In 2022, inflation shifted from a background worry to a central concern for many investors, particularly those approaching retirement. Central banks have been raising interest rates to rein in inflation, but it may take much of 2023—or longer—before inflation settles back toward the 2% annual target many governments favour. The Bank of Canada has used a 2% inflation guideline since 1995.
How Canadian investors are responding to inflation fears
Unsurprisingly, inflation ranks especially high among worries for retirees and those close to retirement. A recent Leger/Questrade survey, the 2023 RRSP Omni report, found that 87% of Canadians are concerned about rising prices. Despite that, many remain committed to saving and investing: 73% of registered retirement savings plan (RRSP) holders plan to contribute in 2023, and 79% of tax-free savings account (TFSA) holders intend to add to their accounts. Even so, a large share of respondents worry about the impact of inflation on their RRSPs (69%) and TFSAs (64%), and 25% say they are “very” concerned about both inflation and a potential recession.
The report highlights that these concerns raise doubts about Canadians’ perceived control over their financial futures, particularly for households earning under $100,000 a year. That group may need to tap savings or investments to cover expenses in 2023, and fewer than half feel confident about their financial future. Confidence remains higher among people with incomes above $60,000 despite current economic uncertainty.
Still, it is encouraging that roughly three-quarters of Canadians (75%) continue to save for retirement in some form. In the 2021 data from the same report, RRSPs were cited as the most common savings vehicle (42%), followed closely by TFSAs (40%). Given that RRSPs have existed since 1957 and TFSAs were introduced only in 2009, the near parity is notable. Workplace pensions accounted for contributions by just 26% of respondents.
What about tax brackets and inflation?
There is one potential upside to inflation: many tax thresholds and contribution limits are indexed to inflation, giving savers slightly more room for tax-sheltered or tax-deferred savings this year.
The maximum RRSP contribution limit for 2023 is $30,790, up from $29,210 in 2022 for those with earned income above $170,055 in 2022. The TFSA annual contribution limit rose to $6,500 for 2023, up from $6,000 each year between 2019 and 2022. That increases the cumulative TFSA room to $88,000 for someone who has never contributed and was born in 1991 or earlier.
To counter so-called “tax bracket creep,” the Canada Revenue Agency (CRA) indexes federal tax brackets to inflation. For 2023, the CRA reports an indexation increase of 6.3% for tax and benefit amounts. The federal tax brackets for 2023 are as shown below.
| Annual Income (Taxable) | Tax Brackets | Tax Rates | Maximum Taxes Per Bracket | Maximum Total Tax |
|---|---|---|---|---|
| Up to $53,358 | The first $53,358 | 15% | $8,004 | $8,004 |
| $53,359 to $106,716 | The next $53,357 | 20.5% | $10,938 | $18,942 ($8,004 + $10,938) |
| $106,717 to $165,429 | The next $58,712 | 26% | $15,265 | $34,207 ($15,265 + $18,942) |
| $165,430 to $235,674 | The next $70,244 | 29% | $20,371 | $54,578 ($20,374 + $34,207) |
| Over $235,675 | Over $235,675 | 33% | n/a | n/a |
The Basic Personal Amount (BPA)—the income level exempt from federal tax—is also increasing. The BPA is legislated to rise to $15,000 in 2023. Some higher-income taxpayers may not receive the full $15,000 increase; instead, they will qualify for the previously indexed BPA amount of $13,521 for 2023.
Inflation notes for retirees with CPP and OAS income
Retirees receiving Canada Pension Plan (CPP) and/or Old Age Security (OAS) will see inflation adjustments reflected in payments beginning around January 27, 2023. For CPP pensions already in payment before January 1, 2023, the annual increase is based on the change in CPI for the 12 months ending October 2022 versus the 12 months ending October 2021—a rise of 6.5%.
The maximum CPP for someone starting CPP in 2023 is calculated differently: it relies on a five-year average of the Year’s Maximum Pensionable Earnings (YMPE) covering 2023 and the previous four years. That five-year average tracks wage growth rather than the Consumer Price Index. Because wages recovered as lower-paying jobs returned after the pandemic’s first year, the 2023 maximum CPP benefit increased from $1,253.59 per month in 2022 to $1,306.57 per month in 2023—roughly a 4.2% rise that reflects the YMPE average and the enhanced CPP phase-in.
Inflation indexing also affects Old Age Security recipients. The income threshold that triggers the OAS recovery tax (clawback) has risen; for 2023, the threshold begins at $86,912, allowing some retirees to earn more before clawbacks apply.
Inflation’s impact on younger Canadians and the new FHSA
Inflation and rising home prices have made entry-level housing less attainable for many young Canadians, particularly those without financial help from family. To help, the first home savings account (FHSA) is expected to launch on April 1, 2023. The FHSA will let first-time buyers save up to $40,000 toward a first home with tax-deductible contributions, similar to an RRSP. Growth inside the FHSA will be tax-free, and withdrawals for qualifying home purchases will not be taxed. The FHSA can be used alongside the existing Home Buyers’ Plan from an RRSP.
Some financial planners suggest using TFSA savings strategically to fund an FHSA. The FHSA combines tax-deductible contributions (like an RRSP) with tax-free growth and withdrawals (like a TFSA), offering a useful tool for prospective first-time buyers.
TFSA vs RRSP for 2023: what Canadians prefer
The Leger/Questrade results indicate Canadians may be prioritizing TFSAs slightly more than RRSPs when it comes to maxing out contribution room. Even with the TFSA annual increase to $6,500, that amount remains under a quarter of the maximum RRSP room of $30,790 for 2023 for those with maximum eligible earned income. Given the difference, only 29% of RRSP holders plan to fully maximize RRSP room in 2023, while 46% intend to max out their TFSA space. TFSA enthusiasts tend to be male and aged 55 or older.
Views on inflation often shape how people invest inside TFSAs and RRSPs. Many investors use TFSA accounts to hold high-yield Canadian dividend stocks that generate tax-free income; some public portfolios in the personal finance community report monthly tax-free distributions approaching $1,000. Others caution that TFSAs are scarce, valuable real estate for long-term tax-free growth, so speculative assets—IPOs, SPACs, cryptocurrencies and crypto ETFs—may be better suited to non-registered accounts where tax-loss harvesting can offset gains.
On a personal note, after losses tied to U.S. tech stocks and some cryptocurrency exposure in 2022, I’m adopting a more conservative approach as I near 70. I plan to let existing positions recover but directed my first 2023 TFSA contribution into a five-year guaranteed investment certificate (GIC). At the time, the best available rate at my provider was about 4.31%; others report finding higher rates at independent institutions.
Jonathan Chevreau is the Investing Editor at Large for MoneySense. He founded the Financial Independence Hub and is the author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].
Read more Retired Money:
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- Reading the “Annual Returns of Key Asset Classes”—what it means for Canadian investors
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- How might inflation impact your retirement plans?