Budget measures summary
After eight consecutive interest rate hikes, the Bank of Canada has hit pause on rate hikes, holding the overnight rate at 4.5%. Canada's strong labour market and higher than anticipated wage growth has complicated the Bank of Canada's goal of achieving its 2% inflation target. Inflation fell to 5.2% in February from 5.9% in January. Although some progress has been made, Canadian wages grew by 5.4% year-over-year in February, and the unemployment rate sat at 5%, just shy of the record-low seen in the summer of 2022.
In addition to the Bank of Canada's fight to control inflation, mounting geopolitical tensions and global supply chain shocks present significant challenges to achieving the government's objective economic stability. While there are many indications that a technical recession is a possibility in 2023, whether the federal budget has cooled or fueled further inflation is yet to be seen.
Summary of key tax initiatives
The government introduced new tax incentives for investment in clean technologies and expanded eligibility for some previously announced measures that reward clean technology investment.
In addition, there is clarifying legislation relating to inter-generational transfers of businesses that expand the family members that may participate in such transfers. The new rules also require factual economic control be transferred in either a 3-or 10-year period in order to qualify.
The budget proposes to change the Alternative Minimum Tax (AMT) rules to expand the application of the rules to broaden the calculation, as well as increase the rate of the AMT. This will result in higher income individuals potentially paying more AMT.
Finally, the government is seeking to expand the application of the General Anti-Avoidance Rule (GAAR) by introducing a new economic substance test. The budget proposes changing the threshold for the avoidance test from a “primary purpose” to a “one of the main purposes” test, adding a 25% penalty to be applied to the benefit sought, and extending the reassessment period to which GAAR can be applied.