Introduction
In this blog post, we will detail the important tax changes in Canada for 2024 that you need to know.
Last year was difficult with ongoing inflation and rising interest rates, but for the new year, we have good news for ordinary Canadians: we will see an overall reduction in taxes so that you can keep more money in your pockets. We will cover new limits for the TFSA, RRSP, and FHSA, as well as major changes to the CPP, updates to tax brackets and tax credits, and I will conclude with a step-by-step example connecting it all together.
2024 TFSA Contribution Limit Increase
Starting with some excellent news, the TFSA contribution limit for 2024 has increased to $7,000. This is the first time we have seen a consecutive increase in the TFSA for two years! For 2024, we get an additional $500 that you can contribute to your TFSA and watch those investments grow tax-free year after year. The TFSA is one of the most powerful tools we have as Canadians to build long-term wealth, so make sure to use it wisely.
We cannot stress enough the importance of a TFSA in building your financial future. There is no downside to a TFSA; it can only help you. On January 1, 2024, everyone will get an additional $7,000 in contribution room that you can put into your TFSA. But if you don’t have the money, don’t worry, you won’t lose it. Contribution room carries forward indefinitely, and if you don’t have the money, you can transfer stocks and ETFs from your non-registered account to your TFSA. Just be aware that you may have to pay capital gains tax on this transfer, although a one-time tax is well worth a lifetime of tax-free growth.
Everyone in Canada has the same TFSA contribution limit, it only depends on your age and not your income. If you were born in 1991 or earlier, meaning you will be 33 years old or older this year, you have a total of $95,000 in contribution room for a TFSA, which means if you have never added any money to your TFSA, you can put that full amount of $95,000 into your TFSA. And for new Canadians, you do not need to be a Canadian citizen or even a permanent resident if you are living in Canada and have a valid social insurance number, you can open a TFSA and start investing. But you only start accruing TFSA room once you start living in Canada and are at least 18 years old.
2024 RRSP Contribution Limit Increase
For the RRSP, we also have higher contribution limits for 2024. The RRSP is a powerful investment tool to build your retirement fund and reduce your tax bill, but your contribution room depends on your income each year. Your RRSP contribution room will increase by 18% of your earned income from the previous year. Earned income includes your regular employment income from your job plus your net business income and rental income if you are a property owner, but it does not include investment income such as dividends and capital gains.
So, if you have a salary of $80,000 at your job, you will earn 18% of that amount, which is $14,400 in RRSP room. But these 18% new room is capped at an annual limit. In 2023, that limit was $30,780; so, if you had a massive income of $200,000, you won’t get the full 18% of that amount in RRSP room, you would be capped at that $30,780 limit. But good news for high-income earners – in 2024, that annual limit has been increased to $31,560. So, if you earn over $170,000, you will be able to take advantage of this additional RRSP room and reduce your taxes.
2024 FHSA: The First Home Savings Account
One of the best things in 2023 was the FHSA. The First Home Savings Account is there to help Canadians buy their first home, and it combines the best benefits of the TFSA and RRSP. All the money you put into the FHSA is tax-deductible, reducing your tax bill just like the RRSP, and that money is invested and ultimately withdrawn tax-free like the TFSA. This completely changes the game, so take advantage of it.
There are no changes for 2024, you get the same annual contribution limit of $8,000, but here’s the important part, you only build that room if you actually open an account. Make sure to open an FHSA before December 31, even if you don’t put any money into that unused room, the $8,000 for 2023 will carry forward, so in 2024, you will have a total of $16,000 in FHSA room. If you wait until January to open your account, you miss out, you will only be able to contribute $8,000 for the year.
2024 CPP Payments Increase
One of the biggest changes for 2024 is the CPP, the Canada Pension Plan. Here is our much detailed blog post on this topic.
The CPP is a retirement plan that all Canadians contribute to, except for Quebec. Just like our taxes, the CPP is deducted from our salary, and unfortunately, that amount is increasing starting January 1, 2024. The maximum CPP contributions will increase, and this is new for 2024, there will now be a secondary level for higher incomes.
If you earn less than $66,000, your CPP contributions will not change, you will pay the same amount as in 2023. But if you have a higher income above $73,200, you will pay an additional $300 to the CPP this year, which is $12 more on every paycheque, so be prepared.
Again, if you earn over $73,200, you will contribute the maximum amount to the CPP, which is $4,055, and if you are a self-employed individual running a business or an employee of your incorporated business, you will have to pay both your portion and the employer’s portion.
2024 Tax Bracket Updates
Now for the good news on tax changes in Canada for 2024, the federal tax brackets have been adjusted so that everyone pays slightly less federal taxes. We have tax brackets that start at the bottom and overlap, so your first $55,000 of income is taxed at the lowest rate of 15%, then your next $55,000 is taxed in the second bracket at 20.5%, then the next bracket is 26%, and so on. This way, low-income Canadians pay a lower percentage of taxes compared to higher-income earners.
For 2024, the tax rates remain the same but the brackets themselves have increased by 4.7%, which is a good thing. Now, a larger portion of your income will fall into the lower tax brackets, so you will pay that lower tax rate, and this will help all Canadians. Specifically, the lowest tax bracket of 15% has been increased by $2,500, so now your first $55,867 will be taxed at this lowest rate. The second tax bracket of 20.5% has been increased by $5,000, so now any income above $55,867 but below $111,733 will be taxed at 20.5%. The third tax bracket has been increased by nearly $8,000, and so on.
All Canadians will see more money in the lower brackets, and therefore, you can expect an overall lower tax bill. Note that this only applies to federal taxes; each province also has its own provincial tax brackets.
2024 Tax Credits Increase
Basic Personal Credit
Many tax credits are also increased this year, with the most significant being the Basic Personal Amount tax credit, which helps all Canadians. For 2024, the Basic Personal Amount tax credit will reach $15,705. This is designed so that if you earn less than $15,705 per year, you will not pay a single dollar of federal tax. This is particularly useful for students and part-time workers.
For everyone else, you receive a tax credit to not be taxed on the first $15,705 in that first tax bracket. Remember, the first bracket has a tax rate of 15%, so you will save 15% of $15,705, which will save you $2,355 in federal taxes. And all Canadians benefit from this compared to 2023, we get to keep an additional $105 in our pockets thanks to this credit. However, if you are in the higher second tax bracket and earn over $173,000, your tax credit is phased out as your income increases. But don’t worry, this credit does not phase out by much even if you are in the higher second tax bracket. For those in the highest tax bracket exceeding $246,000, you will still receive the minimum tax credit of $14,156. But for the vast majority of Canadians earning less than $173,000, you get the full credit, which will save you $2,355 in federal taxes.
Lifetime Capital Gains Exemption
Another significant increase we are expecting for 2024 is the lifetime capital gains exemption, which is increasing substantially to $1,016,836. This tax advantage is not for most people, it only helps Canadians who own a small business and sell their business, it also applies to farms and fishing properties, for example.
If you are a business owner, and if you were to sell that business for $1 million, you would be taxed on that $1 million in capital gains, which would cost you over $220,000 in taxes. But with this exemption, you can reduce your taxable gains by $1,016,836, effectively wiping out your entire tax bill.
This is a huge advantage of starting a business in Canada; you can eventually sell that business as a share sale, and provided that certain conditions are met, that share sale is extremely tax efficient.
Alternative Minimum Tax
Note that the above capital gains example is very simplified; in reality, there is something called the Alternative Minimum Tax that targets extremely high-income earners, so you cannot sell a $1 million business and get away with zero tax, the calculation is far too complex for this blog post, but using our example, you would pay about $30,000 in taxes, which is still a great deal for a $1 million sale.
Other Tax Changes in Canada for 2024
- The maximum EI insurable earnings will increase to $63,200.
- The prescribed rate for loans will increase to 6%.
- The medical expense threshold will increase to $2,759.
- The age amount will increase to $8,790 for those 65 or older.
- The OAS recovery tax will increase to almost $90,997.
- There are also changes for individuals with children, dependents, or disabilities.
Example of $80,000 Salary Income
Let’s bring this home with a simple example to illustrate the tax changes in Canada for 2024.
Let’s say you earned $80,000 as a salary in 2023 and let’s assume your income in 2024 is the same. Your federal taxes on this income for 2023 would be $13,464. For 2024, the federal taxes would be $13,327. That’s $137 or about 1% less.
Now, this is only federal taxes. You will also pay provincial taxes depending on the province you live in. If you live in Ontario, for example, your provincial taxes would be about $90 lower.
Combining this with higher Basic Personal Credit, you would save an additional $132 in federal and provincial taxes, bringing the total decrease in taxes to $360. Not bad! But, hold on … didn’t we say CPP was going up? Yup. On $80,000 of salary income, you can expect to pay about $300 more in CPP. As such, your net savings are a paltry $60, but savings nonetheless.
Get In Touch!
Still have questions about tax changes in Canada for 2024? Reach out to our team to discuss how we can help you and your business with your tax planning and save money!
