NOTE: The following podcast was recorded in March 2021, prior to the deadline for the 2020 tax year.
Tax season approaches every year, but filing taxes for the year of 2020 isn’t the same as any other. With the added factor of working from home, self-employment, or CERB, many Canadians are left with questions on how to file taxes on their own.
That’s why Tyler invited Jen Pollock, Ratehub’s VP of Finance and Operations, and Caroline Corbeil, Wealthsimple’s Tax Expert, to answer all your tax-related questions on this episode of Real Money Talk Podcast. And spoiler alert – filing your own taxes isn’t as difficult as it seems.
Filing your own tax return
This year, the deadline to file your tax return is April 30, 2021 or June 15, 2021 if you or your spouse is self-employed.
Caroline explains there are only a few cases where you won’t be able to do your own taxes, but, for the average person it shouldn’t take more than an hour.
To find out exactly how much you owe, Wealthsimple Tax actually automates your balance and refund with every piece of information you enter. Each province has different tax brackets, but for federal taxes, everyone’s initial $48,535 or less, is taxed at 15%. The next tax bracket at 20.5% goes up to $97,069, so in other words, the money between $48,536 and $97,069 is taxed at 20.5% for everyone.
To explain the way tax brackets work further, only the money within each bracket is taxed at its specific rate. So if your income for the year is $60,000, your first $48,535 will still only be subject to 15% federal tax while the remainder will be taxed at 20.5%. “It’s definitely a thing that a lot of Canadians don’t understand – it’s really just the incremental difference.”
If you don’t file your tax return, however, the CRA will send you a request, and you’ll likely need to pay a penalty. And you’ll no longer receive many CRA benefits, such as the GST/HST credit, child care benefit, and you could have problems with CPP and EI.
Work from home claims
“Working from home is going to be a big deduction this year for a lot of Canadians. The CRA announced a new way to claim your employment expenses this year – they introduced the temporary flat rate method.” Using this method, you can claim $2 per day for the number of days you worked from home. This is capped at a $400 maximum, and you won’t need to provide any documents to support your claim.
The other way is to get a deduction through the detailed method. In this case, you’ll need to get a T2200 form signed by your employer and provide receipts for your utilities and rent. Your claims expense will be based on your percentage of work space in comparison to your total space at home.
Caroline explains that it’s probably more beneficial to use the temporary flat rate method if you lived in a shared space. However, if a large percentage of your home space is used for work, the detailed method could be the way to go.
There is one big difference between being a homeowner and a tenant. If you own your home, you can still claim your utilities and internet usage, but you won’t be able to claim any mortgage interest or property tax.
Caroline also mentions that if you received CERB during the pandemic, you’ll receive either a T4E form (if you applied through Service Canada) or a T4A form (if you applied through CRA). When filing your tax return, you can simply enter the slip’s information into the software, and the income will be added to your taxable amount.
“It is a little scary for some people because they weren’t withholding tax on these payments. So people may owe a little bit more money or not get as big of a refund this year if they worked and were on CERB for part of the year.”
If you picked up a side-hustle during the pandemic, you also need to report this income on your tax return. However, Caroline points out you can typically deduct a lot of expenses when you’re self-employed. For instance, you can claim any related motor vehicle expenses when driving for Uber – just be sure to keep track of your gas receipts and mileage.
Tax credits vs. tax deductions
“A tax credit is basically a way to reduce the amount of tax payable you have. It just gets applied directly to the tax that you're owing which can result in a refund or balance due, depending on your situation.” Common tax credits include the basic personal and spousal amount, but there are also a few tax credits that aren’t as well known. For instance, the digital news subscription tax credit is a new one, eligible to those that are subscribed to an online news source.
On the other hand, tax deductions, such as the RRSP deduction, lowers your amount of income instead of the amount you owe directly. When your net income and taxable income is reduced, you’ll be paying less in taxes since you’re taxed at a percentage of your income. With an RRSP deduction, Caroline points out that you could even come down an entire tax bracket.
Capital gains tax
A capital gain means you sold an asset (e.g. stocks, bonds, real estate) for a profit. And in Canada, you’ll be taxed on 50% of this amount. So if you had made a $1,000 gain during the year, you’ll only be paying tax on $500 of that amount.
This could change at some point, as a larger portion of capital gains used to be taxed in Canada. Prior to the year 2000, 75% of profits were taxed while this later dropped to 66% and then eventually to its current amount, 50%.
Tax implications for landlords
If you rent out your space to others, you may be wondering if you need to claim this money as additional income on your tax return. Caroline explains that it really comes down to one question – what is your intention?
“If you are renting out space in your home (or your entire home) with the intention of making a profit, then yes, you do have to declare your rental income. But if you’re just renting out a portion of your home to family, or someone you're close to, and charge less than the fair market value (and have no expectation of profit), then you don't have to claim any of that income – it’s likely going to be a loss anyways.”
For Airbnb owners, however, the income you make is most likely taxable as there is typically an intention of making a profit.
If you couldn’t tell already, this episode of Ratehub’s Real Money Talk Podcast is quick, to the point, and full of information to prepare you for the 2020 tax season. To hear the conversation with Tyler, Jen, and Caroline in full, be sure to check your favourite personal finance podcast, Real Money Talk on Apple or Spotify.