A taxing situation

Opinion

Hey there, time traveller!
This article was published 23/01/2021 (1723 days ago), so information in it may no longer be current.

If you’ve been bad mouthing 2020 — because it’s been one of the deplorable spins around the sun in collective memory — it may not, unfortunately, be entirely done with us yet.

After all, you’ve still got your 2020 tax return to do.

Normal tax seasons are enough to induce headaches.

This time around might trigger a migraine.

“Most people find tax filing very complex in a normal year,” says tax expert Evelyn Jacks, president of the Winnipeg-based Knowledge Bureau, which provides education for financial professionals.

Jacks is also an author of numerous books on Canada’s tax system, including the most recent Make Sure It’s Deductible: Little-Known Tax Tips for Your Canadian Small Business.

Safe to say, she knows a thing or two about the tax changes for 2020.

“People’s lives are continuously changing, and tax law is continuously changing; then you add to that a pandemic where you literally see the rules change on a daily basis,” says Jacks, who recently prepared a 366-page technical manual on all the changes for tax professionals.

“Simply, the volume of change that was going on in 2020 was truly hard to keep up with.”

The takeaway is there’s plenty for us to consider as we prepare to file for an April 30 deadline — which could even change because things continue to be fluid with Canada Revenue Agency (CRA) and the pandemic itself.

Most notably, some individuals who have received government supports like the CERB (Canada Emergency Response Benefit) could end up owing taxes upon filing.

“The idea here is just to plan ahead and be ready that you may owe some tax when you file your return,” says John Waters, director of tax consulting services, BMO Private Wealth in Toronto.

Even without COVID-19, 2020 saw a number of changes that may affect filing season.

That includes a new credit for digital news services subscriptions of up to $500, worth a maximum of $75 in tax savings. (Yes, including this might seem like a shameless plug for the Free Press, but it could also save you a few bucks if you’re reading this online.)

Additionally, CPP (Canada Pension Plan) premiums increased to 10.5 per cent, applicable to a maximum income of $58,700.

“The important thing here is that there are more people in the gig economy where they have to pay” the employer portion too, Jacks says.

“This is not a small amount combined” as much as $2,898 just for the employee part. Self-employed folks are on the hook to cover both portions — a maximum of $5,796 — that is payable upon filing their return if they haven’t paid in instalments.

Another change — albeit a good one — is the Canada Training Credit, worth $250 in tax savings annually.

“This is for people who are working and going to school for a new designation, for example, and are not reimbursed by their employer,” Waters says, adding it applies only to individuals ages 25 to 64.

The past year, 2020, is the first year the credit can be applied. The amount can be carried forward, and individuals are eligible for another $250 each year, to a lifetime maximum of $5,000 in refundable credits.

Another change: the basic personal federal amount is increasing to $13,229 for earners with net income of less than $150,473. The amount is gradually clawed back to $12,298 for earners with net income up to $214,368. Folks earning more than that can just claim $12,298.

Indeed the new amount may come in handy for recipients of CERB, which was not taxed at source, meaning some individuals could face a tax bill on as much as $14,000 of payments. (The same goes for students who received the Canada Emergency Student Benefit.)

To figure out what you owe, “you have to add up all the CERB and other benefits you’ve received–that’s step one,” says chartered professional accountant Neal Winokur, author of The Grump Accountant: One Fed-Up Tax Pro’s Practical Plan to Fix Canada’s Senselessly Complicated Tax System.

Then add on all your other income. That may include Employment Insurance payments for some, and for self-employed, it might include the Canada Recovery Benefit (CRB). Both programs replaced CERB starting in October. Additional supports may be Canada Recovery Caregiving Benefit and Canada Recovery Sickness Benefit. All of these CERB replacements had tax deducted at source, but only 10 per cent of the gross benefit. That’s likely not enough, given “most people will be in a higher tax bracket if they had other income,” Winokur says.

Individuals that received these supports, whose net income for 2020 exceeds $38,000, will likely face a claw-back repayment for their CRB upon filing, Jacks says.

“When you file your tax return, you have to pay back 50 cents of every dollar of CRB for every dollar of net income above $38,000.”

Another critical mention here for the self-employed and sole proprietors of small businesses is the Manitoba Bridget Grant ($5,000) and the Manitoba Gap Loan (also $5,000 and now forgiven) count as taxable income. CEBA (Canada Emergency Business Account) also had a forgivable loan portion of up to $20,000. Water notes that too counts toward taxable income.

Unlike other supports, such as CERB, grants and forgivable loans are considered earned income and, as such, could trigger CPP premiums to be paid along with income tax for self-employed workers and sole proprietors, Jacks says.

Given all these supports could result in owing taxes, opposed to getting a refund, figuring out your tax situation in the next few weeks is important, and could even save you a few dollars. That’s because if you are now earning money again, and have some savings in the bank, you can reduce your tax bill with last-minute RRSP contributions for 2020 before the March 1 deadline.

“That could actually get some people under the $38,000 level so that they don’t have to pay back the Canada Recovery Benefit,” Jacks says. Furthermore, a reduced net income could also help increase other tax credits.

But enough of talk of potential tax repayment pain.

Let’s end on a positive note for the newfangled office dwellers, attired in the new-normal business attire — bathrobe and slippers — hunched over a laptop at the kitchen table.

If you worked from home because of the pandemic, you can use a new temporary flat rate method to simplify home office expense claims.

This new claim, created just for the 2020 tax year, means you do not need receipts or a proration of home floorspace to claim, for example, a portion of the utility bills. Rather as long as you worked from home for more than 50 per cent of the time for four consecutive weeks, you can claim $2 per day up to 200 days for a maximum deduction of $400 against income.

Waters notes the Government of Canada website walks you through this new measure, and the more involved claim method, to figure out if your expenses may be worth more than the simple deduction.

“It’s worth looking into to decide what’s the best methodology,” he says. “And then have your ducks all lined up and ready to go when it’s time to file.”

A bit of advice, though: You may want to choose simplicity over the more involved method even if you’re giving up a few bucks in tax savings because a higher claim may raise flags at CRA, Jacks says.

“The question really becomes: Is it going to be worth it to you to put yourself into an audit profile?”