Inflation and taxes are two of the biggest financial challenges facing retirees, but there is a silver lining: many tax rules and major retirement benefits in Canada are indexed to inflation. Federal income tax brackets, contribution limits for registered accounts and programs such as the Canada Pension Plan (CPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) are adjusted regularly to reflect rising prices. These adjustments can meaningfully affect retirees’ after-tax income and retirement planning decisions.
For 2024, federal income tax brackets are indexed using a 4.7% inflation rate. The federal rates become 15% on taxable income up to $55,867; 20.5% on income between $55,867 and $111,733; 26% between $111,733 and $173,205; 29% between $173,205 and $246,752; and 33% on income above that. Most provincial tax brackets are also adjusted for inflation. The basic personal amount (BPA) for 2024 is $15,705, meaning most Canadians will pay no federal tax on the first $15,705 of income.
TFSA contribution limit rises in January
Early in 2024, contribution room for Tax-Free Savings Accounts (TFSAs) increased to $7,000, up from $6,500 in 2023. That followed several years at $6,000 prior to 2023. Because TFSA limits are indexed for inflation, savers who contribute regularly can build significant tax-free savings over time. A Canadian who has never contributed to a TFSA and who was eligible every year would have cumulative TFSA contribution room of $95,000 as of January 2024.
Financial professionals note that any rise in TFSA limits is helpful because TFSA contribution limits are relatively modest compared with RRSP room. As Chartered Financial Analyst Anita Bruinsma has observed, even modest increases can make the account more valuable to a broad range of investors. Inflation also brings higher government benefits and expanded contribution room across registered accounts, which can partially soften the impact of rising living costs.
| 2024 projected | 2023 | 2022 | 2021 | 2020 | |
| Indexation | 4.7% | 6.3% | 2.4% | 1% | 1.9% |
| TFSA annual limits | $7,000 | $6,500 | $6,000 | $6,000 | $6,000 |
| Old Age Security repayment thresholds | $90,997 | $86,912 | $81,761 | $79,845 | $79,054 |
While the official annual indexation rate in 2024 (4.7%) is lower than 2023’s rate (6.3%), it remains considerably higher than the inflation rates in 2021 and 2022. That cumulative price growth over the past two years has been highly visible to consumers, especially on essentials such as groceries and fuel. At the same time, higher CPP and OAS payments and larger registered-account limits help reduce some of the pressure for retirees living on fixed incomes.
Rising RRSP contribution limits
Inflation also increases annual maximum contribution limits for Registered Retirement Savings Plans (RRSPs). The RRSP limit rose from $27,830 in 2021 to $31,560 in 2024—a jump of about 13.4% over that period. Higher RRSP limits allow individuals to shelter more income from tax on a tax-deferred basis and increase the potential annual tax deduction for RRSP contributions.
For many savers, higher RRSP room provides an important opportunity to accelerate tax-deferred savings and reduce current-year taxes if they have the capacity to contribute.
OAS clawback threshold also rises
Another inflation-related improvement for retirees is the rising threshold for Old Age Security clawbacks. OAS benefits begin to be recovered when net income exceeds a specific threshold, and that threshold is indexed for inflation. The clawback threshold was $79,054 in 2020, rose to $86,912 in 2023 and is projected to reach $90,997 in 2024.
Because each spouse’s OAS is assessed individually, a retired couple can generally earn nearly $182,000 in combined income before either person’s OAS begins to be clawed back. For many retirees, reaching or slightly exceeding that level is a “good problem” to have, since it means higher overall retirement income despite a partial reduction in OAS benefits.
Is CPP inflation hedging a reason to take CPP a bit early?
CPP is not subject to clawbacks, although it is taxable, and benefits are indexed to inflation after they start. This creates a timing consideration for people deciding when to begin CPP. Actuary Fred Vettese has argued that, in certain market conditions, taking CPP a year or two earlier rather than deferring until age 70 can be advantageous because the benefit will receive annual inflation adjustments once it has begun.
The interaction between wage inflation (used in calculating deferred CPP amounts) and price inflation (used to index paid benefits) means the optimal start date can vary. If wage growth outpaces price inflation, waiting can increase the lifetime benefit. But if price inflation is higher—as it was recently—starting earlier could yield a larger nominal income stream sooner. Vettese has suggested that, for those considering CPP in 2024, starting late in 2023 would have made sense for many people.
Other advisers urge caution. Bruinsma recommends evaluating CPP timing within the broader context of current and expected income, employment status, longevity, planned asset sales and personal priorities. CPP decisions are semi-permanent: once benefits start, reversing or changing that decision can be complicated and limited by narrow time windows.
In addition to discussing CPP timing, some experts point to the changing attractiveness of annuities and fixed-income options in a higher-rate environment. Higher nominal rates and rising dividend yields have made certain income-producing investments more appealing than they were a few years ago, but concerns about future inflation spikes remain a factor to weigh when considering long-term guaranteed products.
Inflation remains a persistent challenge that erodes purchasing power over time. Unlike workers who may receive periodic wage increases or indexed pay adjustments, retirees must rely on savings, pensions and indexed government benefits to maintain standards of living. The automatic indexation of tax brackets, registered-account limits and retirement benefits does not eliminate inflation’s impact, but it does provide meaningful relief in key areas of retirement income and tax planning.
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