Looking under the hood of the new basic personal amount

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The federal government wasted little time proposing an increase to the federal basic personal amount (BPA). This campaign promise, if passed, should provide federal tax savings for nearly 20 million Canadians beginning this year. The increase will also eliminate federal tax for about 1.1 million Canadians.

The details

This proposal will increase the BPA up to $15,000 by 2023. People with incomes less than or equal to the bottom of the fourth federal tax bracket ($150,473 in 2020) gain the most from the increase. For others, the BPA will be reduced until it’s completely removed for individuals with incomes greater than or equal to the top federal tax bracket ($214,368 in 2020). These changes will also apply to the spouse or common-law partner amount (spousal amount) and the eligible dependant credit.

The reduction

For Canadians with incomes above the fourth federal tax bracket, the proposed BPA will be lowered until it reaches the existing BPA when income hits the top federal tax bracket. To see how the reduction works, let’s look at an example:

A person has an income of $170,473 in 2020. To figure out the reduction, find the dollar difference between the top and fourth federal tax brackets and the proposed and existing BPAs:

Tax bracket difference: $214,368 - $150,473 = $63,895
BPA difference: $13,229 - $12,298 = $931

Next, calculate the difference between the income and the fourth bracket then divide by the difference between the tax brackets:

Amount of income higher than the fourth federal tax bracket: $170,473 - $150,473 = $20,000
Proportion of extra income to bracket difference: $20,000 / $63,895 = 31.3%

Finally, determine the dollar value of the reduction and apply it:

Dollar value of reduction: 31.3% x $931 = $291
New lower BPA: $13,229 - $291 = $12,938

The savings

This chart shows the annual increases for both the existing BPA and the proposed BPA, and the extra yearly tax savings:

Year Existing BPA1 YOY (%) increase Proposed BPA YOY (%) increase Tax savings ($)2 Tax savings ($)3
2019 $12,069 - - - - -
2020 $12,298 1.90% $13,229 9.61% $139.65 $279.30
2021 $12,554 2.08% $13,808 4.38% $188.10 $376.20
2022 $12,783 1.82% $14,398 4.27% $242.25 $484.50
2023 $13,038 1.99% $15,000 4.18% $294.30 $588.60

The ripple effect

Some income tax rules use the value of the BPA, like the child-care expense deduction. These rules would be changed to refer to the maximum value of the credit. Other income tax rules that use the value of the BPA, such as rules about transferring unused credit amounts, would still use the BPA (reduced due to the income test, if applicable).

If the BPA increase passes as proposed, it will have a broad positive impact, although a small annual tax savings for individuals. To make sure the credit targets the right people, a complex calculation has been created to reduce the proposed BPA. Such is the reality in our fast-paced modern society. Thank goodness for spreadsheets and coders who can update our tax software to calculate this for us in the blink of an eye.

1 Based on Department of Finance Canada indexation projections for 2021–2023. 2 For single persons with net income less than or equal to the fourth federal tax bracket, with no spouse/common-law partner or eligible dependant. 3 For two-earner couples with net income less than or equal to the fourth federal tax bracket, or one-earner couples with net income less than or equal to the fourth federal tax bracket who claim either the spousal amount or the eligible dependant credit.

The commentary in this publication is for general information only and shouldn’t be considered investment or tax advice. Get the advice of professionals to make sure that any action you take is appropriate for your specific situation.

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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