2021 tax season primer: Our roundup of the best tax tips for Canadians

by Ann deBruyn

hand on a folder that reads empower, as in these tips will empower you when doing your taxes!

Photo by Kelly Sikkema on Unsplash

Doing your taxes can be a bit like building IKEA furniture. There are lots of different pieces, the instructions aren’t always clear, and it’s often feels like it could be easier just to call in the hired pros. That’s why we rounded up our favourite expert tax advice. Whether you’re going full DIY on your income tax return or engaging a professional, these tips should help you make sense of the rules so you can keep your tax bill (and frustration) to a minimum. Here are 15 of our best tax tips for Canadians (in no particular order). 

Claims for COVID-related work expenses 

Did you work from home because of COVID-19? If so, there’s now a no-fuss way to claim a deduction for home office expenses.

“In 2020, eligible employees who worked remotely could deduct up to $400 in home expenses from their taxable income, without the need to keep receipts or get a signed T2200 form from their employer. The government has promised to extend the simplified deduction through the 2022 tax year, and to increase the allowable amount to $500.”

Find out more about this deduction and other recent tax proposals: What you need to know about your 2021 income taxes  

Compare the Best TFSA Rates in Canada*

When to claim a tax deduction on interest payments

You may be able to claim a deduction for the interest paid on money you’ve borrowed for investment purposes, such as a mortgage on a rental property or a loan to purchase investments in non-registered accounts. Even then, however, there are restrictions:

“According to Canada Revenue Agency (CRA), ‘most interest you pay on money you borrow for investment purposes [can be deducted] but generally only if you use it to try to earn investment income. … If the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.’ … An example of when interest may not be tax deductible is when you buy land that does not produce rental income and can only produce capital gains. Buying a stock that has no history of paying dividends (or the class of shares does not allow dividends) is another potential example.

More on claiming a deduction on interest payments: Are interest payments tax deductible?

Self-employed: How much to set aside for personal income tax

It’s normal for an employer to remove income tax from your paycheque. If you’re self-employed however, that responsibility is yours. 

“As a general rule, you should always set aside 25% of your income for taxes. You’re taxed only on your net income which is your total income minus all your expenses. Look for line 104 on your tax return where it says  employment income not on a T4 slip.’ This is where you report your business income.”

Learn all about filing taxes when you work for yourself:  How to file taxes when you’re self-employed

Incorporated business owners: How should you pay yourself?

A salary may be better than dividend income when it comes to tax deductions for child care expenses and RRSP contributions. But as a business owner, you’ll also have to pay CPP contributions on that salary as both the employer and employee.

“Generally speaking, paying a salary is preferable to dividends in most provinces. Paying salary may, for example, allow a business owner to deduct child care expenses. Dividend income is not considered earned income when it comes to child care expense deductibility. Salary is considered earned income for Registered Retirement Savings Plan purposes and generates RRSP room. Dividend income is not. Paying a salary allows a business owner to contribute to Canada Pension Plan (CPP). However, they must contribute both the employee and employer portion. This reduces the “return” on paying into CPP to earn a future retirement pension.”

Learn more about the pros and cons of salary compensation for owners of a corporation: Incorporated business owners: Should you pay yourself a salary?

The best investment for your taxes

Should you put your money in a tax-free savings account (TFSA) or registered retirement savings plan (RRSP)? The question may be simple, but the answer is not—and can vary greatly depending on your financial situation and goals. 

“With a TFSA, you pay tax on money you’ve earned before you make a contribution; and with an RRSP you get a tax refund now on money you contribute, but will have to pay tax later, on money you withdraw from the plan. This difference, along with your income, your investment timeline, and other factors will all contribute to making the right decision for your investment dollars. You may find that you can use both vehicles simultaneously.”

More on the differences between these investments here:  TFSA vs RRSP: How to decide between the two

Dividing investment assets because of a divorce

Ending a marriage can be a costly endeavour for both parties involved. But at least they can avoid paying extra taxes when they divide their investments.

“Normally, when assets are transferred between spouses, a capital gain resulting from a subsequent sale would be attributed back to the original spouse on sale. This is called spousal attribution. Attribution does not apply if the asset was transferred as a result of a separation or divorce, whether you are common-law or legally married.”

More on breaking up and breaking up investments:  Separation and divorce: How do we split up our investments?

Plan ahead for tax changes if you expect to retire abroad 

If you’re going to spend your post-work years outside of Canada, be aware that you may face some tax implications. 

“If you sell or rent out your home in Canada … you will likely become a non-resident of Canada. There may be tax implications for assets you own when you leave. Assets like non-registered investments will be subject to a deemed disposition (sale) and this may trigger capital gains tax. Other assets, like pensions and investments, will be subject to withholding tax after you leave. “

Learn more about paying tax abroad: Where do we pay income tax if we retire abroad?

Stop paying for CPP if you’re retired and still working

If you’re collecting Canada Pension Plan (CPP) benefits and continue to work because you want the income or simply enjoy it, you may be able to opt out of paying CPP contributions.

“You can start CPP as early as age 60; if you’re still working at that point, you need to keep contributing to CPP. If you’re 65 or older, and plan to continue working, you can choose not to contribute to CPP by completing  Form CPT30 Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election .” 

For more on collecting CPP while working:  Can Canadian seniors collect government benefits while still working?

Don’t claim child support payments

Parents who pay child support can’t claim a tax deduction for those payments. However, the person receiving support gets that money tax free. 

“Child support payments cannot be deducted on the tax return of the person paying them. This is the case for all agreements or court orders negotiated after May 1997. The good news for the recipient, however, is that child support is not taxable (in other words, the parent who receives child support does not have to pay tax on that money). Further, any support payments stipulated in an agreement or court order are deemed to be child support if they are not specifically identified as spousal support.”  

More tips for those newly divorced or separated with kids:  Tax basics for newly separated parents

Set a game plan for your U.S. investments 

Whether it’s stocks, real estate or other assets, markets south of the border have always been a draw for Canadian investors. But you need to be aware of the tax implications when investing in the U.S. 

“A Canadian is generally subject to 15% withholding tax on the gross proceeds of U.S. real estate, unless they file for a withholding certificate prior to closing to reduce the tax based on the estimated capital gain. U.S. capital gains tax paid is eligible to claim in Canada as a foreign tax credit. If a Canadian taxpayer has more than $100,000 in foreign assets, including U.S. stocks, ETFs, rental real estate, or other investments, they need to file the T1135 Foreign Income Verification Statement form with their Canadian tax return. The $100,000 limit relates to the cost, in Canadian dollars, for the investments.”

Learn more about investing in the U.S. as a Canadian citizen: Tax planning for Canadians who invest in the U.S.

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A refund feels good, but this is better

Getting money back after filing your income tax return is certainly enjoyable. But wouldn’t you rather hold on to that cash from the start, instead of giving an interest-free loan to the taxman? 

“Look at how much income tax is being withheld from your paycheques. If it’s more than necessary, you can arrange for your employer to deduct less.”

Find out other ways to keep more money in your pocket:  8 year-long tax strategies to build wealth faster

Don’t lie on your taxes

This should go without saying. It’s particularly unwise, however, to lie about your earnings and then post about lavish purchases online, since the CRA may check your social media accounts.

“From the CRA’s point of view this is a legitimate practice on their part because posts on social media really aren’t private. How does this work? Say you just bought a new $85,000 sail boat and are boasting about it by posting a photo of it on Facebook. The CRA could see this and then check it against what you declared as income last year.”

Other ways the CRA can catch tax lies:  7 ways the tax man is watching you

Your time as a landlord is not deductible

If you’re a landlord who’s handy with repairs and maintenance, you may think there’s a chance you can claim any repair or maintenance services you performed. Unfortunately, that’s not allowed. 

“CRA views this as a personal contribution to the overall value of the building, which you, as the owner, will ultimately reap when you sell the property, and therefore it is not deductible.”

Other things to know about landlord deductions:  Little-known tax deductions landlords should consider

Timing is key for making any cottage expense claims

If you’re a cottage owner and rent out the property, keep all your receipts. Just make sure to claim them at the right time.

“Allowable expenses are usually deducted on a cash basis—that is, in the calendar year in which you incur them—as long as you match them to the revenue earned in the same period. These can range from the advertising to landscaping costs and common things such as maintenance and repairs.”

Here are some other things to claim:  Renting out the cottage? Don’t miss out on these 11 tax-deductible expenses

Keep your tax return documents, even after you file

An audit can happen at any time: Tax files are often chosen at random, and you could be the unlucky winner. So, you’ll want to have your papers ready if the CRA comes calling. That means holding on to six years of tax return documents (or longer if you own business property).

“The more organized you can be with receipts and other documentation relating to your return, the better off you’ll be if you are selected for an audit. Be prepared to produce them quickly when CRA asks to see them, and keep in mind that members of your family may be asked to offer up their own documentation as well.”

More tax tips for being ready for an audit:  6 ways to make your tax return audit-proof

More on income taxes:

  • We break down the tax brackets in Canada for 2021 (and provinces, too) based on annual income
  • How to do your taxes and beat procrastination
  • When taxes are due—and other things to know about your 2021 income taxes

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