A Brighter Side to Inflation: The Largest Index Adjustment in Years
There may be some good news that comes with the significant inflation we’ve been enduring. The adjustments made to certain government income tax and benefit amounts — such as the basic personal amount (the federal non-refundable tax credit on an income tax return), the annual dollar limit for the TFSA and the GST/HST tax credit — will be the highest seen in many years. This is because the government adjusts these amounts based on inflation using consumer price index data. With inflation reaching 40-year highs in recent times, the indexation increase is the largest since the 1980s.
Indexation Increase Per Year, 2019 to Current
Many of these adjustments take effect on January 1, such as the increase to the TFSA dollar limit. However, other adjustments will take place on July 1, such as income-tested benefits like the GST/ HST tax credit and the child disability benefit, as this coincides with the beginning of the program year for these benefits. It will also increase our income tax brackets.
Why is this important? The adjustment helps compensate for the higher cost of living we are experiencing. For instance, if the tax bracket thresholds are not indexed to inflation, an increase in income would mean higher taxes paid and a loss of purchasing power. This occurred when Alberta de-indexed its tax brackets in 2019, effectively forcing Albertans to pay $646 million more in taxes from 2020 to 2022.1 Alberta will resume indexing for the 2022 tax year.
For more information on the indexation adjustment, please see: https://www.canada.ca/en/revenue-agency/services/tax/individuals/ frequently-asked-questions-individuals/adjustment-personal- income-tax-benefit-amounts.html
1. www.cbc.ca/news/canada/calgary/alberta-taxes-indexation-inflation-1.6510978
2023 TFSA Dollar Limit: As a result of adjustments for inflation, the 2023 TFSA annual dollar limit will increase to $6,500, bringing the eligible lifetime amount to $88,000. The annual dollar limit hasn’t increased since 2019. Don’t overlook the opportunity for tax-free growth!