New tax rules for the 2020 filing year

As the 2020 individual tax filing deadline quickly approaches, many Canadians will be dealing with tax situations quite unlike those of previous years. With interrupted employment, new government benefits, different necessities and expenses, and small businesses operating in ways they never had before, you may be wondering what these changes mean for you and your taxes. Summarized below are a few key differences for this year’s filing.

Sources of income – government relief programs

With 8.9 million Canadians applying for the Canada Emergency Response Benefit (CERB) in 2020 and 441,000 “education letters” sent to recipients warning them they may not be eligible for the benefits they received, this year’s tax filing season will no doubt introduce a level of complexity new to many Canadians. Unlike employment income for which tax is deducted at source, income tax was not withheld on CERB payments. Recipients must report CERB payments as income when they file their personal income tax return. CERB payments are considered “ordinary income” and will be subject to tax at each individual’s marginal tax rate. If you received CERB payments and have since determined you received them in error, unless you repaid the amounts in 2020 you may still be required to include the payments in your 2020 income for tax purposes. We recommend you seek professional tax advice if you find yourself in this position.

In the fall of 2020 CERB was replaced with three new benefits: the Canada Recovery Benefit (CRB), the Canada Recovery Sickness Benefit (CRSB), and the Canada Recovery Caregiving Benefit (CRCB).

As with the CERB, all three of these benefits must also be included in income and are subject to tax at the individual’s marginal rate. However unlike CERB payments, a 10% tax is withheld at source from amounts distributed under these programs. Additional tax may be payable depending on the individual’s total income for the year and if an individual’s total income (excluding CRB payments) exceeded $38,000 in 2020, they may be required to pay back CRB payments at a rate of fifty cents on the dollar of CRB received for income over this amount.

If you were a business owner and your business participated in government relief programs, be aware that assistance received under the Canada Emergency Wage Subside (CEWS) and Canada Emergency Rent Subsidy (CERS) programs is also taxable. The forgivable portion of any Canada Emergency Business Account (CEBA) loan is also taxable income and must be included in income in the year the loan is received.

Expense deductions – medical, child care, travel

It was anything but standard operating procedure in 2020 and many of the deductions tax-filers typically avail themselves of may be lower than in previous years or even unavailable all-together. With travel largely restricted for three quarters of the year there will no doubt be a significant drop in the allowable travel related expenses for many tax-filers. Most medical and childcare facilities were also closed for extended periods in 2020 resulting in lower expenses for some families. This may mean a higher tax bill than you are used to as the available deductions will be proportionality reduced. One potential opportunity is to look for unclaimed medical expenses from 2019 as the medical expense tax credit can be claimed for eligible expenses that were paid during any 12-month period that ended within the calendar year.

RRSP contributions

The deadline for 2020 RRSP contributions has passed, but there are still decisions to be made. Be sure to consider whether it makes sense to forgo claiming your 2020 RRSP contributions against your 2020 income.

Many Canadians saw their incomes reduced last year and if you are expecting a higher taxable income in the future it may be advisable to save the corresponding deduction to use against a future year’s income.

Remember, you don’t need to claim your contributions in the same tax year they are made. However, if your reduced medical, childcare, and travel expenses have resulted in a higher than expected tax bill, it may make sense to use the deduction for the 2020 tax year.

Also keep in mind that if your earnings dropped in 2020 so too may your RRSP contribution room for 2021 as personal limits are calculated on the preceding year’s earned income.

Home office expenses:

The bedrooms, kitchens, and even closets of employees across the country were coopted as workspaces in 2020. In recognition of these unique circumstances, the Canada Revenue Agency modified the home office expense deduction claim process by shortening the qualifying period, allowing individuals to claim additional expenses (including home internet access fees), and introducing a temporary “flat rate” method and a streamlined “detailed” method for claiming the deduction.

To make a claim using the temporary flat rate method, individuals must meet all of the following criteria:

• Worked from home in 20202 due to the COVID-19 pandemic
• Worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020
• Only home office expenses (as opposed to other employment expenses such as motor vehicle expenses) are claimed

If you are eligible for the new temporary flat rate method, you can claim $2 for each day worked from home in 2020 due to the COVID-19 pandemic, up to a maximum of $400 per individual. If multiple people work out of the same home, each individual may claim the full amount. Note that days off, vacation days, sick leave days, etc. cannot be claimed.

This past year was unlike any we’d previously seen and so too is this tax season. Consider seeking professional advice to maximize your available deductions and reduce your overall tax burden.