inflation / shauni

This article appears in the February 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Nova Scotia has not indexed its tax bracket thresholds to inflation in 23 years, imposing a significant tax hit. The province is one of only two — along with Prince Edward Island — that does not annually index its tax brackets.

When wages increase to offset the rising cost of living but tax bracket thresholds remain fixed, a greater portion of a taxpayer’s income may be exposed to higher tax brackets. This is known as “bracket creep.”

“You get invisible tax increases every year as the real [dollar] value of these thresholds comes down,” said William B.P. Robson, CEO of the C.D. Howe Institute in Toronto.

And with inflation running high, “people are getting pushed into higher brackets at a much more rapid rate,” Robson said.

The federal government and every other province and territory index their tax bracket thresholds to inflation annually, either by using the federal indexation factor or applying their own.

For example, the federal government raised the upper threshold of its first tax bracket to $53,359 for 2023 from $50,197 in 2022, an increase of 6.3%. New Brunswick, which uses the federal indexation factor, raised the upper threshold of its first bracket to $47,715 in 2023 from $44,887 in 2022.

In contrast, Nova Scotia’s upper threshold for its first bracket remains $29,590, unchanged from 2000 when the province switched from taxing a percentage of federal tax to taxing income. In 2004, the province added a fourth tax bracket, for income above $93,000, and in 2010 it added a fifth, for income above $151,000. Those two thresholds have not increased either.

Keith MacIntyre, a partner with Grant Thornton LLP in Halifax, said in an email that Nova Scotia’s decision in 2000 to switch to “tax on income” from “tax on tax” allowed the province to keep tax brackets low, “representing a real cost to those with low incomes.”

For example, the 80.3% difference between the federal government’s $53,359 first tax bracket threshold and Nova Scotia’s $29,590 first bracket means a Nova Scotia taxpayer with an income of $53,359 in 2023 would pay $1,464 more in tax compared with what they would be paying if Nova Scotia had indexed its brackets to match that of the feds, assuming the province’s lowest 8.79% tax rate applied.

Nova Scotia does provide personal tax credits for low- and modest-income earners — notably, a $3,000 supplement to the $8,481 personal exemption amount, spousal amount and eligible dependent amount, which is clawed back between $25,000 and $75,000 of income. However, the credits also are not indexed.

In an emailed response to a question about whether the province was considering indexation, Steven Stewart, a spokesperson for Nova Scotia Finance, said the government’s priority was health care.

“Indexing tax brackets would limit our ability to make those health investments,” Stewart wrote. “However, in preparing a budget, the government continues to evaluate all possibilities.”

P.E.I., the other province that doesn’t index, increased its three tax brackets most recently in 2008 to: income up to $31,984, income over $31,984 to $63,969, and income over $63,969. The province also raised its basic personal amount in 2023 to $12,000 from $11,250 in 2022.

While Ontario indexes its first three tax brackets to inflation, it does not index its top two brackets — income over $150,000 to $220,000, and income over $220,000. These bracket thresholds were introduced in 2014 and have not increased since. Alberta resumed indexing in 2022 after holding 2020 and 2021 tax brackets and credits at the 2019 amounts.

Prior to 2000, all provinces and territories (except Quebec) charged tax as a percentage of federal tax. When the federal government began indexing its tax brackets in 2000, the provinces and territories using “tax on tax” systems switched that year or soon after to “tax on income” regimes, giving themselves greater control over their own taxation.