One small benefit of inflation is that it helps drive the annual contribution limit for tax-free savings accounts higher.
Not in 2022, however. Inflation hit an 18-year high of 4.7 per cent in October, yet the Canada Revenue Agency recently said the contribution limit for TFSAs next year will remain at $6,000 for the fourth straight year.
It’s a shame we’re not getting an increase in the TFSA limit this year because so much household cash has piled up since March, 2020. While some households were financially slammed in the pandemic, others stockpiled cash in bank and investment accounts. In a TFSA, this money and the gains it generated over the years would remain tax-free.
If ever there was a year when the TFSA limit seemed to be primed for an increase because of inflation, it was 2022. The reason why the limit will remain unchanged has to do with some intricacies in the process of inflation indexing.
TFSAs were introduced in 2009 with a $5,000 annual contribution limit, an amount that has quietly in the background been indexed to inflation every year. The indexed amount is then rounded to the nearest $500 – it’s this number that is used to determine the annual contribution limit.
To see how this works, let’s take a look at the 2022 calculations. The indexed contribution amount for the year is $6,162.70, based on inflation of 2.4 per cent. For the limit to rise to $6,500, the indexed amount needs to reach or surpass $6,250.
CRA gauges inflation by taking the consumer price index reading from Statistics Canada over the 12 months from Oct. 1 to Sept. 30 and comparing it to the same period of the previous year. Inflation was near dormant late last year and in early 2021 – it was only in March that the cost of living really took off.
While living costs have risen sharply of late, the recent inflation indexing rate of 2.4 per cent isn’t exceptional. CRA records show a 2.8-per-cent rate in 2012 and a 2.2-per-cent rate for 2019. At the low end, we’ve seen inflation indexing rates as low as 0.6 per cent in 2010.
The overall low level of inflation over the past 12 years can be seen in the fact that the current TFSA limit is only $1,000 higher than it was at launch in 2009. You may remember a $10,000 limit was in place for 2015 – a change in government resulted in the limit being brought back to $5,500 for 2016.
The next increase, to $6,000, came in 2019. Expect a bump to $6,500 in 2023.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.