While most of us think tax season in Canada doesn’t really kick off until April, the truth is that you can—and should—start preparing your income tax return well before spring. It’s especially important to get a head start on your return this year if you collected any COVID-19 benefits in 2020, because you may be surprised to discover that you owe taxes instead of qualifying for a refund.
To make filing your taxes as stress-free as possible, we’ve developed this guide to give you all the information you need, including new and revised tax breaks available on this year’s return, and how COVID-19 affects Canada’s 2021 tax season.
What’s New for Taxes in Canada 2021
The federal government regularly adds, removes or changes eligible deductions, credits and benefits that can save you money on your annual tax return. As a result, it can be tricky to know which ones you should claim from year to year. Here are the major changes to look out for when you prepare your 2020 return, so you don’t miss any tax-saving opportunities.
- Simplified Home-Office Expenses Deduction: Because millions of employed Canadians worked remotely in 2020 due to the COVID-19 pandemic, the government has made it easier to claim a deduction for home-office expenses this year. To qualify, you had to perform more than 50% of your usual work hours from home over a period of at least four consecutive weeks during 2020. If you meet that threshold, you can deduct $2 for every day you worked at home due to the pandemic, up to a maximum of $400, from your taxable income. If you use this new temporary flat rate method to claim the deduction, you don’t need any receipts or other documentation.
- Canada Training Credit: If you paid for tuition or training in 2020, you may be able to claim this brand-new refundable tax credit. Here’s how it works. At the end of 2019, eligible workers aged 25 to 65 began automatically accumulating an annual sum of $250, up to a lifetime maximum of $5,000, in a Canada Training Credit account. Starting this year, you can claim the full balance in your Canada Training Credit account, or up to half your eligible tuition/training fees, whichever is less. Unused amounts remain in the account and can be claimed in future years. If you’re not sure whether you qualified for the Canada Training Credit or what your account balance is, check the Notice of Assessment that you got from the CRA after filing your 2019 return, or in your CRA My Account online.
- Canada Pension Plan Enhancement Deduction: Introduced last year to help offset the financial blow of new “enhanced” CPP premiums on insurable earnings, this deduction is now even bigger. Employed individuals can reduce their 2020 taxable income by up to $165.60, while self-employed filers can deduct up to $331.20. The bad news: the reason for the larger tax break is an increase in those enhanced premiums, meaning you’re now paying more in CPP contributions.
COVID-19 and Taxes in Canada 2021
Any payments you may have received in 2020 from the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB), or Canada Recovery Caregiving Benefit (CRCB) is considered taxable income and must be reported as such on your return. The government agency (CRA or Service Canada) that issued the payments will mail you a T4A or T4E tax slip by the end of February, showing the total amount in benefits you received. (If you don’t receive your slip(s) by then, check your My Account for electronic copies.)
The problem is, the government did not withhold any taxes on some of these payments (namely CERB and CESB) and may not have withheld enough taxes on others, which means you could owe more money than you expected. Here’s how much you might owe, based on the type of benefits you collected:
- CERB or CESB – No taxes were deducted at source, so you’ll now owe income taxes on the full amount received, calculated at your marginal tax rate. So, for example, if you live in Ontario and received the maximum of $14,000 in CERB payments and had $15,000 in other net taxable income in 2020, your marginal tax rate would be 20.5%. That means you’d owe $2,870 in taxes on the benefits you received.
- CRSB or CRCB – 10% tax was withheld at source. Depending on your total income for 2020, you may need to pay more tax than that. (If your income was on the low end, 10% might be too much, which could mean a refund for you.)
- CRB – 10% tax was withheld at source, so same as above. There’s an added wrinkle with CRB, however, for those with other income totalling more than $38,000 in 2020. In that case, you’ll have to reimburse $0.50 of the CRB for every dollar of net income above $38,000 (not including the CRB itself).
These possible tax hits could come as a surprise, especially if you don’t have enough deductions, credits or taxes withheld from your other sources of income to offset the amounts owing. Then you’ll have to come up with money to pay the CRA by April 30, 2021, or you’ll also face interest charges. (If you come up short, follow the advice in “What if I can’t pay my taxes in Canada?”) The same goes for any COVID-19 benefit payments you may have received for which you were not eligible, as the CRA will ask you to pay them back.
Tip: If all this worries you, use an online income tax calculator (like this one) to quickly estimate your federal and provincial taxes and find out how much money (if any) you may end up owing.
How to File Taxes in Canada
There are several ways for Canadians to file their taxes:
- Mail-in a paper copy: If you filed a paper return last tax season in Canada, the CRA should automatically mail you the 2020 income tax package by the end of February. Otherwise, you can view and download forms from the CRA website starting Jan. 18, 2021.
- File Online: The CRA calls its online filing for individuals NETFILE (as opposed to EFILE, which is the service that tax preparers use). To send in your return via NETFILE, choose a certified desktop, online, or mobile software product to prepare your return and follow the prompts to submit it to the CRA. Aside from the convenience of filing online, using tax software allows you to maximize your tax savings. Some make it easy by asking you a series of questions and then determining which of the more than 400 deductions and credits you may be eligible for.
- File by Phone – Canadians with low or fixed incomes, and whose tax situation doesn’t change much each year, are invited by letter to use the CRA’s automated phone service, File My Return.
When Does NETFILE Open for 2021?
NETFILE opens on Monday, February 22, 2021, for filing personal tax returns for the 2020 tax year. To file online, you must use CRA-certified tax-filing software products that use the NETFILE web service. You can also file previous tax years back to 2015, but returns for tax years earlier than 2014 must be done on paper.
Frequently Asked Questions
The Final Word
Tax time doesn’t have to be painful. There are plenty of resources online to help you through it as well as reliable online tax filing software to make it easier. Just schedule some time to get it done before the deadline. Late filers risk being hit with penalties. Wouldn’t you rather spend that money on something you want? And if you’re getting a refund, get those funds as soon as possible so you can do what you like with them. In either case, file on time!
Lastly, don’t forget to review our handy guide on How to Get More Money Back from your Tax Return! It could put a little more change in your pocket.