Toronto Tax Lawyer’s Guide to the Basic Personal Amount Tax Credit – Tax authorities

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The Basic Personal Amount (BPA) is a non-refundable tax credit that can be claimed by all individuals who are Canadian tax residents. The amount a taxpayer is entitled to claim is based on the taxpayer’s net income and tax residency in Canada.

Two sets of basic personal amounts apply to Canadian taxpayers. The Federal Basic Personal Amount deducts federal income tax for all taxpayers using the same thresholds across Canada. The provincial basic personal amount is determined by each province with different thresholds and application rules.

This article discusses the basic personal amount rules that apply to an Ontario resident and concludes with pro tax advice from our top Canadian tax lawyers.

Tax residency and the 90% rule

Individuals who are Canadian tax residents are entitled to claim the basic federal and provincial personal amount on their tax return. An individual’s tax residency, that is, a person’s residency status for Canadian tax reporting purposes, is determined by a variety of factors. Taxpayers with significant residential ties – specifically, a home, spouse or dependent in Canada – are very likely to be considered factual tax residents in Canada.

However, if you have recently returned or moved to Canada, the 90% rule may apply with respect to filing your income tax and your entitlement to the basic personal amount. An immigrant or emigrant may be considered a part-year resident in the year of arrival or departure from Canada. Part-year residents are eligible for the full Basic Personal Amount if, during the non-residency period, their reported Canadian-source income is 90% or more of the taxpayer’s net worldwide income. Additional documents and statements may be required if a part-year resident is claiming the full Basic Personal Amount. If a part-year resident does not meet the 90% rule, their basic personal amount to which they are entitled will be proportional to the period of residence.

Calculation of the federal and provincial basic personal amount

The federal basic personal amount changes from year to year to keep up with inflation. In 2021, the federal basic personal amount was set at $13,808 for taxpayers with a net income of $150,473 or less. For 2022, the net income threshold for deducting the full amount increases to $151,978.

Even though a Canadian taxpayer files both federal and provincial income taxes on a single return, each province has a different system for assessing an individual’s basic personal amount. The full Ontario Basic Personal Amount, for example, does not change based on the taxpayer’s net income. Instead, Ontario imposes an additional tax, the surtax, on taxpayers whose annual income exceeds a certain threshold.

As a tax credit, the basic personal amount can seem confusing because the amount is not the actual tax deducted but the basis for the deduction. The actual deduction from your tax payable is calculated by the basic personal amount multiplied by the lowest tax rate in the income tax bracket. If you earn less than the basic personal amount, this tax credit effectively exempts you from paying any income tax. A Toronto taxpayer who earned $50,000 in 2021, for example, is eligible for the federal basic personal amount deduction of $2,071.20 (13,808*15%) and the Ontario basic personal amount deduction $549.44 (10,880*5.05%).

The net income threshold

There are two criteria for calculating a taxpayer’s entitlement to the basic federal personal amount. The first criterion is the net income declared by the taxpayer during a taxation year. For example, if your 2022 net income is $216,511 or more, your federal basic personal amount will be reduced to $12,421. Anyone with a net income of $151,978 or less can claim the full federal amount of $13,808. You will need to do a calculation to determine your basic personal amount if your 2022 net income is between $151,978 and $216,511.

The basic Ontario personal amount remains the same regardless of a taxpayer’s net income or taxable income. Instead, Ontario imposes an additional tax on taxpayers whose taxable income exceeds $81,411. The basic Ontario personal amount for 2022 is set at $11,141.

Transfer the basic personal amount to your spouse

The non-refundable tax credit can only be used to increase a taxpayer’s refund if their net income is greater than the basic personal amount. You can also transfer your unused basic personal amount to your spouse, common-law partner or eligible dependant. An eligible CRA dependent for tax purposes includes parents or grandparents who are dependents of the taxpayer, a child under the age of 18, or an adult child who has a mental or physical disability.

If you were separated from your spouse or common-law partner for 90 days or more during the year due to a relationship breakdown, you and your spouse or common-law partner are not entitled to transfer the amounts unused on your tax return. In addition, the net income and tax residency of your spouse, common-law partner or eligible dependent may limit the maximum tax credit transfer they can receive.

Pro Tax Tips – Save tax by timing your arrival and income

For part-year residents, the date you arrived in Canada and your worldwide or foreign income affect your basic personal amount. You may choose to arrive early in the year if you are certain that your Canadian income will not exceed 90% of your worldwide income to maximize the basic personal amount you can claim. The more time you spend in Canada while resident for part of the year, the more you can claim. Alternatively, you can structure or plan your worldwide income to ensure that your main source of income is in Canada.

For more advice on the basic personal amount tax credit, contact our expert Toronto tax lawyers.

FAQs

What basic personal amount can I claim on my tax return?

The calculation mainly depends on your net income and your tax residency. If you are a full-year Canadian tax resident, you are entitled to claim the full federal and Ontario basic personal amount when filing your tax return. For 2022, the full federal basic personal amount is $14,398 and the full Ontario basic personal amount is $11,141.

What is the 90% rule?

The 90% rule applies to taxpayers who have not been Canadian tax residents for a full year, whether departing or arriving in Canada. Therefore, they may only be eligible for the full deduction of the basic personal amount if 90% of their net worldwide income is from Canadian sources. Otherwise, the amount to which they are entitled will be pro-rated based on the length of their tax residency in Canada.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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