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  • Charles Rotenberg

Budget 2023

This afternoon, Finance Minister Chrystia Freeland tabled the 2023 Budget. There has been a lot of talk in recent days about help for Canadians with food and other costs, help with health and dental care, and a new one-time credit to help with those costs.

The question, as always, is how the Government proposes to pay for those measures.

What was not in the Budget

There were no general increases in tax rates for small corporations or individuals

There was no increase in the inclusion rate for capital gains.

There was no overall tax on principal residences.

There was no immediate change to rules related to surplus stripping. More about this below.

There was no extension for the repayment by businesses of Covid related loan programs.

What was in the Budget

There are proposed changes to the rules for intergenerational transfers of businesses.

A cap is introduced on the increase in Alcohol Excise Duty Rates as of April 1, 2023.

There are proposed new rules to “update” the Alternative Minimum Tax (AMT) (i.e. make it more expensive to more taxpayers).

The promised rules to update the General Anti-Avoidance Rule (GAAR) are included (again to make it more applicable to more taxpayers and transactions).

The Goods and Services Tax Credit (GSTC) has been increased and is now referred to as the Grocery Rebate.

Employee Ownership Trusts have been amended to facilitate transfers of businesses to groups of employees. If any of my readers are involved in an Employee Ownership Trust, I will be happy to discuss the changes, but do not propose to discuss them this evening.

There is an increase to the deduction for Tradespeople’s Tools Expenses.

There has been some amendment to the rules for Registered Education Savings Plans (RESP).

There is some tinkering with the rules for Registered Disability Savings Plans (RDSP).

There is, as usual, tightening of the rules related to international tax and international sources of income. I don’t propose to discuss these changes in tonight’s newsletter.

As expected there are multiple tax provisions, credits etc. for investment in green technology. In the interest of time, I will not discuss these provisions this evening.

Tax Measures

The 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. The GSTC is non-taxable, income-tested, and indexed to inflation.

Budget 2023 proposes to introduce an increase to the maximum GSTC amount for January 2023 that would be known as the Grocery Rebate. Eligible individuals would receive an additional GSTC amount equivalent to twice the amount received for January. The Grocery Rebate would be paid as soon as possible following the passage of legislation, through the GSTC system. The maximum amount under the Grocery Rebate would be:

  • $153 per adult;

  • $81 per child; and

  • $81 for the single supplement.

This one time additional credit, while welcomed by taxpayers, will do little to really help lower income taxpayers with their increased bills for food, fuel and housing.

Alcohol Excise Duty

Under the Excise Act and the Excise Act, 2001, alcohol excise duties are automatically indexed to total Consumer Price Index (CPI) inflation at the beginning of each fiscal year (i.e., on April 1st).

Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties on beer, spirits and wine at 2%, rather than the projected 6%, for one year only, as of April 1, 2023.

The proposed measure would come into force on April 1, 2023.

Deduction for Tradespeople's Tool Expenses

A tradesperson can claim a deduction of up to $500 of the amount by which the total cost of eligible new tools acquired in a taxation year as a condition of employment exceeds the amount of the Canada Employment Credit ($1,368 in 2023). The total cost of eligible new tools cannot exceed the total of the employment income earned as a tradesperson and any apprenticeship grants received to acquire the tools, which are required to be included in income (i.e. the deduction cannot be used to create a loss from employment income).

Budget 2023 proposes to double the maximum employment deduction for tradespeople's tools from $500 to $1,000, effective for 2023 and subsequent taxation years.

Inter-Generational Business Transfers

As expected, there are rules designed to ensure the transfer of the business over a reasonable period of time. See my earlier newsletter on this topic.

A genuine intergenerational share transfer would be a transfer of shares of a corporation (the Business) by a parent (the Transferor) to another corporation (the Purchaser Corporation) where a number of conditions are satisfied. The following existing conditions would be maintained:

  • each share of the Transferred Corporation must be a "qualified small business corporation share" or a "share of the capital stock of a family farm or fishing corporation" (both as defined in the Income Tax Act), at the time of the transfer; and

  • the Purchaser Corporation must be controlled by one or more persons each of whom is an adult child of the Transferor (the meaning of "child" for these purposes would include grandchildren, step-children, children-in-law, nieces and nephews, and grandnieces and grandnephews).

To ensure that only genuine intergenerational share transfers are excluded from the application of section 84.1, additional conditions are proposed to be added (see comments on surplus stripping below). To provide flexibility, it is proposed that taxpayers who wish to undertake a genuine intergenerational share transfer may choose to rely on one of two transfer options:

  • an immediate intergenerational business transfer (three-year test) based on arm's length sale terms; or

  • a gradual intergenerational business transfer (five-to-ten-year test) based on traditional estate freeze characteristics (an estate freeze typically involves a parent crystalizing the value of their economic interest in a corporation to allow future growth to accrue to their children while the parent's fixed economic interest is then gradually diminished by the corporation repurchasing the parent's interest).

The immediate transfer rule would provide finality earlier in the process, though with more stringent conditions. In recognition of the fact that not all business transfers are immediate, the gradual transfer rule would provide additional flexibility for those who choose that approach.

Both the immediate and gradual business transfer options would reflect the hallmarks of a genuine intergenerational business transfer.

Under both the three year and the five to ten year options, the parent will have a three year period to give up legal control over a three year period. Under the longer option, the Parent can maintain up to 30% of their “factual” control (i.e. equity or debt from the Business) over an extended period of time. For farm and fishing businesses, the Parent may maintain up to 50% of their “factual” control over the 10 year period. In the shorter option both legal and “factual” control must be disposed of over the 3 year period.

For a large family business, it remains to be seen what happens at the end of the of the 10 year period if the child is unable to finance the outstanding balance of the purchase price from traditional lenders.

Under both options, management of the business must be transferred within 3 years from the time of the initial transfer.

There are requirements that a child must continue to work in the Business for the 3 year period, in the shorter option, or 5 years in the longer term option.

The child must maintain legal control of the shares during the 3 year period in the shorter term option. In the 5 to 10 year period, the child must maintain legal control for 5 years or until the purchase transaction has been completed.

The Transferor and child (or children) would be required to jointly elect for the transfer to qualify as either an immediate or gradual intergenerational share transfer. The child (or children) would be jointly and severally liable for any additional taxes payable by the Transferor, because of section 84.1 applying, in respect of a transfer that does not meet the above conditions. The joint election and joint and several liability recognize that the actions of the child could potentially cause the parent to fail the conditions and to be reassessed under section 84.1.

The joint election will be in addition, nor substitution, to the requirement to submit an affidavit as to the validity of the transfer of the shares and an outside opinion as to the value of the shares.

In order to provide the Canada Revenue Agency with the ability to monitor compliance with these conditions and to assess taxpayers that do not so comply, the limitation period for reassessing the Transferor's liability for tax that may arise on the transfer is proposed to be extended by three years for an immediate business transfer and by ten years for a gradual business transfer.

Budget 2023 also proposes to provide a ten-year capital gains reserve for genuine intergenerational share transfers that satisfy the above proposed conditions. It should be noted that there is already a 10 year reserve for a transfer of shares that qualify for the lifetime capital gains exemption.

These measures would apply to transactions that occur on or after January 1, 2024.

If clients wish to take advantage of the current, looser rules, the time to enter into a “C-208 transfer” will be before the end of 2023.

Surplus Stripping

I have written in the past about transactions designed to convert taxable dividends (taxed @ 48% in the top bracket) into capital gains (taxed @ 26.76%). These transactions are generally referred to as capital gains strips or retained earnings strips.

For some reason the Government continues to equate these transactions with sales under Bill C-208, discussed immediately above. There is nothing in C-208 that includes or excludes these types of transactions. However, the Government seems to believe that the two are connected.

Since the changes to C-208 are to be effective January 1, 2024, we can assume that the Government will attempt to eliminate these types of “strip” transactions at the same time.

Alternative Minimum Tax for High-Income Individuals

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.

The taxpayer pays the AMT or regular tax, whichever is highest. 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, so it is really, in most cases, a pre-payment of tax which can be refundable, rather than an absolute cost. The AMT does not apply in the year of death.

Budget 2023 proposes several changes to the AMT calculation. Key design features of the new AMT regime are described in detail below. Additional details will be released later this year.

Broadening the AMT Base

A number of changes are proposed to broaden the AMT base by further limiting tax preferences (i.e., exemptions, deductions, and credits).

Capital Gains and Stock Options

The government proposes to increase the AMT capital gains inclusion rate from 80 per cent to 100 per cent. Capital loss carry forwards and allowable business investment losses would apply at only a 50-per-cent rate.

It is also proposed that 100 per cent of the benefit associated with employee stock options would be included in the AMT base.

Lifetime Capital Gains Exemption

Under current rules, 30 per cent of capital gains eligible for the lifetime capital gains exemption are included in the AMT base. The government proposes to maintain this treatment.

Donations of Publicly Listed Securities

The government proposes to include 30 per cent 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. The 30-per-cent inclusion 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

Under the new rules, the AMT base would also be broadened by disallowing 50 per cent of the following deductions:

  • employment expenses, other than those to earn commission income;

  • deductions for Canada Pension Plan, Quebec Pension Plan, and Provincial Parental Insurance Plan contributions;

  • moving expenses;

  • child care expenses;

  • disability supports deduction;

  • deduction for workers' compensation payments;

  • deduction for social assistance payments;

  • deduction for Guaranteed Income Supplement and Allowance payments;

  • Canadian armed forces personnel and police deduction;

  • interest and carrying charges incurred to earn income from property;

  • deduction for limited partnership losses of other years;

  • non-capital loss carryovers; and

  • Northern residents deductions.

Expenses associated with film property, rental property, resource property, and tax shelters that are limited under the existing AMT rules would continue to be limited in the same manner.

Non-Refundable Credits

Currently, most non-refundable tax credits can be credited against the AMT. The government proposes that only 50 per cent of non-refundable tax credits would be allowed to reduce the AMT, subject to the following exceptions.

The Special Foreign Tax Credit would continue to be allowed in full, and would be based on the new AMT tax rate.

The proposed AMT would continue to use the cash (i.e., not grossed-up) value of dividends and fully disallow the Dividend Tax Credit.

Some non-refundable credits that are currently disallowed would continue to be disallowed in full: the Political Contribution Tax Credit, the Labour Sponsored Venture Capital Corporations Credit, and the non-refundable portion of investment tax credits.

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 %.

Carry Forward Period

The length of the carry forward would be maintained at seven years.

There is no indication as to the effective date of the proposed changes.

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 above is the Government rationale. Actually, the GAAR was intended to give the CRA an advantage over taxpayers even when taxpayers meet all of the technical rules of a particular provision. Over the years the Courts have limited, somewhat, the application of the GAAR, so with this Budget, the Government is trying to take back their advantage and override the Courts.

Budget 2023 proposes to amend the GAAR by: introducing a preamble; changing the avoidance transaction standard; introducing an economic substance rule; introducing a penalty; and extending the reassessment period in certain circumstances.


A preamble would be added to the GAAR, in order to help address interpretive issues and ensure that the GAAR applies as intended. It would address three areas where questions have arisen (i.e., where the Government doesn’t like the way the Courts have interpreted the issues).

While the GAAR applies to every other provision of the Income Tax Act, it fundamentally denies tax benefits sought to be obtained through abusive tax avoidance transactions. It in effect draws a line: while taxpayers are free to arrange their affairs so as to obtain tax benefits intended by Parliament, they cannot misuse or abuse the tax rules to obtain unintended benefits. When introduced it was a radical departure from the tried and true position that a taxpayer could arrange their affairs to pay the minimum amount of tax – regardless of the intention of Parliament.

Finally, the preamble would also clarify that the GAAR is intended to apply regardless of whether or not the tax planning strategy used to obtain the tax benefit was foreseen.

Avoidance Transaction

The threshold for the avoidance transaction test in the GAAR would be reduced from a "primary purpose" test to a "one of the main purposes" test. This is consistent with the standard used in many modern anti-avoidance rules and would apply to transactions with a significant tax avoidance purpose but not to transactions where tax was simply a consideration.

Economic Substance

A rule would be added to the GAAR so that it requires economic substance in addition to literal compliance with the words of the Income Tax Act. Currently, Supreme Court of Canada jurisprudence has established a more limited role for economic substance.

The proposed amendments would provide a lack of economic substance tends to indicate abusive tax avoidance. A lack of economic substance will not always mean that a transaction is abusive. It would still be necessary to determine the object, spirit and purpose of the provisions or scheme relied upon, in line with existing GAAR jurisprudence. In cases where the tax results sought are consistent with the purpose of the provisions or scheme relied upon, abusive tax avoidance would not be found even in cases lacking economic substance. To the extent that a transaction lacks economic substance, the new rule would apply; otherwise, the existing misuse or abuse jurisprudence would continue to be relevant.

The amendments would provide indicators for determining whether a transaction or series of transactions is lacking in economic substance. These are not an exhaustive list of factors that might be relevant and different indicators might be relevant in different cases. However, in many cases, the existence of one or more of these indicators would strongly point to a transaction lacking economic substance. These indicators are: whether there is the potential for pre-tax profit; whether the transaction has resulted in a change of economic position; and whether the transaction is entirely (or almost entirely) tax motivated. This would likely capture any surplus stripping transactions. The CRA has not been successful in applying the current GAAR provisions to this type of transaction.

The transfer of funds by an individual from a taxable account to a tax-free savings account provides a simple example of how the analysis could apply. Such a transfer could be considered to be entirely tax motivated, with no change in economic position or potential for profit other than as a result of tax savings. Even if the transfer is considered to be lacking in economic substance, it is clearly not a misuse or abuse of the relevant provisions of the Income Tax Act. The individual is using their tax-free savings account in precisely the manner that Parliament intended. There are contribution rules that specifically contemplate such a transfer and, perhaps more fundamentally, the basic tax-free savings account rules would not work if such a transfer was considered abusive.

The proposal would not supplant the general approach under Canadian income tax law, which focuses on the legal form of an arrangement. In particular, it would not require an enquiry into what the economic substance of a transaction actually is (e.g., whether a particular financial instrument is, in substance, debt or equity). Rather, it requires consideration of a lack of economic substance in the determination of abusive tax avoidance.


A penalty would be introduced for transactions subject to the GAAR, equal to 25 per cent of the amount of the tax benefit. Where the tax benefit involves a tax attribute that has not yet been used to reduce tax, the amount of the tax benefit would be considered to be nil. The penalty could be avoided if the transaction is disclosed to the Canada Revenue Agency, either as part of the proposed mandatory disclosure rules or voluntarily. This would build upon the mandatory disclosure rules and ensure that the Canada Revenue Agency has early access to the information it needs to respond quickly to tax risks through informed risk assessments, audits and changes to legislation. As such, a consequential amendment would be made to the proposed reportable transaction rules to permit voluntary reporting.

The introduction of a penalty changes the math considerably. In the past, the risk of a GAAR assessment was tax and interest charged as if the transaction had not occurred. There was little monetary risk since the tax was the same as if the transaction had not been entered into, and the interest was, presumably, offset by the benefit of the use of the money in the interim. The penalty can be a game changer.

Reassessment Period

A three-year extension to the normal reassessment period would be provided for GAAR assessments, unless the transaction had been disclosed to the Canada Revenue Agency. This extension reflects the complexity of many GAAR transactions, along with the difficulties in detecting them.


Interested parties are invited to send written representations to the Department of Finance Canada, Tax Policy Branch at by May 31, 2023. Following this period of consultation, the government intends to publish revised legislative proposals and announce the application date of the amendments.

Registered Education Savings Plans

Registered Education Savings Plans (RESPs) are tax-assisted savings vehicles designed to help families accumulate savings for the post-secondary education of their children. Contributions to RESPs may be eligible for government matching grants, such as the Canada Education Savings Grant. Low- and middle-income families may also qualify for Additional Canada Education Savings Grants or the Canada Learning Bond.

Increasing Educational Assistance Payment withdrawal limits

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 education-related expenses. EAPs are taxable income for the RESP beneficiary.

The Income Tax Act requires that RESPs place limits on the amount of EAPs that can be withdrawn. For beneficiaries enrolled full-time (i.e., in a program of at least three consecutive weeks' duration requiring at least 10 hours per week of courses or work in the program), the limit is $5,000 in respect of the first 13 consecutive weeks of enrollment in a 12-month period. For beneficiaries enrolled part-time (i.e., in a program of at least three consecutive weeks' duration requiring at least 12 hours per month of courses in the program), the limit is $2,500 per 13-week period.

Budget 2023 proposes to amend the Income Tax Act such that the terms of an RESP may permit 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

Allowing divorced or separated parents to open joint RESPs

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.

Budget 2023 proposes to enable divorced or separated parents to open joint RESPs 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.

Registered Disability Savings Plans

Registered Disability Savings Plans (RDSPs) are designed to support the long-term financial security of a beneficiary who is eligible for the disability tax credit. Where the 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. However, establishing a legal representative can be a lengthy and expensive process that can have significant repercussions for individuals. Some provinces and territories have introduced measures that provide sufficient flexibility to address this concern.

Qualifying Family Members

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 whose capacity to enter into an RDSP contract is in doubt, and who does not have a legal representative.

Budget 2023 proposes to extend the qualifying family member measure 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.

Siblings as Qualifying Family Members

To increase access to RDSPs, Budget 2023 also proposes to broaden the definition of 'qualifying family member' to include a brother or sister of the beneficiary who is 18 years of age or older. This will enable a sibling to establish an RDSP for an adult with mental disabilities whose ability to enter into an RDSP contract is in doubt and who does not have a legal representative.

This proposed expansion of the existing qualifying family member definition would apply as of royal assent of the enabling legislation and be in effect until December 31, 2026. A sibling who becomes a qualifying family member and plan holder before the end of 2026 could remain the plan holder after 2026.


I have attempted to highlight changes that affect many of my readers (I don’t act for many financial institutions or oil and gas companies), so many items in the Budget have not been discussed. Some I will discuss in time and others only as the need arises in a particular circumstance.

The big item for my clients is the proposed changes to Bill C-208 transfers of businesses. Overall, I am satisfied with the proposed changes – they strike a balance between the need to transfer a business with a reasonable tax cost, and the possible abuses open under the existing rules which don’t ensure that a genuine transfer has occurred. They may be a bit unrealistic in the time needed to properly transfer control of a business to the next generation, but the provisions are not unreasonable. Again, I question the Government’s attempt to conflate the C-208 provisions with surplus stripping.

Otherwise there are some minor benefits for average taxpayers, but the Government has huge deficits and is limited in what they can do.

I would be pleased to discuss the Budget provisions with you and your advisors.

- Chuck


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