Tax Changes in Canada for 2023

We’re coming up on a new year, and with the new year comes a bunch of changes to tax programs for Canadians.

In this article we break down the important tax changes for 2023 that Canadians need to know. 

It’s been a challenging year with the highest inflation we’ve seen since the late 80s, and record interest rate increases to match.

Thankfully most of the tax changes we’re about to discuss are going to help Canadians save their money and pay less tax.

We’ll break down the following tax changes:

• RRSP Limit Updates for 2023
  
• A TFSA Limit Increase in 2023
  
• How TFSA Limits work for New Canadians
  
• The brand new “First Home Savings Account” or “FHSA”
  
• CPP Contribution Rate Increases
  
• Federal Tax Bracket Changes for 2023
  
• The Basic Personal Amount has Increased
  
• The Lifetime Capital Gains Exemption has also increased
  
• And the Goods and Services Tax Credit will double temporarily.

If you'd rather have Joe explain the tax changes, check out this video below 👇

RRSP Contribution Limit Increases

Our first important tax update is an increase to the annual maximum RRSP contribution limits.

The RRSP or “registered retirement savings plan” is a savings plan that is registered with the Canadian government.  It’s designed to help Canadians save up for retirement.

Let’s start with a very quick recap of how RRSPs work

With RRSPs:

• You contribute cash or investments into your RRSP account and receive a personal tax deduction for the amount of the contribution.
  
• This deduction reduces the amount of personal tax payable, which often shows up as a refund when you file your tax return.
  
• Investments held within the RRSP can grow tax free while they remain in the registered account
  
• Your funds are only taxed when you withdraw them from your RRSP account.

Here’s where things have changed in 2023

Each year, Canadian residents build up RRSP contribution room at a rate of 18% multiplied by their earned income.

Most commonly, “earned income” includes:

• Employment income from your job
  
• Business income from self-employment or a partnership
  
• Rental income
  
• But not dividend income or investment income

Previously, the maximum annual increase to contribution room was 18% of earned income up to a maximum of $29,210.

In 2023, the annual limit has increased.  

It is still 18% of earned income, but the maximum has increased to $30,780.

The annual maximum contribution has increased by $1,570 which is great news for those earning more than $165k per year.

TFSA Contribution Limit Increases

Next up we have an increase to your annual TFSA contribution limit.

In 2023, the amount that you can contribute to your TFSA will increase by $6,500.

TFSAs are investing accounts made available by the federal government to Canadians 18 years or older.  TFSAs are designed to help Canadians invest and save their money, but they’re a bit different from RRSPs.

With TFSAs:

• You contribute cash or investments into your TFSA with the idea of investing or building up your savings.
  
• Your investments can grow tax free inside the TFSA
  
• Unlike with RRSPs, there is no tax deduction when you contribute to your TFSA
• However, funds are not taxed when you withdraw them from your TFSA like they are with RRSPs

TFSAs are designed more for short-term saving compared to RRSPs that are designed to save for retirement.

Canadian residents aged 18 and up receive an increase to their TFSA contribution room each year.

The program started in 2009 with an annual TFSA contribution room of $5,000. The annual contribution limits have slowly increased along with inflation.

You can see in the chart below how much contribution room has increased each year since 2009.

The annual TFSA limit increased from $6k in 2022 to $6,500 in 2023.

If you were born in 1991 or earlier and have been a Canadian resident since 2009, you’ll be able to contribute up to $88k to your TFSA.

Next let’s look at TFSAs for new Canadians.

TFSAs for New Canadians

Any individual that is a resident of Canada who has a valid SIN is 18 or older is eligible to open a TFSA.

This is a great saving tool for eligible Canadian residents.

Non-residents who are 18 or older and have a valid SIN can still open a TFSA.  However, any contributions made as a non-resident are subject to a 1% tax for each month that the contribution stays in the account.  

This 1% tax usually means it’s not worth it for non-residents to bother contributing.

If you’re a new Canadian and you open a TFSA, you’ll have contribution-room starting in the year that you open the TFSA.

For example if you become a Canadian resident in 2022, you will have $12,500 of TFSA contribution room in 2023.

That’s $6k from 2022 and $6,500 from 2023.

This table shows how much TFSA contribution room you would have available based on the year that you become a Canadian resident.

Using a TFSA for investing and saving is often overlooked; it’s really an excellent way for Canadians to save and invest their money. 

First Home Savings Account (FHSA)

One of the most interesting tax changes coming in 2023 is the introduction of the “First Home Savings Account” or FHSA.

The FHSA was designed to help Canadians save up for the purchase of a home.  It’s a tax sheltered account with similarities to the TFSA and RRSP.

How the FHSA Works

Similar to the TFSA, the funds you invest in the FHSA can be invested and grow tax free.

On top of that, the funds that you contribute will create a tax deduction on your personal taxes similar to the way that RRSP contributions work.

When you’re ready to purchase an eligible home, you’ll be able to withdraw the funds tax-free to make your purchase like you would with a TFSA.

It’s really the best of both worlds when compared to TFSAs and RRSPs.

The FHSA was first announced along with the 2022 federal budget and is expected to be implemented sometime in 2023.  Some of the details are not finalized yet, but here is what we know so far.

FHSA Contribution Limits

The FHSA will have a lifetime contribution limit of $40,000 and an annual contribution limit of $8,000.

If you open an FHSA in 2023, you’ll be able to contribute up to $8k during the year and receive a deduction on your taxes.

If you contribute $8k each year for five years, you will have maxed out your lifetime contribution room of the FHSA.

If you open your FHSA in 2023 and only contribute $3,000, you can carry the unused $5,000 of contribution room to subsequent years.

That means in 2024 you could contribute the unused $5k plus your current $8k for a total contribution of $13k.

The unused $5k from 2023 carries over.

The program will likely become available in the second quarter of 2023 which is great news for those of us trying to save up for a home purchase.

FHSA Restrictions

There are some restrictions to the use of the FHSA.  

To Be Eligible to open an account you will need to be a resident of Canada who is at least 18 years of age.

For withdrawals to be non-taxable, you’ll need to be a qualified first time home buyer.

This doesn’t necessarily mean that you’ve never purchased a house.  What it does mean is that you can’t have lived in a house that you own within the past five years.

For example if you owned and lived in a home but moved out in 2022, you would need to wait five years before you could be an eligible first time home buyer.

There are some additional nuances that we’ll explain in a future article once the program has been finalized.  

For now, though, I recommend that future home buyers start saving up their first $8k to contribute in 2023.  It’s a great program that is going to help offset the high cost of housing in Canada.

CPP Contribution Rate Increases

Next we’ll move on to the upcoming changes to the Canada Pension.  Specifically we’ll look at the change to the maximum CPP contribution amount.

The Canada Pension Plan or CPP is a federal pension plan that all pensionable workers in Canada contribute to.

CPP for Employees

Employees will be familiar with the line item on their pay stubs where CPP is deducted from their pay.

In 2022, CPP was deducted at a rate of 5.7% on employee pay.

The maximum amount that could be deducted from an employee’s pay during the year was $3,499.80.

In 2023, the rate will increase to 5.95% and the maximum will increase to $3,754.45.

This means less money for employees, and the increase will be felt even more by employers and self-employed individuals.

CPP for Employers

In Canada, employers also pay CPP contributions equivalent to the amount that their employees pay.  

The increased employee contributions will mean that the employer contributions and costs will increase as well.

CPP for Self-employed

Self-employed workers will also be noticeably hit with the CPP increase.

They pay both the employee CPP contribution as well as the employer portion.

This means that a self-employed person who earns more than $66,600 will pay $7,508.90 in total CPP to the government.

That’s the employee portion of $3,754 plus the employer portion of $3,754.

12% of earnings gone for the self employed, even before they start to pay income tax!  Yikes.

Federal Tax Bracket Changes

Ok moving on to some better news for taxpayers.

Federal tax brackets will change in 2023 to account for inflation.

If you’re not sure how tax brackets work, check out our article on tax brackets in Canada for the full rundown.

With these 2023 tax bracket changes, the federal tax rates aren’t actually changing, but the earnings brackets are increasing.

In this chart 👇, we can see that the tax rates remain the same but the taxable income amounts within each bracket are going up in 2023.

For example your first $53,359 of employment income or self-employment income will be taxed at only 15%.

Whereas last year, income above $51,197 started to hit the next tax bracket and was taxed at 20.5%.

This change means that more income is taxed at a lower rate than before, which reduces taxes for all Canadians.

This doesn’t account for provincial tax rates; we’re just talking about the federal tax brackets here, but it’s still good news.  

Again, check out that article linked in the description to see how federal and provincial tax brackets affect how much tax you pay.

The Basic Personal Amount Increase

Continuing on with good news for Canadians, we have an increase to the basic personal amount or BPA.

The BPA is a tax credit that can be claimed by all Canadians.

It allows workers to earn up to the basic personal amount without having to pay a single cent of federal income tax.

In 2022, the basic personal amount was $14,398 which meant that a taxpayer could earn up to that amount and not pay any federal income tax.

In 2023, the BPA has been increased to $15,000 which gives a bit more cushion to workers before they have to start paying federal income tax.

There are also provincial taxes to account for, but this is still a nice break for Canadians from Federal tax.

Lifetime Capital Gains Exemption Increase

The lifetime capital gains exemption is a significant tax break that is provided to Canadian business owners.

It allows owners of qualified small businesses to sell the shares of their business at a significant gain without having to pay tax.

In 2022, the Lifetime Capital Gains Exemption was $913,630, meaning that a business owner could sell the shares of their business at a gain of almost $914k without having to pay any tax on that gain.

In 2023, the LCGE amount increased to $971,190.  

That same business owner could now sell at a gain of $971k before any tax would need to be paid.

This is a pretty amazing benefit but it only affects business owners in Canada who own a small business corporation and are able to sell that business at a gain.

For more details on the lifetime capital gains exemption, check out this brief explainer within our article on holding companies.

Goods and Services Tax Credit Doubles

The Goods and Services Tax Credit is designed to help offset the financial impact of the GST for low and modest-income people and families. 

The credit is paid quarterly in January, April, July, and October.

The total annual amount received depends on family size and income. 

For the July 2022 through June 2023 benefit year, eligible people can receive:

• $467 for singles without children;
  
• $612 for married or common-law partners;
  
• $612 for single parents; plus $161 for each child under the age of 19.

To ensure the GST Credit is targeted to those who need it most, those with family net income of less than about $40k receive the full Credit amount.

Above that income level, the GST Credit amount is gradually lowered as income increases. The full phasing out depends on family type.

For instance, it’s fully phased out at about $50k for a single person without children, and at about $58,500 for a couple with two children.

In 2023 eligible Canadians are expected to receive double the amount of the tax credit for Six Months.

This is another proposed change but appears likely to be confirmed in the near future.

Pending parliamentary approval, the proposed extra GST Credit will be paid to all current recipients through the existing GST Credit system.

There would be a one-time, lump-sum payment made before the end of 2023.

More good news for Canadian taxpayers :)

Final Thoughts

Glad we could end on another positive note with some tax savings for Canadians.

Those are the top changes to Canadian taxes in 2023 that you should know about.

If you have another tax topic or update that you would like us to cover, please reach out in the comments below.

We’re also happy to provide general guidance, and we really do enjoy answering your questions, so please don’t be shy.

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