was a very reactive plan in nature, addressing a few pressing current matters. The main topics were a cost-of-living benefit, nicknamed “the grocery rebate,” that is a one-time payment to approximately 11 million people of low and modest income. The benefit is estimated to be a $2.5 billion value of inflation relief to those who need it most. The second was increased dental coverage for families making less than $90,000 per year with details on eligible coverage to be released later this year. The government is also focusing on making Canada green by investing in clean electricity, and “growing a clean economy.” And they’re providing tax credits for both of those.

On the intergenerational transfer of businesses

JY: Budget 2023 proposes to amend the intergenerational family business transfer rules that came into effect in 2021 and are intended to provide tax relief for transfers of shares of qualified small business corporations or a family farm or fishing corporation, to a corporation controlled by an adult child of the transferor. The tax relief is intended to allow the transferor — the parent or the grandparent — to achieve capital gains treatment on the sale of their shares, and thus access to lifetime capital gain exemption, instead of receiving deemed dividend tax treatment under an anti-avoidance rule. These proposals are designed to ensure that only genuine intergenerational share transfers take place. The government has proposed two different options. One is a three-year immediate intergenerational business transfer, and the second is a 5- to 10-year gradual transfer. The budget also proposes to provide a 10-year capital gain reserve for genuine share transfers that satisfy the above-noted conditions. The regular capital gain reserve is five years.

Overhauling the alternative minimum tax

JY: Budget 2023 proposes to update the alternative minimum tax regime, which has largely been untouched since its introduction in 1986. The update served to broaden the application of AMT, increase the AMT tax rate, and target the tax to high-income individuals. AMT is a parallel tax calculation that allows fewer tax deductions and credits than under the ordinary income tax rules. It currently applies a 15% tax rate with a small $40,000 exemption. The taxpayer pays the AMT or the regular tax, whichever is higher. To target high-income individuals, the government proposes to increase the AMT exemption from $40,000 to approximately $173,000. The exemption amount would be indexed annually to inflation. The proposed changes to AMT will also broaden its application by:

* increasing the AMT capital gains inclusion rate from 80% to 100%;

* including 100% of the benefit associated with employee stock options;

* including 30% of capital gains on donations of publicly listed securities;

* disallowing various deductions from AMT; and

* restricting certain non-refundable tax credits from being credited against AMT.

Finally, the budget proposes to increase the alternative minimum tax rate from 15% up to 20.5%.

Changes to RESP withdrawals.

JY: The budget has proposed two changes to RESPs. One is increasing the educational assistance payment withdrawal limits. EAPs are limited to $5000 for beneficiaries enrolled full time, and $2500 for beneficiary enrolled part time. The budget proposes EAP withdrawals of up to $8,000 for beneficiaries enrolled in full-time programs, and up to $4,000 for beneficiaries enrolled in part-time programs. The second change to RESPs is allowing divorced or separated parents to open joint RESPs. Currently, only spouses or common law partners can be joint owners of an RESP.

And, finally, how would he describe this year’s federal budget.

JY: Overall, the 2023 federal budget was pretty light in content and complexity. There will not be any heavy lifting to do by financial advisors, and I don’t think they will have their clients overly concerned by the content.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to John Yanchus of Canada Life. Visit us at investmentexecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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