I’ve always been overzealous when it comes to filing my tax return. I’m one of those people who does it on the first day the Canada Revenue Agency (CRA) allows us to. (By the time you read this, I'll have filed already.) But I’m aware not everyone is as eager as I am. Many Canadians, almost half of us, in fact, put off doing our taxes until the last minute, or don’t file at all. (Deep sigh.) It’s not that scary, y’all, I promise.
Not only is it in your best interest to file, it’s also smart to file as soon as you can — especially this year. Thanks to the pandemic, your 2020 return might be more complicated, especially if you received any government benefits. While there’s no prize for filing early, if you procrastinate and leave it to the last minute, you’re more likely to make costly mistakes. And, you may face penalties if you miss a deadline. There's also this: "If you’re due for a refund, the sooner you file, the sooner you will get the refund back,” says Taheera Fidaali, founder of Saskatoon-based Tula Accounting & Consulting. And if you owe the government money? “Filing early gives you a clear idea of how much you will owe and gives you time to save the exact amount you need if hadn’t saved enough throughout the year," she adds.
Here are the six things you should know about how to get your best tax return ever in 2021.
CERB and other COVID benefits may be taxable
If you received the Canada Emergency Response Benefit (CERB) or the Canada Emergency Student Benefit (CESB), you might owe taxes on your 2020 tax return. That’s because no tax was withheld by the government when the payments were issued. (Note: If you received the Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB), or Canada Recovery Caregiving Benefit (CRCB) payments may be in the clear —10% tax was withheld.)
How do you know if you have to pay? That depends on how much income you earned in 2020 and your marginal tax rate. Generally speaking, the more money you make, the larger your marginal tax rate will be. That’s why you should always be on the lookout for deductions (more on that below) so you can minimize what you need to pay and maximize credits to help you get the most back.
You can claim home office expenses for WFH during COVID
Speaking of deductions, if you’re one of the five million Canadians who started working from home during COVID, there’s a tax credit for that. The feds have introduced a new temporary flat rate method; employees who worked from home at least 50% of the time for four consecutive weeks can claim $2 per day for each day worked, up to a maximum of $400.
If you want to claim more than the flat rate, you’ll have to use the detailed method to claim the deduction. This method requires you to calculate the size of your workspace and provide supporting documentation to be eligible.
Research what other deductions and credits you’re eligible for
Even if you had no income in 2020, there are hundreds of credits and deductions you can take advantage of — you just need to know where to find them. For instance, if you were in university or college last year, you might be able to claim a deduction or a credit-related to education. That includes tuition and textbook amounts, interest paid on student loans, and moving expenses.
Even some of the medical expenses that you did not claim on your health benefits may be tax-deductible. Luckily, the CRA provides a detailed list of eligible medical expenses, so be sure to look over it. I didn’t know about some refundable tax credit expenses, including crutches, medical cannabis, and even gluten-free products for people with Celiac disease. Other more well-known tax deductions and credits include childcare expenses, spousal and child support payments, property taxes, rental payments, and charitable fees. There’s also some new credits to look out for. Like the digital news subscription tax credit, which can get you 15% off qualifying Canadian news subscriptions up to $500.
I can’t go through the entire list to help you get the maximum refund, but you get the idea. And you don’t have to do all the research yourself, either. If you’re doing your taxes on your own, there is CRA-certified software available to guide you. I used TurboTax because my accountant friend recommended it and they have a whole YouTube channel with a ton of tutorials. But there’s also Wealthsimple Tax, UFile, and CloudTax, to name a few. You can also get your taxes done at a free virtual tax clinic hosted by local organizations in your community.
Use your RRSP to your advantage
To recap, an RRSP is a retirement savings plan to which you or your spouse or common-law partner can contribute. Your RRSP contribution limit is 18% of your pre-tax income from the last tax year, plus any unused amounts from previous years. Any money you contribute to an RRSP will not be taxed the year you make the deposit and only be taxed when you withdraw it. How does this relate to your tax return? Well, contributing to your RRSP allows you to cut your tax bill. “Basically the government is saying, if you put your income in an RRSP account, you won’t have to pay taxes on that income until you retire,” says Fidaali. “Most people will have lower income level at retirement and thus pay lower amounts of tax."
(If you make less than $50,000 a year, it may be a better idea to maximize your Tax Free Savings Account (TFSA) contributions first and contribute to RRSPs when you reach a higher tax bracket than you think you will be when you retire.) It’s too late to contribute to your RRSP for 2020, the deadline was March 1. But if you have it’s a good idea to start putting money in an RRSP or TFSA for your 2021 tax return — even it's $25 a paycheque.
Gig workers and freelancers should take advantage of write-offs
The gig economy is a reality for many Canadians. Whether you’re a freelance virtual assistant, Instacart driver, or dog walker, you still need to report that income to the CRA. To avoid any surprises come tax season, Mohammed Asaduallah, founder and CEO of Benji, a website that helps freelancers with their taxes, says gig workers should aim to put aside 20% to 25% of their income for taxes throughout the year. "I always aim to go higher," says Asaduallah. "This way if I don't end up using it all [to pay my taxes], it's like a nice little bonus."
The good news? There are ways to shrink tax bills. You can write off home office expenses, personal development and website expenses, payment processing, bank fees, and gear and equipment, to name a few. If you don’t know where to begin, Benji offers free tax write-off guides for freelancers. You can also browse the CRA’s website and personal finance blogs for the best information. I find Instagram is a great resource as well. Some of my favourites for additional tips and support are Tula Cpa, Tax Chick, and The Financial Fixup.
Avoid interest and late fees
This may seem obvious, but I’ll remind you anyway. One of the best ways to get your best refund is to avoid any late-filing penalties. Whether you’re a salaried employee or self-employed, submit your tax return on time. This year, the deadline to file is April 30. If you or your common-law partner are self-employed, you have until June 15. However, if you owe any tax, it must still be paid to the CRA by April 30.
These fees can add up; after April 30, penalties and compound daily interest may start to accrue. The late penalty is 5% of your balance due, plus 1% of your balance due for each month your return is late (to a maximum of 12 months). If you can’t pay your full balance owing on or before the deadline, don’t fret. Contact the CRA and set up a payment plan to avoid any further penalties.