Archived - Chapter 6:
Effective Government and a Fair Tax System

Millions of Canadians depend on government services every day. Whether they are renewing passports or receiving important benefits, Canadians rightly expect these services to be efficient and effective.

The federal government is continuing to invest in improving the services that Canadians count on and is taking new steps in Budget 2023 to ensure that government spending is sustainable, efficient, and focused on the priorities that matter most to Canadians.

Budget 2023 also introduces new measures to ensure that the wealthiest pay their fair share of tax, and that our tax system is one in which everyone plays by the same set of rules.

Key Ongoing Actions

Recent investments to improve services for Canadians include:

• Accelerating claims processing and reducing backlogs for Employment Insurance (EI) and Old Age Security (OAS) with $1.02 billion to Service Canada;
• Reducing call centre wait times with $574 million for Service Canada and $400 million for the Canada Revenue Agency;
• Improving services at the border with a $137 million investment in the Canada Border Services Agency;
• Speeding up immigration application processing by hiring 1,250 new staff and investing in more efficient technology; and,
• Providing faster services to veterans through $115 million for Veterans Affairs Canada to reduce backlogs and retain case managers.

Previous measures to ensure a fair tax system include:

• Raising taxes on the wealthiest one per cent to cut taxes for the middle class;
• Permanently increasing the corporate income tax rate of the largest, most profitable banks and insurance companies in Canada;
• Introducing a one-time, 15 per cent tax on the taxable income above $1 billion of banking and life insurer groups to help pay for the COVID recovery;
• Introducing a new luxury tax on private jets, yachts, and luxury vehicles;
• Increasing to $15,000 the amount of income that Canadians can earn before paying any federal income tax;
• Preventing wealthy Canadians from using foreign shell companies to avoid paying Canadian tax; and,
• Limiting excessive interest deductions to ensure that large companies pay their fair share.

6.1 Effective Government

The efficient use of Canadians' tax dollars is essential to delivering on the priorities that matter most to Canadians. Budget 2023 delivers a refocusing of government spending to continue to serve Canadians most effectively.

From the creation of the Canada Child Benefit, to infrastructure investments in our communities, to supporting Canadians through the pandemic, the federal government has proudly invested in Canadians and the Canadian economy since 2015.

These investments have lifted millions of Canadians out of poverty, built more vibrant communities across the country, grown our economy, and helped weather a once-in-a-century pandemic. Ensuring the federal government can continue to invest in Canadians for years to come is essential.

After two years of emergency pandemic spending, the government committed in Budget 2022 to begin normalizing the overall level of program spending, and announced that the government would examine previous spending plans with a view to reducing COVID-19-related spending by up to $3 billion over four years.

In the 2022 Fall Economic Statement, the government delivered on this commitment with reduced spending of $3.8 billion, owing to lower-than-expected need for COVID-19 supports in 2021-22.

Moving forward, Budget 2023 will continue these efforts to bring the pace and scale of the growth of government spending back to a pre-pandemic path, in order to ensure that Canadians' tax dollars are being used efficiently and being invested in the priorities that matter most to them.

Further savings in Budget 2023 will meet the commitments laid out in last year's Budget—and will help pay for the strengthening of Canada's public health care system, the delivery of the Canadian Dental Care Plan, and the building of Canada's clean economy.

• Budget 2023 proposes to reduce spending on consulting, other professional services, and travel by roughly 15 per cent of planned 2023-24 discretionary spending in these areas. This will result in savings of $7.1 billion over five years, starting in 2023-24, and $1.7 billion ongoing. The government will focus on targeting these reductions on professional services, particularly management consulting.
• Budget 2023 proposes to phase in a roughly 3 per cent reduction of eligible spending by departments and agencies by 2026-27. This will reduce government spending by $7.0 billion over four years, starting in 2024-25, and $2.4 billion ongoing. Reductions will not impact direct benefits and service delivery to Canadians; direct transfers to other orders of government and Indigenous communities; and the Canadian Armed Forces.
• The government will also work with federal Crown corporations to ensure they achieve comparable spending reductions, which would account for an estimated $1.3 billion over four years starting in 2024-25, and $450 million ongoing.

In total, these proposals represent savings of $15.4 billion over the next five years.

As part of the government's commitment to responsibly manage Canadians' tax dollars, it is also continuing to assess the pace and scale of previously announced spending that has yet to occur. Where implementation is slower than originally planned, when take-up is lower, or when circumstances have changed, it makes sense to ensure government resources are still allocated to their best purpose.

• Budget 2023 proposes to reduce previously announced funding that remains unallocated or is no longer required, or to delay it where the pace of implementation is slower than originally envisioned. This will result in savings of $6.4 billion over six years, starting in 2022-23.

The regular review of government programs is important if they are to deliver their intended results for Canadians.

• Budget 2023 announces the introduction of cross-government program effectiveness reviews, to be led by the President of the Treasury Board. The first review will examine skills training and youth programming, to determine, by Budget 2024, whether improvements can be made to help more Canadians develop the skills and receive the work experience they need to have successful careers.

6.2 Improving Services for Canadians

Budget 2023 proposes new investments to ensure Canadians can count on fast and effective services from the federal government, and receive the benefits they are entitled to in a timely manner.

When Canadians travel by air, their experience should be safe, dependable, and respectful of their rights. The Canadian Transportation Agency is responsible for ensuring Canada's transportation systems run smoothly and efficiently, for protecting consumers, and for holding airlines accountable.

In Budget 2023, the federal government is proposing new steps to strengthen the Canadian Transportation Agency, make airlines more accountable, and ensure that passengers are fairly compensated for delays and cancellations.

• Budget 2023 proposes to amend the Canada Transportation Act to strengthen airline obligations to compensate passengers for delays and cancellations. These changes will align Canada's air passenger rights regime with those of leading international approaches and ensure that Canadians are fairly compensated for travel delays that are within airlines' control.
• Budget 2023 also announces the government's intention to amend the Canada Transportation Act to make the Canadian Transportation Agency's complaint adjudication process more efficient, and to provide the Minister of Transport with the authority to impose a regulatory charge on airlines to help cover the costs of resolving air passenger complaints.

These measures build on the government's March 14, 2023, announcement of $75.9 million over three years, starting in 2023-24, to ensure the Canadian Transportation Agency has the resources for enforcement and compliance, and to provide dispute resolution services to Canadians and businesses when they are unable to resolve issues directly with air, rail, or marine service providers. 

Airlines and airports around the world were hit hard by the pandemic, and those in Canada were no exception. As air travel returned through 2022, Canadians faced unacceptable flight delays, long lineups at airports, and mishandled baggage.

While delays have been reduced in recent months, the federal government is acting to strengthen air passenger rights and improve Canadians' experiences at the airport.

• Budget 2023 proposes to provide $1.8 billion over five years, starting in 2023-24, to the Canadian Air Transport Security Authority (CATSA) to maintain and increase its level of service, improve screening wait times, and strengthen security measures at airports.
• Budget 2023 proposes to amend the Canada Transportation Act to require the sharing and reporting of data by airports and air carriers. This will help to reduce delays and improve coordination between airports, airlines, and CATSA.
• Budget 2023 also proposes to provide $5.2 million over five years, starting in 2023-24, to Transport Canada to collect and analyze air sector performance data.

Canadians are eager to travel abroad again, and people from around the world continue to want to come to Canada to work, study, and build their lives. Whether someone is renewing their passport, immigrating to Canada, or reuniting with their family, everyone should be able to count on fast and efficient service.

Last year, as the world opened up and people began to travel, too many Canadians and newcomers were forced to deal with unacceptable wait times. To address this, the federal government has adopted new technologies, streamlined processing, and made significant new investments, including $135 million in 2022-23 to address immigration application backlogs. This has resulted in:

• The elimination of passport application backlogs and the return to pre-pandemic processing times of 10 days for in-person applications at specialized passport offices, and 20 days for applications received by mail or dropped off at a Service Canada Centre;
• The processing of 5.2 million applications for permanent residence, temporary residence, and citizenship in 2022—double the number of applications processed in 2021; and,
• The government moving more key services online, including the confirmation of permanent residence status and the introduction of online citizenship testing and ceremonies, as well as addressing backlogs of paper-based applications through digitization.

Those who served Canada with our flag on their shoulder deserve to receive benefits and services in a timely manner.

Since 2015, the federal government has invested more than $11 billion to enhance benefits and services for veterans, and applications for benefits have increased by 47 per cent. After significant staff reductions were made at Veterans Affairs Canada between 2009 and 2014, these cuts and the rise in applications after 2015 led to unacceptable wait times for too many veterans.

While the government has reduced backlogs by more than 60 per cent since 2020 by hiring 350 staff and speeding up processing, there is still more work to do.

• Budget 2023 proposes to provide $156.7 million over five years, starting in 2023-24, and $14.4 million ongoing to Veterans Affairs Canada, the Royal Canadian Mounted Police, and the Veterans Review and Appeal Board to reduce backlogs and support service delivery across several programs and services.

All Canadians should have quick and easy access to information on government programs and services—whether they are a senior who prefers to call, a person with a disability who requires a more accessible website, or someone who prefers to look for information on their phone. After a sharp rise in inquiries during the pandemic, requests for information through Canada.ca and 1 800 O-Canada (622-6232) remain at nearly double their pre-pandemic levels.

• Budget 2023 proposes to provide $17.7 million over four years, starting in 2023-24, to Employment and Social Development Canada to increase capacity at 1 800 O-Canada call centres, improve Canada.ca, and ensure that Canadians can access information they need about government benefits and services.

The federal government delivers more than $60 billion in Old Age Security benefits to more than seven million seniors each year. To ensure the timely and reliable delivery of these critical benefits, the Old Age Security IT system must be updated.

• Budget 2023 proposes to provide $123.9 million over seven years, starting in 2023-24, to Employment and Social Development Canada to complete Old Age Security IT modernization.

When COVID-19 hit, the federal government responded by providing emergency income supports to close to nine million Canadians. This support was essential, and it helped Canadians weather a once-in-a-century pandemic.

To minimize delays and ensure that Canadians received the support they needed, benefits arrived quickly. Inevitably, this led to overpayments and, in some cases, abuse of the system. In Budget 2023, the government is taking further action to ensure the integrity of Canada's emergency benefit system.

• Budget 2023 proposes to provide $53.8 million in 2022-23 to Employment and Social Development Canada to support integrity activities relating to overpayments of COVID-19 emergency income supports.

The federal government is committed to working with Canadians to recover overpayments. Those struggling with the repayment process are able to work with Canada Revenue Agency to develop a flexible repayment plan that works with their individual life circumstance.

Equalization and Territorial Formula Financing programs enable all provincial and territorial governments to provide comparable services to Canadians.

• Following consultations with provinces and territories, Budget 2023 proposes to renew the Equalization and Territorial Formula Financing programs for a five-year period, beginning April 1, 2024, and make technical changes to improve the accuracy and transparency of the programs.

6.3. A Fair Tax System

Programs and services that Canadians rely on—including Old Age Security, the Canada Child Benefit, Early Learning and Child Care, and transfers to provinces in support of health care and education—are dependent on a robust national tax base.

Budget 2023 builds on progress the federal government has made since 2015 to close loopholes, crack down on tax avoidance, and ensure that the wealthiest pay their fair share.

Through the significant use of deductions, credits, and other tax preferences, some of the wealthiest Canadians pay little to no personal income tax in a given year.

The AMT is intended to ensure that the highest-income Canadians cannot disproportionately lower their tax bill through advantages in the tax system. The AMT has not been significantly reformed since its implementation in 1986, and thousands of the wealthiest Canadians still pay very little income tax.

• To ensure the wealthiest Canadians pay their fair share of tax, Budget 2023 proposes legislative amendments to raise the AMT rate from 15 per cent to 20.5 per cent and further limit the excessive use of tax preferences. These amendments would generate an estimated $3.0 billion in revenues over five years, beginning in the 2024 taxation year.
• Under the proposed reforms, the basic AMT exemption would increase more than fourfold, from $40,000 to $173,000, significantly increasing 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.

Under these reforms, more than 99 per cent of the AMT paid by individual Canadians would be paid by those who earn more than $300,000 per year, and about 80 per cent of the AMT paid would be by those who earn more than $1 million per year.

Canada is committed to ending the corporate tax race to the bottom and ensuring that multinational corporations pay their fair share of tax wherever they do business. This is about putting Canadian workers and businesses on a level playing field with our global competitors.

Canada continues to strongly support the two-pillar international tax reform plan agreed by 138 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.

Pillar One (Reallocation of Taxing Rights)

Pillar One will ensure that the largest and most profitable global corporations, including large digital corporations, pay their fair share of tax in the jurisdictions where their users and customers are located. Canada and our international partners have been developing the rules of this innovative new system through an OECD-led process, and countries are working towards completing multilateral negotiations so that the treaty to implement Pillar One can be signed by mid-2023.

To ensure that Canadians' interests are protected in any circumstance, the federal government will continue to advance legislation for a Digital Services Tax. It is Canada's hope and expectation that the timely implementation of the new multilateral system will make a Digital Services Tax unnecessary.

Pillar Two (Global Minimum Tax)

Pillar Two, a global minimum tax regime, will ensure that large multinational corporations are subject to a minimum effective tax rate of 15 per cent on their profits wherever they do business.

To function effectively, Pillar Two requires coordinated implementation by countries around the world. Recent steps taken by a number of countries to implement Pillar Two in 2024, including the members of the European Union, the United Kingdom, Japan, and the Republic of Korea, mean the multilateral framework for the global minimum tax regime is now being put in place.

• Budget 2023 reaffirms Canada's intention, announced in Budget 2022, to introduce legislation implementing the Pillar Two global minimum tax. The primary charging rule of Pillar Two and a domestic minimum top-up tax would be effective for fiscal years of multinational corporations that begin on or after December 31, 2023. The secondary charging rule would be effective for fiscal years that begin on or after December 31, 2024. The government will continue to monitor international developments as it moves forward with the implementation of Pillar Two.

The 2022 Fall Economic Statement announced the federal government's intention to introduce a two per cent tax on share buybacks by public corporations in Canada, with details to follow in Budget 2023.

• Budget 2023 announces that the proposed tax would apply as of January 1, 2024 to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada. A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million.

It is estimated that this measure would increase federal revenues by $2.5 billion over five years, starting in 2023-24. Importantly, this would also encourage firms to re-invest in their workers and businesses.

Currently, the dividends that financial institutions receive on Canadian shares are not treated as business income and are effectively exempt from tax. Financial institutions rely on this treatment to lower their tax burden, which reduces tax revenues that are important to delivering benefits and services to Canadians.

• Budget 2023 proposes to amend the Income Tax Act to treat dividends received on Canadian shares held by financial institutions in the ordinary course of their business as business income.

This measure would apply to dividends received after 2023, which would increase federal revenues by $3.15 billion over five years starting in 2024-25, and by $790 million ongoing. 

The General Anti-Avoidance Rule (GAAR) was added to the Income Tax Act in 1988 to prevent abusive tax avoidance. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit that was unfairly created. The GAAR has helped to tackle abusive tax avoidance but it requires modernizing to ensure its continued effectiveness.

• Budget 2023 proposes to release for consultation draft legislative proposals to strengthen the GAAR. Additional details are found in the Budget Supplementary Information, under "General Anti-Avoidance Rule."