As a newcomer to Canada, it’s important you’re aware of Canadian taxation rules to file your tax returns accurately and take advantage of benefits and credits you’re entitled to. The Government of Canada introduced several new tax measures and modified some existing guidelines which you should know about for the 2023 tax season as you begin to prepare your tax return for the 2022 tax year.
Tax returns are due April 30, 2023, but since that day is a Sunday, you have until May 1, 2023 to file. If you owe taxes, your payment is also due by that date to avoid penalties. If you’re self-employed, you have until June 15, 2023 to file your income tax return.
Filing tax returns can be confusing and overwhelming—even more so for a newcomer filing taxes in Canada for the first time. If you’re struggling to complete your tax return, the government encourages newcomers with a simple tax situation to get help at a free tax clinic.
In this article, we’ll review some of the changes that may affect your tax situation. This update includes:
- Changes to federal tax brackets
- Basic Personal Amount (BPA) increase
- Registered Retirement Savings Plan (RRSP) limit increase
- CPP and QPP payments increase
- Claim up to $500 for work-from-home expenses
- TFSA contributions for 2023
- New First Home Savings Account (FHSA) in 2023
- New anti-flipping rule for home sales in 2023
1. Changes to federal tax brackets
The Government of Canada has adjusted the tax brackets for the 2022 tax year. The latest adjustments mean you’ll pay a lower tax rate on more of your income earned in 2022.
A tax bracket is a tax rate that’s applied to a specific range of income. There are five tax brackets that make up the federal government’s progressive tax system.
The five federal tax brackets for 2022 are:
- Income earned up to $50,197 is taxed at 15 per cent
- Income earned at $50,197 up to $100,392 is taxed at 20.5 per cent
- Income earned at $100,392 up to $155,625 is taxed at 26 per cent
- Income earned at $155,625 up to $221,708 is taxed at 29 per cent
- Income earned at $221,708 and above is taxed at 33 per cent (this is called the top tax bracket)
If your income falls within one of the higher tax brackets, not all of your income gets taxed at that rate. Only the amount of income within that range is taxed at the higher rate. For example: if your taxable income for 2022 is $110,000, you’re subject to three tax rates: 15 per cent tax on $53,359, plus 20.5 per cent tax on $53,358, plus 26 per cent tax on $3,283. Your income tax return should include all your earnings sources, such as your 9-to-5 job, side hustle, or a business you’ve started.
Note that each province has its own tax brackets and those are adjusted based on provincial indexation calculations. When you complete your tax return, you are subject to the tax rates of the province or territory you resided in as of December 31, 2022 (in addition to the federal tax rate).
2. Basic Personal Amount (BPA) increase
The Basic Personal Amount (BPA) is a non-refundable tax credit. Individuals whose income is below the BPA threshold are eligible for a full reduction in federal income tax, while individuals who have a higher income are entitled to a partial reduction in taxes. Since the BPA is non-refundable, it can only be used to reduce the amount of tax you owe to the Canadian government. You cannot be paid any excess amount.
For the 2022 tax year, the federal BPA was increased to $14,398 (from $13,808 in 2021). This $590 increase is an “enhancement” to the BPA that only applies to individuals with an income of $155,625 or less. (It is the third of four enhancements to the BPA applied annually since 2020 with the final enhancement to increase the BPA to $15,000 in 2024.)
In the 2022 tax year, if your taxable income is at or below $14,398, your federal income tax is reduced to zero. If your income is above the BPA but less than $155,625, you can apply the maximum BPA ($14,398) to your income tax return and claim 15 per cent of that amount to reduce your taxes.
For example: If you have a taxable income of $45,000 in 2022, the federal income tax rate you pay on that income is 15 per cent which equals $6,750. The tax credit for your federal BPA is $14,398. You can claim 15 percent of it, or $2,159.70. This tax credit will reduce your federal income tax to $4,590.30 ($6,750 minus $2,159.70 = $4,590.30).
If you earned more than $155,625 in 2022, the federal government will adjust the BPA according to your income as the full enhancement does not apply to you. If you earned $221,708 or more in 2022, your BPA is $12,719 (you are not eligible for the BPA enhancements that began in 2020).
Each province and territory also has a BPA with its own updated thresholds that you will apply to your tax return based on where you reside.
3. Registered Retirement Savings Plan (RRSP) limit increase
The Registered Retirement Savings Plan (RRSP) is a tax-deferred savings plan that helps you build retirement funds and reduces your taxable income each year you contribute. You can contribute up to 18 per cent of your previous year’s income to this plan, up to a specified dollar limit. The RRSP contribution limit for 2022 increased to $29,210 (from $27,830 in 2021). This means you can contribute up to 18 per cent of your 2022 income to your RRSP, up to a maximum of $29,210.
The amount you contribute to your RRSP can be deducted from your income, in your tax return in order to lower your taxable income and the amount of taxes you owe. However, note that you can only begin contributing to an RRSP after you’ve filed your first tax return in Canada (the year after you arrive). Your Notice of Assessment (NOA) will indicate how much contribution room you have for the tax year.
4. CPP and QPP payments increase
The maximum pensionable earnings under the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) for the 2022 tax year increased to $64,900 (up from $61,600). The basic exemption amount is unchanged at $3,500 (you don’t need to contribute to CPP if your income is below this amount).
If you work for an employer, the CPP contribution rate for you (the employee) and your employer is 5.7 per cent of your earnings up to a maximum contribution of $3,499.80 each. The QPP contribution rate is 6.15 per cent of your earnings up to $3,776.10 each. Your contribution will be deducted from your regular paycheque. However, if you’re self-employed, you must pay both the employer and employee contributions for CPP and, therefore, will owe 11.4 per cent of your 2022 income up to a maximum total contribution of $6,999.60.
5. Claim up to $500 for work-from-home expenses
The ability to claim $2 for each day you worked from home due to the COVID-19 pandemic is available for the 2022 tax year, as it was in the 2021 tax year. If you worked more than 50 per cent of the time from home for at least four consecutive weeks, you are eligible to claim up to $500 for the year in your tax return. This is the final year this deduction will be offered.
6. TFSA contributions for 2023
The annual Tax Free Savings Account (TFSA) contribution limit for 2023 has increased to $6,500, up from $6,000 in 2022. This is something to bear in mind when planning your investment strategy for the 2023 tax year. However, when completing your tax return for the 2022 tax year, you are subject to the 2022 TFSA limit of $6,000.
To calculate the amount of taxes payable on your TFSA, be sure to consider any unused contribution room from previous years that carry forward, TFSA withdrawals in 2022 that add contribution room, and if you over-contributed to your TFSA in a previous year.
7. New First Home Savings Account (FHSA) in 2023
You may be eligible for some federal tax credits in the 2023 tax year, including the First Home Savings Account (FHSA). The new FHSA offers prospective first-time home buyers in Canada the ability to save up to $40,000 tax-free.
It comes into effect April 1, 2023 and, therefore, does not impact your tax return for the 2022 tax year. However, you can begin contributing up to a maximum of $8,000 per year to your FHSA in 2023. This will impact your tax return filed in 2024 because contributions to an FHSA are tax-deductible. Additionally, investment income earned in your FHSA as well as withdrawals from your FHSA to purchase your first home are tax-free.
8. New anti-flipping rule for home sales in 2023
The federal government has updated how the income earned through the sale of your home may be taxed. As of January 2023, if you sell a residential property you’ve owned for less than a year, the profit from the sale will be treated as business income and will be subject to tax. There are a variety of exemptions, such as divorce, death, and relocating for a job. This change does not does not apply to your income tax return for the 2022 tax year, but is something to keep in mind, as it may affect your taxes when you file your return in 2024.
As a newcomer, you’ll only need to start filing taxes the year after you arrive in Canada. However, even if you’re a recent newcomer, some of these taxation related changes may begin to impact you in your first year in the form of payroll deductions, tax credits, saving to buy a home, and more.