The 2021 tax season is upon us following an unprecedented year, financially and otherwise, for many people. The COVID-19 pandemic caused financial difficulties for individuals and businesses across Canada. For the first time, the Canada Revenue Agency (CRA) introduced emergency cash and tax benefits to support Canadians during the crisis. To make the most of these benefits and mitigate your resulting tax obligations, you should start preparing for your taxes early.
The CRA has set the deadline to file your income tax return as follows:
- March 31, 2021, for a partnership firm;
- April 30, 2021, for individuals and sole proprietors; and
- June 15, 2021, for a self-employed individual.
Preparing for and completing your tax return will take time, as you may need to collect much more information than in previous years and complete the necessary calculations. Below is a step-by-step guide to help you prepare and file your 2020 taxes:
Step 1: Collect necessary documents pertaining to income and expenses
First, you need to collect all your income and investment documents to calculate your taxable income before including any benefits. Collect any T4 tax slips from the CRA or your employer summarizing your employment earnings, COVID-19 benefits, and deductions for the year. You also may have T5 slips for investment income like equity, dividends, and interest earned.
Once you have the documents gathered, confirm the amount(s) you may have received under the Canada Emergency Response Benefit (CERB) and the Canada Recovery Benefit (CRB). The federal government provided $2,000 per month to qualified CERB recipients between March 15 and September 26, 2020. You may need to include up to $14,000 in CERB benefits in your 2020 taxable income. The agency replaced the CERB with the CRB after the CERB ended on September 26, 2020.
The government provided a pre-tax amount of $1,000 every two weeks in the form of the CRB. Recipients can get this benefit for up to 26 weeks. The window for applying for the CRB extends from September 27, 2020, to September 25, 2021. This benefit is only available to those who are not eligible for the Employment Insurance (EI) benefit. The maximum CRB you can get in the 2020 tax year is $5,400 (after deducting withholding tax).
You also need to add to your taxable income any tips received, gratuity income, income from part-time work, dividends, investment income, and interest earned.
Step 2: Study the tax benefits and deduct the benefits that apply to you
Next, you need to check the various tax breaks for which you qualify. To qualify for the home-office-expense tax deduction, you should have worked from home for over 50% of your working hours for four consecutive weeks last year. The CRA allows you to deduct $2 per day, up to $400, in-home office expenses from your taxable income. This means that you can claim the home-office-expense tax deduction for up to 200 working days. These 200 days should not include vacations, sick leaves, and statutory holidays. You can claim this deduction only for those expenses for which your employer did not provide reimbursement.
You may qualify for the basic personal amount (BPA) tax credit if you file your income tax returns. With this non-refundable tax credit, the CRA aims to provide tax relief to qualified Canadians.
The BPA tax credit can reduce your federal tax bill by a maximum of $1,984 in 2020. The CRA calculates this credit amount by multiplying the federal tax rate of 15% with the BPA amount of $13,229. You can get the entire $1,984 tax credit if your 2020 net income was up to $150,473. The BPA tax credit starts phasing at income above $150,473 and stabilizes at $1,845 when your income is above $214,368.
If you turned 65 last year, you are also entitled to the age amount tax credit. The age amount limit for 2020 is $7,637, and the tax credit comes to $1,146 (15% of $7,637). You can claim the full amount as a tax credit if your net earnings do not surpass $38,508. For income above $38,508, your age amount starts reducing and becomes zero if your earnings cross $89,421.
These tax deductions and credits will help reduce your tax bill significantly.
Step 3: File your income tax returns
Once you compute your taxable income, you need to file your income tax returns. Before filing your return, ensure that your personal information including the postal address, bank account details, date of birth, and marital status is updated with the CRA. Do not forget to attach all the tax slips and apply all the tax credits and deductions that you have received. You need to save the receipts of these deductions and credits in case the CRA requires additional confirmation of any information you provided. According to the CRA, you should save all your tax documents for a minimum of six years.
Use the following table to calculate the amount of federal tax that you owe to the CRA:
COMBINED FEDERAL & ONTARIO TAX RATES FOR 2020 & 2021
Every province has a different tax bracket and tax benefits. Once you know how much you owe, you can pay the amount online, in person, or using a third-party service provider.
Filing your taxes online will help expedite the process if you are owed a refund. After the CRA checks your taxable income and taxes paid, it will refund the extra tax that you have paid. The refund will reflect in your bank account within eight weeks of paper filing and eight days of online filing.
Why should you file your income tax on time?
If you fail to file your income tax returns by the due date, the CRA will charge a 5% penalty on the tax amount due. It will charge another 1% per month on the balance you owe for a maximum of 12 months. Earlier, the CRA would also charge interest if you don’t pay your entire tax by the due date. However, those who received at least one of the following benefits in 2020 may qualify for interest relief on tax payments received by April 30, 2022:
- Canada Emergency Response Benefit (CERB)
- Canada Emergency Student Benefit (CESB)
- Canada Recovery Benefit (CRB)
- Canada Recovery Caregiving Benefit (CRCB)
- Canada Recovery Sickness Benefit (CRSB)
- Employment Insurance (EI) benefits
- Provincial or territorial emergency benefits
Note: there are additional criteria to qualify for interest relief. For more information, please see the full list of criteria here.
Contact Sloan Group LLP in Toronto for Experienced Assistance with Your 2020 Tax Filings
Doing your taxes can be an overwhelming task, especially in a year where there was an unprecedented number of taxable subsidies. We can help you prepare for your taxes and file your income tax returns. At Sloan Partners LLP, our team of accounting professionals are dedicated to delivering reliable solutions to our clients and identifying the best solutions to mitigate tax obligations. If you would like to discuss how partnering with us could benefit you or your business, contact us to schedule a consultation. Please reach out to us online, or by phone at 416-665-7735.