New Year Brings New Rules

National Post


The first day of January ushers in not just a new year but introduces a fresh set of tax brackets and increased tax and benefit amounts that have been newly indexed to inflation.

In late November, the Canada Revenue Agency announced a 2.8% indexation increase for 2012. This indexation factor is arrived at by taking the percentage change in the average Consumer Price Index (CPI) data as reported by Statistics Canada for the 12-month period ended Sept. 30, 2011 relative to the average CPI for the 12-month period ended on Sept. 30, 2010.

While most increases to the brackets and credit amounts kick in on Jan. 1, the increases to the Canada Child Tax Benefit (including the National Child Benefit Supplement and the Child Disability Benefit) and the GST/HST credit only take effect on July 1, which coincides with the start of the program year for those benefits.

You may be surprised to learn that full indexation in accordance with CPI wasn’t always the norm. In fact, prior to 2000, indexation would only take effect in years in which the percentage change in the CPI exceeded 3%. The result of this partial indexation is that when inflation ran below 3%, the personal income tax system would stay stagnant, not keeping up with inflation and result in what tax pundits and economists refer to as “bracket creep.”

So, what are some of the new numbers? For 2012, the four indexed federal tax brackets (and rates) are: $0 to $42,707 (15%), $42,707 to $85,414 (22%), $85,414 to $132,406 (26%) and above $132,406 (29%).

The basic personal amount is up to $10,822 for 2012, which is the same as the spouse or common law partner amount, while the amount for children under 18 is now $2,191 per child. These amounts are multiplied by 15% to arrive at the federal tax credits.

While the maximum RRSP contribution limit for 2012 has also increased to $22,970 up from $22,450 in 2011, you may be surprised to learn that the TFSA contribution limit for 2012 is remaining at $5,000 for the fourth year in a row.

The CRA confirmed this month that “with the application of the indexation increase of 2.8% for 2012 and rounding the result to the nearest $500, the TFSA dollar limit for 2012 remains at $5,000.”

This caught some tax geeks by surprise. While the TFSA rules in the Tax Act specify that the annual TFSA limit would be determined by indexing $5,000 to inflation and rounding the result to the nearest $500, one would have thought that with three years’ cumulative indexation, surely we would be at $5,500 by now.

But a check of the math confirms that if we index $5,000 by the inflation factors for 2009 (0.6%), 2010 (1.4%) and 2011 (2.8%), we get $5,243 (i.e. $5,000 x 1.006 x 1.014 x 1.028), which rounded to the closest $500 gives us a $5,000 TFSA limit yet again for 2012.