Today, most of my comments will relate to how the budget affects high-net-worth ("HNW") individuals and small business owners.
In the 2022 budget report, there is a section titled “A Fair Tax System”. Within the section, the report stated “some high-income Canadians still pay relatively little in personal income tax as a share of their income—28 per cent of filers with gross income above $400,000 pay an average federal PIT rate of 15 per cent or less, which is less than some middle-class Canadians pay. These Canadians make significant use of deductions and tax credits, and typically find ways to have large amounts of their income taxed at lower rates”.
This budget follows through on the above “fairness initiative” and proposes to limit the deductions and credits used by high-income Canadians by amending the AMT to "better target" high-income individuals.
Prior to my retirement from public accounting, I worked over 35 years with multi-National firms, mid-sized firms and a smaller firm. I only rarely observed my HNW filers paying tax at a 15% or less rate. My experience in the majority of cases was the opposite. HNW individuals less than thrilled, over how much tax that had to pay, most of it at a 54% tax rate. But I will accept the CRA's statistics as accurate and assume my sample size was not representative.
The AMT was created in 1986, to ensure high income Canadians paid at least a minimum rate of income tax. Conceptually, the AMT prevents high income earners from paying little to no tax by comparing their tax liability as calculated on their "regular" tax return to an alternative method, in which AMT is charged at 15% with adjustments for certain amount less a $40,000 exemption. If the AMT is higher than the regular tax, the taxpayer must pay the higher AMT result.
It should be noted that many of the reasons a taxpayer may pay a low rate of income tax in the first place is due to incentives provided by the Income Tax Act for donations, reduced capital gains rates, the sale of Qualifying Small Business Corporations etc. Thus, as I discuss below, the increase in AMT comes about in part because you will be required to add back a higher percentages of some of the incentives the government provides for charitable organizations etc. on your income tax return, which is counter to public policy in some cases.
The budget proposes for years beginning after 2023, to increase the AMT rate from 15% to 20.5% (plus the provincial component) and to increase the exemption from $40,000 to approximately $173,000 by 2024. The AMT base will be broadened by increasing the capital gains rate for AMT purposes only (the general capital gains inclusion rate of 50% was not changed) from 80% to 100%, by including 100% of stock option benefits, 30% of capital gains on the donation of marketable securities (again, this is only for AMT purposes, not regular income tax purposes where the donation of marketable securities eliminates any taxable gain associated with the stock donated) and will broaden the base by disallowing for AMT purposes, 50% of deductions such as child care, moving expenses, employment expenses (other than to earn commission income), interest and carrying charges, non-capital loss carryovers amongst others.
It is important to note that AMT can be carried forward seven years and thus, with proper planning and the right economic circumstances, the AMT can often be recovered over time to the extent a person’s regular income tax exceeds the AMT in a given year.
If you may have a significant tax event in 2024, whether a large income inclusion, a capital gain or a large donation or deduction, you will want to speak to your accountant. They can review your income tax situation to determine if you should accelerate any of these times to 2023 or whether you pay sufficient regular tax, such that if you wait until 2024 there will be no AMT impact or if you pay the AMT, you will recover it in future years.
The proposals will provide stricter rules and lower thresholds for an avoidance transaction. The proposals also include a penalty equal to 25% of the tax benefit, that can be avoided if the transaction is disclosed to the CRA. The government will hold consultations until May 31, 2023, after which they will release the legislation with an effective date.
Personal Tax Measures
Alternative Minimum Tax
This budget follows through on the above “fairness initiative” and proposes to limit the deductions and credits used by high-income Canadians by amending the AMT to "better target" high-income individuals.
Prior to my retirement from public accounting, I worked over 35 years with multi-National firms, mid-sized firms and a smaller firm. I only rarely observed my HNW filers paying tax at a 15% or less rate. My experience in the majority of cases was the opposite. HNW individuals less than thrilled, over how much tax that had to pay, most of it at a 54% tax rate. But I will accept the CRA's statistics as accurate and assume my sample size was not representative.
The AMT was created in 1986, to ensure high income Canadians paid at least a minimum rate of income tax. Conceptually, the AMT prevents high income earners from paying little to no tax by comparing their tax liability as calculated on their "regular" tax return to an alternative method, in which AMT is charged at 15% with adjustments for certain amount less a $40,000 exemption. If the AMT is higher than the regular tax, the taxpayer must pay the higher AMT result.
It should be noted that many of the reasons a taxpayer may pay a low rate of income tax in the first place is due to incentives provided by the Income Tax Act for donations, reduced capital gains rates, the sale of Qualifying Small Business Corporations etc. Thus, as I discuss below, the increase in AMT comes about in part because you will be required to add back a higher percentages of some of the incentives the government provides for charitable organizations etc. on your income tax return, which is counter to public policy in some cases.
The budget proposes for years beginning after 2023, to increase the AMT rate from 15% to 20.5% (plus the provincial component) and to increase the exemption from $40,000 to approximately $173,000 by 2024. The AMT base will be broadened by increasing the capital gains rate for AMT purposes only (the general capital gains inclusion rate of 50% was not changed) from 80% to 100%, by including 100% of stock option benefits, 30% of capital gains on the donation of marketable securities (again, this is only for AMT purposes, not regular income tax purposes where the donation of marketable securities eliminates any taxable gain associated with the stock donated) and will broaden the base by disallowing for AMT purposes, 50% of deductions such as child care, moving expenses, employment expenses (other than to earn commission income), interest and carrying charges, non-capital loss carryovers amongst others.
It is important to note that AMT can be carried forward seven years and thus, with proper planning and the right economic circumstances, the AMT can often be recovered over time to the extent a person’s regular income tax exceeds the AMT in a given year.
If you may have a significant tax event in 2024, whether a large income inclusion, a capital gain or a large donation or deduction, you will want to speak to your accountant. They can review your income tax situation to determine if you should accelerate any of these times to 2023 or whether you pay sufficient regular tax, such that if you wait until 2024 there will be no AMT impact or if you pay the AMT, you will recover it in future years.
General Anti-Avoidance Rule (“GAAR”)
The proposals will provide stricter rules and lower thresholds for an avoidance transaction. The proposals also include a penalty equal to 25% of the tax benefit, that can be avoided if the transaction is disclosed to the CRA. The government will hold consultations until May 31, 2023, after which they will release the legislation with an effective date.
Other Measures
There are various other personal tax provisions in the budget, including a small increase in RESP educational assistance withdrawals for the first 13 weeks on full or part-time enrollment, fees and premiums related to Retirement Compensation Arrangements and Registered Retirement Disability Savings Plans (extends the ability of a parent, spouse or common law partner to open an RDSP for an adult whose capacity to enter into a RDSP contract is in doubt by three years and broadens the definition of a qualifying family member) that you should discuss with your advisor if they relate to your circumstances.
The government has proposed a refundable investment tax credit (“RITC”) for clean hydrogen equipment, clean technology equipment (including geothermal equipment), clean technology manufacturing and processing equipment, carbon capture utilization and storage and consultations on RITC’s for certain clean electricity systems and equipment.
There are various other personal tax provisions in the budget, including a small increase in RESP educational assistance withdrawals for the first 13 weeks on full or part-time enrollment, fees and premiums related to Retirement Compensation Arrangements and Registered Retirement Disability Savings Plans (extends the ability of a parent, spouse or common law partner to open an RDSP for an adult whose capacity to enter into a RDSP contract is in doubt by three years and broadens the definition of a qualifying family member) that you should discuss with your advisor if they relate to your circumstances.
Corporate Tax Measures
Clean and Green Equipment
The government has proposed a refundable investment tax credit (“RITC”) for clean hydrogen equipment, clean technology equipment (including geothermal equipment), clean technology manufacturing and processing equipment, carbon capture utilization and storage and consultations on RITC’s for certain clean electricity systems and equipment.
If your business plans to purchase such equipment, I suggest you set-up a meeting with your accountant to discuss and understand the proposed requirements, effective dates and credits (15-40% depending on equipment and various factors) and to review the tax and environmental benefits for your corporation of purchasing such equipment.
From a business take-up perspective, some economic pundits feel the use of subsidies instead of RITC would result in a more effective Clean and Green strategy, but hopefully the RITC’s will prove to be a large enough incentive.
As this provision is very complex, you will need to discuss any potential business transfer to your children with your tax advisor.
The budget proposes new rules (effective January 1, 2024) to facilitate the use of EOTs to acquire and hold shares of a business. EOTs are intended to assist private business owners in transitioning their businesses to their employees on a potentialy more efficient tax and financing basis.
If you are considering selling your business to your employees, speak to your advisor about whether an EOT may be a viable selling option for you in the future.
From a business take-up perspective, some economic pundits feel the use of subsidies instead of RITC would result in a more effective Clean and Green strategy, but hopefully the RITC’s will prove to be a large enough incentive.
Intergenerational Business Transfers
This is very tax oriented rule, and you will need to consult your tax advisor. In general terms, the government wanted to facilitate intergenerational business transfers within families where a certain technical section of the Income Tax Act (84.1) was restrictive. However, the government felt the original provisions allowed unintended consequences such as parents still controlling the business and children not having sufficient active involvement in the business. Thus, they have proposed to tighten the rules for such transfers, effective January 1, 2024.
The exclusions have been tightened such that taxpayers can now rely on only one of two transfer options:
1. An immediate three-year test based on arm-length sale standards or
2. A five-to-ten-year test based on estate freeze characteristics (see this prior post on estate freezes).
The exclusions have been tightened such that taxpayers can now rely on only one of two transfer options:
1. An immediate three-year test based on arm-length sale standards or
2. A five-to-ten-year test based on estate freeze characteristics (see this prior post on estate freezes).
Employee Ownership Trusts (“EOTs”)
The budget proposes new rules (effective January 1, 2024) to facilitate the use of EOTs to acquire and hold shares of a business. EOTs are intended to assist private business owners in transitioning their businesses to their employees on a potentialy more efficient tax and financing basis.
If you are considering selling your business to your employees, speak to your advisor about whether an EOT may be a viable selling option for you in the future.
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.
No comments:
Post a Comment