ESG incentives and changes to business transfer framework hailed

Budget 2023: tax planners will be 'overjoyed' at new rules

ESG incentives and changes to business transfer framework hailed

While this week’s federal budget delivered an overhaul to the alternative minimum tax (AMT) that targeted high earners, the new clean energy sector incentives is a positive for clients, according to a leading ESG-focused advisor.

“I took a really different lens to this because I specialize in responsible investing, so I looked at it through the environmental, social and governance lens and how it would affect my clients,” Patti Dolan, a senior wealth advisor and portfolio manager with The Wagner Investment Management Team with Wellington-Altus Private Wealth in Calgary told Wealth Professional.

“The clean economy tax credits, which amount to $83 billion, are a real game changer for the clean energy sector. For my clients, it provides a lot of opportunity and it’s also an opportunity for really interesting energy transition. That got me excited.”

Dolan also liked the fact the federal government plans to follow the European Union’s standards for having a universal phone charger and is supporting small appliance repair, so they’ll no longer be obsolete.

Regarding changes to the AMT, which limits the tax deduction available to high earners from certain incentives by applying a 15% tax rate with a $40,000 exemption amount, Dolan believes the impact will be minimal. The budget, in a bid to limit “excessive use of tax preferences” outlined plans to increase the AMT rate to 20.5% and raise the exemption amount to $173,000 (fourth federal tax bracket). Because clients pay the AMT or regular tax, whichever is highest, this means that more than 99% of AMT paid will be done by those who earn more than $300,000, with 80% paid by those who earn more than $1 million. Dolan told WP that most people who pay AMT now earn more than $300,000 and can afford different flow-through products and more aggressive tax planning to reduce their taxes.

Meanwhile, she applauded the federal government restricting payday – or predatory – lenders who have been charging up to 60% annually. They now can only charge a maximum of 35% or 14% per $100. She noted that may not impact her clients, but could impact their business employees or companies that her clients may want to invest in.

“That’s a real game changer for a lot of individuals to be able to get out of debt,” said Dolan. “A lot of immigrants, or people who don’t have a credit rating, such as younger people, get suckered into it. Alberta set maximum rates years ago, but this is federal legislation, which is really great.”

She also noted that financial institutions can no longer claim the dividend tax credit for clients invested in bank stocks. They must claim dividends as business income, which could impact their earnings.

The budget also announced that full-time students can withdraw $8,000 rather than $5,000 and part-time students can withdraw $4,000 rather than from $2,500 from their Registered Education Savings Plans. The tax-free home savings account will begin on April 1.

Budget’s tax implications

While Craig McIntyre, a certified financial planner, who is the director of tax and estate planning for IG Wealth Management in Ottawa, noted that there were no changes to the capital gains tax, he said the budget did provide more details about the proposed legislation for the business transfer framework, introduced about 18 months ago. It impacts many of his clients’ business succession plans – for their children or employees buying their businesses.

The children can’t flip the business right away. They have to be involved for 36 months, then they can sell it to complete an immediate transfer. Or they can do a gradual business transfer and sell it over five to 10 years if they have been involved for 60 months.

“That gives everyone a little more flexibility, more than we expected,” he said. “So, I think tax planners are going to be overjoyed with them putting these rules in.”

There are also new rules for employee ownership trusts, which allows employees to buy a company from a business owner. That provides owners with another option, so it’s easier to sell.

“It’s not unusual for one employee to buy a company, but this structure is new to me,” said McIntyre, who has been in the business for 20 years. While he noted that it looks like there will be restrictions on the former owner retaining control, he is waiting for more clarification. He’s particularly interested to see how it will impact capital gains since it also allows for a 10-year capital gains reserve to help the business owner who must pay the tax on the capital gain.

McIntyre said the AMT changes, which can impact people with incomes over $300,000, who have often sold a business and can claim a lifetime capital gains exemption, means “less people are going to be affected, but those who are going to be affected are going to be affected more”.

Meanwhile, if a disabled child’s legal representative or guardian has not set up a Registered Disability Savings Plan (RDSP) for a mentally incapacitated child, the government’s also making it easier for other qualifying family members, such as siblings, to set up the plan to aid that child.

Families earning less than $90,000 who do not have dental coverage now will be eligible. And finally, he said, the government is strengthening the General Anti-Avoidance Rule (GAAR), which allows it to review tax transaction and potentially charge up to 25% of taxes owing.

“I think they’re trying to strike a balance between guidance for tax planning professionals and trying to protect their base, so they’re trying to put some rules in place so everyone knows what’s on side and what’s off-side with GAAR,” said McIntyre. “It looks like they’re trying to spell out what they’re looking for in language that everybody can understand.”