Last month, the Federal Government and Canada Revenue Agency came out with a number of tax updates for the 2025 tax year. These included a new TFSA limit, an increase in CPP payouts, and several other goodies for workers and investors alike. Many of these benefits were discussed in the media extensively after the government/CRA announced them. The new TFSA limit in particular has been discussed to death since it was announced.
Less talked about was the increase in the basic personal amount. The basic personal amount is an amount of income on which you pay no taxes. In November, the government increased this amount from $15,704 to $16,129. This is a significant increase, ensuring that lower income Canadians pay low taxes, and that all Canadians enjoy a shelter on their first $16,129. In this article, I will explore the basic personal amount tax credit and what the recent increase means for your finances.
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All about the basic personal amount
The basic personal amount is an amount of income that is tax-free. Those who earn the basic personal amount or less, pay no taxes. Everybody else gets a portion of their income sheltered through a tax credit. The way it works is, taxes on income below the basic personal amount are taxed at 15% or less. In Canada, tax credits are worth 15%. So, by putting a tax credit on income at or below the basic personal amount, the CRA reduces tax on that amount to zero.
How to claim the basic personal amount tax credit
You actually don’t need to take any specific action to “claim” the basic personal amount tax credit. You simply need to file your taxes, and the CRA will take care of the rest. There are ways to maximize the amount of income you save via the basic personal amount tax credit, though. For example, if you hold your investments in a tax-free savings account (TFSA) rather than a taxable account, you reduce your taxable income, while increasing your “real” income (if the investments pay off).
Investing in ETFs: A way to reduce your taxes
Holding exchange-traded funds (ETFs) in a TFSA is a great way to reduce your overall tax burden. ETFs generally pay dividends, which are immediately taxable. This creates an incentive to hold such ETFs in a TFSA – especially bond ETFs, which do not get the dividend tax credit.
Consider the PIMCO Canadian Core Bond Fund (TSX: CORE) for example. It is a fund that invests exclusively in Canadian bonds, including treasuries, provincial bonds, corporate bonds, and more. The fund pays about $0.2884 in annual distributions, which at today’s price ($20.8) provides a 1.38% yield. That’s not an especially high yield, but if you hold CORE in a taxable account, you could end up paying more taxes on it than you’d pay on a high yield stock. The reason being that CORE’s distributions – being interest not dividends – aren’t eligible for the dividend tax credit. So, if you’re going to be holding bond ETFs like CORE, be sure to hold as high a percentage of them as possible in a TFSA or RRSP. Doing so can result in considerable tax savings.
