The 2020 tax year is over and, unlike last year, the Canada Revenue Agency (CRA) won’t extend the income tax-filing deadline in 2021. It’s better to start reading about your taxes and collecting supporting documents as that will take time. Although the deadline to pay your 2020 income tax is April 30, the CRA encourages you to file your returns as early as February’s end. Here are three common mistakes that delay the whole tax process.
Not filing income tax returns because you don’t have an income
Many Canadians don’t file their income tax returns if they have no working income. But they could forget to account for the money you earned from investments or income splitting with your spouse. Even if you don’t work, you should file your tax returns, as the CRA offers many refundable benefits to low- and mid-income earners.
For instance, a single person above 19 years of age can get an average goods and service tax (GST) credit of $296 and up to $451. You can also get $1,381 in the Canada Workers Benefit (CWB). For both credits, your annual net income should be below $47,527 and $24,573, respectively. You can also get child benefit if you are a parent and the old age security (OAS) pension if you are above 65 years of age.
You can get all the above cash benefits just by filing your returns.
Not reporting income from all sources
The CRA noted another common mistake Canadians make while filing returns is that they only state their working income. There is other income like tips, gratuity, income from part-time work, dividends, investment income, and taxable benefits like the Canada Pension Plan (CPP). This year, there will be an addition of Canada Emergency Response Benefit (CERB), Canada Recovery Benefit (CRB), and other taxable COVID-19 benefits.
Ensure that you add these benefits to your 2020 taxable income. If you have maxed out your CERB and Canada Recovery Benefit (CRB), you will have to add $19,500 ($14,000 from CERB and $5,400 from after-tax CRB) in your 2020 taxable income.
Claiming the wrong deductions or missing out on eligible tax breaks
The third most common mistake is missing or misunderstanding the tax breaks. The CRA offers many tax credits and deductions depending on your age, income, marital status, and the number of children. There are tax breaks like the basic personal amount, pension income amount, age amount, and caregiver amount.
Moreover, the CRA introduced three new tax breaks in 2021: the digital new subscription credit, Canada training credit, and home office expense deduction. You can learn about these tax credits in my Tax Planning 101 series.
Make your investment grow in a tax-effective way
The right information can significantly reduce your tax bill and give you several tax-free cash benefits. The CRA also offers another way to grow your investment income in a tax-efficient way. You can contribute $6,000 in your Tax-Free Savings Account (TFSA). This contribution will be taxed, but your income from these investments will not.
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Check out this free report for more options for your TFSA.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Puja Tayal has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Amazon, Shopify, and Shopify and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon.