Economic volatility has been strong over the past year as a result of COVID-19 developments and rising inflation. As a result, while submitting income tax returns in 2023 and after, Canadian taxpayers need to be aware of a number of changes.
Our team has highlighted the key factors that should be reviewed this year to ensure as a medical professional, your finances are being managed properly.
Inflation adjustment factor:
The majority of income tax and benefit amounts (but not all) are inflation-indexed. The Canada Revenue Agency said in November 2022 that the inflation rate to be applied to index the tax bands and amounts for 2023 would be 6.3%.
On January 1, 2023, new tax bracket thresholds and different non-refundable credit amounts go into effect. However, other benefits, including the Canada Child Benefit and the GST/HST credit, only go up on July 1, 2023. This also marks the start of the program year for the income-tested benefit payments that are based on your preceding year’s net income and are expected to be reported on your 2022 tax return, which is due this spring.
Tax brackets in 2023:
The 6.3% rate was used to index all five federal income tax rates for 2023. The new federal tax brackets are as follows: 0 to $53,359 (15%); over $53,359 to $106,717 (20%); over $106,717 to $165,430 (26%); over $165,430 to $235,675 (29%); and everything beyond that is taxed at a rate of 33.3%. Additionally, each province has its own set of tax bands, the majority of which have also been adjusted for inflation using the appropriate provincial indexation factors.
Basic personal amount (BPA):
The BPA is the maximum amount of money a person may make before paying any federal taxes. The BPA will rise yearly until it reaches $15,000 in 2023, at which point it will be adjusted to inflation, the government stated in December 2019. Because of this, the higher BPA for 2023 has been established by law at $15,000. This means that in 2023, a person can make up to this amount before paying any federal income tax.
When the lowest federal personal income tax rate of 15% is applied to the BPA for taxpayers earning more than this amount, the federal credit is valued at $2,250. The credit is only worth the full amount if you would have paid that much tax in the year otherwise since it is “non-refundable.”
However, because there is an income criteria, wealthier earners could not receive the full, enhanced BPA. For taxpayers with net earnings above $165,430 (the bottom of the fourth tax band for 2023), the increased BPA is gradually lowered on a straight-line basis until it is totally phased out when a taxpayer’s income exceeds $235,675 (the threshold for the top tax bracket in 2023). Taxpayers in that top group who forfeit the expanded amount will continue to get the “old” BPA, which is $13,521 for 2023 and is inflation-indexed.
Contributions to the CPP (QPP):
Based on the revised annual maximum pensionable earnings of $66,600 (with a $3,500 basic exemption), the 2023 contribution rate for the Canada Pension Plan is 5.95% (6.4%), with the maximum contributions by employees and employers set at $3,754.45 ($4,038.40 for the QPP).
The maximum CPP contribution for 2023 will be $7,508.90 ($8,076.80 for QPP), up from the amount for 2022 of $6,999.60 ($7,552.20 for QPP), for self-employed Canadians who must contribute twice as much. The provinces and the federal government adopted a multi-year plan six years ago to gradually raise payments and benefits. The CPP rise is a component of that plan.
The employee contribution rate for employment insurance is 1.63 percent (1.27 percent for Quebec), with a maximum contribution of $1,002.45 ($781.05 for Quebec) based on the employee’s 2023 maximum insurable earnings of $61,500.
Tax-free savings account (TFSA) limit:
For the first time since 2019, the TFSA contribution cap will rise to $6,500 from $6,000 in 2023. For those who have lived in Canada since 2009, have attained the age of 18, and have never made a TFSA contribution, the cumulative limit is now $88,000.
RRSP dollar limit:
The monetary cap for registered retirement savings plans in 2023 has increased to $30,780 from $29,210 in 2022. Of course, you are only permitted to contribute up to the present annual dollar limit and a maximum of 18% of your 2022 earned income, which includes rental and (self-)employment income less any pension adjustments.
Old Age Security (OAS):
If you get OAS, the payback level for 2023 is $86,912, indicating that if your taxable income exceeds this amount, your OAS will be lowered in 2023.
First Home Savings Accounts (FHSA):
The new tax-free FHSA is set to go into effect on April 1, 2023, thanks to newly enacted legislation. With the help of this new registered plan, potential Canadian first-time homebuyers may save up $40,000 tax-free for their first house.
Contributions to an FHSA will be tax deductible, similar to RRSPs, but withdrawals for the purpose of buying a first home, including any investment income or growth accrued in the account, will be non-taxable, similar to TFSAs. A first-time homeowner may use the FHSA plus the current Home Buyers’ Plan to buy their first house, according to the new legislation.
Multigenerational Home Renovation Tax Credit:
This new credit, which is equal to 15% of eligible costs (up to $50,000) incurred for a qualifying renovation that creates a secondary dwelling to enable an eligible person (such as a senior or a person with a disability to live with a relative), goes into effect on January 1st.
Lastly, new regulations on flipping residential properties are set to take effect on January 1st with the goal of “reducing speculative demand in the market and helping to calm excessive price increases.” If you’ve owned your house for less than a year, the principle residence exemption won’t apply when you sell it (with certain exceptions). The gain will instead be completely taxed as company income.
If you have any questions on the tax changes and new rules and how they might affect you and your finances as a medical professional, contact our team here.
Stay In Touch