The COVID-19 pandemic continues to have an outsized influence on our lives. But as we contend with lockdown, restrictions and vaccination plans, some aspects of normal life carry on: It’s tax season and whether you dread looking for receipts, or anticipate getting a tax refund after you file, this year’s tax returns may not be like anything you’ve done before.
This year, your taxes may be more complicated than usual. The federal government offered a slew of COVID-19 pandemic relief options in 2020 and altered some tax rules. As well, many of us saw significant changes to our lifestyles, income and spending over the past year. For these reasons and more, some experts suggest it could be a mistake to leave your tax filing until the last minute.
“The COVID-19 pandemic has changed the way we all live and for many of us it’ll change the way we do our taxes too. Everyone should begin getting organized around their taxes early and be prepared to dive deeper into what you may claim or owe,” says Georgia Swan, a Tax and Estate Planner with TD Wealth.
She says even if your income stayed the same this past year, you might want to think about whether there are tax credits or other opportunities available to you that you haven’t used before which would, in turn, change how you file 2020’s tax returns. Here are some tax planning considerations to keep in mind before you file.
Remember the filing deadlines
Last year, the government pushed back the deadlines for filing taxes due to the COVID-19 pandemic. However, there is no grace period announced for this year and we are back on a normal schedule for deadlines. The tax filing deadline for individual returns is April 30. If you’re self-employed or have a spouse or a common-law partner who is self-employed, the deadline to file your taxes is June 15 — but if tax is owed, the payment deadline is April 30. For a Trust with a December 31 year end, the deadline for filing a tax return is March 31. Otherwise trust returns are due 90 days after year end.
Keep these key numbers at hand:
For 2020, the maximum RRSP contribution is 18% of your 2019 earned income up to a maximum of $27,230. In addition, you may have unused contribution room from previous years that may be carried forward.
For 2021, the annual limit is $6,000 and, for someone who has never contributed and has been eligible for contribution since 2009, the maximum contribution is $75,500.
The basic personal amount (BPA)
For 2020, the basic personal amount (BPA), a non-refundable tax credit that can be claimed by all individuals, was raised to $13,229 for those with net income of $150,473 or less. The benefit is reduced for incomes above that level.
Maximum pensionable earnings
For 2020, the maximum pensionable earnings amount is $58,700. The basic exemption amount is $3,500.
To find out your personal RRSP and TFSA limits for the tax year, you can log into My Account on the Canada Revenue Agency (CRA) website, or use the MyCRA app, to view your personal income tax and benefit information online. You can also get more information from the CRA’s Outreach Liaison Officer Services.
Manage CERB or other benefits tax-wise
Many people are used to getting tax refunds from the government, but Swan says, some of us may be owing taxes for the first time if they applied for the Canada Emergency Response Benefit (CERB). The government withheld 10% in taxes for the Canada Recovery Benefit (CRB), the Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB). However, no tax was deducted on CERB payments and CERB will be reported as taxable income to recipients on a T4A slip issued by CRA.
Because of this, Swan says, everyone should find out if they need to pay tax this year, and when they need to pay it, as penalties and interest can accrue if you are late. You may need time to find the money if you owe tax. Taxes owed are due on the date when taxes are filed, April 30, but the government has recently announced some temporary relief from interest charges: Canadians who received COVID-19 related benefits and had a total taxable income of $75,000 or less will not have any interest charged on overdue taxes due until April 30, 2022.
Swan says the best course of action can be to calculate your taxes early and contact your tax professional or the CRA for guidance.
(Some people realized they did not need CERB and have paid the funds back to the government already: If you realized that you were not entitled to some of the benefits that you received and you paid the emergency benefits back prior to December 31, 2020, repaid amounts will be deducted from the amount reported on your 2020 T4A slip.)
Claim work from home expense deductions
Many of us were forced to work from home (and continue to do so) because of the COVID-19 pandemic. In response, the government has changed and simplified the rules around claiming deductions for home office expenses. The CRA has a new simplified process whereby if you worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020, you are able to claim a $2 deduction per day for up to a maximum of 200 days worked at home, totalling $400. Under the simplified process, the CRA is not asking you to provide receipts for the expenses incurred.
However, if you believe you may have spent more than that on your home office, a more detailed method of claiming deductions, including utilities like heat and hydro and even internet expenses, is available. The detailed method requires getting your employer to provide a form T2200 or T2200S to verify you had to work from home. Also, if you use the detailed method, you should be prepared to keep your receipts and support for your calculation.
Snowbirds: Understand the U.S. residency rules
Canadians who regularly travel to the U.S. during the winter months should be alert to how the COVID-19 pandemic may have impacted their Canadian tax filing obligations, and perhaps also their U.S. tax status. In order to avoid being considered U.S. resident for U.S. tax purposes, individuals will want to avoid meeting the “substantial presence” test. This test is based on a complex calculation taking into consideration the number of days one is physically present in the United States in the current year, as well as in the three-year period that includes the current year.
For 2020, both the U.S. and Canada are providing relief regarding their respective tax residency rules in order to accommodate travellers who may have been stuck on the wrong side of the border in the wake of the pandemic lockdowns. To take advantage of these rules, Canadians are required to file certain forms with the IRS, within certain deadlines, to make the claim for relief. If someone is in the U.S. currently or contemplating a trip, they should be aware that, at this time, relief has been extended only in respect of 2020.
U.S. residency tax laws can be complicated. It may be a good idea to consult a tax specialist to see where you stand and what your filing responsibilities are.
Look after the seniors in your life
You may have parents, grandparents or older friends whose social or advisor networks have been impaired because of the pandemic. You may want to consider letting them know how their taxes might be somewhat complicated this year and you may wish to help them organize their information, so they can be in a position to file before the deadline.
“Right now, nobody wants more complications in their lives but, unfortunately, we all have to ensure we get our tax documentation in on time and pay any taxes owing,” says Swan. “It’s best to deal with it now because the problem is only compounded if you also suffer the bigger problem of a penalty and running up interest on any debt to the CRA.”