Canadians are about to get a small consolation prize for suffering through soaring living costs, as inflation results in bigger benefits and lower taxes for many.
One example? The annual contribution limit for the tax-free savings account is set to rise to $6,500 in 2023, up from $6,000 in 2022. That’s an extra $500 a year Canadians can save and invest in their TFSAs to enjoy tax-free returns.
And as the government recalculates income thresholds for both benefits and taxes based on an unusually high inflation measure, Canadians can look forward to several other outsized changes in 2023 that will benefit their wallets. The added financial oomph, while limited, is designed to cushion the hit from fast-growing prices, said David Field, a certified financial planner and founder of Papyrus Planning.
For higher-income earners and retirees, the bigger boost will likely come in the form of lower income taxes and more opportunities to shelter savings from tax, Mr. Field said. For those in the middle and lower-end of the income spectrum the financial boost will likely come mostly through more generous benefits and higher income threshold to qualify for them, he added.
The planned inflation adjustment for next year is 6.3 per cent, up from 2.4 per cent in 2022 and just 1 per cent in 2021, according to the Canada Revenue Agency. When it comes to personal income taxes, this will result in an effective tax break for many Canadians whose wages have not kept up with inflation, Mr. Field noted.
The top federal tax rate of 33 per cent will apply to taxable income above $235,675. That is up from $221,708 this year. The 29-per-cent rate will kick in at $165,430, up from $155,625. The 26-per-cent tax rate will start at income above $106,717, compared with $100,392 for 2022. And the threshold for the 20.5-per-cent rate will begin at $53,359, instead of $50,197. The lowest federal income tax rate of 15 per cent applies to taxable income below those levels.
As a result of the adjustment, many taxpayers whose earnings haven’t kept pace with inflation will see more of their income taxed at lower rates, with the biggest change in dollar terms happening at the top of the income ladder. For top earners, nearly $14,000 more will be eligible to be taxed at 29 per cent rather than 33 per cent.
Another notable increase applies to the income level beyond which retirees would have to repay part or all of their Old Age Security pension. That threshold starting in 2023 will rise to $86,912, up more than $5,000 from the current $81,761.
The change will give retirees more room to make taxable withdrawals from registered accounts, such as registered retirement income funds, without triggering the OAS clawback, Aaron Hector, a certified financial planner and private wealth advisor at CWB Wealth, said in an e-mail.
Also, choppy financial markets this year mean many retirees have seen the value of their investments decline, which will result in lower minimum mandatory annual withdrawals from their RRIFs in 2023, Mr. Hector noted. That, along with the higher OAS repayment threshold, mean there are likely to be fewer Canadians exposed to the OAS clawback next year, he said.
The higher clawback threshold comes in addition to larger OAS payments, which are adjusted for inflation every three months, resulting in a “double-boon” for recipients of the pension benefit, Mr. Field said.
Other benefits affected by the inflation adjustments are the Canada Child Benefit (CCB) and the GST/HST tax credit, a tax-free payment that lower-income households receive every three months to help offset the sales taxes they pay.
The maximum CCB amount is set to rise from $583 to almost $620 a month for each child under age six and from almost $492 to nearly $523 a month for each child between six and 17. The income thresholds at which phase-out of the benefits begins are also higher for 2023. However, the reset in payment amounts won’t take effect until July, after tax season, as is the case for other income-tested benefit programs.
Also in July, the maximum GST/HST rebate is set to rise to $325 for individuals, up from $306. Earlier this month Ottawa sent out an extra one-time GST credit payment to eligible Canadians to help relieve the financial pressures they’re facing from inflation. The lump-sum payment was the product of a bill introduced by the Liberal government that became law in October with bipartisan support.
Erica Alini