Tax tips every Canadian should know

Tax tips every Canadian should know

This is an updated post with tons of great, new content – enjoy these tax tips every Canadian should know about!

Welcome to tax season folks! This season is not nearly as exciting as any normal NHL playoff season but it’s a season nonetheless!

Submitting your tax return is one thing. Making sure you include all the important deductions to avoid leaving money on the table is quite another. 

Today’s post will list a few tax tips I think every Canadian should know about.

Thankfully, I have some help for that. 

Welcome back Grumpy Accountant Neal Winokur!

The Grumpy Accountant – Book Review and Giveaway

Although…after chatting with Neal quite a bit over the last few months, he’s really not that grumpy. He just strongly believes, not unlike many Canadians mind you, there are significant flaws and massive, unnecessary complexities when it comes to our Canadian tax system.

He wrote his book to drive some of that change, and vent about it, and better still you can sign a worthy petition about that tax system reform below – at no cost to you and everything to gain!

(I signed.)

Welcome back to the site Neal!

Thanks Mark, very happy to be back! Although, I must say, in your intro, you write “Welcome to tax season”. The very fact that we have a “tax season” is ridiculous and makes me very grumpy!

Ha. I figured that might trigger you. OK, Neal, I really enjoyed your book and I encourage all Canadians to pick it up and have a read. That said, unfortunately our tax system is a mess including how Canadians understand tax refunds. They seem to view them as a financial windfall and in some cases “found money”.

In your book, you warned people to be wary of thinking “our government is benevolent and generous”.

Can you explain why a large tax refund is really not desirable?

Well, what people have to remember is that big juicy tax refunds means that too much tax was deducted from each of your paycheques throughout the year. Now the government is giving you what you are rightfully owed. But it was yours to begin with and never should have been taken in the first place!

Effectively, one who receives a large tax refund has loaned the government money throughout the year without charging any interest. I hope this person never starts a bank, because if you loan money and don’t charge any interest, the bank would fail in no time.

The tax refund is probably the greatest evil genius that the government came up with. It makes people look forward to filing their tax returns! The majority of Canadians receive tax refunds. The federal government refunded approximately $32 billion of income tax in the 2018 tax year! 

Sadly, it’s the minority of tax filers – those who are self-employed and owners of businesses that are responsible for physically paying all the tax to the government. They feel the pain of actually physically paying tax whereas employees, who have tax deducted from their cheque don’t really see it or realize it. In fact, it’s the opposite, because they receive nice juicy tax refunds.

So we have a two-tiered tax system. Tier number one are those who are physically responsible for making tax payments and tier number two are those who get nice juicy refunds. The second tier, the juicy refund tier are much larger, and the majority of tax filers, which is why the system remains in the status quo.

If you are receiving a small refund each year, then I wouldn’t worry too much about it. But if you are receiving a very large refund each year, then I would consider doing the following:

1. At the start of the year or when you start a new job, you can actually request less tax be deducted from your pay. When you fill out the TD1 form and the provincial equivalent depending on your province, you can indicate if you are eligible to claim certain deductions or credits. This would allow the employer to deduct less tax from each of your pay cheques.
2. You should know you are entitled to claim other deductions or credits not listed on the TD1 form, then you can file the T1213 form which is a request you make to the CRA to allow less tax to be deducted at source.

The increased cash flow throughout the year might help you pay down debt and/or save more money faster as opposed to waiting until the end of the year for your tax refund.

Another reason why this is important is because sometimes there may be delays in processing your tax refunds due to technological problems at CRA, CRA “pre-assessment” reviews of your tax return, and any other potential errors with the processing of your tax return.

Great information. So, 2020 was a year to forget for many but there is a silver lining if you worked from home – including more than 50% of the time. Can you explain for folks what they should be claiming instead of any former T2200 re: “Declaration of Conditions of Employment”. T2200 has been simplified right?

Yes, it has! I was actually in the process of writing an op-ed to be published on the Financial Post Comment page calling for simplification of the home office deduction for 2020 in light of the fact that five million Canadians worked from home in 2020 that do not usually work from home!

Lo and behold, right when I submitted the op-ed, the CRA announced the news that there would be a simplified deduction and we did not need to go through with the publication of that article, which was entitled wryly “All We Are Saying is Give Simplicity a Chance”.

People working from home during 2020 have a choice. They can claim the very simple home office deduction which is $2 per day that one worked from home, up to a maximum of $400. If they use this simplified method, then they do not need to keep any receipts, do not need to provide any further backup documentation to the CRA, and do not need to do any complex calculations.

However, many people will feel that the $400 deduction is not nearly enough and they know they might benefit from using the normal more complicated detailed method.

For employers, the T2200 from has been greatly simplified if they employees working from home during COVID, so that is a huge help to employers. It would have been a complete nightmare for employers to have to fill out the normal 2-3 page T2200 form for an additional five million employees!

In my humble opinion, it seems ridiculous that the true heroes of the pandemic that keep our society going (health care workers, sanitation workers, restaurant workers, grocery store workers, Amazon warehouse workers, etc.) who are not able to work from home do not receive this deduction. It’s completely backwards. (Mark: I agree, insane and backwards.) Therefore, I would call on the government to simply abolish the home office deduction for employees and instead, lower the tax rate for ALL Canadians.

Lowering the tax rate accomplishes the same objective as the deduction – namely, giving people a tax break. But lowering the tax rate for everyone that is much simpler – nobody needs to do anything to qualify for it, no one needs to keep receipts, no one needs to worry about a CRA audit, no one needs additional tax advice which can be costly, and best of all, it would apply to everyone, including all the heroes of the pandemic who are not able to work from home.

Amen. I often feel our tax system is set-up for government self-preservation. Alas, back to you.

As a tax accountant, you help hundreds of people each year. I have my list of top deductions (or credits to apply for every year). My key tax deductions include charitable donations and contributions to my/our Registered Retirement Savings Plans (RRSPs).

What other tax deductions should Canadians consider?

Can you speak to a home-based business and those tax advantages per se in having one?

For employees who work from home, the home office deduction is actually a bit more complicated than it appears. For example:

• Property taxes – only deductible if you are an employee that earns commission income.
• Insurance – only deductible if you are an employee that earns commission income.
• The following are deductible for all:
  • Electricity
  • Heat
  • Water
  • Utilities
  • Utilities portion of condo fees
  • Repairs and maintenance
  • Rent

Keep in mind Mark you must actually calculate the square footage of your house and then calculate the square footage of the office space you use, and that percentage (sq. ft. of office space / total sq. ft. of house) will be used to calculate the amount you are entitled to claim based on the above deductions.

Also, you cannot claim the following:

• Mortgage interest and principal payments
• Furniture
• Home internet connection fees
• Capital expenses (windows, flooring, furnace)
• Wall decorations.

All this information is available here on the CRA website.

All of the above relates to employees. However, if you are self-employed operating your own business, then the deduction works differently. You can deduct any reasonable current expense you incur to earn business income.

You’re self-employed Mark with your blog, but I remind other self-employed individuals they must fill out the T2125 Statement of Business Activities to report one’s income and expenses.  Page 3 of this statement shows all the expenses you are entitled to claim, page 4 shows the home office deduction and page 6 shows the vehicle expenses deduction. Self-employed individuals can claim mortgage interest as part of their home office deduction, unlike employees. I suggest self-employed people look at page 3 in detail to see the list of expenses they are entitled to claim.

Other common deductions and credits are the child care deduction, moving expenses (if you move more than 40 km to start a new job or post-secondary education program), medical expenses, and more. There’s actually over 120 tax credits and deductions now in our system.

ne tax credit that is often overlooked is the “disability tax credit”. I think they should have picked a different name for this credit because many people might be eligible even though they don’t think of themselves as having a disability. For example, people with diabetes, Crohn’s and Colitis, ADD or ADHD, and many other conditions might be eligible for this credit. This credit can be quite lucrative so it’s worth it to look into it:

Tax credits and deductions – persons with disabilities.

If you do not have income, then the disability tax credit can be transferred to a spouse, parent or other relative who does have income and one can go back in time for 10 years to adjust their prior 10 year tax returns to claim the credit. Furthermore, once one qualifies for this credit, they can open a Registered Disability Savings Plan (RDSP) account which functions similarly (but a bit different) to an RRSP and TFSA.

My dream would be for ALL of these to eliminated and abolished – for the simple reason that the tax rates would be lowered to make up the difference, and I would have to find a new job.

Here’s a quick question – should everyone get a CRA “My Account” and why? You cited the benefits of this account many times in your book. What are the advantages again for folks?

Yes, I would recommend it. Even though, the CRA systems are sometimes subject to hacks, and even though their system are sometimes down and even though their systems can be somewhat finicky, in my opinion, I recommend everyone set up their CRA My Account. Likewise, if you have a GST/HST account or payroll account or corporate tax account, set up your CRA My Business Account.

The online system allows you to see your past 10 years of tax returns and notice of assessments and re-assessments, your tax slips for the past 10 years, and your RRSP contribution room and TFSA contribution room other carry-forward history. It allows you to access your “online mail”, see what GST credits, other provincial credits, Canada Child Benefits and other benefits you might be entitled to.

Given how wild 2020 was, you can apply for the COVID-benefits, adjust the past 10 years of tax returns, file notice of objections, change your address, authorize or cancel a representative and more. I absolutely recommend it because it will save you the time and hassle of having to call in CRA to do much of the above.

Let’s face it, sometimes you owe taxes.

Do you absolutely have to pay CRA in instalments and what does that mean anyhow?

If you’re an employee, taxes are deducted at source and the CRA receives their money throughout the year. Therefore, most employees have no obligation to pay the CRA in instalments since the taxes are remitted by the employer directly during the year.

Those who are not employees, such as self-employed people and some others, do in fact have to pay their income tax in instalments throughout the year.

The rule is that in the past tax year, if you owed $3,000 or more of income tax on your tax return, then in the following year, you have to pay your income tax in instalments.

If you fail to pay in instalments, you will be charged penalties and interest. These can certainly add up over time if the instalment payments were large.

You can choose to estimate the amounts of instalment payments you have to pay based on your prior year tax bill or on your estimate of income for the current year. For example, if in the current year, you have zero income or very low income, even though you might have had more than $3,000 of taxes payable in the prior year, then in the current year, there would be no obligation to make instalments.

These, along with other tax payments, can be paid online from your bank account by finding the CRA under the payee list in bill payments. Your social insurance number (SIN#) would be the account number.

Back to small business owners, any tax tips for them this year and every year Neal?

My most important piece of advice to small business owners, whether self-employed individuals, partners in a partnership or incorporated business owners is to set aside a portion of one’s revenue as well as a portion or all of the GST/HST they collect. Set up a savings account to go along with your chequing account.

(Mark: Neal, smart, I will do that for my corporation very soon.)

Every time you receive a deposit of revenue into your chequing account, transfer 10-20% (or speak to a tax advisor to calculate the exact amount you need to set aside) into a savings account, along with the GST/HST you collect. Failure to do this will leave you in a tough position at the end of the year when it comes time to file your tax returns and pay your tax bills. This piece of advice is probably the most important thing self-employed and small business owners can do to ensure they don’t fall behind on their tax payments.

I would also advise self-employed people and small business owners to utilize new apps to make their bookkeeping easier. Business owners must become expert record-keepers. You have to keep your receipts for six tax years, add up all your expenses by category, keep track of your GST/HST collected and GST/HST paid, and more. Incorporated business owners have even more extensive bookkeeping requirements. QuickBooks Online, (no affiliation), Receipt Bank, and other apps can be very helpful in making this task easier and more efficient, saving you a lot of time in the long run.

The other main tip I would advise incorporated business owners is to plan, in advance, at the start of every year, what salary or dividend or combination thereof they want to pay themselves for the year. Don’t wait until the end of the year to plan this because then you could fall behind on potential required payroll tax payments and T4 or T5 filings. It’s better to plan this in advance, early on, and of course, the plan can be modified throughout the year as required.

Mark, we wrote a detailed post here for folks to consider salary or dividends or both from their corporation.

In my opinion, this entire regime needs to be massively simplified as soon as humanly possible! One option would be abolishing income tax altogether and moving exclusively to a sales tax. A less radical plan would be allow self-employed individuals and business owners to be taxed on their gross revenue at a lower rate. This would eliminate the need for receipt keeping for expenses and eliminate the need for such extensive bookkeeping requirements.

Neal, what about tax tips for retirees? In your book, I think you mentioned some estate planning tips? Those seems to be VERY important!

There’s so much to say here. The best advice is to simply become a non-resident of Canada and once that’s accomplished, pay a flat 25% tax rate on one’s RRSP withdrawals.

But for the majority of retirees who will stay in Canada, remember one can choose to start receiving Canada Pension Plan (CPP) early at 60, or wait until 65 or delay until 70.

You can also choose to receive Old Age Security (OAS) at 65 or delay until 70. There seems to be a benefit to delay CPP until 70 but less benefit by delaying OAS.

You’ve written a few articles on that, so I won’t repeat!

When to take your CPP.

How your survivorship benefits are managed with CPP and OAS.

RRSPs collapse in the year after one turns 71 so one has to plan for that as forced RRSP withdrawals will begin at that time at fixed rates potentially pushing one into higher than planned tax brackets. It’s worth it to sit down with a fee-only certified financial advisor to create a real retirement plan.

In terms of estate planning, one should ensure one’s assets are held jointly with one’s spouse so that when the first spouse dies, the asset passes directly to the other spouse without a deemed disposition of the asset and resulting capital gain upon death.

Some provinces also have “probate fees” which is essentially an asset tax on one’s value of one’s assets at the date of death. By holding assets jointly, one could avoid probate fees when the first spouse dies.

One should list their spouse as “successor holder” on their TFSA so that when one dies, the TFSA can be contributed directly into the other spouse’s TFSA.

(Mark – great point Neal. We’ve done that and it was part of the fine print I read after I opened up my TFSA years ago.)

Readers – check out this post for any help on key accounts how you can consider managing your beneficiaries for TFSAs, RRSPs, RRIFs and more.

Regarding your link above Mark, I think it’s so important that people plan for a potential big tax bill upon death because of the value of one’s RRSP/RRIF will be fully taxable in the final tax return. Don’t die with a massive RRSP account!

Your content is a great start but I would highly recommend everyone consult with an estate planning lawyer and tax specialist in this area to ensure they have everything set up properly. Everyone should have a will; failure to have a will could lead to really disastrous consequences!

Neal, we covered a lot of ground. Very much appreciated. Finally, what piece of tax advice do you have for Canadians this particular tax season?

Don’t forget that CERB, CRB, CRCB, and CRSB are all taxable income. If you received any of these benefits by now, you should have received a T4A slip which shows the amount you received. These must be reported on your tax return and you may even have a tax bill to pay due to this additional income. The government has indicated it will offer interest relief to those who can’t pay their tax bills on the COVID-benefits.

Also, remember that the CERB has zero tax deducted at source but the CRB, CRCB, and CRSB, which replaced CERB did in fact have income taxes deducted at source at a rate of 10%, so it’s important to fill out your tax returns correctly based on the slips received from CRA.

So far, the CRA has not indicated that the deadline dates for filing will be extended, as they were last year. If you ask me, I would prefer they did NOT extend the deadlines. I’d rather tax season end on April 30^th as opposed to go on forever and ever as it did in during 2020!

Also, if you repaid CERB before December 31^st, then the amount on the T4A slip you received should take this into account so you don’t include more income than you actually received in your tax return.

However, if you repaid CERB after December 31^st, then you actually have to report the full amount on your T4A slip in your tax return and then in 2021 you will receive another T4A slip showing the repayment which can be deducted in 2021.

Lastly, make sure to join my movement to simplify Canada’s insanely complicated tax system. 

Please sign my petition here to this effect and send a copy of my book to your Member of Parliament! Let this be the last “tax season” and let’s simplify our tax system such that my job (tax accountant) doesn’t exist and our tax bills become simplified to a point whereby we can file on our own a simple post-card sized tax return or not have to file at all!

We can only hope Neal, again, thank you.

Hard to believe we could make tax engaging on this site, but I think we did! A huge thanks to Neal for his time today, suggestions, advocacy for tax system reform and more. I encourage you to get a copy of his book. That small investment in knowledge could save your thousands, and keep more of your money in your pocket.

I hope to have Neal back on the site again in the coming months, for more tax and financial takes.

Readers, what did we miss? Anything you think we should add in this overview post? What tax system reforms would you like to see and why? 

Other reading:

My take (and future plans) on minimizing tax in retirement.