When you file a Canadian tax return, federal tax is calculated separately from provincial tax — both are calculated on the same tax return. Every year we look at the indexation factors both federally and provincially — they are not the same. Marginal tax brackets, tax rates, and tax credits are also different federally from each province which causes a little confusion for the non-accountants trying to absorb it all. For purposes of this article, we will look at the federal indexation adjustments.
At the end of every year we review the federal indexation adjustments for personal income tax and benefit amounts. Below we have highlighted some of the items that we look at and how we integrate that information into discussions with our clients. The federal indexation adjustments take effect every January 1st relating to income tax brackets, and non-refundable tax credits. Other income-tested benefits like the goods and services tax credit, Canada child benefit and Child disability benefits take effect every July 1.
For 2023, the federal indexation amount was 6.3 per cent. In comparison, the federal indexation per centage increases for 2022, 2021, and 2020 were 2.4 per cent, 1.0 per cent, and 1.9 per cent, respectively.
Federal Tax bracket thresholds
The lowest tax bracket is 15.0 per cent in both 2022 and 2023. In 2022, the 15.0 per cent rate applied on the first $50,197 of taxable income. Every year, the taxable income is adjusted for each threshold. For 2023, the lowest tax bracket is applied on the first $53,359 of taxable income.
For example, individuals who made $53,000 in 2022 would have $50,197 taxed at 15.0 per cent and the remaining $2,803 taxed at 20.5 per cent. For 2023, the indexation results in the full $53,000 falling within the first federal marginal tax bracket of 15.0 per cent.
Taxable income at the first tax bracket which the 15.0 per cent applies
- Taxable income above which the 20.5 per cent tax bracket begins 2023 — $53,359
- Taxable income above which the 20.5 per cent tax bracket begins 2022 — $50,197
- Taxable income above which the 26 per cent tax bracket begins 2023 — $106,717
- Taxable income above which the 26 per cent tax bracket begins 2022 — $100,392
- Taxable income above which the 29 per cent tax bracket begins 2023 — $165,430
- Taxable income above which the 29 per cent tax bracket begins 2022 — $155,625
- Taxable income above which the 33 per cent tax bracket begins 2023 — $235,675
- Taxable income above which the 33 per cent tax bracket begins 2022 — $221,708
Basic Personal Exemption
In December 2019 the government announced an increase to the basic personal amount. This increase was applicable for individuals whose net income for the year is less than or equal to the amount at which the 29 per cent tax bracket begins. Below we have broken this out into two components for 2023: 1) Income at or below $165,430 and 2) Income above $165,430.
Basis Personal Exemption — Net Income at $165,430 or below
Individuals whose net income for the year is less than or equal to the amount at which the 29 per cent tax bracket begins ($165,430 for 2023), the basic personal amount increased to $15,000 for 2023. The amount is indexed after 2023.
Basic Personal Exemption — Net Income above $165,430
For individuals whose net income is greater than the amount at which the 29 per cent tax bracket begins ($165,430 for 2023), the increase in the basic personal amount gradually phases out so that the basic personal amount for individuals whose income is greater than the top tax bracket threshold ($235,675 for 2023), remains unchanged and continues to be indexed. For individuals whose net income is above $165,430, the basic exemption is $13,521 for 2023.
Old Age Security (OAS) repayment
When we are having meetings with clients, we always have the OAS repayment threshold in mind. Clients with large RRIF accounts, unrealized capital gains, and retained earnings in private companies often have a few variable choices with respect to the level of income to generate personally every year. We communicate with our clients’ accountants to map out a level of income that reduces tax throughout our clients’ lifetime and hopefully ensure they also collect Old Age Security. Near the end of every year, we will estimate our clients’ income levels and attempt to get net income (line 23600) up to the repayment threshold. For couples we often attempt to have both at this threshold level. The repayment threshold increased $5,151 in 2023 compared to 2022.
- Old Age Security (OAS) repayment threshold 2023 — $86,912
- Old Age Security (OAS) repayment threshold 2022 — $81,761
Qualifying Small Business Shares
Many of the medical professionals and business owners that we work with have incorporated their businesses. Incorporation has several benefits; one of which is the ability to sell the qualifying small business shares in some situations and not pay any tax on a portion of the capital gain. When we are preparing financial plans we will factor in savings. The exemption limit increased $57,560 in 2023 compared to 2022.
- Exemption limit 2023 — $971,190
- Exemption limit 2022 —$913,630
- Deduction limit (half of the capital gain is taxable) 2023 — $485,595
- Deduction limit (half of the capital gain is taxable) 2022 — $456,815
The above indexation amounts are those that commonly impact many of our clients. There are many other non-refundable tax credits that also may be applicable, such as spouse or common-low partner amount, amount for an eligible dependant, Canada caregiver amount for children under age 18, Canada caregiver amount for other infirm dependants age 18 or older, age amount, Canada employment amount, disability amount, etc.
The indexation adjustments were significant for 2023. We would encourage you to evaluate your current plan and take advantage of the increases when possible. We also recommend that you review your financial plan and make the appropriate adjustments given the higher level of inflation and the adjustments noted above.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears at timescolonist.com. Call 250.389.2138, email email@example.com, or visit greenardgroup.com.