OTTAWA—Flying under the radar of Budget 2023’s spending and deficits are a couple of tax hikes on wealthy individuals and corporations that were telegraphed a year ago. But analysis shows that such tax hikes can impact people who are simply using well-established tax deductions, and a tax expert says they can also adversely impact business investment.
These measures are part of a section where the feds say they are working toward a “fair tax system.”
Budget 2022 planted the seeds for changes to Canada’s alternative minimum tax (AMT) on wealthy individuals, saying it had not been substantively updated since its introduction in 1986. Along with that, the government launched a public consultation on the global minimum tax of 15 percent on multinational corporations, championed in 2021 by the Organisation for Economic Co-operation and Development (OECD).
And now in Budget 2023, they are realities.
A senior government official told The Epoch Times that the way the government is structuring the AMT for wealthy individuals is what is novel in this budget, and that the revenues expected to be generated are more elevated than what they would be by simply trying to close tax loopholes.
“They’ve achieved what they said was their objective of making the AMT have more bite,” said Brian Ernewein, senior adviser on national tax with KPMG Canada, in an interview.
As a result of the AMT provision, Budget 2023 expects revenues to increase by a total of $2.95 billion over the next five fiscal years, from 2023–24 to 2027–28.
“I would guess that the revenue estimates on the AMT are relatively reliable,” Ernewein said.
A question raised was that with tax increases on the wealthiest Canadians, the revenue might be “slippery” in that this income group can relocate or find other ways to pay less tax.
The senior government official said, “We’re confident of those numbers.”
AMT Details
Budget 2023 proposes to raise the AMT rate from 15 percent to 20.5 percent and to raise the basic AMT exemption from $40,000 to $173,000. This increases the income level necessary to pay the AMT.
“This would result in a tax cut for tens of thousands of middle-class Canadians, while the AMT will more precisely target the very wealthy,” according to the budget.
In a C.D. Howe Institute study published a day before the March 28 release of Budget 2023, Ernewein and two colleagues looked at potential ways high-income earners can lower their effective tax rate. They determined that capital gains lie at the heart of the issue.
“The current capital gains inclusion rate and lifetime capital gains exemption appear to be the reason that 72.9 percent of higher-income individuals were in the under-15 [less than 15 percent average federal tax rate] category in 2019,” according to the study.
The RRSP deduction was another factor that meaningfully lowered effective tax rates.
The study concluded that it is common and longstanding income tax provisions being employed and not something like shell companies in tax havens and other more elaborate accounting treatments.
“Many of these cases involve individuals encountering major, one-time events: For example, the sale of a farm or small business, or the family cottage; or making a significant RRSP contribution or charitable donation.”
Budget 2023 did not up the tax burden on capital gains.
“But if it [the government] is wedded to its election platform commitment that ‘everyone [in] the top bracket pays at least 15 percent each year,’ there is real cause for concern,” according to the C.D. Howe Institute report.
Ending the Race to the Bottom
The 15 percent global minimum tax works to ensure that multinational corporations pay their “fair share” wherever they do business, and that Canadian workers and companies play on a level playing field with global competitors, according to Budget 2023.
The OECD and G20 have been driving this international tax reform, which the budget points out has the support of 138 countries.
Ernewein added that a country’s corporate tax rates relative to those of other countries are probably most relevant to attracting business investment. This is something that Canada has struggled in doing and that in turn affects Canadian productivity.
“If our taxes are oppressive, certainly that can be a dominant factor for people’s location decisions, but I don’t know that I’d see the changes today as being the straw that breaks the camel’s back,” Ernewein, who worked for over 35 years in the Tax Policy Branch of the Department of Finance, said.
For the global minimum tax, Budget 2023 projects total revenues of $5.13 billion over the two fiscal years from 2026–27 to 2027–28.
This year’s budget also includes a 2 percent tax on publicly traded companies buying back their own stock, to encourage these firms to re-invest in their workers and the business. This is expected to generate nearly $2.5 billion over the next five fiscal years, from 2023–24 to 2027–28.
Also, dividends that financial institutions receive on Canadian stocks in the ordinary course of their business will no longer be effectively exempt from tax. This new tax is projected to increase federal revenues by $3.15 billion over five years starting in 2024–25.
