Preparing to file taxes in 2021 is a reminder that we’re not done with 2020 yet.
The COVID-19 pandemic will be with us for some time. Canada’s economy isn’t expected to really recover until 2022, vaccination rollout permitting. So 2021 is going to be as much, if not more, of a challenge.
According to a recent Ipsos study, four in 10 Canadians are “struggling” at best when it comes to their financial health. Among those people, almost one in five feel they are “sinking” financially. Meanwhile, only one-third of Canadians say they are “thriving.”
To brace for the financial challenges ahead, we asked money gurus Janine Rogan and Heidi Rumohr for advice. Rogan is the chartered professional accountant behind the Wealth Building Academy, a financial literacy program educating Canadians on how to manage and invest their money. Rumohr is a financial services veteran who coaches her clients to crush their debts through her company, Rumohr Financial Services.
As part of our NOW Money series, Rogan and Rumohr will hold our hands through financial decisions like choosing the right mortgage, adapting our debt payments for a new economic reality and adjusting our lifestyles to save money and feel safe during COVID-19.
But first, we need tips on how to file our taxes for last year. After all, our upcoming income tax return is essentially asking us to quantify the unprecedented and godforsaken year that was 2020
Radheyan Simonpillai: One of the earliest financial challenges we’re going to have to tackle in 2021 is filing our taxes for 2020. Recently, the Canadian government introduced a new option to claim $400 in expenses for people who have been working from home during the pandemic. Tell us about our options, Janine.
Janine Rogan: You could actually claim more than $400 if you fill out the T2200 and get your employer to sign that. But if you can’t get your employer to sign that or you don’t want to go through the hassle of filling that out, there is this simplified version that allows you to claim two dollars a day up to a maximum of $400 on your return.
As someone who has been working from home for ages, I always claim my phone, internet and other household expenses on my income taxes.
JR: You want to be careful with those expenses so that you’re only claiming the portion that you actually use for work. I try to tell people, you’re probably not using your cellphone 100 per cent of the time for work. If your cellphone bill is $100 per month, and you’re using it a third or half of the time for work, you’re going to want to prorate that for the amount that you’re actually going to be able to claim. And I would say the same is true for internet.
Just make sure that you are getting on top of that and starting to collect all of those utility or internet bills so that you have them available when you are filing your taxes.
What if you also purchased a home computer for work. Can you expense the depreciation on that?
JR: That would definitely come into play on that long form T2200. That would definitely be a case where you want to not do the short form $400 easy claimable expense.
There are also other new tax benefits people want to keep in mind in their 2020 filing.
This is the first year people are going to be able to claim the Canada Training Benefit and the digital news subscription tax credit. The Canada training benefit helps individuals going back to school to get training. They can submit their expenses and get $250 per year to offset some of those costs. The digital news subscription tax credit is a benefit for specific news publications with an online presence. If you have a subscription to one of those, you’ll want to include those on your tax return as well.
What should people who received CERB or Canada Recovery Benefit support expect when filing their taxes in 2021?
JR: None of the CERB payments were taxed when they were deposited into your bank account. An important thing to do now is to find an online calculator and figure out at a high level how much tax you’re going to owe. You’ll want to figure out how much you actually earned and received in all of 2020. If you were employed for a certain part of 2020, grab your last pay stub, find the box that says total employment income and find the box that says total income tax paid. Put those into an online calculator and add in your CERB payments. Figure out if it shows that you’re owing anything. You have until April.
Maybe the government will extend the filing deadline this year as well. But right now, we have until April 30 to make those payments. Getting ahead of that and making sure that you have four months to save for any unexpected tax bill is something that’s going to be really important for Canadians.
Heidi, what do you want people to keep in mind when filing their taxes?
Heidi Rumohr: If you’re in a refund situation, what’s your plan for the refund? Where’s that money going to best serve you to reach your financial goals? A lot of people either treat it as bonus money and spend it, or they count on it. They know what it is and that actually is part of their cash flow. I definitely think that a lot of us have an opportunity to give that refund more intention around how you’re going to spend that money to reach your financial goals. I know a lot of my clients are going to put that refund into their emergency fund savings.
How can we ensure a refund helps us achieve our financial goals?
HR: Let’s say you invest in your RRSPs and you find out you’re going to get a $1,000 tax refund. One strategy you could use is to actually put an extra $1,000 in your RRSP, maybe by using money from your savings. Put an extra $1,000 that you weren’t planning on contributing because you know that you’re going to get a $1,000 tax refund to replenish that. You have to do it before you receive the refund. If you wait to receive the refund it will be too late to reinvest for that tax year.
So if I’m putting $2,000 a year in my RRSP and I know I’m going to get a $1,000 tax refund, I’m going to use money from my savings to contribute $3,000 instead. And afterwards, I’m going to take that $1,000 refund and replenish my savings. I’m not out any extra money and now I have an extra $1,000 in my investment.