Cost Estimate of Increasing the Basic Personal Amount Tax Credit

In December 2019, the government announced its intention to increase the Basic Personal Amount (BPA) beginning in 2020.[^1]  The BPA is an indexed non-refundable tax credit available to all residents of Canada.  Individuals can also claim an equivalent amount if they have a dependent or partner, net of their dependents’ and partner’s net income.

Effectively, the new measure will be an indexed top-up to the BPA (i.e. base BPA) and individuals with net incomes at or below the 4th federal income tax bracket ($150,473 for 2020) would be eligible for the full value of this top-up.  Individuals with higher income would see their increased BPA reduced until it is equal to the base BPA for individuals with income over the 5th federal income tax bracket ($214,368 for 2020).  The increased BPA schedule is outlined below:

Changes to the BPA have consequential changes to the Child Care Expense Deduction.[^2]  These are included in PBO’s analysis.  Since the BPA tax credit is means tested, there is a potential behavioural response by individuals with net incomes above $150,473 and below $214,368.[^3] 

PBO also provides distributional analysis to examine the impacts on families by their incomes and size.

This analysis is based on Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M). The assumptions and calculations underlying the simulation results were prepared by the office of the PBO; the responsibility for the use and interpretation of these data is entirely that of the PBO.

PBO modified the glass box files in SPSD/M v. 28 to model the means-tested increase to the BPA Tax Credit.  PBO projected the baseline BPA amounts and income thresholds using PBO’s CPI projections.  The increased BPA amounts were projected to 2024 using PBO’s CPI projections.

Once the model was built, the baseline and projected BPA amounts were entered into SPSD/M.[^4]  PBO used SPSD/M to calculate the resulting change in federal personal income tax (PIT) revenues.

To estimate the behavioural response, PBO calculated the change in the marginal tax rate (MTR) for individuals with incomes between the fourth and fifth federal income tax bracket thresholds, for each year between 2020 and 2024 (inclusive).  PBO used an elasticity of taxable income (ETI) of 0.1, which indicates that a 10% decrease in the after-tax value of an extra dollar earned will reduce taxable income by 1% (and consequently reduce tax revenues).[^5]

The results produced by SPSD/M were then standardized according to PBO’s EFO, using the ratio of SPSD/M’s baseline federal PIT revenues to EFO projections of federal PIT revenues.

PBO estimates the net cost of this policy change to be $783 million in 2019-2020, rising to $6.9 billion in 2023-2024 once the increased BPA is fully implemented.

* Includes consequential change to the Child Care Expense Deduction, which was a small amount.

• Estimates are presented on an accrual basis as would appear in the budget and public accounts.
• A positive number implies a deterioration in the budgetary balance (lower revenues or higher spending). A negative number implies an improvement in the budgetary balance (higher revenues or lower spending).

The distributional impacts of this policy were simulated using SPSD/M. PBO estimates 0.9 million individuals will no longer pay federal income tax and 21.0 million individuals will pay less federal income tax as a result of this policy change.

Individuals with net incomes between $51,510 and $159,694 receive the largest average reduction in their income taxes and individuals with net incomes below $15,000 or above $227,504 receive the smallest reduction in their taxes.

The reduction for individuals with incomes greater than the 5th tax bracket threshold is due to those individuals claiming an additional amount from their dependent or partner.