“Tax news” doesn’t exactly sound like something you’d be excited to read about.
But you should be.
(Or at the very least, your Certified Financial Planner ® should be excited to tell you about it!)
There are some truly exciting changes coming in 2023 that will
affect your paycheck, your investments, your small business, and your real estate.
Changes That Will Affect Your Paycheck
Tax Brackets
The federal government adjusted the tax bracket limits so everyone (yes, everyone!) will pay less in federal tax.
The tax rates are remaining the same, but the bracketsthemselves are changing.
Currently, the first $50,197 of your taxable income is taxed at 15%.
In 2023, the first $53,359 of your taxable income will be taxed at 15%.
That means more of your money ($3,162 of it, to be exact) will fall into that lower tax bracket. Ultimately? You will pay less tax.
Similarly, the 26% tax bracket starting amount has increased from $100,392 to $106,717. That’s $6,325 of your money that will now be taxed at 26% instead of 29%.
All the tax brackets have increased.
So what does that mean for you, other than paying less in income tax?
These changes might impact your overall financial strategy. For example, it might change how much you withdraw from an RRSP, or if you sell non-exempted property.
Many of the federal tax benefits (child tax benefit, child caregiver credit, etc.) are also increasing.
Canada Pension Plan (CPP) Contribution
If you are an employee, you likely notice the deduction for your CPP contribution on every pay stub. In 2023, that amount is increasing to 5.95%. Essentially, that means you are taking home less pay – although you will get to claim it back when you retire. 5.95% of your pay will be deducted for CPP until you reach the annual maximum of $3754.40 (which will only happen if you make more than $66,600.)
If you are self-employed, you must pay for your portion and your “employer” portion. That means the annual maximum for CPP is $7508.
Changes That Will Affect Your Investments
Tax-Free Savings Account (TFSA) Contribution
The TFSA contribution limit is increasing for the first time since 2019. In 2023, the limit will be $6,500 – that’s $500 more you can contribute than before.
TFSA contribution room is based on your age, not your income, so everyone in Canada gets the same amount. If you can’t contribute the maximum amount each year, you don’t “lose” the room – it carries over.
Registered Retirement Savings Plan (RRSP) Contribution Limit
What stays the same? You can contribute up to 18% of your income into an RRSP per year, and room accumulates if you haven’t contributed previously.
That means that your RRSP room will grow by 18% of your earned income from 2022 (employment income, net business, and rental income).
If you have a salary of $80,000, you will earn 18% of that ($14,400) as RRSP contribution room.
As of 2023: the annual maximum contribution room is increasing from $29,210 to $30,780.
If you have a salary of $180,000, you will earn $32,400 of RRSP contribution room. However, in 2022 you could have only actually used $29,210 of that room because of the annual maximum. In 2023, you’ll be able to use $30,780 of that room. That is an extra $1570 room you can now use in 2023!
Since contributing to your RRSP reduces your taxable income, this is a win-win!
Changes That Will Affect Your Small Business
If you own a small business and are considering selling it in 2023, you are in luck!
The lifetime capital gains exemption is jumping from $913,630 to $971,190 in 2023.
For example, imagine you have a small business you sold for $1,000,000. If there were no exemption, your taxable capital gains would be $500,000, and you would owe approx. $260,000 in tax. With the exemption, though, you can reduce your $1,000,000 of capital gains by $971,190. That means your capital gains are only $28,810, so you only pay tax on half of that: $14,405. At the highest marginal tax rate, that’s a tax owing of only $7,700 – a far cry from $260,000!
With this increase in the Lifetime Capital Gains Exemption limit, you can reduce the amount you will pay in capital gains tax by an additional $57,560!
Changes That Will Affect Your Real Estate
The federal government is introducing a brand-new tax-sheltered account called the Tax-Free First Home Savings Account (FHSA).
Contributions will be tax-deductible – just like an RRSP.
Withdrawals will be non-taxable – just like a TFSA.
So far, this new registered plan will allow you to contribute $8,000 every year, up to a lifetime maximum of $40,000.
Legislation has not officially been passed yet, but it looks promising. At present, eligibility rules include that you must be 18 years old, you must live in Canada, and you must be a qualified first-time home buyer.
What is a qualified first-time home buyer?
The government is currently defining that as someone who has not lived in a house they own for the previous five calendar years.
Although all these changes may not sound earth-shattering, they have the potential to radically shift your financial strategy.
If you’d rather not muddle through these changes on your own, book a call.