edit Taxes CRA
While paying taxes is inevitable, Canadians can look to take advantage of several tax breaks offered by the Canada Revenue Agency, or CRA, to reduce their tax liability each year. One such non-refundable tax credit is the basic personal amount, or BPA, which can be claimed by all Canadian residents.
The primary aim of the BPA is to offer a full reduction from federal income tax to individuals with taxable income below the BPA. Moreover, it provides a partial reduction to taxpayers with taxable income above the BPA.
Basically, a non-refundable tax credit reduces the amount you may owe. However, if your non-refundable tax credit is more than what you owe, you will not be eligible for a refund on the difference amount.
How much will the BPA tax credit help you save?
The BPA was increased to $13,229 in 2020 for those with a net income of less than $150,473. The increase is reduced for individuals with a net income between $150,473 and $214,368. So, if you earn over $214,368, your BPA will stay at $12,298.
The BPA has increased to $13,808 in 2021, $14,398 in 2022, and $15,000 in 2023, after which it will be indexed to inflation. In 2024, the BPA has increased to $15,705, which means your tax bill will reduce by $2,355.75 (15% of $15,705) next year.
Use tax credits and buy diversified index funds
Canadians can invest the savings originating from tax breaks and invest the proceeds into diversified exchange-traded funds, or ETFs. Generally, ETFs allow you to gain exposure to a basket of stocks at a low cost, diversifying your portfolio and reducing overall risk.
Over 80% of large-cap funds fail to beat their benchmarks, which shows us how difficult it is to invest in individual stocks. So, if you invest in index funds, there is a good chance for you to beat a majority of investment managers over time.
iShares S&P/TSX Index 60 Index ETF (TSX:XIU) offers you access to the 60 largest companies in Canada. With more than $10.5 billion in assets under management, the XIU ETF also provides you with a dividend yield of 3.5%.
In the last 20 years, the XIU ETF has returned 177% to shareholders. After adjusting for dividends, total returns are closer to 367%. In this period, the equity markets have wrestled with the dot-com bubble, the great financial crash, the COVID-19 pandemic, rising inflation, and multiple interest rate hikes.
Despite numerous headwinds, the Canadian equity market has delivered inflation-beating returns to shareholders over two decades.
Equity investors can diversify their portfolios further by holding ETFs such as Vanguard S&P 500 Index ETF (TSX:VSP), which provides you exposure to the 500 largest companies in the U.S.
With $2.45 billion in assets under management, it offers you a yield of 1.3%. Moreover, the VSP ETF is hedged to the Canadian dollar, sheltering you from fluctuations in foreign exchange rates.
In the last 10 years, the VSP ETF has returned 171% in dividend-adjusted gains and remains a compelling choice for long-term investors.
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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