The 2023 CAF Pay raise info is out.
Most CAF members will get an 8.2% pay bump in 2023. In addition, you can expect a retroactive lump payment to hit your account on 15 Jul 23.
You may be curious about the following:
- How much retroactive pay can I expect on 15 Jul?
- What impact do the pension and taxes have on my back pay?
- How does the 2023 pay increase compare to inflation?
- How does the backpay influence RRSP, TFSA and FHSA considerations?
2023 CAF Backpay Calculator
I built the Google Sheets calculator below to estimate:
- Total back pay
- Total tax deductions for 2023
- Total pension contributions for 2023
While I have been careful in building this tool, errors are possible. That’s the disclaimer. If you find an issue, please report it to jake@wealthycorner.com.
Backpay Pension Deductions
A portion of your back pay will be automatically removed and contributed to the pension plan. Here are the pension deduction rates over the past three years:
Let’s assume you expect to earn over $66,600 in 2023, before the backpay.
In this case, 12.37% of your back pay will be invested into the pension plan. For example, consider a $6,000 retroactive lump sum … $742 will be invested in the pension.
Pension contributions are not taxed. Therefore, only $5,258 of your $6,000 backpay would count toward your taxable income in 2023.
The CAF Pension Benefits
Pension deductions are great. They are a form of forced savings and investing that mitigate demands on your self-discipline.
I estimate the money you contribute to the pension provides an equivalent 15% annualized risk-free return … good luck getting that anywhere else.
To estimate the value of your pension, consider that you’d need a $1,600,000 portfolio in stocks/bonds to provide $50,000 of expected annual income, adjusted for inflation, for life (see safe withdrawal rates).
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Tax Implications
Your backpay will be taxed as if you earned all income in calendar year 2023. Therefore, you may be pushed into a higher tax bracket in 2023.
For example, let’s look at a mbr (George) in Ontario who expects to earn $86,600 in 2023, not including the retroactive pay.
Every extra dollar George earns is taxed at 29.5% in Ontario.
But once as soon as George earns over $86,700, his tax rate on each additional dollar earned jumps to $31.48%.
The tax rate on each additional dollar earned is George’s marginal tax rate. George will never see less take-home pay by increasing income – a common misconception.
Back to the $6,000 lump sum. As per above, $742 is not taxed since it went to the pension, leaving George with $5,258 subject to tax at your new rate of 31.48%.
Therefore, George pay $1,655 in tax. From the original $6,000 lump sum, George expects $3,600 to hit his account.
Use of Tax Sheltered Accounts
Any money contributed to the RRSP is not taxed. If the backpay bumps you into a higher tax bracket in 2023, moving money to the RRSP in 2023 may yield more benefits than in other years.
In most cases, the TFSA is the best option for CAF members who expect to get a full pension.
As a rule of thumb, the TFSA is the priority over the RRSP when your tax rates in retirement are expected to be higher than your tax rates today. For more, see TFSA Maxed: Now What or see my TFSA vs. RRSP vs. Taxable Calculator.
The First Time Home Savings Account opened in April 2023. Good timing. Contributions to the FHSA (annual max of $8,000) reduce the amount of money you lose to tax by reducing your taxable income in the year of the contribution.
In addition, investment income in the FHSA is not taxed. You are not taxed when you remove the money from the FHSA. Therefore, the FHSA will combine the benefits of the TSFA and RRSP.
Backpay: FHSA/RRSP Example
Consider the example above, with George who has a 31.35% marginal tax rate. George gets a $6,000 backpay lump sum on 15 July. $1,655 disappears to tax.
But if George placed puts his money in the FHSA or RRSP. Come tax time (Mar 2024), he gets his $1,655 back.
Alternatively, you can avoid waiting until tax time by reduceing your tax paid at the source by:
- Filling out the T1213
- sending it to the CRA
- Awaiting the CRA’s response letter
- Giving the CRA’s response letter and the T1213 to your SOR.
2023 CAF Pay Raise Vs Inflation:
Over the period from Feb 2020 to Feb 2023, inflation has run at 12.45%. Your income has grown at 8.2%. Therefore, you took a 4.25% cut in inflation-adjusted terms.
I am not counting the additional increases for NCM standard rates. Nor am I counting increases for the new Canadian Armed Forces Housing Differential (CFHD).
Finally, CAF pay has exceeded average Canadian wage growth by about 2% since 2017 (cumulative, not compounded).
Ways to Use Retroactive Pay
There are a few ways to use retroactive pay. The “best” way is unique to you and your goals.
People who build wealth and financial independence tend to use windfalls as follows:
- Pay down ALL consumer debt.
- Build an emergency fund held as cash, equal to 3-6 months of essential expenses.
At this point, (financial) stress is minimized. It’s time to grow wealth:
- Meet short-term savings goals for expenses in the next five years with sinking funds.
- Grow wealth via index investing.
The Mental Accounting Bias
Mental accounting is the tendency to treat money differently based on the label you give to that money. For example, people treat Casino winnings differently than the money they worked hard to earn.
Like a tax return, the retroactive lump may feel like free money. But it is not.
Instead, the backpay is money you earned in 2021, 2022 and the first three months of 2023.
Like a tax return, most people will produce a mental account for backpay that labels it as “spending money”.
But it is possible to flip the switch and put mental accounting to work in your favour.
One way to do this is to allocate (all or a portion of) your retroactive lump sum to an account labelled as “money for the future.” Perhaps this account is a sinking fund, or an investing account.
Thanks to mental accounting, money placed in an account labelled for the future is less likely to be removed to fund today’s consumption.
Hedonic Adaptation
In addition, it can be helpful to reflect on the psychology of human well-being to make the best use of backpay.
Conclusion: Cautious Optimism
There is much negativity around the pay raise. And fair enough, there are legitimate problems. But this post is not the place for my individual opinion.
I will share an approach to life (and personal finance) that I find helpful.
First, I try my best to avoid allocating time and energy to things outside my control. Energy allocated to things outside my control can no longer be devoted to things in my control (like writing this blog).
In addition, deliberate gratitude improves well-being. On that note, I’ll look for the silver lining of a CAF mbr’s financial state:
- The pension has enormous value. Consider a WO retiring in 2024, with the best five years at $94,100. After 25 YOS, the pension will be $47,500. You need a $1,560,000 investment portfolio to provide similar retirement income.
- CAF pay has beat civilian sector wage growth in Canada between 2017 and 2022.
- Regular pay increases since 2016 have closely matched inflation. It could be worse. For example, Ontario provincial workers have had pay increases restricted to less than 1% since 2019!
- With short leave, most CAF members get over six weeks off each year, increasing their equivalent hourly pay.
4 thoughts on “2023 CAF Retroactive Pay (Back Pay): Everything You Need to Know”
For the calculator for back pay do I enter monthly gross or yearly into the orange cells?
Hi Steve,
Thanks for the comment. You enter your monthly amount from the pay scales. The column to the right will populate the annual retroactive amount for each year. I’ve updated the Google Sheets Tracker to show this.
Jake
Hi Jake. This is a fantastic tool. Keep up the good work. if not done so already, I recommend posting this tool on the CAF reddit forum.
I appreciate the feedback! I try to avoid linking my blog posts on Reddit, as Reddit views this as self-promotion. But if you found the post helpful, I would love it if you considered linking to the URL of this post in reddit yourself. Thanks – Jake.
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