On December 9, 2019, the federal government announced that by 2023, the Basic Personal Amount (BPA) would be grown to $15,000. That’s a fair jump from today, but what does this mean for Canadians? And how will it benefit you – or not – on your tax return?
How it works
The BPA is a non-refundable tax credit that can be claimed by any individual living and working in Canada. The idea is to give a full reduction from your federal income taxes if you make below the BPA. It then gives a partial reduction for those making above the BPA. Basically, it reduces what you owe the government at tax time.
One year ago, the government announced it would begin to increase the BPA. In 2020, the BPA will increase from $12,298 to $13,229 for those making a net income of $150,473 or less. From there, it will be increase to $13,808 in the 2021 tax year, $14,398 in 2022, and $15,000 by 2023. After that, it will be indexed based on inflation.
So when it comes to your taxes, you are able to take $15,000 off your net income at the end of the year. This will reduce the 15% in taxes that come from the BPA, which by 2023 will by $2,250! For this year, it will be $1,984 based on the 2020 amount that comes off your tax return if you make under that $150,473 amount.
Grow your own BPA
There are great advantages to the BPA, mainly that it brings down the overall amount you would owe the government at tax time. This can be the difference between a higher and lower tax bracket. It’s also beneficial at a time when there is a highly volatile market that is likely to continue for even years.
Even with a vaccine for COVID-19, it is likely going to be some time before the economy completely rebounds in a post-pandemic world.
So right now, it’s ideal to take advantage of the BPA and create your own BPA in case of another emergency and market crash. I like to recommend taking 10% of each pay cheque to put toward investing in a Tax-Free Savings Account (TFSA). However, I understand this year has been hard financially.
Instead, perhaps take the discount you receive from the BPA each year and put that toward investing. This year, that would be $1.984, as I mentioned previously.
Foolish takeaway
Used properly, this can create a solid passive income stream. A great option to consider are dividend stocks in the healthcare industry. This area is getting a lot of investment during the pandemic, making it a perfect defensive stock in a volatile market.
That makes NorthWest Healthcare Properties REIT (TSX:NWH.UN) a strong option with its 6.37% dividend yield and its five-year return of 121% as of writing. Especially as revenue continues to soar from 1% about a year ago, to 10.8% during the latest earnings report.
If you started with using half of your 2021 TFSA contribution room, that would be a $37,750 investment, bringing in $2,416 in annual dividends as of writing!
Add $1,984 and you now have $2,542 in annual passive income! That’s a solid, practically guaranteed personal basic income as long as NorthWest remains on its steady track.