The time for your client to file their 2023 personal income tax return is just around the corner. Need a reminder about how Canadians are taxed, including something to share with your clients… read on.
Individuals who reside in Canada are taxed on the worldwide income they receive in the calendar year. There is a federal layer of tax and a provincial layer of tax. The tax rate your client pays depends on the amount of the taxable income they received in the calendar year and the tax brackets they fall into. The 2023 Federal tax brackets are shown in the table below (which are indexed each year for inflation). Each province also has its own tax brackets and rates.
| Federal Tax Bracket | Rate |
|---|---|
| Up to $53,359 | 15.00% |
| $53,360 – $106,717 | 20.50% |
| $106,718 – $165,430 | 26.00% |
| $165,431 – $235,675 | 29.00% |
| $235,676 and over | 33.00% |
As you can see, the rate your client pays will be a blended rate depending on their taxable income for the year. They pay Federal tax at 15% on the first $53,359, then the rate increases to 20.50% for income above $53,359 etc. Once their income is over $235,676, then every dollar after that will be at the 33% Federal tax rate. With provincial taxes added on, the top combined income tax rate ranges from 44.50% in Nunuvut to 54.80% in Newfoundland and Labrador. Have your client check out these links for the combined Federal and Provincial tax rates for the province in which they reside: E&Y (rates and a personal tax calculator), KPMG (tax rates and brackets), as well as this Tax Calculator. There is an alternative minimum tax (AMT) that could apply if your client has certain preference items. A taxpayer pays the higher of AMT and regular income tax. There are changes to the AMT for 2024 which are outlined in our Advisor Talk article Alternative Minimum Tax Changes – What Your Client Needs to Know – don’t forget to share this with your clients.
Some types of income are more tax efficient than others. If your client earns capital gains, only 50% of the gain will be included in their taxable income, while their employment and investment income will be fully taxed. Withdrawals from your client’s RRSP or RRIF are also fully taxable. Dividends receive preferential tax treatment through the use of the dividend gross-up and tax credit. There are two types of dividends: eligible and non-eligible dividends. Non-eligible dividends are taxed at a higher rate than eligible dividends. Usually, dividends your client receives in their investment portfolio would be eligible dividends (dividends from publicly traded securities). While your client prepares their 2023 tax return, have them review the types of income they earned and evaluate if they should make a change to the types of income they are receiving. However, remind them to not let the taxation of the income be the only reason for changing an investment – type of income should match their financial planning goals.
Certain expenditures are deductible from your client’s income and there are also tax credits that can reduce their tax liability. The CRA’s website has a page that describes the deductions and tax credits that are available that can reduce your client’s tax liability. To be applied to your client’s tax return, the expenses must have been incurred by December 31 of the tax year in question (except for RRSP contributions which can be made 60 days after year end and still reduce the prior year tax liability – so for the 2023 tax year, RRSP contributions can be made up to February 29, 2024). For employees, there are less deductions than for those who are self-employed. The most common deductions are for RRSP contributions, childcare expenses, capital losses and investment related expenses. New for 2023 is the first home savings account (FHSA). The contribution limit for this account is $8,000 and is tax deductible. For more information on how this account works, have your client consult CRA’s First Home Savings Account (FHSA) page. The most common credits are for medical expenses, charitable donations and tuition fees.
Of course, there are also ways for your client to save taxes on income in the long-term by investing in a tax-free savings account (TFSA) or registered education savings plan (RESP), for example. While contributions to these types of plans don’t result in a deduction on your client’s tax return, the income earned in the plans are not taxable while in the plan. For TFSA, there is no tax for your client on withdrawal. For RESP, the funds are taxed in the hands of the student. The TFSA contribution limit for 2024 is $7,000. If your client has not made a TFSA contribution in the past, the contribution room carries forward. For example, if they were 18 years or older in 2009 and have never contributed to a TFSA, they could contribute $95,000 to a TFSA in 2024. For more information on how TFSAs work, read How Your Client Can Use a TFSA to Get Better Investing Results. For more information on RESPs, check out Helping Your Client Maximize their RESP, SMART TALK… about registered savings plans (RESPs) and this Start Education Planning Now calculator.
NOW is also an opportune time to check in with your clients and review their overall financial and estate plan which would include your client’s wills, power of attorney and representation agreements, life insurance needs as well as critical illness and disability insurance.
If you have any tax related questions, be sure to reach out to your local PPI Collaboration Centre for more information – we’re here to help!
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