Don’t we all wish that we could put 2020 behind us and never give it another thought?
But as Benjamin Franklin famously said, nothing can be said to be certain in this world, except death and taxes. And sure enough, we need to file our 2020 tax returns very soon.
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Given the unprecedented year, 2020, there have been a few changes for the 2021 tax season.
Before we dive into the details, here are some key dates that you need to keep in mind for this tax season:
- The CRA will start accepting tax returns on February 22, 2021, and so this date marks the start of the 2021 tax season
- The tax filing deadline is once again April 30, 2021 (for most people)
- For self-employed people, the tax filing deadline is June 15, 2021 (but you must pay any taxes owed by April 30, 2021)
- The deadline to contribute to an RRSP for the 2020 tax year is March 1, 2021
Taxes on Emergency Benefits (CERB & CESB)
In response to the COVID-19 Pandemic, the Government of Canada introduced various benefits and relief measures in 2020 to assist Canadians who were most impacted.
As a result of these taxable benefits, your tax return may look a little different this year.
Depending on when you received the benefits, CRA may or may not have withheld taxes at the source. The Government did not withhold taxes on the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB) in the earlier months of the pandemic.
All this, unfortunately, means that you may owe some taxes to the CRA come April 30th.
The Canada Revenue Agency (CRA) will send you a T4A slip to report any COVID-19 emergency or recovery benefits received in 2020. You may also check My Account to download electronic copies of your T4A slips.
The Simplified Home Office Deduction
In 2020, over 2.4 million Canadians worked from home due to COVID-19.
You may have been one of those who had to work from your kitchen table, couch, bedrooms, guestrooms, dens, etc. Expenses associated with remote working may be eligible for deduction in the 2021 tax season.
The CRA introduced a simplified temporary flat rate method to claim your home office expenses. To be eligible, you need to meet the following criteria:
- You worked from home more than 50% of the time for at least four consecutive weeks in 2020 due to the COVID-19 Pandemic.
If you meet the above criteria, you may claim $2 for each day you worked from home in 2020 due to the pandemic up to a maximum of $400. With this simplified method, you do not need to submit receipts nor obtain any forms from your employer.
This simplified home deduction is only for the 2020 tax year.
If you incurred significant work-related expenses, you could still use the existing detailed method to claim your home office costs.
Canada Training Benefit
In 2019, the Canadian Government introduced the Canada Training Benefit to help with the need for workers to re-train to keep up with the demands of an ever-changing economy.
It is a non-taxable credit. And to be eligible for this credit, you need to meet the following criteria:
- Be between the ages of 25 and 64
Eligible workers accumulate a credit of $250 per year, up to a lifetime maximum of $5,000. You can use this credit to cover up to half of your tuition (if the amount is lesser than your cumulative available credit).
If you have unused amounts in your Canada Training Benefit account, you can carry them forward to future years.
2021 Tax Season Update on Canada Pension Plan (CPP) Contributions
If you are 18 years or older but younger than 65, your employer will deduct CPP contributions from your paycheques. Your employer is also required to contribute an amount equal to the CPP deductions made from the employees.
For example, if you make $100 of CPP contributions from your paycheque, your employer will also contribute $100 on your behalf. As such your total CPP contribution for that paycheque is $200.
In Canada, the CPP provides basic benefits upon retirement or should you become disabled.
Each year, the CRA provides the maximum pensionable earnings, the year’s basic exemption amount, and rate to calculate CPP deductions.
The maximum pensionable earnings increased to $61,600 in 2021 from $58,700 in 2020. The rate has also increased from 5.25% to 5.45%.
Bad news: you will be paying more for your CPP contributions in 2021.
Good news: you can use the CPP Enhancement Deduction of $165.60 to reduce your 2020 taxable income. Every dollar counts.
2021 Tax Season Update on Employment Insurance Contributions
In Canada, Employment Insurance (EI) provides temporary income support to unemployed workers until they find new employment.
The EI program also helps workers in unique life situations such as pregnancy, caring for a newborn, illness or caring for family members with critical ailments.
You may only qualify for EI if you have paid premiums in the past year and meet the qualifying conditions.
Your employer deducts EI premiums from your paycheques. Each year, the CRA determines the maximum annual insurable earnings and the applicable rates.
In 2021, the maximum annual insurable earnings increased to $56,300 from $54,200 in 2020. The rate to calculate the premiums you pay remains unchanged at 1.58%.
Registered Retirement Savings Plan (RRSP) Contribution Limit
The maximum annual RRSP contribution limit for 2021 has increased to $27,830 from $27,230 in 2020.
As in previous years, your maximum annual contribution is the lesser of 18% of your income or $27,830.
The RRSP allows your investments to grow tax-free as you do not pay taxes on investment gains until withdrawal (typically in retirement).
Contributions to an RRSP also provide an immediate tax benefit of decreasing your taxable income and thus reducing your tax liability in a given year.
You can learn all about the RRSP here and find out whether it is suitable for you.
Tax-Free Savings Account (TFSA) Contribution Limit
The annual TFSA contribution limit for 2021 remains at $6,000, which is the same as the previous couple of years.
If you have eligible since the inception of the TFSA in 2009 and have never contributed to a TFSA, your total cumulative contribution room is now $75,500.
The TFSA provides an excellent opportunity to invest tax-free as all investment gains are exempt from taxation. You can read more about the TFSA here.
How to File Your Taxes
There are four main ways to file your taxes in Canada.
1. Using certified desktop, online, and mobile software such as TurboTax and SimpleTax
2. On paper. If you filed on paper last year, the CRA would automatically mail you the Income Tax Package by February 19, 2021. However, due to COVID-19, there may be delays, and as such, you may want to consider switching to online filing.
3. File by Phone. Canadians with low or fixed incomes and tax situations that do not change much from year to year can use this option. The CRA provides an automated phone service called File my Return.
4. Community Volunteer Income Tax Program. The CRA allows community organizations to host free tax clinics for Canadians with modest income and simple tax situations. Volunteers may complete tax returns for free by videoconferencing, phone, or a document-drop-off arrangement.
While paying taxes is certainly never welcome, preparing ahead of time for the upcoming 2021 tax season will help you avoid any surprises on tax day, April 30, 2021.
Further, the tax rules’ recent changes allow deductions such as the simplified home office deduction, the Canada training benefit, and the CPP enhancement deduction.
These deductions may not be sufficient to offset your entire tax liability, but every dollar counts. And as a rule of thumb, never leave money on the table.
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