New Basic Personal Amount for 2020

It’s bigger, but it’s also more complicated

On Dec. 9, 2019, the new government introduced legislation to implement changes to the Basic Personal Amount (BPA). This is a broad-based tax change that should put more money into employees’ pockets every payday and help reduce quarterly or annual instalment remittances for others. But, it’s all very complex, and the changes are scheduled to begin in 2020. There is a spoiler alert, however.

Unfortunately, the payroll formulas for 2020 published by the Canada Revenue Agency (CRA) on Nov. 22 do not include any adjustment to the indexed Basic Personal Amount. While the TD1 forms normally published in November are not yet available for 2020, it begs the question: When will withholding taxes be reduced to take into account these new changes?

If the change is implemented in payroll deductions beginning July 1 instead of January 1, employees will be overpaying for the first half of the year, possibly resulting in larger refunds for 2020.

Now to the complexity. The plan is to gradually increase the BPA to $15,000 by 2023 for taxpayers with taxable income below the 29% tax bracket ($150,474 for 2020). Taxpayers in the 33% bracket (income over $214,368 in 2020) will see no enhancement to the Basic Personal Amount. Women would receive almost 6% of the nearly 1.1 million individuals taken off the tax rolls by the measure, says Finance Canada.

These changes will also mean that two other provisions on the tax return will increase: the Spouse or Common-Law partner amount and the Eligible Dependant (or Equivalent-to-Spouse) amount. Several other provisions based on the BPA will also be affected, as per the news release from Finance Canada:

* The Child Care Expense Deduction.
* Eligibility to roll over proceeds from certain registered plans of a deceased parent or grandparent.
* The definition “preferred beneficiary,” in the case of certain trust rules.
* The determination of the residency status of children dependent on certain individuals.

As mentioned, draft legislation was introduced on Dec. 9 to implement these changes. The changes must still be passed into law. The enhanced Basic Personal Amounts will be:

* For the 2020 taxation year, $13,229, (the enhancement is $931).
* For the 2021 taxation year, $13,808, (the enhancement is $579).
* For the 2022 taxation year, $14,398, (the enhancement is $590).
* For the 2023 and subsequent taxation years, $15,000 (the enhancement is $602).

So, rather than phasing in the increases to the BPA equally, there’s a greater bump in the first year and the following three years appear to be equal with indexing.

Based on the legislation, you can expect that you’ll have to compute your Basic Personal Amount on a worksheet. For 2020, the computation may look something like this:

The Parliamentary Budget Office estimates the cost of these changes to be as follows:

These tax changes appear to add a new “clawback zone” and with it some higher marginal tax rates for incomes over $150,474.

Walter Harder, DFA-Tax Services Specialist, is President of Walter Harder and Associates, specializing in tax research, and business building tool development. In addition to preparing T1 returns for clients, Walter provides tax web tools development for Knowledge Bureau and is the co-author of several of Knowledge Bureau’s certificate courses.

Evelyn Jacks is an award-winning financial educator, best-selling author, tax expert, and founder of Knowledge Bureau™, a widely respected financial education institute and publisher which has welcomed thousands of students from the various financial services to its online and in-class programs. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.