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Higher TFSA contribution limit and lower taxes are among the rare upsides of high inflation

This article was originally published by The Globe and Mail on November 15, 2022.

Canadians continue to receive a small consolation prize for suffering through rising living costs, as inflation results in bigger benefits and lower taxes for many.

An example? The annual contribution limit for tax-free savings accounts is set to increase to $6,500 in 2023, up from $6,000 in 2022. That’s an additional $500 a year Canadians can save and invest in their TFSA to enjoy tax-free returns.

And as the government recalculates income thresholds for both benefits and taxes based on measures of unusually high inflation, Canadians can look forward to a few more big changes in 2023 that will benefit their wallets. The additional financial oomph, while limited, is designed to cushion the blow of rapidly rising prices, said David Field, a certified financial planner and founder of Papyrus Planning.

For high-income earners and retirees, the big boost will likely come in the form of lower income taxes and more opportunities to shelter savings from taxes, Mr. Field said. Financial boosts will likely come through more generous benefits and higher income thresholds to qualify for those at the middle and lower-end of the income spectrum, he added.

The projected 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 would result in an effective tax break for many Canadians whose wages have not kept pace with inflation, Mr. Field noted.

The top federal tax rate of 33 percent applies to taxable income above $235,675. That’s up from $221,708 this year. The 29-percent rate will start at $165,430, up from $155,625. The 26-percent tax rate will begin at incomes above $106,717, compared with $100,392 for 2022. And the 20.5-percent rate threshold will start at $53,359 instead of $50,197. The lowest federal income tax rate of 15 percent applies to taxable income below that level.

As a result of the adjustment, many taxpayers whose incomes do not keep pace with inflation will see more and more of their income taxed at a lower rate, with the biggest change in dollar terms occurring at the top of the income ladder. For top earners, about $14,000 more will be taxed at 29 percent instead of 33 percent.

Another significant increase applies to income levels beyond which retirees must pay part or all of their old-age security pension. Starting in 2023, this threshold will increase to $86,912, up $5,000 from the current $81,761.

Aaron Hector, a certified financial planner and personal wealth advisor at CWB Wealth, said in an e-mail that 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.

Also, this year’s financial markets mean many retirees have seen their investments decline in value, which will result in lower minimum mandatory annual withdrawals from their RRIFs in 2023, Mr. Hector noted. That, along with the higher OAS reimbursement threshold, means fewer Canadians are likely to face OAS clawbacks 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-bonus” for pension benefit recipients, Mr. Field said.

Other benefits affected by the inflation adjustment are the Canada Child Benefit (CCB) and the GST/HST tax credit, a tax-free payment that helps low-income families offset their sales tax payments every three months.

The maximum CCB amount is set to increase from $583 to about $620 a month for each child under the age of six, and from about $492 to about $523 a month for each child between the ages of six and 17. The income threshold at which benefits begin is also higher for 2023. However, the reset of payment amounts will not take effect until July after tax season, as is the case with other income-tested benefit programs.

Also in July, the maximum GST/HST rebate is set at $325 for individuals, up from $306. Earlier this month Ottawa sent additional one-time GST credit payments to eligible Canadians to help alleviate the financial pressures they are facing from inflation. The lump-sum payment was the result of a bill introduced by the Liberal government that became law in October with bipartisan support.