A tax break is a tax concession or advantage that is allowed by the government to taxpayers. A tax-break benefits taxpayers in a lot of ways as it can lower an individual’s total tax liability and increase one’s disposable income.
These savings, in turn, can be used to invest in stocks, real estate, or bonds as well as increase consumer spending which will have a positive impact on overall economic growth. Deductions, credits, and exemptions are ways in which the government offers tax reliefs, and the Canada Revenue Agency (CRA) offers numerous tax breaks to residents.
While the tax filing and tax-paying deadline for 2020 have just ended, you should make sure you have considered every deduction possible for future filings. Here are three tax-breaks that Canadians should be on the lookout for during the ongoing pandemic and beyond.
Basic Personal Amount
Basic Personal Amount (BPA) is a non-refundable tax credit that can be claimed by every Canadian citizen on their income tax return. It provides a full or partial reduction to taxpayers depending upon their income. The BPA amount changes every year to keep up with inflation.
The BPA for individuals with a net income of less than $150,473 has been increased to $13,229 from $12,298 in 2020. This amount then starts reducing for people with income between $150,473 and $214,368.
There will be no change in your BPA amount if your income is above $150,473 i.e. it will remain at $12,298 and we can see this tax break benefits taxpayers belonging to lower-income brackets. Further, the BPA will be increased to $15,000 by 2023 in a phased manner,
According to CRA, a non-refundable tax credit reduces what you may owe. However, if your total non-refundable tax credits are more than what you owe, you will not get a refund for the difference.
This is a tax break that you may be able to enjoy during the ongoing pandemic. If you have a workspace in your home where you spend over 50% of your work hours, and you use that space only to earn your employment income on a regular basis, then you can deduct the expenses you paid that relate to this workspace.
This can include the cost of electricity, heating, maintenance, property taxes, and home insurance. However, you cannot deduct mortgage interest or capital cost allowance. You can use a reasonable estimate to decide the percentage of expenses you can deduct for the tax-break.
The CRA confirms you can also deduct the amount required to maintain the office space. If your office space is rented, then you can deduct the percentage of the rent. According to CRA, the amount you can deduct is limited to the amount of employment income remaining after all other employment expenses have been deducted.
If you cannot deduct all your workspace expenses in the year, you can carry forward the same and deduct the remaining expenses in the following year, provided you are receiving income from the same employer. Note that you cannot use work-space-in-the-home expenses to create or increase a loss from employment.
The Registered Retirement Savings Plan (RRSP) is a tax-sheltered account aimed at long term retirement planning. The RRSP deduction limit is 18% of your annual income with a maximum threshold of $27,230 for 2020.
We know that the best feature of an RRSP is that it is a tax-deductible account i.e. the amount you invest in your RRSP is deducted from your overall income and you don’t have to pay any tax on it until withdrawal. In short, you can claim a tax deduction on your RRSP contributions.
For example, if you are making $40,000 a year, you pay close to 20% tax on it. Now, if you contributed $5,000 in your RRSP, you can deduct that amount from your taxable income which now stands at $35,000.
You only have to pay taxes when you withdraw money from your RRSP account and ideally, you start withdrawing after 65 years of age when the tax is at a marginal rate and your income is significantly lower.
Even if you fail to use your RRSP contribution room in a particular year, the unused space is carried forward to the following year. This makes RRSP a great way to reduce the overall amount you pay on taxes.