The Canada Revenue Agency (CRA) has extended the tax filing deadline for individuals to June 1, 2020. The tax payment date has also been extended to September 1, 2020. There are several deductions or tax breaks that individuals can use to lower their income tax. We take a look at three such tax breaks that can help lower your taxes.
Basic personal amount and age amount
In late 2019, the Government of Canada tabled a motion to propose an amendment to the Income Tax Act. The CRA aims to increase the basic personal amount (BPA) to $15,000 by 2023. The BPA is a non-refundable tax credit that can be claimed by all residents.
According to the CRA, the BPA will provide a full reduction from federal income tax to individuals with taxable income below the BPA. It also provides tax breaks to individuals with taxable income above the BPA.
The CRA increased the maximum BPA to $13,229 from $12,298 for individuals with a net income of $150,473 or less. The BPA enhancement is gradually reduced for people with a net income between $150,473 and $214,368. In case an individual has a net income of over $214,368, the BPA stands at $12,298.
The age amount is a tax break for Canadians over the age of 65. If you’re above the age of 65 and your net income is below $37,790, the total claim is $7,494. If the net income is between $37,790 and $87,750, this amount will vary. For Canadians earning more than $87,750, there is no tax break.
CRA deducts RRSP contributions
The Registered Retirement Savings Plan (RRSP) is a retirement plan that is tax-deductible. The RRSP contribution limit for 2019 was $26,500; this figure stands at $27,230 for 2020.
Comparatively, the deduction limit for 2019 is the lesser of 18% of an individual’s pre-tax income or the contribution limit. For example, the RRSP deduction limit for an individual earning $75,000 is $13,500. Alternatively, for someone with a pre-tax income of $200,000 the deduction limit will be capped at $26,500 even though 18% of net income is $36,000.
Once you have contributed to the RRSP, Canadians can invest this amount into buying top-quality ETFs such as the iShares S&P/TSX 60 Index ETF (TSX:XIU). We know the equity markets are volatile right now and it is prudent to diversify your risk.
An ETF provides an opportunity to invest in a basket of funds. XIU is the most liquid Canadian ETF and has exposure to the country’s top 60 companies. Its largest holdings with ETF weights are:
- Royal Bank of Canada: 7.39%
- Toronto-Dominion Bank: 6.38%
- Shopify: 5.52%
- Enbridge: 5.2%
- Canadian National Railway: 4.98%
In terms of industry exposure, financials account for 32.4% of XIU, followed by Energy, Materials, and Industrials at 15%, 13%, and 10.9%, respectively.
Investment mogul Warren Buffett is a strong believer in index funding, especially for those who do not have the time or expertise to analyze individual stocks. Investing in ETFs is a long-term play.
The XIU is currently trading 17.4% below record highs and is a good bet for investors to create considerable wealth over time.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
David Gardner owns shares of Canadian National Railway. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Canadian National Railway, Enbridge, Shopify, and Shopify. The Motley Fool recommends Canadian National Railway. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.