Higher federal tax bracket thresholds, as well as increased tax credit and benefit amounts, may allow clients to realize significant tax savings in 2023.
The federal government’s annual indexation adjustment for personal income tax and benefit amounts, which is tied to the rate of inflation, will be 6.3% for 2023, compared to 2.4% in 2022 and 1.0% in 2021.
That means the top federal tax rate of 33% will kick in at $235,676 of taxable income in 2023, up from $221,709 in 2022, a difference of $13,967. At the other end of the scale, Canadians can earn up to $53,359 in 2023, up from $50,197 in 2022, before being subject to the 20.5% tax rate, a difference of $3,162.
“It’s an opportunity for [clients] to really pay attention and maximize the credits they could take, but also look at their sources of income and maybe take advantage of that higher tax tier,” said Carol Bezaire, vice-president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto.
For example, retirees might consider making a larger RRIF withdrawal next year if they need extra money to cover the higher cost of living, while not necessarily paying a higher marginal tax rate, Bezaire explained.
Other clients may want to consider realizing capital gains in 2023 — for example, selling a cottage for which the principal residence exemption is not available — to take advantage of the higher tax bracket thresholds, she added.
Amounts related to non-refundable tax credits, such as the age amount for individuals 65 or older or the Canada caregiver amount for children under 18, are rising by 6.3% next year, too.
Make sure clients are taking full advantage of any credits for which they are eligible, Bezaire suggested: “You want to pay attention to [credits and benefits] more than you ever have before.”
While most tax credits and benefits are indexed to inflation, a few are not, said John Waters, director of tax consulting services with BMO Private Wealth in Toronto. One example is the pension income tax credit amount, which is fixed at $2,000.
“The value of that credit becomes less and less as inflation increases,” Waters said.
The threshold for old age security (OAS) repayment rises to $86,912 in 2023, up from $81,761 in 2022, a difference of $5,151. Once taxable income rises above the threshold amount, a “recovery tax” is charged at a rate of 15% of the difference between an individual’s income and the threshold amount, up to a limit of the amount of OAS the individual has received.
“That can be a significant tax clawback if you hit that [OAS threshold],” Waters said. A higher threshold is a positive for clients looking to avoid the clawback, he said.
The lifetime capital gains exemption (LCGE) amount on the sale of qualifying small business shares is rising to $971,190 in 2023, up from $913,630 in 2022, an increase of $57,560, providing a great opportunity for tax savings for clients considering selling a business.
Clients who sold qualifying small business shares earlier in life, when the LCGE was set a lower level, can take advantage of any unused increased amount on any subsequent qualifying sale, Waters said: “It’s a lifetime limit.”
The higher LCGE amount will also be useful to business owners who wish to sell their business to their children, Bezaire said.
Last year, the federal government passed Bill C-208, which allowed business owners selling shares of their business to their child to take advantage of the LCGE on the proceeds of the sale. Before the change in law, the proceeds of disposition on a sale of a business to a child were taxed as a dividend.
Both Waters and Bezaire point out that the LCGE on the sale of qualified farm or fishing properties is $1 million, which is higher than the LCGE amount for the sale of qualifying small business shares. Once the LCGE amount for small business shares rises above $1 million, which may be as soon as 2024, the lifetime exemption for farms or fishing properties will rise to match the LCGE for small business shares, and remain indexed to inflation.
Federal tax brackets
|Tax rate||2023 taxable income||2022 taxable income|