The TFSA contribution bump: a mountain or a molehill for financial planning?

Ontario-based financial planner weighs in on how inflation has impacted savings, taxes, and debt for ordinary Canadians

The TFSA contribution bump: a mountain or a molehill for financial planning?

While inflation has generally been a cost-of-living headache for Canadians, it has also led to some silver linings in terms of financial planning possibilities – and TFSAs are a case in point.

Recently, the Canada Revenue Agency (CRA) announced that as a result of spiking inflation, the TFSA contribution limit has increased from $6,000 to $6,500, expanding the window for TFSA users to put their dollars in the tax-advantaged savings vehicle.

“The TFSA is the best account the government has ever created,” declared Andrea Thompson, founder and financial planner at Modern Cents. “Inflationary increases were built in through a formula which allows the annual contribution limits to increase to the nearest $500, should inflation increase significantly enough.”

Thompson notes that the TFSA contribution limit last increased in 2019. That means the recent increase in contribution room represents a roughly 8% increase over four years, translating to an average linear increase of 2% per year.

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On balance, Thompson estimates that the inflation-sparked TFSA contribution bump isn’t a significant financial-planning win. Canadians who could afford to maximize their TFSA contributions even before will continue to do so, and those who could not afford to make the most of their TFSAs before will not be immediately impacted.

“Over time, the increase in overall TFSA contribution room – $88,000 since 2009 for Canadian residents aged 18 and over – will become more significant as these years of contributions add up,” Thompson says. “That is more impactful than the year-to-year change, itself.”

The CRA also announced that due to inflation, federal income tax brackets have increased by 6%, less than the 6.9% CPI print that was reported this past September. Still, the increase in brackets was much more significant compared to the 2021-2022 period, when the change in tax brackets was just 2%.

The new increase should offer relief to individuals whose wages won’t rise from 2022 to 2023. For those on the cusp of certain tax brackets, Thompson adds, may see their marginal tax rate decrease as a result of the inflationary increases.

“For example, someone making $105,000 in 2022 would have had their top dollar taxed at 26%, and in 2023 it will now be taxed at 20.5%,” she says. “This may present some opportunities to review someone's tax and savings strategies, such as how much they ought to contribute to an RRSP vs. a TFSA.”

To help curb inflation, Canada’s central bank has been on a campaign of continued rate hikes that’s seen interest rates rise from 0.25% in March to 3.75% as of October. That has opened up some potentially compelling options in the market for GICs.

“For individuals looking to ensure their short-term savings are earning some nominal rate of interest, GICs seem more attractive due to higher interest rates than they have in a long time,” Thompson says. “Although they still do not keep up with the rate of inflation, they offer risk-averse investors with better rate options than they would have seen a year ago.”

Some Canadians who own rental properties may also see a planning windfall from the BoC’s rate hikes.

“From a planning perspective, individuals who have rental properties with variable rate debt may see a greater tax writeoff due to higher interest costs on that debt,” Thompson says. “In turn, this may reduce or eliminate taxes payable on earned income from a rental property.”