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First Look at the 2023 Canadian Federal Budget

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After the release of the 2023 Canadian Federal Budget, BMO Chief Economist, Doug Porter discussed key elements that may affect the economic outlook over the coming months. BMO Private Wealth tax expert, John Waters, provided an overview of significant personal and small business income tax measures announced in the budget.

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  • Douglas Porter, BMO Chief Economist, BMO Capital Markets

  • John Waters, Vice-President, Director of Tax Consulting Services, BMO Private Wealth

  • Moderator: Caroline Dabu, Head, Wealth Distribution and Advisory Services, BMO Private Wealth

Federal Budget Light on Economics: Expert Insight

The 2023 federal budget will be remembered as much for what it didn’t include as for what it did. While the government emphasized themes like the green energy transition, partially to keep pace with the United States, and new healthcare spending, Ottawa offered few measures to help Canadians cope with skyrocketing inflation.

From a personal tax perspective, the budget offered a “grocery rebate,” minor tweaks to some registered plans and reform of the Alternative Minimum Tax (AMT), which will impact higher-earning Canadians, as well as new provisions to help private businesses.

These were some of the main takeaways from a panel of BMO experts featuring Chief Economist and Managing Director Doug Porter and John Waters, Vice President and Director of Tax Consulting Services at BMO Private Wealth. The virtual panel, First Look at the 2023 Canadian Federal Budget, was moderated by Caroline Dabu, Head of Wealth Distribution and Advisory Services at BMO Private Wealth, and addressed everything from the impact of the rising deficit to how changes to the AMT will impact high-net-worth Canadians.

Short on Inflation

“From an economic perspective, I would have to characterize this budget as a little bit light on that front,” Porter said in opening his remarks, noting an emphasis on new spending on green energy and health care and limited steps to address affordability for Canadians as they wrestle with the highest inflation in decades. “Inflation is still public enemy number one,” he said, adding that the only real step to address affordability was a so-called grocery rebate, which is effectively an enhancement of the GST tax credit.

On balance, said Porter, the 2023 budget introduces net new spending and stimulative measures rather than taming inflation. “It’s sort of acting at cross purposes of what monetary policy has tried to do over the past year.”

Most of those new spending measures come in the form of tax credits to incentivize investment in the clean economy to respond to the U.S. Inflation Reduction Act, which included a US$369-billion investment in domestic energy production and manufacturing, amongst other steps, to reduce carbon emissions by roughly 40 percent by 2030.

While the new incentives outlined in the budget will be modest initially, they will rise to more than $5 billion per year by the 2026/27 fiscal year. Some of those measures include credits for investments in renewable energy production and clean manufacturing, and offsets for the cost of mining and production equipment for mining and processing critical minerals. All of the credits are contingent on manufacturers maintaining wage and benefit programs and training apprentices. 

The new provisions, while meaningful, don’t go as far as the spending plan in the U.S., although as Porter noted, Ottawa doesn’t have the fiscal heft to match that level of spending on clean tech. Instead, Canada’s overall strategy has been to tax carbon and let the market resolve it.

Growing Budget Deficit

Heading into the budget lockup, the budget deficit was expected to come in under $40 billion for the current fiscal year and then moderate to $30 billion for the fiscal year that begins in April. Now, Ottawa is looking for a deficit of $43 billion and $40 billion for the coming year, said Porter. “Not a huge deal, but on balance, it’s a bit of a deterioration and a step in the wrong direction.” 

Still, he doesn’t expect the new spending will pose a risk to the Canadian economy. Overall, he forecasts that Canadian GDP will grow slightly by between 0.5 percent and 1 percent this year, factoring in an expected mild contraction in the North American economy over the next few quarters. With the Canadian economy operating at near full employment and the economy operating flat out despite persistent headwinds, Porter said the new budget represents a bit of a misstep. “I’d have to characterize it as a little bit of an economic disappointment in the fact that we did see this net new spending at a time when monetary policymakers are trying to restrain the economy and rein in inflation,” said Porter.

The prospect of a contraction in the Canadian economy and a slightly lower-than-expected print on the consumer price index will likely keep the Bank of Canada (BoC) from raising the overnight rate again this year, said Porter. “Our official call is that we think the Bank of Canada is done raising rates,” he said. “We don’t think the budget changes that, and we expect the Bank, in fact, to stay on hold through the rest of this year and then begin trimming interest rates in 2024.” That’s in contrast to the BoC’s global counterparts – notably the U.S. Federal Reserve – which are expected to continue to hike rates to fight inflation.

The divergent paths between the BoC and the Fed have pressured the Canadian dollar early this year, but banking sector stress in the U.S. has recently given the loonie a bit of a lift, and it is likely to strengthen rather than weaken over the next 12 to 18 months as the U.S. dollar “loses some altitude.” With another U.S. rate hike on the horizon, Porter expects that trend to start soon thereafter.

Limited Tax Implications

From the personal and private business income tax perspective, BMO’s John Waters said the 2023 budget brought few surprises.

“There’s definitely some significant changes that will impact high-net-worth Canadian individuals as well as Canadian businesses,” said Waters. “But there were no broad-based changes to personal or corporate tax rates to write home about.”

While there were some minor tweaks to allow students to withdraw up to $8,000 from their Registered Education Savings Plans (RESP) in the first 13 weeks of enrollment year versus $5,000, and there was the GST rebate, or the so-called grocery rebate, which will support some 11 million lower- and modest-income Canadians, the expected change to the AMT was one of the more notable changes.

The AMT has been in place since 1986 to ensure tax filers are paying a minimum amount of tax regardless of their deductions or tax credits claimed. The AMT is a separate calculation that is run parallel to ordinary income tax rules, with the taxpayer paying whichever amount is higher. For the purpose of the AMT calculation, the minimum tax base will be broadened (by increasing the capital gains inclusion rate to 100% from 80%, for example) and only 50% of many common expenses and tax credits, like interest charges and charitable donations, will now be deductible for AMT purposes, explained Waters.

Ottawa is also increasing the AMT tax rate to 20.5% from the flat 15%, he added. At the same time, the federal government is raising the basic exemption level to $173,000 from $40,000, to protect lower- and middle-income individuals from AMT. The changes, which are proposed to come into effect in 2024 could increase tax for higher income individuals, and are expected to generate about $3 billion in tax revenue over the next five years, said Waters. Most of the revenue will come from individuals earning more than $1 million.

“It’s not going to affect everyone,” explained Waters. “There may be some changes in tax behaviour and looking at other options, like using a corporation to earn investment income.”

Good News for Private Corporations

Waters said there were a couple of positive changes for private corporations in the budget, too. The government is introducing a new trust structure to facilitate employee ownership of private businesses. “The goal here is to increase or encourage employee participation and engagement incentives,” noted Waters, adding that it will provide another exit option for business owners.

Rather than owners having to exit their business by selling to a competitor or risk having that business being shut down or seeing its assets sold off, “the concept here is that the trust would take on the debt to purchase the company, and the loan would be repaid from future company profits so that employees participating would have a minimal upfront cash payment and benefit from growth down the road,” he explained.

The new trusts will also be exempt from the 21-year rule that would otherwise apply to trusts, to recognize the longer time frame of the strategies. More details are expected to be announced, but it’s a positive development that will put Canada more in line with the United Kingdom and the U.S., said Waters. The new trust structure is expected to be in place for 2024.

Overall, both Porter and Waters had mixed reviews of the budget, surprising more for what it lacked than for what it contained. The muted market reaction suggests investors felt the same. “I would probably rank this in the bottom 10 of the past 30 in terms of market moving or importance,” said Porter.

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Speaker 1 (00:03):

My time.

Speaker 2 (00:12):

Hello everyone. My name is Caroline Dubu. I'm head of Wealth Planning and Advisory Services for Bemo Private Wealth, and I'll be your host for today's virtual session on the 2023 Canadian Federal Budget. As we gather here today, I acknowledge that I'm greeting you from Toronto, and that this land has, for many millennia been the traditional territory of indigenous nations, including the Huran, Wenda, the Huo, the Anina, and most recently the Mississaugas of the credit. Our teams across North America today are on the traditional territories of many indigenous nations. We honor and recognize the first peoples of our territories and the ongoing contributions of First Nations, Inuit, and Metis people to the vibrancy of our communities today. On behalf of your Bemo relationship manager, thank you for taking the time to join us today. So yesterday, finance Minister Christie Freeland tabled the federal government's budget, and today I'm pleased to be joined by be os Chief economist Doug Porter, for his take on how the elements of this year's budget may affect the economic outlook for the next 12 months.


And, uh, Bemo Private Wallace vi, vice President and Director of Tax Consulting Services, John Waters. John is gonna share his insights on the most, uh, significant personal and small business tax income tax measures, uh, announced yesterday in the budget. We have received, uh, a number of questions, uh, from many of you in advance of the presentation through the registration site. Um, and so many of those questions, they're gonna be answered during, uh, both Doug and John's presentation. Uh, but if you have additional questions for, uh, either Doug or John, uh, please enter them in the chat box on your screen, and we're going to address as many as we can. Uh, we've left plenty of time for a q and a session following, uh, their formal remarks. Uh, Doug and John have both published a full reports with their insights on the budget, and, um, they're gonna be shared following this event. Doug's report can also be found on the bemo economics, uh, website, and John's can be found on our private Wealth Insights hub. So, Doug and John, thank you for being, uh, with us today. Um, Doug, why don't we get started with you for your, uh, your take on, uh, this year's budget?

Speaker 3 (02:28):

Sure. Thank Caroline, and thank you very much, and good morning everyone. I'd just like to echo Caroline and, uh, thanking you for, uh, joining us, uh, today for this, uh, post budget analysis. I have to say, I've been, uh, covering budgets for, well, a little bit more than 30 years now. And this, I would probably rank this in the, uh, the, the bottom 10 in terms of market moving or importance. Um, it, there, there wasn't a whole lot in this budget versus, uh, some others, but that's not to say, uh, that it, that it wasn't important in its own right. And there, there were a few key, uh, key, I guess the, the three things that really stood out to me the most, uh, first of all was the, definitely the focus on, on green energy, some of the subsidies and, and the tax credits there.


Uh, second of all, and and this really was, uh, news before the budget was the, uh, the extra funds put aside for healthcare spending. I, I suspect that's a theme we're gonna hear time and time again in, in the years ahead. This is certainly not the end of that story, um, but there was an important element added on that front. And the, the third, uh, thing I was looking at would highlight was, uh, just some of the, uh, the focus on, uh, on affordability, um, and some of the, uh, the measures to try to help Canadians with the very high levels of inflation. And the highlight move there was the so-called grocery rebate, uh, which was really just an enhancement of the, uh, the GST tax credit and really had nothing to do with, uh, groceries, uh, per se. Um, I would, I would say standing back and looking at it, uh, from an economist standpoint, I would say, given the, that the fact that inflation is still, I would say, public enemy number one, uh, from an economic perspective, I would, I would have to characterize this budget as a, as a little bit light on that, that front.


And I wonder about the thrust of it, you know, the fact that on balance, we did see net new spending, net new stimulative measures and very little, uh, to help Canadians deal with, uh, the relatively high inflation I'd, I'd have to characterize it as a, as a little bit of an economic disappointment in the fact that we did see this net new spending at a time when monetary policy makers are, are trying to restrain the economy, trying to bring in inflation, and instead we actually get an, an upgrade in terms of the size of the deficit. For instance, as recently as the fall economic statement, which was just late last year, uh, you know, it was looking like the, uh, the budget deficit was gonna come in a little bit less than 40 billion for the, uh, the current fiscal year, and then moderate to 30 billion for the fiscal year.


That's supposed to begin on April the first. Instead, for a variety of reasons, partly economic, and partly because of some of the new measures that we saw in yesterday's effort, we're now looking at a budget deficit of 43 billion for, uh, for the current fiscal year and about 40 billion, uh, for, for the coming year. Not, not a huge deal, but on balance, a bit of a deterioration, a bit of a step in the wrong direction. And what that tends to do is it actually means that the government's own fiscal anchor, which they've been focusing on the, uh, the, the debt GDP ratio is actually going to rise in the year ahead. So by their own benchmark, we're actually seeing a deterioration in the, in the fiscal landscape over, over the next year. Uh, again, I would characterize that as a little bit of a disappointment given the fact that we're essentially operating with an economy at full employment.


You know, I've never seen the job market as tight or as healthy as what we're dealing with right now. The unemployment rate's only 5%. And at a time when, you know, the, as I said, the, you know, the number one, uh, economic concern here is the level of inflation, you know, to be seeing the, the deficit, you know, come in on, on the high side and seeing the debt GDP rising. I'd, I'd have to characterize that as a little bit of a miss though. Um, in terms of the net new fiscal measures, we calculate that there were a couple tens of a percentage gdp not, not a huge move by any means, but when you add in the, uh, you know, the grocery rebate, which, uh, they put into the, the prior fiscal year, and some of the steps that the promises have taken, uh, we calculate that the overall net fiscal impulse, as we like to call it, from all the budgets taken together, uh, equals about a half a percent of G D P.


It's not a huge move, but again, at a time when, you know, other policy makers are actually trying to restrain inflation, it's sort of acting at cross purposes of what monetary policy is trying to do over the past year. Now, let's, let's turn a little bit to, you know, what this might mean for the, uh, for the economic outlook and, uh, you know, where we stand now given, you know, some of the banking sector stress that we've seen over, over the past year. As I said, when, uh, when we look at the net fiscal impulse, it adds a little bit to growth. Uh, but overall, we're looking at an economy that's likely to grow by a little bit less than 1% this year. And that's a, that's quite a soft performance for, for the economy. Uh, many analysts, such as ourselves, have been calling for at least a mild con contraction in the, uh, in the North American economy over the next couple quarters.


Uh, we're sticking to that view, but there's no question that the economy started the year with more momentum than many of us were expecting. Uh, so we're still relatively comfortable looking for growth of between a half to 1% this year, which again, is, is a below average performance. It's, it's one of the softer, uh, years that we've seen for the, uh, the economy in the last 20 years. Um, and, and, uh, definitely a big step down from, uh, from growth of over 3% that we saw last year. I will will say though, that the, uh, uh, the budget is actually based on an even more conservative or cautious assumption for, uh, for the economy in the year ahead. It's based on, uh, a private sector consensus that was put together about a month ago or so. And, uh, that consensus was only looking for three tenths of a percent of growth this year, which is even lower than what we're, we're expecting.


So I certainly wouldn't, uh, tell you that this budget is, uh, is based on overly rosy economic assumptions. I, I would, I would assert, if anything quite, uh, quite the opposite. Um, the, i, I guess in terms of what this means for interest rates is, I, I don't think it really, uh, affects the, uh, the interest rate outlook in, in a meaningful fashion one way or tether. Um, of course, one of the big economic stories of, of the past month is, has been the, uh, the banking sector stress that we saw really first begin, uh, with the California Bank in Silicon Valley, and then spread out to, uh, to Europe. Um, the, the biggest market impact from, uh, from that stress is we've seen a significant change in what financial markets are building in for future central bank rate HI hikes over, over the next year.


Um, despite that, we still saw the Federal Reserve raise interest rates. Last week we saw the Bank of England, the Swiss National Bank, and the European Central Bank. In recent weeks, even in the midst of that banking sector, stress still go ahead and raise interest rates. The Bank of Canada, uh, became, however, became the first major central bank to hit the pause button about a month ago. And we think that they're gonna stay on pause through the rest of this, uh, this year. Uh, the budget does not change that. Um, at the margin, the banking sector stress puts a little bit of, um, or raises the, uh, the chances of the bank at some point, cutting interest rates later this year. But our official call is that we think the Bank Canada is done raising rates. We don't think the budget changes that, uh, and we expect the bank, in fact, to stay on hold through the rest of this year and then begin trimming interest rates in 2024.


That's provided that inflation does continue to come down. I have to say, uh, inflation actually has been a little bit lower than we would've expected in recent months. The, uh, the pullback and energy prices will probably grease the wheels a little bit further in the months ahead. Uh, we still think that the bank will not be comfortable until around the turn of the year, though, with the inflation outlook, uh, before they begin to, uh, to cut rates at, uh, at that time. Uh, the last thing I'll end on is, uh, just, uh, the Canadian dollar, um, and what the budget might mean for the Canadian dollar and what that bank of candle oat look might mean, uh, for, uh, for, for the currency. Uh, we actually did see the Canadian dollar come under a little bit of stress, uh, up until about a month ago.


And some of that was on the view that the bank of candle was indeed moving to the sidelines at a time when the know other central banks, especially the US Central Bank, the Federal Reserve, was still raising interest rates. It's interesting that the banking sector stress has actually helped the Canadian dollar a little bit on net, just because it's taken some of the more aggressive views on the US Central Bank out. In other words, it's sort of capped, uh, the amount that the US Central Bank will be raising interest rates. And the net effect of that has actually been to somewhat support the Canadian dollar. When we look ahead over the next 12 to 18 months, our underlying view is that the Canadian dollar is more likely to strengthen than weaken, especially when the end of fed rate hikes come into view, which we think is fairly soon on the horizon, we think that the US dollar more broadly will lose a little bit of altitude. And as a result of that, the Canadian dollar is likely to strengthen on, on balance. And we, you know, effectively, we don't think that yesterday's budget, uh, really alters the, uh, the course for, uh, for the central Bank. Um, that's it for, for a very big picture. Look along, join you again for questions after we hear from John, but first I'll turn it back to Caroline. Thank you very much.

Speaker 2 (11:17):

Terrific. Thanks, Doug. So it sounds like we shouldn't expect any big market, uh, impact or change in any of your projections based on this budget.

Speaker 3 (11:28):

No, and in fact, the, uh, the, the market response in the, in the last, uh, the last 12 hours or so has been very, very muted. And, and by the way, that, that tends to be fairly typical these days. I can recall a time in the 1990s when the, you know, the Canadian dollar and interest rates could move very violently in the wake of, uh, of a, of a, a budget from Ottawa. But, uh, you know, the, the markets, uh, you know, certainly they pay attention mm-hmm. <affirmative>. Um, but we really saw next to no market reaction based on, on this budget.

Speaker 2 (11:54):

No. Okay. Thanks. Thanks, Doug. We'll come back to you and, and now what I'll do is I'll turn it over to, uh, John Waters, our head of tax consulting services here at, uh, BMO Private Wealth. So John, what's, what's your take from a personal tax, uh, and small business perspective?

Speaker 4 (12:10):

Yeah, I guess it would be somewhat similar to Doug in terms of nothing huge to write home about, although there's definitely some significant changes that will impact, uh, high net worth Canadian individuals as well as, uh, Canadian private businesses. Um, similar to to last year, uh, the, there were no, uh, changes in the capital gains inclusion rate. I know that that's a perennial rumor. Um, nothing on that front specifically this year. No broad-based personal or corporate tax rate changes or, uh, changes to tax brackets. Uh, I would say that most of the income tax changes, uh, that were proposed yesterday, uh, were expected or telegraphed in recent weeks. And, uh, many of these related to the liberal election platform, or filling in some of the details on some outstanding measures that have been previously announced. The main themes as Doug had outlined, uh, you know, targeted inflation relief, um, public healthcare, including dental incentives to the, the candidates clean economy.


But in terms of individuals, I, I would say, as in prior budgets, somewhat of a, a, a Robinhood theme, uh, in that, uh, higher taxes on the wealthy in this case, in the form of a broader alternative minimum tax, which I'll, I'll talk about a bit more in a second. And the grocery rebate, um, to 11 million lower modest income Canadians, uh, one time payment through the G S t uh, credit later this year. Uh, some positive tweaks, uh, slight tweaks to some registered plans, uh, some integrity measures as, as in prior budgets, specifically related this year to the general anti-avoidance rule to, uh, to, uh, strengthen it and modernize it. But, uh, the main personal tax change that I would say is related to alternative minimum tax. So no surprises here. We knew something was coming. This was, uh, first announced in the liberal election platform in 2021, and last year's budget in, uh, announced the government's intention to examine a new minimum tax regime.


They were highlighting last year that about 28% of individuals with gross income in excess of 400,000 in 2019 paid less, uh, paid less than 15% of federal tax. So, a bit of background on the alternative minimum tax calculation. This has been with us since 1986. It's a separate calculation that theoretically would happen for all tax filers, and it starts with, uh, your regular taxable income is calculated and adds back certain tax preference items. Things like capital gains, exemptions, flow through, share deductions, things like that to your regular taxable income, and comes up an adjusted amount to which a 15% flat federal tax rate is applied. And to the extent that that minimum amount is in excess of your regular tax otherwise calculated, you would pay that higher, uh, minimum amount, so the higher of the two. But you have the ability within seven years to, to carry that, uh, minimum tax forward to, to reduce future taxes to the extent that your, um, regular tax exceeds that minimum tax in future years.


So what was proposed in the budget this year is to broaden that minimum tax base, uh, to include, say, for example, a full 100% amount of capital gains instead of the obviously 50 for regular income tax purposes and what was previously 80% under this regime. It's also further limiting some tax preference items. So deductions or credits, uh, disallowing, um, many common 50% of many common expenses for the purpose of this alternative minimum tax calculation. And, uh, 50% for most credits. So things like, uh, interest costs or, or charitable donations would stand out. It's also increasing the tax rate, uh, that flat 15% to, uh, 20.5, which parallels the, the tax brackets. Uh, but notably, it's increasing the exemption amount from $40,000 flat amount to approximately 173,000. Uh, and this, uh, takes it's scheduled to take place in 2024. So the purpose of that is to exclude most Canadians and really focus in on, um, the very wealthy.


And, uh, even the government documents say that, uh, it's expected to generate about 3 billion, uh, of tax revenue over the next five years, and that 99% of that, uh, revenue will be from individuals earning greater than 300,000. And, um, 80% of that will be from individuals owning, uh, oh, sorry, earning greater than a million. So what does that mean? Well, I, I think that this is all, as I say, been around for many years, and this is always a consideration for high income individuals that have significant deductions or credits to reduce their tax bill substantially. And it, it's more of the same and probably, um, you know, uh, affecting more people and affecting them more severely. So just to be aware, if you've got high income, particularly things like dividends or capital gains, and you are claiming significant credits, uh, or deductions that you may be caught under this regime, a lot of it will be, you know, meeting with your accountant, doing some calculations to figure out the impact.


Uh, but just to have that awareness, uh, particularly around capital gains income, um, and around some common deductions like interest or lost carry forwards, and even donations, especially, uh, uh, donations of appreciated capital property in terms of the double whammy of, uh, changes to the, um, alternative minimum tax calculations for donations and for, for capital gains. So obviously it's not gonna affect everyone. Uh, you've got the ability to carry forward for seven years, um, but there may be some changes in tax behavior in looking at things like, um, using a corporation to earn investment income as an example. Um, just briefly, I I wanna highlight a couple of key themes for private corporations. Uh, there's a couple of key changes there. The first one relates to, uh, employee ownership trusts. Now, this is a positive development, and again, telegraphed and expected, uh, but glad, glad to see it in this year's budget.


Uh, so the idea here is that, that the government is introducing a new trust structure into the tax legislation that will facilitate employee ownership of private businesses. And the goal here is, of course, to increase or encourage employee participation and engagement incentives, that sort of thing, but also to provide another exit option for business owners when they're looking to exit their business versus maybe selling to a competitor or, or, um, um, to the US and maybe have that business being shut down or, uh, stripped the asset stripped out. So similar to what's happening, what's been happening for many years in the US and uk, uh, that's been quite, uh, employee ownership trust quite popular there. Um, the concept here is that the trust would take on the debt to purchase the company, and the loan would be repaid from future company profits, uh, so that employees participating would have a minimal upfront cash payment to, to benefit, uh, with the growth down the road.


So the budget introduces some new rules to, uh, define the qualifying conditions, uh, to set up this structure and, uh, propose some changes, uh, to the tax legislation that would otherwise maybe impede, uh, the usefulness of the structure. So things like a capital gains reserve, extending that from five to 10 years and, uh, exempting these trusts from the 21 year rule that would otherwise apply to trust, to recognize that a longer timeframe of, of these strategies. So certainly more to come on this, it's an important, uh, positive development, um, and expected to be in place for 2024, but, uh, certainly more details, uh, forthcoming. And the final point here that I wanted to mention also related to private corporations, uh, has to deal with, uh, intergenerational share transfers. Uh, so this one a less positive mood move, uh, but again, something, uh, completely expected. And, uh, we're, we've been waiting, I guess for the last couple of years to see some changes here.


Uh, by way of background, um, the tax legislation has historically, um, been, uh, unfair, I would say, to, um, family members purchasing a a, a business, uh, from, from the, a previous generation's parents, that sort of thing. Uh, previously the tax legislation on a, a sale or transfer, uh, to an unarmed length person. So another family member, there are certain anti avoidants or surplus stripping rules that would often convert, would, would otherwise be a capital gain on a sale to a third party, to a taxable dividend on the sale to a related party. Uh, particularly when, um, the, the sale of transfer involved a, um, a corporation and, and the, the funds, uh, within the, the company being purchased would be used to finance that buyout. Uh, so what that means is, uh, higher tax rates and no ability to access the capital gains exemption.


So certainly not a great result. Uh, a couple of years ago, there's a private member's bill called BU Bill C 2 0 8, that made its all, all the way through Royal Ascent and, uh, sought to, uh, rectify this inconsistency and level the playing field. Uh, but we know when that came out that the government did not like certain elements of that and indicated at that time and, and said, uh, that they were going to make some changes, uh, in the future to clarify that these, um, these, uh, rules that, um, would level the playing field would only be available in situations that constitute a genuine intergenerational transfer. So we've got some more clarity from the budget as to what exactly that means. And it, it's basically requiring a, a greater involvement of children in the running and, and, um, growth of the business and a gradual reduction over time and withdrawal of the parent in the activity and their ownership value in that, uh, family business.


And the, the budget specifically outlined two mechanisms that that might happen in the form of an immediate sale. Uh, so for up to a three year period, or in the form of an estate free scenario to take place over a five or 10 year period, and provided some specifics around, uh, the requirements in terms of the timing of, uh, you know, the gradual withdrawal of the parent and the increasing involvement of the child. So that's certainly, uh, some big changes there for business owners. Uh, a few other smaller things, uh, uh, around, uh, lower credit card fees and some ITCs, uh, for green economy, um, and a forthcoming review of research and development. Um, but those are the, the main actors, uh, for individuals in private corporations.

Speaker 2 (23:01):

Thanks so much for that, John. And, uh, I know there's a number of questions already queue queuing up for you. So I, I do wanna move, um, uh, and switch gears to take some questions from, uh, from the audience. And we're gonna start with some submitted questions. And John, since, since you were, um, since you just finished, I do wanna, there's a question in terms of, um, any notable emissions and surprises from your perspective. I mean, there's some stuff that has been signaled the capital gain, um, uh, inclusion rate was left on change, but any big omissions from your perspective or surprises?

Speaker 4 (23:35):

No, I, I would say no, Caroline. Um, there, I, I think a lot of the things that we saw, as I mentioned, were expected. And I think, I think also the flip side that things that we were expecting to see actually did show up in the budget. Uh, I guess maybe one slight surprise might be around what I went through in terms of the alternative minimum tax in the particular impact to, uh, charitable donations, um, that we, we, in the tax community, we had always sort of scratched our heads, like, what are they gonna do with the alternative minimum tax regime and would they impact donations? The answer to that was yes. So that's a bit interesting, uh, a mild surprise. And, uh, certainly we will, we'll look to see more of the details and how that might impact, uh, the charitable sector.

Speaker 2 (24:27):

Thanks, John. Is there, um, uh, I just, uh, Doug, you talked about the fact that even though there's no, uh, you know, short term impact you're expecting from, from this budget, there is a much larger than, uh, projected, um, federal deficit. And, uh, certainly it was, first it was, we were supposed to have a surplus in, uh, 20 27, 20 28, and now there's going to instead be a 14 billion deficit. So what's the broader, you know, longer term economic impact of this?

Speaker 3 (24:59):

Yeah, and quite, quite frankly, I think that most of us don't take those, uh, forecasts, you know, four to five years down the road with, uh, with a great deal of seriousness because there are just so many different curve balls that can affect the economy o over time. But I, I think in, in a way, it's, it, it sets the tone, it sets the mood and the fact that, um, you know, essentially the government is, does, does not even forecast a, a budget surplus five years, uh, hence is, is pretty telling that they don't, uh, view it as, as a significant priority in, you know, in years gone by. They have essentially, in so many words, told us that their, their anchor is, uh, the debt GDP ratio, and as long as that's coming down, uh, then their view is that they're running a relatively, uh, restrictive or stable, uh, fiscal policy.


But I think what just happened in the last year shows you that the debt GDP anchor is, is not terribly reliable. Um, you know, because if you do get a slowdown as, as we're looking at over the next year and even a cooling in, uh, in underlying GDP inflation, then the denominator GDP can slow, you know, quite, uh, quite quickly and suddenly lead to a backup in, uh, you know, in, in your pre anchor, which is exactly what we're gonna see over, over the next year. Uh, so I think it's, it's fairly significant that the, uh, the government has basically given up on e you know, even projecting a, a budget surplus five, uh, five years from now. Yes. Um, in terms of its market impact. That's, that's relatively light. Um, but it's, it's interesting to me that, uh, you know, basically the bond market is still attaching, you know, so much less risk to Canada than the us for instance, you know, 30 year government bond yields are much lower.


10 year government bond yields are much lower in Canada than they, they are in the us. And part of that is based on Canada's relatively sound or fiscal landscape. And there, you know, there is little doubt that Canda is, uh, is in a better, uh, position than, uh, than than the US from a long-term perspective. But that doesn't mean there isn't, uh, there isn't room for improvement. And, and again, I, I would just go back to one of my earlier comments that a time when we, we've got full employment, the economy is essentially operating flat out, and, you know, the overall thrust of policy should be trying to restrain inflation now would've been the time, uh, to basically aim or, uh, you know, look for a budget surplus at, uh, at some point in the not too distant future. And I think they sort of missed a, a bit of a golden opportunity here.

Speaker 2 (27:16):

Yeah. So what would you, the, the grocery rebate was a, was meant, meant to address inflation rising prices, but was there anything else in here at all to address ri rising costs? And, and would you have expected, what would you have expected to have seen to address inflation in this budget?

Speaker 3 (27:34):

So I think what the government would say is, you know, look, we're we're doing things like helping out low income individuals with the, with the dental care and, and that sort of thing. You know, they're trying to make life more affordable for, uh, you know, for individuals on that front. But in, in reality, no, there, there's, there's precious little, I, I guess the one tiny thing I would point to, and the only reason why I would mention it is that, uh, you know, they did actually cap the, uh, the increase in the liquor tax and, you know, w w I don't know if you caught it, but there's, there's been a bit of a, you know, bit of a campaign, uh, you know, quite a, quite a big, uh, advertising campaign, uh, tr trying to hold back on on those tax increases. I, I suppose at the margin that somewhat, uh, caps the, uh, the, you know, the inflationary impact from, uh, from that front, that's the kind of thing I would actually look for the government to do is to, you know, try to restrain their own user costs. You know, tho those are some of the steps that they, uh, you know, that they could take to try to restrain inflation, but really, it, it, it took a backseat in, uh, in, in this budget.

Speaker 2 (28:30):

Yeah. So we won't see as much of a big increase on our beer and beer and wine, but, uh, <laugh>, um, in any event, just on, on the tax rates, I'm gonna turn to you, John. Uh, and it was a more an administrative tax filing question that came, came in here. Mm-hmm. <affirmative>, if my spouse and I are not subject to top personal, uh, marginal tax rates, will we still have to file, uh, any schedules on our returns related to a M T?

Speaker 4 (28:56):

Well, I would say that that's gonna relate primarily to the amount of gross income before deductions. So as I mentioned, if you do have a high gross income before, uh, the tax deductions, like interest costs or childcare, that sort of thing, uh, or there's significant, um, tax credits, like donation dividends, that sort of thing, uh, then the answer could be yes, but it's really gonna depend on the gross income. If, if that doesn't get you into the higher brackets, that you don't need to worry about it. And even if, um, you know, taking into account that that high gross income and a, and all the add backs, there's still a threshold of 173,000. So you have to be, you know, pretty significant, uh, higher income to, to be, to be affected by the emt.

Speaker 2 (29:42):

Okay. Thanks, John. I'm gonna go back to, uh, you, Doug, because one of the opening themes that you talked about was obviously the green, um, the green energy and the green initiatives. And so a question has, uh, has come up here in terms of the, the new green initiatives announced yesterday. Um, how will the likes of Hydro One TransAlta, TransAlta renewables and other power producers and transmitters be affected?

Speaker 3 (30:07):

So in my role, I can't talk to specific names, uh, per, per se, but I would, I would say in general, some of the measures taken will be a benefit to the renewable sector in, in general. Um, and that especially goes for utilities that rely heavily on, on, on renewables. I think it is, uh, net, net a a positive for, for that sector. Of course, each specific company is gonna benefit to, uh, to a different degree, uh, for the utility sector more broadly. I, I think it's, uh, it's, it's not so clear cut, uh, that, that this is necessarily a, a large positive. It really does depend on, uh, to what extent they're, uh, you know, uh, exposed to, uh, to the renewable sector. I, um, you know, to some, some of the names that were mentioned there, I think it, it's, it's relatively small in, in terms of, of the net impact. But I, I I, I, I would say overall it is, it is a net small positive for the sector, but it really does, does depend on, uh, the extent to which they're exposed to the renewable sector in, in particular.

Speaker 2 (31:06):

Yeah. Okay. And on, on this budget overall, I just wanna, wanna pivot to the impact of other sectors. Is there, uh, an impact on the manufacturing and food industries as a result of anything announced in yesterday's budget?

Speaker 3 (31:21):

So there were some, uh, tax credits for, for manufacturers in general. If, uh, you know, insofar as they're, they're dealing with the, uh, the clean tax sector, um, to a, to a large extent, you know, that what many people were looking for was, of course, we had this massive bill out of the US last year, the inflation reduction act, and we, you know, we're waiting to see how, how would candor respond, uh, to that. Clearly we, we don't have the fiscal health to be able to, or heft, I should say, uh, to be able to respond to it. Uh, one for one that, uh, you know, I I I would actually assert that, uh, what, what, uh, the US did was probably, uh, over and above what they could, uh, fiscally handle at, uh, at, at this stage of the cycle. And perhaps it wouldn't, it, you know, really didn't make sense for can to even try.


I think really our, our best, uh, you know, best option was to try to pick particular sectors and lean in where, where we could, and to the extent that we could, uh, we could afford it, uh, the other, and, and I think essentially that's what this, uh, this budget did. The other thing I would point out is though, is if we step back a bit, you know, Canada's overall strategy has really been to tax carbon, which the US has, has not done. And, you know, and, and basically let, let the market sort it out. And of course, that carbon tax is, uh, is, is gonna go up much further in the, in the next five years or, or so. And I really wonder if it does make that much sense for, for Canada to even, you know, be trying to match what the, the Americans are, are doing.


And, and I guess the last point I would make there is, you know, we, we, and, and, you know, almost no one's talking about this anymore, but we've got a big debt ceiling, uh, fight coming in, in the, in the months ahead. And I think the end result of that will be the, you know, the, the, the deal that we're gonna end up seeing, uh, to, to advance the debt ceiling is that we're gonna have to see some real restraint in, in the US on the fiscal side. And I wonder if a, a lot of the measures that we've seen in the last couple years won't, uh, won't get reversed or are offset in, in some, uh, to some extent by, uh, coming fiscal restraint in, in the us.

Speaker 2 (33:18):

Yeah, it'll be interesting to see. That's for sure. Um, as expected, John, there's a lot of questions coming in around the, uh, uh, alternative minimum tax. And so were there any changes to dividend tax rates or dividend, uh, tax credits? And on a related note, do um, any dividend tax credit changes have any impacts to, uh, the a M T changes that were announced?

Speaker 4 (33:42):

Yeah, so the answer is no. Uh, there were no changes to either the tax rates on dividends or, uh, the dividend tax credit mechanism, and there were no changes to, even though there was a lot of changes in terms of the alternative minimum tax calculation, as I mentioned to, to capital gains. And, and the other, uh, deductions credits, there were the, its status quo for, for dividends. Um, and historically, and then going forward after this budget dividends, uh, the tax credit is not taken into account in alternative minimum tax calculations, and neither is the, the, the gross up. So it's the actual cash amount of the dividend received that's reported as income, so it's status quo. So certainly it's part of the calculation as it was before. And perhaps, um, you know, as I mentioned, um, you know, people with dividend income or capital gain income in particular, um, because it's not fully taxed, uh, either of those sources of income, um, are the ones probably more, more likely to be subject to the, um, am m t going forward.

Speaker 2 (34:44):

Yeah. Of all the tax measures intro introduced, what, um, uh, what's the biggest impact that you see on personal, uh, finance?

Speaker 4 (34:55):

Well, certainly the alternative, the minimum tax is, is the big one, uh, especially for higher income individuals. Um, I, I would also highlight tho those two measures for business owners. Uh, obviously not as widespread because, uh, it's focusing on business owners, but, um, those are, are, are very important to, to business owners in terms of the employee trusts as another option. Um, but also if, uh, there's any desire and the future to transfer to the next generation. So those are definitely gonna have, uh, a big impact to, to many family businesses.

Speaker 2 (35:26):

Was there anything in the budget that impacts, uh, or addresses seniors?

Speaker 4 (35:31):

Not really. Uh, there was, uh, no specific tax measures that, uh, were exclusive to, to seniors. Um, I would highlight the impact of the grocery rebate, uh, for lower or modest income seniors, uh, that are receiving the GST credit. Uh, I would also highlight the automatic, uh, tax filing service for, for vulnerable Canadians who don't currently file. I'm surprised to learn that, uh, the government said in the budget documents that about 12% of Canadians don't, uh, file their tax returns annually. So, uh, imagine that that's probably a lot of low income individuals that don't have, have the means or the knowledge to, to do so. And probably a lot of seniors as well. Um, and, and maybe some that are, um, uh, could be receiving the, uh, guaranteed, uh, income supplement, uh, some lower income seniors that, uh, hopefully will now receive that by having their tax returns filed automatically for them. Um, a final point is that I, I know in, in, um, the platform of the liberal election, uh, there was mention of a career extension tax credit to help seniors, uh, stay in the workforce longer. Um, we still haven't seen that there was maybe a thought, we might see it in this one, but, um, perhaps down the road.

Speaker 2 (36:47):

Okay. Thanks John. Um, so Doug, back to you. I mean, we've obviously, the budget was released in a time of, you know, we've got inflation, we've got, um, the interest rate environment, but the other theme is, o obviously housing costs are still, um, you know, they're still up there, right? And, and so housing affordability is still an issue. Was there anything in this budget that addressed, um, real estate and, uh, you know, the housing cost issue?

Speaker 3 (37:18):

So when we think back to last year's budget, the, the main theme of last year really, really was the housing, uh, sector. And it got sort of short shrift in, in this one. There were, there were a couple tweaks to, uh, to what they unveiled over over the, in this one, there were a couple tweaks here. For instance, the, the ban on on foreign buyers, they slightly changed it, uh, there before buyers. They slightly changed it. Projects were, were maybe being, uh, canceled as as a result of that. And, and so they slightly lightened the, uh, the band on, on foreign purchases of, of real estate to, to make sure it wasn't, uh, impacting, uh, commercial real estate and it wasn't impacting, um, you know, development of multi-units. And, and I think that was actually a, a, a positive step and, uh, and the new first time, uh, <inaudible> and, uh, and the new first time, uh, labor account is now coming live in, uh, in, in April.


But yeah, housing definitely, uh, had a bit of a backseat. It's interesting when we think back on what's happened to the housing sector in, in the last year, it's been just, just an amazing flip of the switch. You know, a year ago we were dealing with one of the hottest markets that we had ever seen, and it's like the, the lights got turned out as soon as the Bank Canada started raising interest rates. And since that time, uh, prices nationally are down by more than 15%, you know, with obviously huge regional differences. But it's interesting that realistically that decline in price has not improved affordability because it's essentially been offset one for one by the rise in interest rates over the last, uh, 12 months. And in fact, there are many cities, uh, that, you know, a typical buyer would actually see a higher payment now than they would've 12 months ago, even with the, uh, you know, the pullback and prices.


And, and you know, what we, we think we're seeing now in the market is it looks like it may be bottoming out. Not I, I'm not looking for it to turn around in, in a big way, but because the fact that the Bank of Canada has moved to the sidelines because we've had a pullback in, in bond yields. And yes, because of very, very strong population growth, it looks as if some key markets are starting to, uh, to stabilize. And, you know, the market balance is actually, uh, starting to, uh, to turn around a little bit. We'll, we'll see if that's, you know, just a, you know, a little bit of a false dawn, uh, that we're seeing at this point. But it, uh, it does look like in, in many cities, the, uh, the worst might be over on that front.

Speaker 2 (39:32):

Okay, now the bank, let's stay on interest rates cuz the Bank of Canada is the only, uh, you know, bank, bank that's, that's held steady. Um, and you've said the not, there's nothing in this budget that changes your interest outlook, you're still expecting in, uh, interest rates to hold for this year, potentially decrease next year. Um, what would, what would, uh, I guess change your outlook, um, on that? Like what would cause the Bank of Canada to, to change? I mean, you mentioned inflation, but anything else?

Speaker 3 (40:01):

Oh, I think if the, uh, the banking sector stress that we've seen over the last, uh, three weeks or so flares up again, as in a much more significant way globally mm-hmm. <affirmative>, uh, and, and it does tend to weaken, uh, the, the global economy more than most analysts have, have suspected up to this point. That's something that could, uh, could get the bank off the sidelines and actually cutting rates by the second half of the year. I mean, as, as we speak, the markets are actually pricing in, uh, uh, modest bank account rate cuts, uh, by late later this year. They're certainly looking, uh, or have priced in, uh, some under this year, they're looking or half priced in and some, that's why the reserve and reserve is still raising interest rates. So they just raised interest rates last week and they've, they've essentially told us that they might raise rates again in May. So that's, um, you know, it's, it's quite a statement to have the financial markets pricing and rate cuts in, in the second half of the year. Mm-hmm.

Speaker 2 (40:53):

<affirmative>, you referenced, um, banking, um, you know, some of the bank, recent bank bank failures in the banking sector. That was one of the questions that was submitted. Whether or not there was any measures in the budget that was in response to the recent failures of, of, um, some of the US and, and European banks that we've seen.

Speaker 3 (41:12):

I I don't know if John can add anything to this, but the only thing I saw is there was some talk about, you know, looking at deposit insurance, but there were no, uh, no concrete, uh, steps taken on, uh, on that front. Uh, by, by the way, the one thing I was remiss in mentioning, and, and I appreciate that there were some folks on, on, on the capital market side on, on this. I said there was no market reaction. There was one very small market that did have a pretty violent reaction to this because, uh, to, to the budget, the, uh, uh, because it mentioned that they're gonna review the, uh, can mortgage bond, uh, which has basically been ave a vehicle over the last 20 years, uh, by, by which, uh, you know, the, uh, they've been boring at, uh, five year money and, and, you know, trying to support the, uh, the housing market, they're now looking at blending that into the general boring program. So we saw quite a move in that, that very narrow area of, of the financial markets. But I would say for the, uh, the overall investor, that's, uh, that's really not a significant, uh, step.

Speaker 2 (42:06):

Okay. We're gonna end, I think I have time for one last question, and it was, uh, one for you, John. Were there any changes that impact taxes on investment holding companies owned by individuals?

Speaker 4 (42:18):

Uh, no. The short answer is no. There were no changes that specifically would impact, uh, tax rates or investment hold codes. Uh, I, I guess the only comment that I would make there is, I, uh, alluded to earlier in terms of the alternative minimum tax, there may be some desire for individuals, uh, that could be subject to the revised a m t to and have significant investment income to consider the use of a holding company to earn that investment income. Uh, that of course has some tradeoffs in terms of, um, maybe some higher taxes, uh, each year on, on certain types of income. Um, I think of foreign income subject to, uh, tax source and, uh, complexities on the death of the shareholder, um, that sort of thing. But, uh, it, it may be a strategy, um, that, that might work for some people going forward.

Speaker 2 (43:07):

Thank you to you both. I'm just going to just look and see and queue up and see if there are any other questions that have been submitted. No, we are good. So, uh, listen, Doug and John, thank you so much again for, um, uh, sharing your expertise and your insights on yesterday's budget. And, um, as a reminder to everybody, we've, we do have, uh, Doug and John's, uh, publications that will be shared right after this, but, uh, they're accessible on the BMO economics, uh, website as well as the private wealth, uh, hub as well, so you can, uh, get them there. But, uh, I wanna thank all of our clients for taking the time to join us today. Uh, and I hope you found this discussion to be, uh, insightful and informative. Um, if you had a question that we did not get to, please let your, uh, relationship manager, your BMO professional know. Um, and we will, uh, uh, uh, for sure get, get you an answer, and I'm sure you'll find it in, in both the John and Doug's publication. So thank you very much and have a wonderful rest of your day.


Douglas Porter, CFA Managing Director & Chief Economist
Caroline Dabu Head, Wealth Distribution and Advisory Services at BMO Private Wealth
John Waters, CPA, CA, CFP®, TEP Vice President, Director of Tax Consulting Services at BMO Private Wealth

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