25 – INDIVIDUAL TAX CREDITS (NO TRANSFERS OR OPTIONS)

Table of Contents

1. Understanding the Basic Personal Amount and Canada Employment Amount
2. The Enhanced Basic Personal Amount (2020 and Beyond)
3. Understanding CPP and EI Premium Tax Credits
4. Understanding CPP and EI Overpayments and How to Claim a Refund

Understanding the Basic Personal Amount and Canada Employment Amount

When you’re new to Canadian taxes, the idea of tax credits can seem complicated. But two of the simplest and most important tax credits for individuals are the Basic Personal Amount and the Canada Employment Amount. These are credits almost every Canadian taxpayer can claim, and they play a key role in reducing the amount of tax you owe. Let’s break them down in a clear and beginner-friendly way.

1. The Basic Personal Amount (BPA)

The Basic Personal Amount is essentially the amount of income you can earn in a year before you start paying federal or provincial income tax. Think of it as your “tax-free allowance.”

• Who can claim it? Any resident of Canada for tax purposes. There are no additional conditions.
• How much is it? The amount changes slightly each year due to inflation, but in recent years it has been roughly around $12,000.
• What it means in practice: If your total income is less than the basic personal amount, you won’t pay any federal or provincial income tax. For example, if you earned $8,000 in a year, you would pay no tax at all because your income is below the basic personal amount.

It’s important to note that the Basic Personal Amount only reduces income tax. Other contributions, like the Canada Pension Plan (CPP) or employment insurance premiums, may still apply even if you don’t owe any tax.

2. The Canada Employment Amount (CEA)

The Canada Employment Amount is another credit that helps offset some of the everyday costs of working. While self-employed Canadians can deduct certain work-related expenses on their tax return, employees generally cannot. The Canada Employment Amount helps level the playing field by providing a small tax credit for personal work-related expenses.

• Who can claim it? Any individual with employment income. This includes income reported on T4 slips (line 101 of the tax return) or other employment income (line 104).
• How much is it? This amount also changes slightly year to year but is roughly $1,200.
• How it works: You can claim this credit up to the amount of your employment income. For example, if you only earned $600 in employment income during the year, you can only claim a credit of $600—not the full $1,200.

The Canada Employment Amount is meant to cover small, everyday expenses that come with going to work, such as clothing, commuting costs, or other minor costs that are not directly reimbursed by an employer.

Why These Credits Matter

Both the Basic Personal Amount and the Canada Employment Amount are non-refundable tax credits. This means they reduce the amount of tax you owe but won’t result in a cash refund if the credit is higher than the tax you owe. For most Canadians, these two credits form the foundation of your tax calculation and can significantly reduce your taxable income.

• Basic Personal Amount: Ensures that low-income Canadians pay little or no income tax.
• Canada Employment Amount: Helps employees offset basic work-related expenses that self-employed individuals can deduct.

Understanding these credits is one of the first steps to becoming confident in preparing Canadian tax returns. They are straightforward to apply and are almost always relevant to any tax return you prepare for a Canadian resident.

The Enhanced Basic Personal Amount (2020 and Beyond)

When learning about Canadian taxes, one of the most important concepts to understand is the Basic Personal Amount (BPA)—the income level you can earn before paying federal or provincial income tax. Starting in 2020, the government introduced changes to this amount, known as the Enhanced Basic Personal Amount, which gradually increases the BPA for eligible Canadians. Let’s break down what this means in simple terms.

What is the Enhanced Basic Personal Amount?

The Enhanced BPA is part of a middle-class tax relief initiative. The goal is to gradually increase the basic personal amount so that by 2023, eligible Canadians could earn up to $15,000 tax-free.

However, this enhancement is income-dependent. Not everyone gets the full increase:

• Full enhancement: Individuals earning less than roughly $150,000 per year are entitled to the full increase in the BPA.
• Partial enhancement (clawback): For those earning between $150,000 and $215,000, the extra portion of the BPA is gradually reduced. This is called a clawback, meaning the higher your income within this range, the smaller the enhanced amount you receive.
• No enhancement: Individuals earning over $215,000 are not eligible for the enhanced portion and revert back to the original basic personal amount.

These thresholds are indexed for inflation, so they may change slightly each year.

How It Works in Practice

Here’s an example to make it clearer:

1. Income: $75,000 – The individual is well below the threshold, so they receive the full enhanced BPA.
2. Income: $175,000 – The individual falls in the clawback range, so the enhanced portion of their BPA is reduced proportionally.
3. Income: $275,000 – The individual earns above the upper threshold, so they only receive the regular BPA, without any enhancement.

It’s important to note that the enhanced amount also affects related credits like the spouse or common-law partner amount and the eligible dependent credit. These amounts are similarly adjusted based on the claimant’s income.

Why the Enhancement Matters

The Enhanced BPA reduces the taxable income for eligible Canadians, meaning less tax is owed. For those with lower to moderate incomes, this can provide significant relief by increasing the portion of income that is tax-free. Even though the calculation can seem complicated, the main takeaway is simple: the lower your income (below the thresholds), the more benefit you receive from the enhancement.

• Before 2020: The BPA was a fixed amount for everyone.
• From 2020 onward: The BPA is gradually enhanced for middle-class earners, up to $15,000 by 2023, with a clawback for higher incomes.

Understanding the Enhanced BPA is crucial for anyone preparing Canadian tax returns. It helps ensure that individuals claim the correct amount and take advantage of the available tax relief, especially for middle-income earners.

Understanding CPP and EI Premium Tax Credits

When you work in Canada, whether as an employee or self-employed, you contribute to two important programs: the Canada Pension Plan (CPP) and Employment Insurance (EI). The good news is that the amounts you pay into these programs are not lost—they can help reduce your taxes through tax credits.

Let’s break it down in simple terms.

1. Canada Pension Plan (CPP) Premiums

The Canada Pension Plan is a government program that provides retirement, disability, and survivor benefits. Employees and self-employed individuals pay premiums on their earnings up to a maximum annual limit.

• Who contributes?
  • Employees: Your employer deducts CPP contributions from your pay.
  • Self-employed: You pay both the employee and employer portions when calculating your net business income.
• Tax credit: The amount you pay in CPP premiums is eligible for a non-refundable tax credit, which reduces your federal and provincial income tax. This means it lowers the tax you owe.
• Maximum contributions: Each year, there’s a maximum amount you can contribute to CPP. If you have more than one job, it’s possible to overpay CPP premiums. In that case, the excess is refunded to you by the Canada Revenue Agency (CRA).

2. Employment Insurance (EI) Premiums

Employment Insurance provides temporary financial assistance if you lose your job, take maternity/paternity leave, or are unable to work due to illness.

• Who contributes?
  • Employees: Premiums are automatically deducted from your paycheck.
  • Self-employed: You can voluntarily register to contribute to EI to access special benefits.
• Tax credit: Just like CPP, EI premiums are eligible for a non-refundable tax credit. Only the actual amount you paid, up to the annual maximum, can be claimed.
• Maximum contributions: EI contributions also have a yearly cap. If you work multiple jobs and overpay, the CRA refunds the excess.

3. How the Credit Works

Here’s a simple example:

• Suppose you have two jobs in a year:
  • Job 1: Your CPP contributions reach the annual maximum.
  • Job 2: You also contribute to CPP. These contributions are overpayments and will be refunded, and they do not count toward your tax credit.

The same principle applies to EI premiums. Only the actual contributions up to the annual maximum are eligible for the tax credit.

For self-employed individuals, CPP contributions are calculated using your net business income. If you choose to participate in EI, contributions are calculated based on your self-employment income. Both types of contributions are eligible for tax credits, just like for employees.

4. Key Points to Remember

• CPP and EI contributions are mandatory for employees and optional for self-employed individuals (for EI).
• These contributions are tax-creditable, reducing the amount of tax you owe.
• There are maximum annual limits for both programs. Any overpayments (e.g., from multiple jobs) are refunded.
• The tax credit is non-refundable—it can reduce your tax to zero, but it won’t give you extra money beyond the contributions you made.

Understanding CPP and EI tax credits is essential for anyone preparing Canadian tax returns. They are straightforward to apply and provide a clear benefit by lowering taxable income, especially for those with multiple jobs or self-employment income.

Understanding CPP and EI Overpayments and How to Claim a Refund

When you work in Canada, contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI) are automatically deducted from your pay. But did you know that it’s possible to overpay these contributions? This can happen if you work more than one job in a year, or if your income exceeds the maximum contribution limits. The good news is that any overpayment can be refunded through your tax return.

Let’s break this down step by step in a simple way.

1. Maximum Contributions for CPP and EI

Both CPP and EI have annual maximum limits:

• CPP: There’s a maximum amount you can contribute each year. Once you hit this limit, no further contributions are required.
• EI: Similarly, there’s a maximum annual EI premium you must pay.

These limits change slightly every year and are published by the Canada Revenue Agency (CRA).

2. How Overpayments Happen

Overpayments usually occur in two common situations:

1. Multiple jobs: If you have two or more employers, each will deduct CPP and EI from your pay. It’s possible to exceed the annual maximum when the combined contributions are more than the yearly limit.
2. High income: If your earnings are higher than the maximum pensionable or insurable amounts, your total deductions could exceed the required maximum.

3. Refundable Tax Credits for Overpayments

Any contributions you pay above the maximum are considered overpayments. These overpayments are refundable, meaning you can get them back from the CRA.

• Overpaid CPP is calculated based on your total employment income and reported on a special section of your tax return (Schedule 8).
• Overpaid EI is calculated similarly and is reported using the T2204 form.

For example:

• If you have a full-time job and already reached the CPP maximum for the year, then a part-time job deducts additional CPP, that extra amount is an overpayment.
• The same applies to EI. Any amount withheld beyond the annual maximum is refundable.

4. Key Points to Remember

• Overpayments are refunded automatically when you file your tax return.
• Only the amount above the maximum is refundable. Contributions up to the maximum are non-refundable tax credits, reducing the tax you owe.
• Keeping track of your T4 slips from all jobs is important to ensure you receive the correct refund.

5. Why This Matters

Understanding CPP and EI overpayments is important because it ensures you:

• Don’t overpay unnecessarily.
• Receive all refunds you’re entitled to.
• Accurately calculate your non-refundable and refundable credits when preparing tax returns.

Even though the calculations might seem complex at first, the concept is simple: once you’ve contributed the maximum to CPP and EI for the year, any additional contributions can be claimed back. This is a key part of preparing tax returns for clients with multiple jobs or high earnings.