2020 Federal Tax and RRSP Changes

Budget 2019 contained some important tax and RRSP changes that will probably affect you. The changes are a bit complicated, but we’re here to break them down for you. The good news is, the changes will probably save you money; that is if you earn under $214,368 a year! Let’s jump into the changes.

Basic Personal Amount Adjustment

To understand this change, it’s important to understand a bit about how tax brackets work. The lowest tax bracket right now is $48,535, at 15%. That means that the federal government takes 15% off of the first $48,535 you earn. The next bracket up is $48,534; that means the federal government takes 20% of the first $48,534 you make over your first $48,535. In other words, if you make $48,635, you’ll be taxed 15% on $48,535, then 20.5% on $100.

This system, called a progressive tax system, has a lot of advantages. One problem with the system, though, is that if you’re a lower-income earner, the 15% you have to pay in taxes can really hurt your finances. That’s where the Basic Personal Amount (BPA) comes in. The BPA is almost like another tax bracket - taxed at 0%. Here’s an example: let’s say the BPA is $10,000. That would mean that you pay 0 in taxes on the first $10,000 you earn, then 15% on the next $38,535.

Budget 2019 increased the BPA from $12,298 to $13,229. That means more money in the pockets of most Canadians, though higher earners see a smaller increase in the BPA and some of the highest earners won’t see an increase in the BPA at all. The increase in the BPA can also affect other parts of your taxes - mainly, dependants. Without getting too deep into the weeds about it, whether or not someone can qualify as a dependant depends, in part, on whether or not they’re earning less than the BPA.

Changes to RRSPs

There are two major changes to RRSPs. What is an RRSP? In short, it’s a type of savings plan made to help you out when you stop working. The federal government wants people to invest in RRSPs because it helps them reduce the amount they have to pay out in other federal programs like the Guaranteed Income Supplement. RRSPs can be used for a few other things as well - you might even be able to use yours to help with buying a home.

One of the major changes to RRSPs is that the rules for using them to buy a home have changed. We won’t elaborate too much here, but the idea is that people who experienced the breakdown of a common-law relationship or marriage may qualify to buy a home using their RRSP as though it was the first home they bought. The withdrawal limit has also been increased to $35,000. You can read more about the changes, which affect what’s known as the Home Buyer’s Plan, here.

The other change to RRSPs affects what type of investment they can be used for. There are investments called annuities, where you make a lump-sum payment to a financial institution in return for fixed payments. The new type of annuity introduced is known as Advanced Life Deferred Annuities - you make a lump sum payment and then the financial institution begins to send you fixed payments starting at 85 years old. The advantage of these annuities is that they cost a lot less than some traditional annuities. The disadvantage is, well, that you have to wait until your 85 to start getting paid.

Other Changes

There are a few other changes you’ll see that might affect your paycheck. Canada Pension Plan payments are going up in order to pay for what’s known as the Canada Pension Plan enhancement. Meanwhile, your Employment Insurance premiums will be going down.

There are also some tax benefits you can get when you donate to certain journalistic organizations, or when you buy digital media from those organizations. You can read more about that on the government's Income Tax Measures to Support Journalism page.

There might be other tax changes not outline here. If you have a particular area that you were interested in knowing about feel free to contact us.