Whether you like it or not, tax season is here! As we are all woefully aware, the year 2020 was a bizarre one. The international pandemic had a lasting effect on our lives, including income taxes. In fact, the year brought about several unique taxation issues, including how COVID-19 benefits will be taxed and changes to the home office deduction.
At RATESDOTCA, we understand that tax season can be a stressful time. By the end of this guide, you will understand what documentation you must collect to complete your 2020 tax return successfully. You will also learn the answers to your pressing questions about COVID-19 government benefits and taxation.
Gathering income documentation
CERB and CESB
The Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB) did not have tax withheld at the source. Taxpayers who received either of these benefits are required to include 100% of the amount received on their tax return. The Canadian government will issue a T4A tax reporting slip for the 2020 year. This slip will tell you how much income to include on your tax return.
CRB, CRSB and CRCB
In the latter half of 2020, the Canadian government introduced the Canada Recovery Benefit (CRB), the Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB). The government withheld 10% tax for these benefits at the source. This may not cover your entire tax liability on the funds received, but it does cover a portion. Your final tax liability depends on how much other income you earned over the calendar year.
For CRB, if your income for 2020 was greater than $38,000, you are required to pay the benefit back. If you’re unsure whether this applies to you, it’s wise to set some money aside in the event that you are required to pay back the funds in April.
If you were laid off or otherwise eligible for Employment Insurance (EI), you will need to collect a T4E from the government as well. You should have received correspondence from the CRA on how you can collect your T4E, either by mail or email.
If you received employment income in 2020, you should expect a T4 slip from every employer you worked for over the past year. A T4 slip will tell you how much employment income to report on your tax return.
If you earned self-employment income during the year, you will need to report that income on your tax return. Since you’re self-employed, it’s on you to calculate how much money you earned in 2020 from self-employment activities.
Repaying COVID-19 benefits
If you received a COVID-19 emergency benefit from the Canadian government that you weren’t eligible for, you might be required to pay it back. Some people received payments by mistake, whereas others were unclear on the eligibility requirements. In some cases of fraud, people abused the system.
The government will allow those who accessed CERB based on their gross income instead of net income to keep the emergency benefits, a reversal of its previous stance. As long as the applicant met the other criteria, they can keep the funds. Additionally, those who repaid the funds already would have the money returned.
The CRA began to collect COVID-19 benefits toward the end of 2020 from individuals who shouldn’t have received them. Currently, the CRA is not charging these individuals penalties and provides convenient ways to return the funds. However, the CRA has strong collection authority and could take more drastic action in the future.
The CRA encouraged individuals to repay the amounts voluntarily to avoid tax consequences, but the deadline passed on December 31, 2020. If you repaid the funds, you don’t need to worry about further tax consequences. Otherwise, the CRA will issue a T4A slip, including the amount of the benefits you owe. That amount could be several thousand dollars, so it’s best to prepare for this. Keep in mind that the CRA can keep future tax refunds, benefits or credits and put them toward what you owe if you fail to repay your tax debt.
If you cannot repay the benefits, be sure to call the CRA. They appreciate taxpayers who keep open lines of communication and are more likely to establish a repayment plan with you. If you don’t contact the CRA, the agency might escalate collection actions, which could have adverse effects on your finances.
Gathering expense documentation
Home office deduction
From March 2020 onwards, many Canadians found themselves working from home due to the pandemic. Those who worked from home more than 50% of the time for at least four consecutive weeks in 2020 are allowed to claim a deduction of $2 for every day they were working from home, up to a maximum of $400. This deduction is the simplified home office deduction.
Usually, the home office deduction requires a lot more work to make a claim. You would be required to keep receipts and ask your employer to complete a form. If you have extensive home office expenses, the detailed home office deduction is still available to you and may offer better reimbursement for out-of-pocket home office expenses. Nevertheless, employees have to follow the more extensive process to make this deduction.
Other employment expenses
As an employee, some expenses related to your employment are deductible in addition to home office expenses. Some ordinary deductible employment expenses include:
- Accounting fees
- Legal fees
- Motor vehicle expenses
- Parking expenses
Take a moment to reflect on any expenses related to employment that your employer did not cover. Collect the receipts in preparation for your 2020 tax return filing.
If you’re self-employed, you have a lot more leniency on deductible expenses. Virtually any cost you incurred to earn an income is deductible. Some self-employed deductible expenditures include:
- Capital cost allowance (a percentage of the value of depreciable property like a work computer)
- Advertising costs
- Delivery and shipping fees
- Interest and bank charges
- Property taxes
- Professional fees
Since there are so many deductible expenses for self-employed individuals, give yourself lots of time to collect the documentation.
The federal and provincial governments offer tax credits for charitable donations. Gifting this year was especially important with massive job losses, domestic violence spikes, and marginalized communities’ struggles. Be sure to get a formal tax receipt from any charities you donated to in 2020.
From the federal government alone, individuals can receive a tax credit of 15% on the first $200 of charitable donations and 19% on anything beyond that amount.
Capital gains and losses
Investments, particularly stocks, were extremely volatile in 2020 due to COVID-19. If you bought or sold products in your investment portfolios, you will need to report any capital gains or losses on your tax return.
Most banks and financial service companies will issue a statement showing your realized capital gains and losses. If not, you will need to calculate the amounts on your own. The calculation is quite simple: it’s the sale price less the original purchase price. If the amount is positive, you have a gain. If the amount is negative, you have a loss.
Planning for taxes is essential, especially this year. Below are the deadlines to file your personal taxes. If you fail to meet these deadlines, you might face penalties. Keep these dates in mind when tax planning.
- The filing deadline for employed individuals is April 30, 2021
- The filing deadline for self-employed individuals is June 15, 2021
It is best to prepare all your documentation and get your taxes in early.