2023 Federal Budget Tax Updates

Now, with this new budget, 2023, what it does is it proposes rules designed to ensure that only genuine intergenerational share transfers take place. And that is under their definition for that. And the rules are, from what I've seen, appear to be very tedious. And it may operate for several years after share sale to the adult child corporation. And the rules that provide that a transfer, for example, the parent or the grandparent and their adult child may jointly elect to choose to rely on one or two transfer options for obtaining that tax relief. Hey, in case you didn't know, on March 28, 2023, Christopher Freeland tabled her third budget as the federal Minister of Finance and Deputy Prime Minister for the 2023 federal budget. And I wanted to share with you the highlights related to the the tax budgets and the changes that the government is going to be going through in the 2023 year. As you know, the Income Tax act and all of the plans that the governments have get very, very complicated and detailed and very specific. And all these nuances and changes are very hard to keep track of even for someone like me who has access to resources and knows generally kind of keeps up to date with what's going on. I just can't imagine what it's like as a Canadian going through all of these changes and really understanding what it is and how it impacts you overall. Just a little bit of background. In last year's budget, the federal government predicted a deficit for 2022-2023 of 52.8 billion. What that means is all the tax revenue that the government has collected from you, less the expenses. The expenses are larger than the revenue by 52.8 billion. That was what was projected in last year's budget and today's budget, that amount was Revised down from 52.8 billion to 43 billion, meaning they were able to find either more savings or more revenue collection to bring that deficit of 43 billion. Now I don't know about you, but it seems pretty normal now that to them that they are running on a losing model, meaning if they don't have the cash but they're still having revenues, less expenses, it's still very surprising why they're just accepting that a deficit is normal as course on course to their running the country. Now in 2023-2024 the deficit is 47 billion and it's going to fall apparently to their projections to 21.4 billion for 2027-2028. And to give all of you just a little bit of Context. What I've done is I've just captured the financial statements and the financial reporting highlights for at least 2021 to 2022. Financial statements are the annual report of the government and those should be released hopefully very soon for 2023, sometime in the next few months as according to their schedule. So just wanted to share with you just a little bit of context. Now with all that deficit, that means they generally need to have money available. But if they don't have the cash available to fund the losses, where are those losses going to come from? It's going to come from more borrowed money. What I'm sharing with you is the federal debt as of 2021-2022. And you can see the debt at the beginning of that year is $1 trillion. Okay, this is in millions of dollars. And that deficit at that time is 92:12. And they had some extra income of 4,000. So in total they had a $1.1 trillion. And in case you didn't, just to connect, the message that I started with is they've revised that budget deficit that they're going to incur this year for to be 43 billion. So we need to add another 43 billion to the debt that's going to be. And then in 2023 to 2024 they're going to add 47. And then 2027 to 2028 they're going to project a 21.4 loss. So overall, what do we notice and see the losses are still going to increase on debts. And those debts are just accumulating without a very clear plan of how the debts are going to be repaid. Now, aside from just the operational standpoint of the government and how they're spending our money or how they're collecting our revenues, they go through some policy changes related to multiple circumstances. And I'm not going to go more specifically related to just general impacts of things like their dental care program or anything like that. What I wanted to focus on, especially for those of you who are in our channel, go through specific things around wealth building or wealth generation or wealth transferring. So the first item I wanted to talk about, just to kind of highlight some of the change, just to highlight some of the changes, is something called a new tax on share buybacks. And what does that mean and how does it affect Canadian resident corporations? What that means is this tax on share buybacks will generally apply to Canadian resident corporations that are traded on a designated stock exchange, let's say like the Toronto Stock Exchange, the TSX and the Tax is going to be 2% of the net value of a public company, share repurchases of $1 million or more of equity. And its tax will take effect after 2023 and is intended to discourage companies from using share buybacks as a way to distribute profits to shareholders instead of investing in in their businesses. So that's one major change, but it's mainly affecting public companies the next. In terms of the budget for 2023, there's an amendment related to something in my opinion that's pretty large which is called the intergenerational business transfer. And what that means at a very high level is it refers to the process of transferring a business from one generation, let's say the parent, to another within the family, like a child. And what the 2023 federal budget introduces is to introduce changes to this process which is going to take effect in 2024 or later tax years. And to qualify for this genuine intergenerational shared transfer, additional conditions have to be met that taxpayers will be able to use one or two intergenerational transfer options. The first one is an immediate intergenerational business transfer which will follow a three year test based on arm's length SAL terms. And these changes are intended to provide more flexibility for taxpayers to ensure that their intergenerational business transfers are genuine and not used for tax avoidance purposes. And to give a little bit of background, these rules actually came into effect in 2021 and are intended to provide a tax relief for transfers of shares of qualified small business corporation shares or shares of the the stock of the capital stock of a family farm or fishing corporation. And these are typically defined in the Income Tax Act. And the part that is kind of highlighted is that this is to a corporation controlled by an adult child of the transferor. And that child usually means a grandchild, a stepchild child in law, niece, nephew, grand nieces and grand nephew. Now the tax relief from this bill, Bill C208 is intended to allow the transfer parent or grandparent to achieve capital gains treatment on the sale of their shares to their adult child corporation and thus giving access to the lifetime capital gains exemption instead of receiving a deemed dividend tax treatment under an anti avoidance rule. Now this is a very sophisticated topic that happens usually at deemed disposition for business owners, especially when it's related to them also their shares to their children. However, when this was kind of introduced, the government became concerned that the tax relief was too broad and it allowed business owners to facilitate this strategy called surplus stripping transactions which in effect it allowed them to receive distributions from their corporations as capital gains tax rates instead of at higher dividend tax rates. Now with this new budget, 2023, what it does is it proposes rules designed to ensure that only genuine intergenerational share transfers take place. And that is under their definition for that. And the rules are from what I've seen, appear to be very tedious. And it may operate for several years after share sale to the adult childs corporation. And the rules that provide that a transfer, for example, the parent or the grandparent and their adult child may jointly elect to choose to rely on one or two transfer options for obtaining that tax relief. The first one is what's called a three year immediate intergenerational business transfer which I mentioned earlier. The Second is a 5 to 10 year gradual intergenerational business transfer. And based on these options chosen, various tasks have to be satisfied related to the transfer of the voting control of the corporation and economic interest in the business, management of the business and the adult child's involvement in the business and their corporation's retention to shares. The adult child, just to further highlight, would be jointly and severably liable for any additional taxes payable by the transfer. So the parent or the grandparent, in case these conditions haven't been met, so that has also been newly introduced that the child if this was implemented incorrectly, they want they will claw in the transfer. As part of those conditions the budget of 2023 did introduce was a 10 year capital gains reserve for genuine intergenerational generational share transfer that satisfy the above conditions and the regular it used to be a reserve of five years. All of these measures would apply to transactions that occur on or after January 1, 2024. Now there was a whole bunch of very complicated technical things and this is a very technical component when it comes to ENG professional services in dealing with intergenerational business transfers and planning for that transfer. And all of these rules will start applying if you were to engage into these adjustments or transfers beginning in January 21, 2024. So from then on these new rules or criteria is going to need to be applied if you are not at that stage yet in your financial wealth building journey. That just means that under these new things after 1-1-20 for there's going to be much more tedious rules related to transferring the business to your children that the professional service provider would need to do. There's also a risk now that has been imposed on the adult child that they would be jointly and severely liable for any additional taxes paid if the transfer of the parent wasn't if this process wasn't executed properly. The next topic I want to talk about is this new rule that was introduced in 2023 called the Employee ownership Trust. So what this does is this trust will hold shares of a corporation. Following that, it qualifies for that business transfer for the benefit of the corporation's employees. Where employees who are interested in acquiring a business, an employee ownership trust provides them with an option to do so without having to buy the shares directly. So provided these criteria or conditions after it's been properly navigated through, the trust will generally be taxed similar to other personal trusts. And trust income not distributed to beneficiaries will be taxed in the employee ownership trust's top personal marginal tax rate. That's how trusts normally are taxed at the highest marginal tax rate when it's not distributed to the trustees. But trust income that's distributed to a beneficiary will be taxed in the hands of the beneficiary. And any dividends received by that trust from that business and distributed to its employees will retain their character as dividends and be eligible for a dividend tax credit. One thing to really note is trusts in Canada have a 21 year deemed disposition rule, but employee ownership trusts will be exempt from that 21 year deemed disposition rule. There's a whole bunch of other complications related to an employee ownership trust, but the key thing to take away is these rules related to employee ownership trust will apply starting January 1, 2024. Again, it's a new thing. It's not really clear exactly the main benefits of why you would do something like this, but essentially it's trying to provide a way for employees to purchase the business of from someone else and using a vehicle of an employee ownership trust. The third component that I wanted to talk about is the retirement compensation arrangement. And a retirement compensation arrangement is an employer sponsored plan that allows an employer to provide supplemental pension benefits to employees. And a lot of these are very popular when it comes to setting up for especially business owners because they could deduct those expenses and put it into a locked pension. Now, the RCA subject to the retirement compensation arrangement, otherwise known as an RCA, is subject to refundable tax. It's imposed at a rate of 50% on contributions to an RCA Trust as well as on income and gains earned or realized by the trust. This tax is generally refunded as the retirement benefits are paid from the RCA trust to the employee. Now, these RCA plans are very, in my opinion, quite complicated and very detailed. If you ever end up setting one of these things up, there's a very long, long, large document of very sophisticated terms and rules and parameters and how it works. And these are some of the things that we encounter when we work with, when I work with a lot of the business owner clientele when it comes to seeing them either already having this in place and they may have different opinions as they know and learn about the process of becoming your own banker. And when it comes to process becoming your own banker, in case you haven't had a chance and want to know what that is, make sure you visit watchibc.com for a free 90 minute training related to the process of becoming your own banker. As another alternative option that a lot of business owners actually end up setting up for themselves for the purposes of retirement. The next one I want to talk about is the Retired Education Savings Plan. Now a Retired Education Savings Plan, otherwise known as an resp, is an investment designed to help families save for their child's post secondary education. And in case you haven't seen other videos in our channel related to RESPs, I've done a few videos on that and you can look on our screen and you'll be able to see some of those videos. And just as a little bit of a background, in case you weren't aware that the Educational Assistance Payments, this is the amount that's paid to the beneficiary from an RESP to help finance the cost of any eligible post secondary education initially was limited to $5,000. Can you imagine? So when you put in money into the RESP, it was limited to the beneficiaries to withdraw 5,000 on that full time enrollment in respect of the first 13 weeks in a 12 month period. So there was already restrictions, funny enough, of how much money can be withdrawn out of the resp. A lot of our clients recognize these situations early and they consider whether or not an RESP properly fits their plan. For in case you don't know, we also help clients and their children implement the process of becoming your own banker when it comes to saving for something like education, except it has a lot more open ended opportunities to use and it doesn't end when the child has completed their post secondary. And there's also no conditional requirement that you must go to post secondary in order to access the funds. So those are just something to be mindful of when it comes to setting up an resp. But what has changed in terms of the budget for 2023 is that they have permitted EAP withdrawals to be now 8,000 compared to the 5,000 for beneficiaries enrolled in the full time program. So in case you didn't know, a lot of people make money on online and one of the things that is starting to show is that in the budget of 2023 it provided an update in Canada's participation in the Organization for Economic Cooperation and development groups of 20 inclusive frameworks on base erosion and profit shifting. Two pillar plan for international tax reform so pillar one was the reallocation of taxation rights. In case you aren't aware, taxation is based purely on jurisdiction. If you're located in Canada or you're located in different countries, there's some jurisdiction in how the merits of your efforts, how the government will get that participation of it in the form of taxes unless you're a US citizen where taxes are applied a lot more differently for US citizens. The first one is that pillar one and this pillar is intended to ensure that large global corporations, including large digital corporations, pay a fair share of tax in the jurisdiction where their users and customers are located. Participating countries are aiming to complete negotiations so that the convention to implement pillar one can be signed by mid 2023 and enter into force in 2024. The next one is there's what's called a Digital Service tax. And the federal government will continue to advance legislation for digital service tax, but hopes that the timely implementation of the pillar one will make the dst, the digital Service tax unnecessary. So if pillar one of that reallocation of taxation rights is not enforced, the Digital Service tax could be imposed as of January 1, 2024 and payable as of 2024 for revenues earned as of January 1, 2022. So they would go backwards to January 1, 2022 on those new rules imposed on 2024. So digital service tax is just a more as a Canadian based version of what they're trying to negotiate internationally on a collaborative level. Then there's pillar two, which is called a global minimum tax. And budget. 2023 reaffirms Canada's intention to introduce legislation implementing the pillar two global minimum tax. Certain rules include a domestic minimum top up tax would take effect for fiscal years of multinational corporations starting on or after December 31, 2023. In essence, the highlights that I want to highlight is that in terms of the territory related to digital services, digital products, digital anything on the Internet, whether it's starting at the global level, down to the individual Canadian level, there are discussions and frameworks occurring to tack those activities. And I just wanted to leave that for you to think about the last item I wanted to talk about is there is this general section in the Income Tax Act. It's called the General Anti Avoidance Rule which is called short for GAR and is intended to prevent abusive tax avoidance transactions which will fall under a lot of definitions that are described in the Income Tax act if they can. If they can establish abusive tax avoidance. The GAR applies to deny tax benefits created by those abusive transactions, as they would call it. And what has happened is a consultation on various approaches to modernizing and strengthening the GAR has recently been conducted. So the key takeaway is they've fortified more rules to limit the ability to have any more ambiguity as it relates to planning or being proactive in legally structuring the minimum amount of taxes payable. This part again will fall into that general umbrella of the garbage. So a few amendments have changed related to the gar. The first is the preamble. A preamble would be added to the GAR to help address interpretive issues and ensure that the GAR applies as intended. The second is avoidance transactions. The threshold for the avoidance transaction test in the GAR would be reduced from a primary purpose test to one of the main purpose tests. This is consistent with the standard use in modern anti avoidance rules and strikes a reasonable balance. It would apply to transactions with a significant tax avoidance purpose, but not to transactions where tax was simply a consideration. The next one is a penalty. A penalty would be introduced for transactions subject to the GAR and it's equal to 25% of the amount of the tax benefit. The other one I just wanted to highlight in terms of the GAR amendments is a reassessment period. A three year extension to the normal reassessment period would be provided for GAR assessments. So they've now increased the timeline which they can reassess reassessments unless the transactions has disclosed to the Canada Revenue Agency. Now a lot of these changes something just wanted to always keep in the forefront of your minds as you're learning about the tax implications that you generally may not have control over when the government sets these type of policies is that there's always wide speculation in the budget that one time, sooner or later there are these possible changes that may take effect, have possibility to take effect, but haven't been affected yet. And this includes the possibility of an increase in the capital gains inclusion rate from what was originally 50% and what historically has gone to 75%. So those are just some things to be mindful of. Measures that broadly target capital gains planning. So you can kind of already see with the intergenerational wealth transfer of a business that is sort of policy movement that's creeping towards targeting capital gains planning. In the US they have what's called a wealth tax, while in Canada usually it follows the directions of the us there's always speculation wondering whether a wealth tax will be implemented. If we kind of look at the situation overall, as much as I'm just highlighting and giving you some highlights on the Federal Budget for 2023, it's really important that you visit the Department of Finance from the CRA to draw and receive their proposed information on the budget. What I've done is just streamlined and simplified anything related to wealth generation and impacts that may happen to you, but it's not a complete discussion on everything overall. What I just kind of wanted to share further was just be mindful of as you are learning about these updates that how does it impact you in your wealth building journey and how important would it be if you can minimize the impact of situations that are and have more control of the situation? And this is where a lot of our clients are. You watching this video want to learn if we learn more where you can bring more of that control into your own hands, into your own family's dynamics hands. And this is where building a family banking system is part of a step to move in that direction. If you really want to learn more about that, it starts with becoming your own banker and you can definitely get your free 90 minute training@watchibc.com so that you can learn more about creating an opportunity for your family so that you can maximize the benefits for yourself. Thanks for listening to Zoo. Please make sure to visit more of our videos in our channel and I hope to hear from you soon. See ya.