Tax Changes for 2024 Bring Tax Planning Opportunities

Evelyn Jacks

Amongst the many tax changes coming for the 2024 tax year is the fact that the federal government has now confirmed an indexing factor of 4.7% on most non-refundable tax credits, tax brackets and income-tested earnings levels for the purposes of refundable tax credits. That announcement will also affect some investments, like the room available for TFSA contributions. But there are more important changes to know about.  Here is a synopsis:

Calculating the indexation levels.  The government uses the average of the Consumer Price Index (CPI) for the 12 months ending September 30, 2023 and divides this by the same figures for the period ending a year before:  September 30, 2022.  For 2024, the calculation comes to 1.047 or 4.7%, and the  tax brackets will rise as follows, according to CRA:

However, for many this won’t make a big difference on take home pay because of another factor:  increasing CPP (Canada Pension Plan) premiums, described below.

Effect on investments. The CRA has confirmed that the maximum Room for TFSA contributions in 2024 will be as expected: $7000.  For the purposes of the capital gains exemption for qualified small business corporation shares, farming and fishing properties,  the indexed threshholds are:

Note that for dispositions after April 20, 2015, is LCGE for qualifying farmers and fishers is the greater of $1 million and the indexed lifetime capital gains exemption on the disposition of qualified small business corporation shares. As the amount is now over $1,000,000 in 2024, the LCGE will harmonize for all three ventures; hence the N/A in the columns above.

Get Ready for CPP Hikes (CPP2).  Everyone who is age 18 and makes more than $3500 in a year must contribute to the CPP.  The maximum age of contribution is 70, although most Canadians start a pension benefit from the CPP by age 65 (there is an options for an early start at age 60).

But premiums must be paid into the fund – the amount of contributions made during your working life will determine your level of pension benefits.  Starting January 1, 2024 and each subsequent year after this, contributions are based on pensionable earnings between the Year’s Maximum Pensionable Earnings (YMPE) and a new second earnings ceiling, referred to as the Year’s Additional Maximum Pensionable Earnings (YAMPE).  In short, there will be a second layer of contributions required from employers and employee contributors earning at higher income levels. The new rates are particularly prohibitive for self-employed taxpayers, who bear the burden of both shares when they file their T1 returns in the spring of 2024.

The CPP calculates these new ceiling levels to take into account the growth in average weekly wages and salaries in Canada.

For 2024,  taxpayers with income under $68,500, the maximum pensionable earnings under the Canada Pension Plan (CPP) will be $68,500.  This an increase of $1900 or 2.85% from last year’s $66,600. The basic exemption amount for 2024 remains at $3,500 – unindexed to inflation.

The second higher, second earnings ceiling of $73,200 will be implemented and used to determine second additional CPP contributions (CPP2) in 2024.  It is the pensionable earnings between $68,500 and $73,200 that are subject to CPP2 contributions.  This results in the following premium increases for contributors at the $68,500 level:

• CPP (1). Calculated at a rate 5.95%, the maximum contribution will be $3,867.50 for each of the employer and the employee.  This is an increase of 3% from last year’s $3,754.45. The self-employed CPP contribution rate remains at 11.90% (5.95% x 2), and therefore the maximum contribution will be $7,735.00.  This is also an increase of 3% - $226.10 more than last year’s maximum premium of $7,508.90.
• CPP (2).  In addition to this, CPP (2) will be based on maximum contributory earnings of $73,200.  The difference between $68,500 and $73,200 is $4700 and those earnings will be subject to an additional premium of 4% or $188.00 more for each of the Employer and the Employee, and $376 for the self employed with net earnings in this range.

What happens on the tax return?  The employed taxpayer will have the CPP contributions deducted from their pay and remitted on their behalf by their employer.  It is possible to claim a 15% non-refundable tax credit on CPP1 contributions.

A tax deduction is claimed on the enhanced portions of CPP1 (amounts over 4%) and CPP2 contributions.

Self-employed (unincorporated) taxpayers will have to contribute the full amount (employer and employee portions of CPP due) when filing their T1 returns. Contributions to the CPP are based on net business income (after expenses).  Schedule 8 is used to do the calculations.  As the numbers are so large this year, it pays to do the estimation of income and premiums due early. 

The self-employed do have until June 15 to avoid late filing penalties on their tax returns, but the CPP premiums will likely throw many of these filers into a “balance due” scenario.  The self-employed are subject to interest charges on unpaid and overdue taxes begin in May of 2024 at a prescribed interest rate that could be as high as Q1’s 10% (these prescribed rates are announced quarterly).  Therefore, it’s important from a year end planning perspective to know and understand the level of taxable income expected to estimate the CPP payable as well as the taxes payable.  

Make a Difference.  Despite indexing of tax brackets and rates at 4.7%, CPP contributions are rising by about 3% for working Canadians.  Help your clients make the most of the inflation “raise” by reducing net income with an RRSP contribution if they are eligible.