Five tax changes for 2023 that business owners need to know about

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The federal government has made several major changes to the tax rules that come into effect this year. Other tax changes may not have been enacted as yet but are set to arrive in the not-too-distant future.

Here are my top five changes that private business owners should know about. Understanding how these measures could affect your tax situation is a financially wise move, especially in these uncertain times.

1. Changes to the small business deduction: potential tax savings?

If your business is a Canadian controlled private corporation (CCPC), it may now qualify for the newly expanded small business deduction. Under the previous rules, this deduction decreased after taxable capital reached $10 million and was eliminated at $15 million or more (for a corporation and its associated companies). Thus, corporations with at least $15 million were subject to the higher general federal business tax rate of 15 per cent, instead of the lower small-business tax rate of 9 per cent.

The passage of Bill C-32 in December raised the upper limit of taxable capital from $15 million to $50 million. This allows more medium-sized companies to benefit from the lower small-business income tax rate on up to $500,000 of active business income and save up to a maximum of $30,000 in federal taxes annually.

To illustrate, let’s say your business has $25 million in taxable capital and earns $500,000 of active business income that would have previously incurred $75,000 in federal taxes. The raised limits could mean your business would be eligible for the small business income tax rate on $312,500 of that taxable income, dropping the federal tax payable to about $56,250. That’s a potential federal tax savings of $18,750.

Certain restrictions apply, so speak to your tax advisor to determine if your business is eligible.

2. Get ready for new trust reporting requirements

The federal government has introduced vast changes to the tax reporting obligations for trusts, which apply to tax years that end after Dec. 30, 2023.

Reflecting Canada’s international commitment to increase transparency, more trusts will be required to file an income tax return (T3) each year, even if the trust has no income or activity. Trusts will also need to include certain information on each trustee, beneficiary, settlor and anyone who has the ability to exert influence over a trustee decision regarding trust income or capital (e.g., a protector). This information includes the name, address, date of birth, place of residency and other taxpayer identification such as a social insurance number or business number. These new rules cover many kinds of trusts, including alter-ego, joint partner and spousal trusts, bare trusts, joint accounts and real estate title corporations.

You and your advisor should review any trust arrangements (including bare trust arrangements) as soon as possible to prepare for these new reporting obligations. For example, if you have a family trust, you’ll need to review the language used to define those involved, such as your spouse, children and relatives. If the language in the trust indenture is quite broad, you may be required to assemble information for many individuals not named as the primary beneficiary but who might be considered “second in line” (e.g., contingent beneficiaries).

While you’ll need to comply with the new reporting obligations for the 2023 tax year, discuss with your tax advisor whether your trust still offers the same benefits as it has in the past. Does it make sense to restructure or wind up the trust altogether? Once you know what’s involved, gather the information required.

Remember: These new rules, which apply to Canada residents and involve all types of trusts, carry significant penalties for non-compliance.

3. Mandatory disclosure rules to increase transaction transparency

Another major development that we at KPMG are tracking for our clients involves the mandatory disclosure rules (MDRs). These proposed rules aim to address aggressive tax planning and involve sweeping changes on reportable transaction rules under the Income Tax Act for taxpayers and their advisors.

Basically, the new requirements lower the threshold for disclosing “reportable transactions” and introduce new requirements to disclose “notifiable transactions.” In most cases, reports to the CRA will be required within 45 days of entering into the transaction. The new rules affect corporations, individuals, trusts and partnerships for transactions that have specific attributes. Advisors who work on these transactions will also have reporting requirements. There are also new reporting requirements for certain corporations based on “uncertain tax treatments,” as reflected in their financial statements.

Certain aspects of the new MDR rules have been delayed. Once in force, the rules will give tax authorities more detailed information to examine higher-risk transactions and decide if a review for tax compliance is needed.

4. New limits on interest deductions

Many businesses may be affected by proposed rules to limit the amount of interest and other financing expenses that can be deducted for income tax purposes. These proposals, known as the excessive interest and financing expenses limitation (EIFEL) rules, generally limit the amount of deductible net interest and financing expenses to 30 per cent of adjusted taxable income, subject to certain exceptions.

It’s important to review these limits to find out if your business is affected and to model potential impacts, such as after-tax cash flows. Given rising interest rates, if your company is heavily financed, it may make sense to modify current financing arrangements, where possible, before the proposed rules take effect for tax years beginning on or after Oct. 1, 2023.

5. Tax relief for family business owners is here – but more changes coming

For many retiring family business owners, the passage of Bill C-208 in 2021 facilitated fairer tax treatment for those passing down the family business to the next generation.

These changes make it possible for family business owners who sell shares of a business to a corporation controlled by their adult children or grandchildren to receive equivalent tax treatment had they sold the shares to a third party. In other words, they would be able to realize a capital gain on the sale – and potentially claim the lifetime capital gains exemption.

Although this is now officially law, the government plans to make amendments to ensure the new rules apply only to “genuine intergenerational transfers” and safeguard against tax avoidance loopholes, such as surplus stripping. These amendments have been the subject of stakeholder consultations, but no announcements have been made to date. Hopefully, family business owners will get the clarification they’ve been waiting for this year.

Many of these tax changes are complex and could have significant implications for your business or industry in 2023. It makes good sense to review your tax situation with a professional to determine how they may affect your business − and what you can do now to prepare.

Dino Infanti is National Enterprise Tax Leader for KPMG LLP in Canada.

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