It’s always a good idea to consider tax breaks that will lower your tax liability. One such non-refundable tax credit in Canada is the Basic Personal Amount, or BPA, which can be claimed by all individuals.
Basically, the BPA provides a reduction in the federal income tax to all individuals with taxable income below the BPA. For those with taxable income above the BPA, the Canada Revenue Agency (CRA) offers a partial reduction.
What is the BPA, and how does it work?
Similar to other non-refundable tax credits, the BPA reduces what you may owe. But if your non-refundable tax credits are higher than what you owe, the CRA will not offer you a refund on the difference.
The BPA was increased to $13,229 in 2020 from $12,298 for individuals with an annual income of less than $150,473. For those earning more than $214,368, the BPA remains unchanged at $12,298.
Last year, the amount increased to $14,398, and the maximum BPA will rise to $15,000 in 2023, after which it will be indexed to inflation.
So, you would have saved $2,159.7 ($15% of 14,398) in taxes this year and can save $2,250 (15% of $15,000) in taxes next year if you are eligible for the maximum BPA tax credit.
Once you have reduced your tax liability, it’s advisable to invest these proceeds in blue-chip dividend stocks such as TC Energy (TSX:TRP). Let’s see why.
The bull case of investing TC Energy stock
One of the largest companies on the TSX, TC Energy trades at an enterprise value of $108 billion. TC Energy is an integrated energy infrastructure company that operates pipelines, storage facilities, and power-generation plants.
It has over 93,000 km of pipelines with more than 653 billion cubic feet of natural gas storage. TC Energy also has seven power-generation facilities with a capacity of 4,300 megawatts, which is enough to power four million homes.
The company recently announced its intention to spin off the Liquids Pipeline business and separate into two independent, investment-grade companies to benefit from long-term trends driving energy transition and energy security.
The spinoff should provide both entities with the flexibility to pursue growth opportunities, which should enhance shareholder wealth over time.
TC Energy stock has returned 2,770% to shareholders in the past two decades after adjusting for dividends. So, an investment of $2,250 in TRP stock in August 2003 would be worth close to $65,000 today.
A majority of these gains can be attributed to TC Energy’s dividend yield of 8.2%. Despite the cyclical nature of the energy sector, TC Energy’s contract-based and inflation-indexed cash flows have allowed the company to increase dividends by 5.8% in the past 20 years.
While past gains don’t matter much to current investors, TC Energy is an organization that enjoys a wide economic moat and is armed with a strong balance sheet. Priced at 10.6 times forward earnings, TRP stock is also very cheap and trades at a discount of 29% to consensus price target estimates. After adjusting for dividends, total returns may be closer to 37% in the next 12 months.
