Canadian taxpayers start paying taxes only when income exceeds the basic personal amount (BPA). The BPA will increase by $579 this year from $13,229 last year. As such, the first $13,808 for the taxation year 2021 is tax-free. The Trudeau administration is fulfilling its campaign promise to implement broad-based tax changes until 2023.
The federal government wants to ensure that an average family could save around $585 a year once the means-tested tax changes are complete. In 2023-2024, the BPA will be $15,000. The Liberals also estimate that the amendment to the Income Tax Act would lift more than 38,000 Canadians out of poverty.
Foregone government revenue
The BPA changes are means-tested, which means the personal exemption drop as income rises. While about 20 million Canadians will have more money in their pockets, the program will cost the government roughly $21 billion. According to the Parliamentary Budget Officer (PBO), it’s foregone revenue over the next five years.
The following are the PBO’s estimates of the federal treasury’s cost: $783 million in 2019-20, $3.4 billion in 2020-21, $4.5 billion in 2021-22, $5.8 billion in 2022-23 and $6.8 billion by 2023-24. After the final year of implementation, the Canada Revenue Agency (CRA) will index the BPA to the succeeding years’ Consumer Price Index.
Regarding reducing the family’s annual taxes, the PBO said couples with children could save around $573. The yearly taxes of couples without children will decrease by $467. For single-parent families, it would mean $336 less in annual taxes. A single-person family will derive $189 in yearly tax reduction.
BPA in 2021
Most Canadian taxpayers can claim the BPA, a non-refundable tax credit for their income tax. For 2021, you can claim the full $13,808 if your income is below the 29% tax bracket, or $151,978. However, the BPA reduces if your income is between 29% and 33% ($216,511) tax brackets.
For an individual taxpayer whose income exceeds $216,511, the maximum BPA is $12,421. In 2022 and 2023, the BPA will increase by $590 and $602. Thus, families can expect more reduction in annual taxes in the next two years.
Earning passive income
An interesting development in the 2020 pandemic is that Canadian families are saving more. Besides saving money, many see the importance of investing and creating passive income to boost household incomes. In today’s low-interest-rate environment, a viable income stock is First National Financial (TSX:FN).
The financial stock pays a hefty 4.94% dividend. Assuming you have $13,808 free cash to invest, you can produce $682.12 in passive income. Last year’s total return was an impressive 17%. First National offers single-family residential and multi-unit residential and commercial mortgages. The $2.55 billion company has an extensive mortgage distribution channel, although clients can also apply online.
First National experienced higher mortgage origination and wider mortgage spread in the quarter ended September 30, 2020. Mortgages under administration increased to a record $117 billion, or 6% higher, than the same period in 2019. Net income grew by 20% to $72.5 million, while revenue grew by 3% to $373.8 million.
Significant tax deductions
The BPA increase should be welcome news to taxpayers. Canadians who need help the most will benefit from a significant tax reduction in 2021 and the years to come. If you hate taxes like most, get ready to claim this non-refundable tax credit.