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The Basic Personal Amount spawned The New Basic Personal Amount – Part 1.

Posted by David Gobeil on

On December 9, 2019, the Department of Finance released a Notice of Ways and Means Motion to amend the Income Tax Act and related Regulations. As of February 8, 2020, these changes have not received Royal Assent, but they are expected to become law effective for 2020.

 The frightening thing is the considerable increase in the complexity of the Income Tax Act from one little Liberal campaign promise. If I were a candidate for any of the professional financial planning designations, I would NOT be concerned about the calculation of the New Basic Personal Amount, but I would want to understand the concepts.

 The Basic Personal Amount is the amount that you can earn without paying any federal personal income tax, which is $12,298 for 2020. All taxpayers can claim a tax credit for the basic personal amount. The basic personal amount is indexed. The conversion rate is the lowest income tax rate.

The New Basic Personal Amount is comprised of The Basic Personal Amount plus the Addition to the Basic Personal Amount (ITA 118(1.1)). (Obviously, someone at Finance needs to come up with better names for these two amounts.)

 The Maximum New Basic Personal Amount is for the 2020 taxation year, $13,229; for the 2021 taxation year, $13,808; for the 2022 taxation year, $14,398; and for the 2023 and subsequent taxation years, $15,000. The amount of $15,000 is indexed for inflation for the 2024 and subsequent taxation years.

 The Addition to the Basic Personal Amount is an additional prescribed amount, which is reduced for individuals with incomes in excess of the bottom of the fourth tax bracket, which is $150,473 for 2020 and eliminated for individuals with incomes in excess of the bottom of the top tax bracket, which is $214,368 for 2020.

 For 2020, your New Basic Personal Amount is calculated as:

  •  (A + (the greater of ($0 and ((B – A) × (1 – ((C – D) ÷ (E - D))))))), where:

A is the Basic Personal Amount of $12,298;

B is the Maximum New Basic Personal Amount of $13,229;

C is your taxable income;

D is the bottom of the fourth tax bracket of $150,473; and

E is the bottom of the top tax bracket of $214,368.

For 2020, your New Basic Personal Amount is calculated as:

  • ($12,298 + (the greater of ($0 and (($13,229 – $12,298) × (1 – ((C – $150,473) ÷ ($214,368 - $150,473))))))); or
  • ($12,298 + (the greater of ($0 and ($931 × (1 – ((C – $150,473) ÷ $63,895)))))).

Example

Assume that Justin Trudeau only has income of $200,000 for the 2020 taxation year.

For 2020, his New Basic Personal Amount would be $12,507.35, calculated as:

  • ($12,298 + (the greater of ($0 and ($931 × (1 – (($200,000 – $150,473) ÷ $63,895))))));
  • ($12,298 + (the greater of ($0 and ($931 × (1 – ($49,527 ÷ $63,895))))));
  • ($12,298 + (the greater of ($0 and ($931 × (1 – 77.5131%)))));
  • ($12,298 + (the greater of ($0 and ($931 × 22.4869%)))); or
  • ($12,298 + $209.35).

The amount for the following tax credits will also change to the amount of the New Basic Personal Amount:

  • the tax credit for individuals who are married or in a common-law partnership (ITA 118(1)B(a)); and
  • the tax credit to individuals who are single and have a wholly dependent relative (ITA 118(1)B(b)).

There are 4 criteria used in the Income Tax act to determine financial dependency, which are addressed in Part 2.


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