The year 2020 saw plenty of opportunities to get cash from the Canada Revenue Agency (CRA). With the COVID-19 pandemic ravaging the economy, the CRA launched the CERB, the CESB, and one-time top ups to GST/HST credits and the CCB. Today, these benefits are winding down. The CERB has only two payment periods remaining, and the one-time bonuses have long since been paid.
However, there is still plenty of CRA cash to scoop up next year — potentially $5,000 worth or more. In this article, I’ll explore how you can get it.
Claim as many deductions as you can
By claiming all the tax deductions you’re entitled to, you can trigger a tax refund that could be worth $5,000 or more. If you have a 50% marginal tax rate and you claim $10,000 worth of tax deductions, you’ll get a $5,000 tax refund–assuming your employer isn’t already adjusting your pay for the deductions. It’s not always possible to claim a ton of legitimate deductions. But there’s at least one that almost all Canadians can take advantage of.
The most obvious deduction
The most obvious tax deduction that all Canadians can claim is the RRSP contribution deduction. Assuming you have a self-directed RRSP, you’ll get a tax refund for contributing to it. If you have a group RRSP, your company might already be adjusting your pay cheque for the contributions. If that’s the case, you won’t get the refund.
Let’s imagine that you were earning $260,000 a year and lived in Ontario. In that case, your marginal tax rate would be about 52%. If you contributed $10,000 to a self-directed RRSP, you’d trigger a $5,200 tax refund. That’s on top of whatever refund you might have gotten for other reasons.
That’s not the only reason to invest in an RRSP either. You also get tax-free growth and compounding. Let’s say, for argument’s sake, that you held a $50,000 position in Fortis Inc (TSX:FTS)(NYSE:FTS) shares in 2020, and cashed it out at the end of the year at a 20% gain.
That position would generate about $1,750 in dividends and a $10,000 capital gain. $5,000 of that capital gain and all of the dividends would normally be taxable. But if you held the Fortis shares in an RRSP, you’d skip all of those taxes.
Some little known gems
In addition to the obvious RRSP deduction, there are plenty of other tax deductions you can claim. These include:
- Union dues
- Childcare costs
- Capital losses
- Various business deductions if you’re self-employed
In general, these types of deductions are more complex, but they can be quite valuable. If you’re interested in claiming them, speak with a CPA. They have the expertise to let you know which deductions you’re entitled to and how much money you can save by claiming them. Most likely, you’ll save more in taxes than you’ll pay in fees.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.