Insights

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency (CRA). That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 15 of this year.

Sometime during the month of February, millions of Canadians will receive mail from the Canada Revenue Agency (CRA). That mail, a “Tax Instalment Reminder”, will set out the amount of instalment payments of income tax to be paid by the recipient taxpayer by March 15 and June 15 of this year.

Receiving an Instalment Reminder from the CRA won’t be a surprise for many recipients who have paid tax by instalments during previous tax years. For others, however, the need to make tax payments by instalment is a new and unfamiliar concept. That’s because for most Canadians — certainly most who earn their income through employment — the payment of income tax throughout the year is an automatic and largely invisible process, requiring no particular action on the part of the employee/taxpayer. Federal and provincial income taxes, along with Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are deducted from each employee’s income and the amount deposited to an employee’s bank account is the net amount remaining after such taxes, contributions, and premiums are deducted and remitted on the employee’s behalf to the CRA. While no one likes having to pay taxes, having those taxes paid “off the top” in such an automatic way is, relatively speaking, painless. Such is not, however, the case for the sizeable minority of Canadians who pay their income taxes by way of tax instalments

The CRA’s decision to send an Instalment Reminder to certain taxpayers isn’t an arbitrary one. Rather, an Instalment Reminder is generated when sufficient income tax has not been deducted from payments made to that taxpayer throughout the year. Put more technically, an Instalment Reminder will be issued by the CRA where the amount of tax which was or will be owed when filing the annual tax return is more than $3,000 in the current (2021) tax year and either of the two previous (2019 or 2020) tax years. Essentially, the requirement to pay by instalments will be triggered where the amount of tax withheld from the taxpayer’s income for the year is at least $3,000 less than their total tax owed for 2021 and either 2019 or 2020. For residents of Quebec, that threshold amount is $1,800.

Such obligation arises on a regular basis for those who are self-employed, of course, and generally for those whose income is largely derived from investments. The group of recipients of a tax instalment reminder often also includes retired Canadians, especially the newly retired, for two reasons. First, while most employees have income from only a single source — their paycheque — retirees often have multiple sources of income, including Canada Pension Plan (CPP) and Old Age Security (OAS) payments, private retirement savings and, sometimes, employer-provided pensions. And, while income tax is deducted automatically from one’s paycheque, that’s not the case for most sources of retirement income. Relatively few new retirees realize that it’s necessary to make arrangements to have tax deducted “at source” from either their government source income (like CPP or OAS payments) or private retirement income like pensions or registered retirement income fund withdrawals, and to make sure that the total amount of those deductions is sufficient to pay the total tax bill for the year. It is that group of individuals who may be surprised and puzzled by the arrival of an unfamiliar Instalment Reminder from the CRA. However, no matter what kind of income a taxpayer has received, or why sufficient tax has not been deducted at source, the options open to a taxpayer who receives such an Instalment Reminder are the same.

First, the taxpayer can pay the amounts specified on the Reminder, by the March and June payment due dates. Choosing this option will mean that the taxpayer will not face any interest or penalty charges, even if the amount paid by instalments throughout the year turns out to be less than the taxes actually payable for 2021. If the total of instalment payments made during 2021 turn out to more than the taxpayer’s total tax liability for the year, he or she will, of course, receive a refund when the annual tax return is filed in the spring of 2022.

Second, the taxpayer can make instalment payments based on the amount of tax which was owed for the 2020 tax year. (Generally speaking, such amount will be known once the taxpayer has completed his or her return for 2020). Where a taxpayer’s income has not changed significantly between 2020 and 2021 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2021 will be slightly less than it was in 2020, as the result of the indexation of both income tax brackets and tax credit amounts.

Third, the taxpayer can estimate the amount of tax which he or she will owe for 2021 and can pay instalments based on that estimate. Where a taxpayer’s income will decrease significantly from 2020 to 2021, such that his or her tax bill will also be substantially reduced, this option can make the most sense.

A taxpayer who elects to follow the second or third options outlined above will not face any interest or penalty charges if there is no tax payable when the return for the 2021 tax year is filed in the spring of 2022. However, should instalments paid have been late or insufficient in amount, the CRA will impose interest charges, at rates which are higher than current commercial rates (the rate charged for the first quarter of 2021 — until March 31, 2021 — is 5%). As well, where interest charges are levied, such interest is compounded daily, meaning that on each successive day, interest is levied on the previous day’s interest. It is also possible for the CRA to levy penalties for overdue or insufficient instalments, but that is done only where the amount of instalment interest charged for the year is more than $1,000.

Most Canadian taxpayers are understandably disinclined to pay their taxes any sooner than absolutely necessary. However, ignoring an Instalment Reminder is never in the taxpayer’s best interests. Those who don’t wish to involve themselves in the intricacies of tax calculations can simply pay the amounts specified in the Reminder. The more technical-minded (or those who want to ensure that they are paying no more than absolutely required, and are willing to take the risk of having to pay interest on any shortfall) can avail themselves of the second or third options outlined above.

To help taxpayers make a decision on how to respond to an Instalment Reminder, detailed information on the instalment payment system is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments.html.

One of the biggest pandemic-related changes in the day-to-day lives of Canadians was the abrupt change to work-from-home arrangements. While such arrangements aren’t new — employees and the self-employed have been working from home for decades, ever since the available technology made such arrangements feasible — what changed in 2020 was the sheer number of Canadians who were working from home for the first time.

One of the biggest pandemic-related changes in the day-to-day lives of Canadians was the abrupt change to work-from-home arrangements. While such arrangements aren’t new — employees and the self-employed have been working from home for decades, ever since the available technology made such arrangements feasible — what changed in 2020 was the sheer number of Canadians who were working from home for the first time.

Even without a pandemic, such work-from-home arrangements have a number of advantages — no one really misses the daily commute, or the costs of that commute and other unavoidable work-related expenses. And, as many Canadians will discover when preparing their tax return for 2020, those advantages include the ability to deduct, for tax purposes, some of the expenses incurred to maintain a home office.

Many if not most employees who worked from home in 2020 will, in fact, have a choice of how to calculate and claim such home office expense deductions. Canada’s tax system already has rules in place to govern the tax treatment of expenditures and reimbursements related to home office work by employees. While those rules aren’t particularly complex, there is some record keeping and calculations required. With that in mind, and in light of the likely millions of taxpayers who will be in a position to claim home office expenses for 2020, the federal government has made available a more straightforward “flat rate” method.

The new temporary flat rate method simplifies the employee’s claim for home office expenses to a significant degree. An employee is eligible to use this new method if he or she worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020 due to the pandemic. Where an employee was provided by his or her employer with the option of working from home and chose to do so, he or she will still be eligible for the flat rate method deduction, assuming the 50%/four week criteria are met.

An eligible employee can claim $2 for each day he or she worked from home in 2020 due to the pandemic. However, the maximum that an individual can claim for the 2020 tax year using the new temporary flat rate method is $400 (200 working days). There is no requirement to document any actual expenses incurred, and no requirement that the employer provide any kind of certification of the work-from-home arrangement.

In many households both spouses worked from home during 2020. Assuming that all of the criteria above are met, both spouses can make a claim for home office expenses using the flat rate method.

Although the new temporary flat rate method is widely available, taxpayers who qualify are still entitled to use the pre-existing detailed method under which actual eligible expenses incurred during the year are tallied and a percentage of those expenses claimed on the 2020 tax return.

In order to claim a deduction for costs related to a work-from-home space using the detailed method, an employee must meet at least one of the following conditions:

• the employee worked from home during 2020 as a consequence of the pandemic; or
• the employee was required by his or her employer to work from home during 2020.

In addition, at least one of the following criteria must also be satisfied in order to claim work-from-home costs under the detailed method:

• the home work space is where the individual mainly (more than 50% of the time) did his or her their work for a period of at least four consecutive weeks during 2020; or
• the individual uses the workspace only to earn his or her employment income—he or she must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of his or her employment duties.

Once these threshold criteria are met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her workspace, such as the cost of rent or condo fees, electricity, heating, water, and home maintenance. For 2020, the list of eligible expenses has been expanded to specifically include internet access fees.

There is no specific formula provided for determining the proportion of eligible costs which can be deducted for qualifying home office expenses. The employee can determine that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home, or he or she can make that calculation based on the number of rooms in the house or apartment relative to the number of rooms used for work-related purposes. Whichever method is chosen, the most important consideration is that the approach taken (and the expenses claimed) be reasonable. In all cases, the CRA can ask the taxpayer to provide documentation and support for claims made using the detailed method.

There is one further requirement for employees who seek to deduct costs incurred in relation to a home office using the detailed method. Each such employee must obtain either a Form T2200S, Declaration of Conditions of Employment for Working at Home Due to Covid-19, or Form T2200, Declaration of Conditions of Employment. On those forms, the employer must certify the work-from-home arrangement and confirm that the employee is not being reimbursed for any home office expenses incurred. Where there is any kind of reimbursement provided, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.

There is no real rule of thumb to determine which of the two methods outlined above would produce a better tax result in each employee’s circumstances. The choice is, however, that of the employee. Those who are willing to do the necessary calculations to determine whether a greater deduction can be obtained by using the more detailed method can certainly do so. Those who would rather avoid all of that required record keeping and those calculations can simply claim the standard amount allowed by the CRA.

To help employees decide whether they can claim home office expenses for 2020 and, if so, which method they want to use, the CRA has provided an extremely useful summary of the available methods, together with an online calculator for such expenses. All of that information can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-229-other-employment-expenses/work-space-home-expenses/what-changes.html.

Under Canadian tax law, the general rule is that all amounts paid by an employer to his or her employees are treated as taxable income. That rule holds whether those amounts are paid as cash remuneration, or in the form of non-cash benefits. However, in some circumstances, that general rule is altered to permit employees to receive certain non-cash benefits on a tax-free, or tax-advantaged, basis.

Under Canadian tax law, the general rule is that all amounts paid by an employer to his or her employees are treated as taxable income. That rule holds whether those amounts are paid as cash remuneration, or in the form of non-cash benefits. However, in some circumstances, that general rule is altered to permit employees to receive certain non-cash benefits on a tax-free, or tax-advantaged, basis.

Like so much else during 2020, the usual structure of working arrangements and employee compensation was displaced, and those changes have led the Canada Revenue Agency (CRA) to take another look at the tax treatment of the kinds of compensation and benefits paid during 2020. The CRA has now released information on some of the benefits or allowances which many employers have paid for the first time during 2020, and on how those benefits and allowances will be assessed for income tax purposes on the 2020 individual income tax return.

The announcements made by the CRA generally deal with compensation, benefits, or allowances paid by an employer to allow his or her employees to work partially or fully from home, as has been required under public health orders.

Home office equipment

In March of 2020, millions of employees were suddenly required to work from home during public health states of emergency. Doing so required, of course, that those employees have (or acquire) the necessary tools and equipment to allow them to do so — including, but not limited to, computers, desks, desk chairs, and, in many cases, upgraded Internet connections.

To allow their employees to work from home, many employers furnished the necessary equipment or provided their employees with the funds to do so themselves. The CRA has now indicated that in some — but not all — circumstances, there may be no taxable benefit to the employee from any such assistance. The general rule is as follows: where an employer pays for, or reimburses an employee for, the cost of computer or home office equipment to enable the employee to carry out his or her employment duties, there is no taxable benefit to the employee.

As is always the case in tax, there are limitations and exceptions to this rule. First, the maximum amount which can be provided to an employee (whether through direct purchase by an employer or reimbursement of expenses incurred by the employee) is $500. Any amount received over that $500 limit will be treated as a taxable benefit to the employee, to be reported on the return for 2020 and taxed as income.

Second, the way in which the employer assistance was structured makes a difference. Where the needed equipment or resources is furnished by the employer or the employer reimburses the employee for such purchases, there is no taxable benefit. Where the employee is provided with an advance to make such purchases and is required to provide an accounting (with receipts) for funds spent, and to return any unspent amount to the employer, there is similarly no taxable benefit received. (In both cases, of course, the amounts received or reimbursed are subject to the $500 limit outlined above.)  Where, however, the employee receives an allowance but is not required to account to the employer for amounts spent, there will be a taxable benefit assessed equal to the amount of that allowance.

Commuting and parking costs

The CRA’s longstanding policy is that costs incurred by an employee to get to and from work, including parking costs, are a personal expense. Where those personal expenses are paid by an employer, the employee is considered to have received a taxable benefit.

The Agency recognizes, however, that employees who do continue to commute to work under current conditions may incur additional expenses, in order to minimize their risk of illness. For instance, an employee could choose to drive to work, rather than incurring the additional risk posed by taking public transit. As well, employees who are working from home may need to “visit” the workplace in order to obtain needed equipment or for other employment-related purposes.

In light of those realities, the CRA is prepared, as a matter of administrative policy, to relax the usual rules relating to employee taxable benefits for commuting. Where an employee continues to go to a workplace on a regular basis, and the employer pays for, reimburses, or provides a reasonable allowance for additional commuting costs incurred, no taxable benefit will be assessed for such reimbursement or allowance. The CRA has indicated, as well, that this administrative concession is extended to situations in which an employer-owned motor vehicle is provided for the commute, provided that this represents a change, in that the employee did not, pre-pandemic, commute to work using an employer-provided vehicle.

Where the workplace is closed and employees work from home but must “visit” the workplace for any purpose that enables them to continue to perform their employment duties from home, a similar policy will apply. Specifically, where the employer pays for, reimburses or provides a reasonable allowance for the commuting costs involved in doing so, there will be no taxable benefit to the employee. Once again, this policy is extended to apply to the use of employer-owned motor vehicles.

Finally, where an individual has an employer-provided parking space at his or her workplace, but that workplace is closed, no taxable benefit will be assessed to the employee.

While there are no dollar limits imposed on the amounts outlined above, there are administrative restrictions and requirements. Most important, the administrative concessions exist to account for costs incurred by an employee only for reasons related to the pandemic and the need to comply with resulting public health measures and restrictions. Second, the overriding requirement of reasonableness will continue to apply and, finally, both employers and employees will be required to maintain records — both to demonstrate the reasonableness of any allowance or reimbursement provided, and to account for the kilometres driven for work-related purposes.

Cell phones and meal allowances

The CRA has existing policies with respect to payment by an employer of costs incurred for employment-related use of an employee’s cell phone, and to the payment of meal allowances, and the CRA has indicated that such policies will continue to apply for 2020.  More information on those policies can be found in CRA Guide T4130, Employers’ Guide — Taxable Benefits and Allowances, which can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4130.html.

The changes to the CRA’s policies with respect to employee taxable benefits are outlined in a Backgrounder which is available on the CRA website at https://www.canada.ca/en/revenue-agency/news/2020/12/employer-provided-benefits-and-allowances-cra-and-covid-19.html.

That Backgrounder indicates that all such administrative policy changes are effective only from March 15, 2020 to December 31, 2020.

For most taxpayers, the first few months of the year are a seemingly unending series of bills and payment deadlines. During January and February, many Canadians are still trying to pay off the bills from holiday spending. The first income tax instalment payment of 2021 is due on March 15 and the need to pay any tax balance for the 2020 tax year comes just 6 weeks after that, on April 30. Added to all of that, the deadline for making an RRSP contribution for 2020 falls on March 1, 2021.

For most taxpayers, the first few months of the year are a seemingly unending series of bills and payment deadlines. During January and February, many Canadians are still trying to pay off the bills from holiday spending. The first income tax instalment payment of 2021 is due on March 15 and the need to pay any tax balance for the 2020 tax year comes just 6 weeks after that, on April 30. Added to all of that, the deadline for making an RRSP contribution for 2020 falls on March 1, 2021.

The best advice on how to avoid a cash flow crunch, at least as it relates to RRSP deadlines, is to make RRSP contributions on a regular basis throughout the year. That is, however, more of a goal than a reality for the majority of Canadians, especially given the job and income losses experienced by so many during 2020 and into 2021.

All that notwithstanding, Canadians who wish to deduct an RRSP contribution on their income tax return for 2020 must make that contribution on or before March 1, 2021.  The maximum allowable current-year contribution which can be made by any individual taxpayer for 2020 is 18% of that taxpayer’s earned income for the 2019 year, to a statutory maximum of $27,230.

Those are the basic rules governing RRSP contributions for the 2020 tax year. For most Canadians, however, those rules are just the starting point of the calculation, as millions of Canadian taxpayers have what is termed “additional contribution room” carried forward from previous taxation years. That additional contribution room arises because the taxpayer either did not make an RRSP contribution in each previous year, or made one which was less than his or her maximum allowable contribution for the year. For many taxpayers that additional contribution room can amount to tens of thousands of dollars, and the taxpayer is entitled to use as much or as little of that additional contribution room as he or she wishes for the current tax year.

It’s apparent from the foregoing that determining one’s maximum allowable contribution for 2020 will take a bit of research. The first step in determining one’s total (current year and carryforward) contribution room for 2020 is to consult the last Notice of Assessment which was received from the Canada Revenue Agency (CRA). Every taxpayer who filed a return for the 2019 taxation year will have received a Notice of Assessment from the CRA, and the amount of that taxpayer’s allowable RRSP contribution room for 2020 will be summarized on page 3 of that notice. Taxpayers who have discarded (or can’t find) their Notice of Assessment can obtain the same information by calling the CRA’s Telephone Information Phone Service (TIPS) line at 1-800-267-6999. An automated service at that line will provide the required information, once the taxpayer has provided his or her social insurance number, month and year of birth, and the amount of income from his or her 2019 tax return. Those who don’t wish to use an automated service can call the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281 and speak to a client services agent, who will also request such identifying information before providing any taxpayer-specific data. Finally, for those who have registered for the CRA’s My Account service, the needed information will be available online.

One question that doesn’t often get asked by taxpayers is whether it actually makes sense to make an RRSP contribution. The wisdom of making annual contributions to one’s RRSP has become an almost unquestioned tenet of tax and retirement planning, but there are situations in which other savings vehicles — particularly the Tax-Free Savings Account (TFSA) — may be the better short-term or long-term option or even, in some cases, the only one available.

When it comes to making a contribution to one’s TFSA, the good news is the timelines and deadlines are much more flexible than those which govern RRSP contributions. A contribution to one’s TFSA can be made at any time of the year, and contributions not made during the current year can be carried forward and made in any subsequent year.

On the other hand, determining one’s total TFSA contribution room is significantly more complex than figuring out one’s allowable RRSP contribution amount, for two reasons. First, the maximum TFSA amount has changed several times (increasing and decreasing) since the program was introduced in 2009. Second, and more important, individuals who withdraw funds from a TFSA can re-contribute those funds, but not until the year following the one in which the withdrawal is made. Especially where a taxpayer has several TFSA accounts, and/or a history of making contributions, withdrawals, and re-contributions, it can be difficult to determine just where that taxpayer stands with respect to his or her current maximum allowable TFSA contribution amount.

In this case, there’s no help to be had from a Notice of Assessment, as the CRA does not provide TFSA contribution information on that form. Information on one’s current year TFSA contribution limit can, however, be obtained from the CRA website, from the TIPS line at 1-800-267-6999 or its Individual Income Tax Enquiries line at 1-800-959-8281, as outlined above. It should be noted, however, that information on one’s current (i.e. 2021) TFSA contribution limit won’t be available through the TIPS line until mid-February 2021.

Determining which savings vehicle is the better option for a particular taxpayer will depend, for the most part, on the taxpayer’s current and future tax situation, the purpose for which the funds are being saved, and the taxpayer’s particular sources of retirement income.

Taxpayers who are saving toward a shorter-term goal, like (hopefully!) next year’s vacation should direct those savings into a TFSA. While choosing to save through an RRSP will provide a tax deduction on that year’s return and, possibly, a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP in a year or two. And, more significantly from a long-term point of view, repeatedly using an RRSP as a short-term savings vehicle will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn cannot be replaced. While the amounts involved may seem small, the loss of contribution room and the compounding of invested amounts over 25 or 30 years or more can make a significant dent in one’s ability to save for retirement.

Taxpayers who are expecting their income to rise significantly within a few years – for example students in post-secondary or professional education or training programs – can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted from income which would be taxed at that higher tax rate. And, in a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Canadians aged 71 and older will find the RRSP vs. TFSA question irrelevant, as the last date on which taxpayers can make RRSP contributions is December 31 of the year in which they turn 71. Many of those taxpayers will, however, have converted their RRSP savings to a registered retirement income fund (RRIF) and anyone who has done so is required to withdraw (and be taxed on) a specified percentage of those RRIF funds every year. Particularly where required RRIF withdrawals exceed the RRIF holder’s current cash flow needs, that “excess” income can be contributed to a TFSA. Although the RRIF withdrawals made must still be included in income for the year and taxed as such, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.

RRSPs and TFSAs are the most significant tax-free or tax-deferred savings vehicles available to Canadian taxpayers, and both have a place in most financial and retirement plans. To help taxpayers make informed choices about their savings options, the CRA provides a number of dedicated webpages about both RRSPs and TFSAs, and those can be found on the CRA website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html and http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

They can be accessed below.

Corporate:

Issue #54 Corporate

Personal:

Issue #54 Personal

The Employment Insurance premium rate for 2021 is unchanged at 1.58%.

The Employment Insurance premium rate for 2021 is unchanged at 1.58%.

Yearly maximum insurable earnings are set at $56,300, making the maximum employee premium $889.54.

As in previous years, employer premiums are 1.4 times the employee premium. The maximum employer premium for 2021 is therefore $1,245.36.

The Quebec Pension Plan contribution rate for 2021 is set at 5.9% of pensionable earnings for the year.

The Quebec Pension Plan contribution rate for 2021 is set at 5.9% of pensionable earnings for the year.

Maximum pensionable earnings for the year will be $61,600, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2021 will be $3,427.90 each.

The Canada Pension Plan contribution rate for 2021 is set at 5.45% of pensionable earnings for the year.

The Canada Pension Plan contribution rate for 2021 is set at 5.45% of pensionable earnings for the year.

Maximum pensionable earnings for the year will be $61,600, and the basic exemption is unchanged at $3,500.

The maximum employer and employee contributions to the plan for 2021 will be $3166.45 each, and the maximum self-employed contribution will be $6,332.90.

Dollar amounts on which individual non-refundable federal tax credits for 2021 are based, and the actual tax credit claimable, will be as follows:

Dollar amounts on which individual non-refundable federal tax credits for 2021 are based, and the actual tax credit claimable, will be as follows:

                                                                 Credit amount                        Tax credit

Basic personal amount*                                   13,808                               2,071.20

Spouse or common law

   partner amount*                                          13,808                               2,071.20

Eligible dependant amount*                             13,808                               2,071.20

Age amount                                                    7,713                                1,156.95

Net income threshold for erosion of 

age credit                                                      38,893

Canada employment amount                           1,257                                  188.55

Disability amount                                           8,662                                 1,299.30

Adoption expenses credit                               16,729                                2,509.35

Medical expense tax credit

Income threshold amount                               2,421

*For taxpayers having net income for the year of more than $151,978, amounts claimable for the basic personal amount, the spousal amount, and the eligible dependant amount for 2021 may differ.

The indexing factor for federal tax credits and brackets for 2021 is 1.0%. The following federal tax rates and brackets will be in effect for individuals for the 2021 tax year.

The indexing factor for federal tax credits and brackets for 2021 is 1%. The following federal tax rates and brackets will be in effect for individuals for the 2021 tax year.

Income level                                          Federal tax rate

$13,808 - $49,020                                        15%

$49,021 - $98,040                                       20.5%

$98,041 - $151,978                                      26%

$151,979 - $216,511                                    29%

Over $216,511                                             33%

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2021 are listed below.

Each new tax year brings with it a listing of tax payment and filing deadlines, as well as some changes with respect to tax planning strategies. Some of the more significant dates and changes for individual taxpayers for 2021 are listed below.

RRSP deduction limit and contribution deadline

The RRSP current year contribution limit for the 2020 tax year is $27,230. In order to make the maximum current year contribution for 2020 (for which the contribution deadline will be Monday March 1, 2021), it will be necessary to have earned income for the 2019 taxation year of $151,278.

Tax-free savings account (TFSA) contribution limit

The TFSA contribution limit for 2021 is unchanged at $6,000. The actual amount which can be contributed by a particular individual includes both the current-year limit and any carryover of uncontributed or re-contribution amounts from previous taxation years.

Taxpayers can find out their personal 2021 contribution limit by calling the Canada Revenue Agency’s (CRA) Individual Income Tax Enquiries line at 1-800-959-8281. Those who have registered for the CRA’s online tax service My Account can obtain that information by logging into that service.

Individual tax instalment deadlines for 2021

Millions of individual taxpayers pay income tax by quarterly instalments, which are due on the 15^th day of March, June, September, and December 2021.

The actual tax instalment due dates for 2021 are as follows:

Monday March 15, 2021

Tuesday June 15, 2021

Wednesday September 15, 2021

Wednesday December 15, 2021

Old Age Security income clawback threshold

For 2021, the income level above which Old Age Security (OAS) benefits are clawed back is $79,845.

Individual tax filing and payment deadlines in 2021

For all individual taxpayers, including those who are self-employed, the deadline for payment of all income tax owed for the 2020 tax year is Friday, April 30, 2021.

Taxpayers (other than the self-employed and their spouses) must file an income tax return for 2020 on or before Friday, April 30, 2021.

Self-employed taxpayers and their spouses must file a 2020 income tax return on or before Tuesday June 15, 2021.

Planning for – or even thinking about – next year’s taxes when it’s not yet even mid-December may seem more than a little premature. However, most Canadians will start paying their taxes for 2021 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.

Planning for – or even thinking about – next year’s taxes when it’s not yet even mid-December may seem more than a little premature. However, most Canadians will start paying their taxes for 2021 with the first paycheque they receive in January, and it’s worth taking a bit of time to make sure that things start off – and stay – on the right foot.

For most Canadians, (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency on the taxpayer’s behalf by his or her employer.

Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2021 (which have not yet been released by the Canada Revenue Agency but, once published, will be available on the Agency’s website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the federal government.

While the TD1 completed by the employee at the time his or her employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, a taxpayer turns 65 years of age, or an elderly parent comes to live with his or her children, the affected taxpayer will be become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

Consequently, it’s a good idea for all employees to review the TD1 form prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to him or her. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

As well, it’s often the case that a taxpayer will have available deductions which cannot be recorded on the TD1, like RRSP contributions, deductible support payments or child care expenses. While such claims make things a little more complicated, it’s still possible to have source deductions adjusted to accurately reflect those claims, and the employee’s resulting reduced tax liability for 2021. The way to do so is to file Form T1213 - Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the Agency. Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing that employer to reduce the amount of tax being withheld from the employee’s paycheque. 

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. While a T1213 can be filed with the CRA at any time of the year, the sooner it’s done, the sooner source deductions can be adjusted, effective for all subsequent paycheques. Providing an employer with an updated TD1 for 2021 as soon as possible, along with filing the T1213 with the CRA, will ensure that source deductions made starting January 1, 2021 will accurately reflect all of the employee’s current circumstances, and consequently his or her actual tax liability for the year.

During the month of December, it’s customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And while the annual office holiday party definitely won’t be happening in 2020, employees may still be able to look forward to something additional in the way of compensation during the last month of the year.

During the month of December, it’s customary for employers to provide something “extra” for their employees, by way of a holiday gift, a year-end bonus or an employer-sponsored social event. And while the annual office holiday party definitely won’t be happening in 2020, employees may still be able to look forward to something additional in the way of compensation during the last month of the year.

It’s certainly the case that employers who provide such extras don’t intend to create a tax liability for their employees. Unfortunately, it’s also the case that a failure to properly structure such gifts or other extras can result in unintended and unwelcome tax consequences to those employees.

Trying to formulate and administer the tax rules around holiday gifts is something of a no-win situation for the Canada Revenue Agency. On an individual or even a company level, the amounts involved are usually small, or even nominal, and the range of situations which must be addressed by the related tax rules are virtually limitless. As a result, the cost of drafting and administering those rules can outweigh the revenue generated by the enforcement of such rules, to say nothing of the potential ill will generated by imposing tax consequences on holiday gifts. Notwithstanding, the potential exists for employers to provide what would otherwise be taxable remuneration in the guise of holiday gifts, and it’s the responsibility of the tax authorities to ensure that such situations don’t slip through the tax net.

There is, as a result, a detailed set of rules which outline the tax consequences of gifts and awards provided by the employer. The starting point for the rules is that any gift (cash or non-cash) received by an employee from his or her employer at any time of the year is considered to constitute a taxable benefit, to be included in the employee’s income for that year. However, the CRA makes an administrative concession in this area, allowing non-cash gifts (within a specified dollar limit) to be received tax-free by employees, as long as such gifts are given on religious holidays such as Christmas or Hanukkah, or on the occasion of a significant life event, like a birthday, a marriage or the birth of a child.

In sum, the CRA’s administrative policy is simply that non-cash gifts to an arm’s length employee, regardless of the number of such gifts, will not be taxable if the total fair market value of all such  gifts (including goods and services tax or harmonized sales tax) to that employee is $500 or less annually. The total value over $500 annually will be a taxable benefit to the employee, and must be included on the employee’s T4 for the year, and on which income tax must be paid.

It’s important to remember the “non-cash” criterion imposed by the CRA, as the $500 per year administrative concession does not apply to what the CRA terms “cash or near-cash” gifts and all such gifts are considered to be a taxable benefit and included in income for tax purposes, regardless of amount. For this purpose, the CRA considers anything which could be easily converted to cash as a “near-cash” gift. Even a gift or award which cannot be converted to cash will be considered to be a near-cash gift if, in the CRA’s words, it “functions in the same way as cash”. So, a gift card or gift certificate which can be used by the employee to purchase his or her choice of merchandise or services would be considered a near-cash gift, and taxable as such. It’s not hard to see that drawing a firm line between cash and non-cash gifts can be difficult. The CRA provides the following information and examples to help clarify that difference.

You give your employee a voucher (which may be a ticket or a certificate) that entitles the employee to receive an item for a set value at a store. For example, you may give your employees a voucher for a turkey valued up to $30 as a Christmas gift, and for convenience, you arrange for your employees to go to a particular grocery store and exchange the voucher for a turkey. The employees can only use the voucher to receive a turkey valued up to $30 (no substitutes). Such vouchers are generally considered non cash gifts.

You give your employee a $100 gift card or gift certificate to a department store. The employee can use this to purchase whatever merchandise or service the store offers. We consider the gift card or gift certificate to be an additional remuneration that is a taxable benefit for the employee because it functions in the same way as cash.

It may seem nearly impossible to plan for employee holiday gifts and other benefits without running afoul of one or more of the detailed rules and administrative policies surrounding the taxation of such gifts and benefits. However, designing a tax-effective plan is possible, if the following rules are kept in mind.

Any cash or near-cash gifts should be avoided, as they will, no matter how large or small the amount, create a taxable benefit to the employee. Although gift certificates or pre-paid credit cards are a popular choice, they aren’t a tax-effective one, as they will invariably be considered by the CRA to create a taxable benefit to the employee.

Where non-cash holiday gifts are provided to employees, gifts with a value of up to $500 can be received free of tax. The employer must be mindful of the fact that the $500 limit is a per-year and not a per-occasion limit. Where the employee receives non-cash gifts with a total value of more than $500 in any one taxation year, the portion over $500 is a taxable benefit to the employee.

While the rules around employer gifts aren’t complex, it is necessary to consider carefully the kinds of gifts which are given and to be mindful of the annual $500 per employee limit on non-cash gifts. At the end of the day, a gift which results in unintended and unwanted tax consequences to the employee will leave the employer looking a lot less like Santa and a lot more like Scrooge!

While Canadians benefit from a publicly funded health care system, there are nonetheless a significant (and increasing) number of medical and para-medical expenses which are not covered by provincial health care plans. As well, an increasing number of Canadians – who may work on contract or who hold several part-time jobs - do not have private insurance coverage for such costs through their employer.

While Canadians benefit from a publicly funded health care system, there are nonetheless a significant (and increasing) number of medical and para-medical expenses which are not covered by provincial health care plans. As well, an increasing number of Canadians – who may work on contract or who hold several part-time jobs - do not have private insurance coverage for such costs through their employer.

In many instances, therefore, Canadians have to pay for such unavoidable expenditures – including dental care, prescription drugs, ambulance trips and many other para-medical services, like physiotherapy, on an out-of-pocket basis. The good news is that where such costs must be paid for partially or entirely by the taxpayer, the tax system provides a medical expense tax credit to help offset those costs. The bad news is that the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. In addition, the determination of what expenses qualify for the credit and which do not isn’t necessarily intuitive, nor is the determination of when it’s necessary to obtain prior authorization from a medical professional in order to ensure that the contemplated expenditure will qualify for the credit.

The basic rule is that qualifying medical expenses (a lengthy list of which can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return.html) over 3% of the taxpayer’s net income, or $2,397, whichever is less, can be claimed for purposes of the medical expense tax credit on the taxpayer’s return for 2020.

Put in more practical terms, the rule for 2020 is that any taxpayer whose net income is less than $79,900 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $79,900 will be limited to claiming qualifying expenses which exceed the $2,397 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2020 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, children who were born in 2003 or later, and certain other dependent relatives - can be added together and claimed by one member of the family. In most cases, it’s best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.

As December 31^st approaches, it’s a good idea to add up the medical expenses which have been incurred during 2020, as well as those paid during 2019 and not claimed on the 2019 return. Once those totals are known, it will be easier to determine whether to make a claim for 2020 or to wait and claim 2020 expenses on the return for 2021. And, if the decision is to make a claim for 2020, knowing what medical expenses were paid, and when, will enable the taxpayer to determine the optimal 12-month period for that claim.

It’s worth noting that, for many Canadians, 2020 has been a year in which income was reduced, owing to temporary layoffs or even permanent job loss. Where income is lower (assuming such income is below the $79,900 threshold), the extent to which qualifying medical expenses incurred during the year will be claimable for purposes of the medical expense tax credit increases. Take, for example, an individual who was laid off for three months during 2020 and who has incurred $2,500 in eligible medical expenses. If that individual’s income for 2020 is $30,000, he or she will be able to claim $1,600 of those expenses for purposes of the medical expense tax credit. If the individual returns to full employment in 2021 and earns $40,000, he or she will be able to claim only $1,300 of those eligible medical expenses on the return for 2021.

Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2021. Where those are significant expenses (for instance, a particularly costly medication which must be taken on an ongoing basis) it may make sense, where possible, to accelerate the payment of those expenses to December 2020, where that means they can be included in 2020 totals and claimed on the 2020 return.

Canadian Emergency Response Benefit

In March of this year, in response to the pandemic, the federal government announced and rolled out a number of benefit programs to assist individuals who had experienced a pandemic-related interruption in earnings.

Canadian Emergency Response Benefit

In March of this year, in response to the pandemic, the federal government announced and rolled out a number of benefit programs to assist individuals who had experienced a pandemic-related interruption in earnings.

The most widely used of those benefits was the Canada Emergency Response Benefit, or CERB, which was received by over 8 million individual Canadians. That CERB benefit, of $500 per week, ran from mid-March until the end of September, meaning that those who were eligible for CERB for that entire period could have received as much as $14,000.

When the CERB program was launched, the priority for the federal government was getting the benefit into the hands of Canadian as quickly as possible. Consequently, although the CERB represented taxable income to those who received it, no tax was deducted from the benefits paid. As a result, anyone who received CERB (and did not repay it) will receive a T4A slip for that income, will need to report it on their income tax return for 2020 and will have to pay tax on that income when the return is filed in the spring of 2021.

While that filing and payment deadline is still months away, it would be prudent for CERB recipients to at least determine how much tax will be payable and to start to make provision for setting that money aside. The amount of tax owed on CERB benefits will depend, of course, on the amount of benefit received, but also on the taxpayer’s total income for 2020 and on the province or territory in which the taxpayer resides.

Taxpayers can arrive at a rough estimate the amount of federal tax payable on their CERB benefits as follows:

• For taxpayers having income for 2020 from all sources of less than $50,000, the percentage of tax payable on CERB received will be 15%.
• For taxpayers having income for 2020 from all sources of between $50,000 and $100,000, the percentage of tax payable on CERB received will be 20.5%.
• For taxpayers having income for 2020 from all sources of between $100,000 and $150,000, the percentage of tax payable on CERB received will be 26%.
• For taxpayers having income for 2020 from all sources of between $150,000 and $214,400, the percentage of tax payable on CERB received will be 29%.
• For taxpayers having income for 2020 from all sources of more than $214,400, the percentage of tax payable on CERB received will be 33%.

Of course, in each case, provincial or territorial tax must be added to arrive at the total tax payable on CERB amounts received. The provincial and territorial tax rates which apply for 2020 at different income levels can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#provincial.

Home office expenses

One of the hallmarks of 2020 has been the number of Canadians working from home. A  work-from-home arrangement has many benefits, and one of the less known of those benefits is the ability to claim a tax deduction on the 2020 tax return for household costs that would have been incurred in any event.

In order to claim a deduction for costs related to a work from home space, employees must meet at least one of the following conditions.

• The home work space is where the individual mainly (more than 50% of the time) does their work; or
• the individual uses the workspace only to earn his or her employment income. He or she must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of his or her employment duties.

To establish that the required circumstances exist, and that the employee is not receiving an allowance or a reimbursement for home office expenses from the employer it’s necessary to have a particular form completed and signed by that employer. That form, the T2200, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2200.html.

Once the requisite criteria are met, and certified by the employer on the T2200, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her work space, such as the cost of electricity, heating and home maintenance.

Where an individual who qualifies under either of the criteria outlined above is a commission employee, an even broader range of costs become deductible. In addition to costs for electricity, heating and home maintenance, a commission employee can also deduct a proportionate share of costs incurred for property taxes and home insurance.

There is no specific formula provided for determining the proportion of eligible costs which can be deducted for qualifying home office expenses. The employee can determine that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home, or he or she can make that calculation based on the number of rooms in the house or apartment relative to the number of rooms used for work-related purposes. Whichever method is chosen, the most important consideration is that the approach taken (and the expenses claimed) be reasonable. In all cases, the Canada Revenue Agency can ask the taxpayer to provide documentation and support for claims made.

In order to determine the amount of any deduction for eligible home office expenses which can be claimed on the return for 2020, it’s necessary to gather together bills and receipts for the various expense categories (utilities bills, property tax notices etc.). It’s a tedious and sometimes time-consuming task, but necessary both in order to determine the amount of any available deduction and to have the required documentation for that deduction available should the CRA ask to see it. The T2200 signed by the employer does not have to be filed with the return, but should also be kept as part of that documentation.

RRSP contributions to be made by the calendar year-end

Most Canadians, even those who aren’t particularly familiar with our tax system, know that contributions to one’s registered retirement savings plan (RRSP) must be made by the end of February to be claimed as a deduction on the return for the previous calendar year.

There are, however, two instances in which making an RRSP contribution before the end of the calendar year is either necessary or advisable.

The first such instance affects Canadians who turn 71 years of age during 2020. Each of those individuals must collapse their RRSP by the end of 2020 – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31^st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31^st of that year.

The other instance in which it is advisable to make the contribution before December 31 relates to spousal RRSP contributions. Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plans (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2020, the contributor can claim a deduction for that contribution on his or her return for 2020. The spouse can then withdraw that amount as early as January 1, 2023 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2021, the contributor can still claim a deduction for it on the 2020 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2024. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively new future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should the need for an unplanned withdrawal arise.

Adjusting the final individual income tax instalment

It’s also possible for some taxpayers to adjust the amount of remaining tax they will pay for 2020. The majority of Canadians pay their taxes by having those taxes deducted by their employer from their regular paycheque and submitted to the Canada Revenue Agency on their behalf. However, there are millions of taxpayers who pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.

The final quarterly instalment for this year will be due on Tuesday December 15, 2020. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2020 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made on or before March 1, 2021. While the tax return forms to be used for the 2020 year haven’t yet been released by the Canada Revenue Agency, it’s possible to arrive at an estimate by using the 2019 form. Increases in tax credit amounts and tax brackets from 2019 to 2020 will mean that using the 2019 form will likely result in a slight over-estimate of tax liability for 2020.

Once an estimate of one’s tax bill for 2020 has been calculated, that figure should be compared to the total of tax instalments already made during this calendar year (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!