As we await the date this spring of the federal budget, here are five tax changes already in effect for 2023 that may be worth discussing at your next client meeting.
1. Indexed amounts, benefits and tax brackets
Each year, most (but not all) income tax and benefit amounts are indexed to inflation. Late last year, the Canada Revenue Agency announced that the inflation rate to be used to index the 2023 tax brackets and amounts would be 6.3%. Increases to the tax bracket thresholds and various amounts relating to non-refundable credits took effect on Jan. 1, 2023, while increases in amounts for certain benefits, such as the GST/HST credit and Canada Child Benefit, only take effect on July 1, 2023.
For 2023, all five federal income tax brackets have been indexed to inflation using the 6.3% rate. The new 2023 federal brackets are: zero to $53,359 of income (15%); above $53,359 to $106,717 (20.5%); above $106,717 to $165,430 (26%); above $165,430 to $235,675 (29%); and anything above that is taxed at 33%. Each province also has its own set of provincial tax brackets, most of which have also been indexed to inflation, but using their respective provincial indexation factors.
2. Basic personal amount
The basic personal amount (BPA) is the amount of income an individual can earn without paying any federal tax. In December 2019, the government announced an increase of the BPA annually until it reaches $15,000 in 2023, after which it will be indexed to inflation.
As a result, for 2023 the increased BPA has been set by legislation at $15,000, meaning an individual can earn up to this amount in 2023 before paying any federal income tax. The value of the federal credit is calculated by applying the lowest federal personal income tax rate (15%) to the BPA, making it worth $2,250.
Higher-income earners, however, may not get the full increased BPA, as there is an income test. The enhanced BPA is gradually reduced, on a straight-line basis, for taxpayers with net incomes above $165,430 (the bottom of the fourth tax bracket for 2023) until it has been fully phased out once a taxpayer’s income is over $235,675 (the threshold for the top tax bracket in 2023). Taxpayers in that top bracket, therefore, who lose the enhanced amount will still get the “old” BPA, indexed to inflation, which is $13,521 for 2023.
3. Multigenerational Home Renovation Tax Credit
Jan. 1, 2023, also marked the beginning of the new Multigenerational Home Renovation Tax Credit. This new credit is equal to 15% of eligible expenses (up to $50,000) incurred for a qualifying renovation that creates a secondary suite to permit an eligible person (such as a senior or a person with a disability) to live with a relative.
4. Anti-flipping rules
Canada’s new anti-flipping rules for residential real estate also became effective on Jan. 1 and are designed to “reduce speculative demand in the marketplace and help to cool excessive price growth.” The principal residence exemption will not be available on the sale of a home if the home has been owned for less than 12 months (with certain exceptions). Instead, the gain will be 100% taxable as business income.
5. First home savings account
Finally, legislation to create the new tax-free first home savings account (FHSA) was passed in late 2022, paving the way for the proposed launch of the FHSA as early as April 1, 2023. This new registered plan may give prospective first-time homebuyers the ability to save $40,000 on a tax-free basis towards the purchase of a first home in Canada.
Like a registered retirement savings plan (RRSP), contributions to an FHSA will be tax deductible. Withdrawals to purchase a first home, including from any investment income or growth earned in the account, will be non-taxable, like a tax-free savings account. The new legislation confirms that a first-time homebuyer can use both the FHSA along with the existing Home Buyers’ Plan (a $35,000 repayable loan from an RRSP) to purchase their first home.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning, with CIBC Private Wealth in Toronto.