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Why your 2022 provincial tax refund may be higher than expected

Alberta’s 2022 provincial tax brackets have been re-indexed to inflation.

By Josh Proulx, JD, BComm 21 March 2023 5 min read

The 2023 Alberta provincial budget was tabled on February 28, 2023. It includes several important changes that could impact your taxes this year. In this story we’ll look at two of the most important—indexation and increases to two personal income tax credits.

 

Indexation

Canadians pay tax at graduated rates, depending on their income for the year. The more income that you earn in a year, the higher the tax rate will be on that income. The federal and provincial tax brackets describe how much of your income gets taxed at each rate. Only the portion of your income that falls into any particular bracket is taxed at that bracket’s rate.

The provincial tax brackets usually increase each year, based on the Alberta Consumer Price Index (CPI). This is called indexing. When tax brackets are indexed to inflation, taxpayers are less likely to slip into higher tax brackets solely because of inflation. Several other non-refundable tax credits were also indexed in this way, including the provincial basic personal amount and the pension income amount.

The Alberta government suspended the indexation of tax brackets and several common credits beginning with the 2020 tax year. Since that time, the Alberta tax brackets have been fixed. This was effectively a tax increase, but it was intended to be temporary. In 2022, on the back of an unexpected budget surplus, the government committed to re-index those tax brackets and credits. This legislation passed on December 15, 2022. Provincial brackets and benefits will be indexed for 2022 at 2.3% and in 2023 at 6%.

The re-indexation will have a surprising result for many Albertan taxpayers. The brackets were re-indexed retroactively. That is, rather than the new tax brackets taking effect immediately, they were deemed to have taken effect as of the beginning of 2022. Since employers were not aware of this re-indexation until near the end of 2022, they have been withholding provincial tax from Albertans’ paycheques as if the tax brackets were not indexed. 

When Albertans file their tax returns for the 2022 year, many people will find a small surprise windfall waiting for them. Since employers inadvertently over-withheld in 2022, the excess withholdings should be returned to you as a tax refund when you file your return.

 

Comparing tax brackets from 2019 to 2023

It is not immediately obvious how big the impact of tax bracket indexing can be for an individual. The amount of your tax reduction depends on your taxable income for the year and the amount of any re-indexed tax credits you claim.

The following table describes the provincial tax brackets in Alberta from 2019 until 2023:

Portion of taxable income taxed at each rate

Tax rate 2019 - 2021 2022 (indexed at 2.3%) 2023 (indexed at 6%)
10% First $131,220 First $134,238 First $142,292
12% $131,221 to $157,464 $134,239 to $161,086 $142,293 to $170,751
13% $157,465 to $209,952 $161,087 to $214,781 $170,752 to $227,668
14% $209,953 to $314,928 $214,782 to $322,171 $227,669 to $341,502
15% Over $314,928 Over $322,171 Over $341,502

For example, let’s imagine someone named John who earns $150,000 each year. In 2021, John’s provincial taxes would look like this:

  • Provincial tax of $15,376 on his $150,000 of income (10% of the first $131,220 and 12% of the next $18,780)
  • A credit for his Basic Personal Amount of $1,937
  • A net provincial tax bill of $13,439.1

In 2022, John’s employer withheld tax as if the 2021 tax brackets were still in effect. But because of the retroactive change to the tax brackets and credits, John’s provincial taxes look like this instead:

  • Provincial tax of $15,315 on his $150,000 of income (10% of the first $134,238 and 12% of the next $15,762)
  • A credit for his Basic Personal Amount of $1,981
  • A net provincial tax bill of $13,334

Due to indexation, a smaller portion of John’s income was taxed in the 12% bracket while a larger portion of his income qualified for the basic personal amount. When John files his tax return for 2022, he should receive a surprise refund of $105. If John claims other re-indexed tax credits, his refund may be higher.

 

Indexing AISH benefits

In addition to re-indexing the tax brackets and non-refundable tax credits, the Alberta government has also passed legislation to index AISH benefits. This change took effect January 1, 2023, and does not have any retroactive effect. AISH benefits were originally frozen by the Alberta government beginning in 2020.

Similar to the tax brackets and non-refundable credits, AISH will now be indexed to the Alberta CPI. The 2023 core benefits will be increased by 6% over the 2022 amounts.

 

Charitable donation credit rate increased

On top of these indexation changes, the Alberta government recently passed a law to assist the charity sector. Under the new law, the credit rate for the first $200 of charitable donations in the year will be increased from 25% to 75%. The federal credit remains unchanged at 15%, while the provincial credit has increased from 10% to 60%. The provincial portion of the donation tax credit can only be used against provincial taxes. 

This new change will make it more cost-effective for taxpayers to make donations to registered charities, for the first $200 of donations each year. For that first $200 of donations, the taxpayer would receive a $30 federal tax credit and a $120 provincial tax credit. If the taxpayer is able to use the full amount of those credits, they are effectively able to donate $200 to charity for an out-of-pocket cost of only $50.

This law has been passed, but is not yet in -force at the time of writing. It will take effect upon Proclamation. The budget confirms that this change will come into effect some time in 2023.

 

Maximum limit for adoption expense credit increased

The adoption expense credit is an existing tax credit that is available both federally and provincially to assist with  expenses associated with adopting a child. In 2022, the provincial limit for eligible adoption expenses was $13,552. The budget announced an increase to this limit in 2023 to match the federal limit of $18,210. The federal and provincial tax credits are 15% and 10% of this amount, respectively, resulting in a maximum $2,731 federal tax credit and a $1,821 provincial tax credit in 2023.

 

For further information regarding the 2023 Alberta provincial budget, please refer to the Government of Alberta’s budget web page.

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