Everything you need to know about tax season in Canada

I have an irrational fear about doing my taxes, and I try to avoid it as much as possible. It really makes no sense, since completing my taxes over the years has made the task incredibly easy. I don’t need to do things by hand anymore and filing has never taken me more than two hours.

Even though I still don’t enjoy doing my taxes, I do admit that I've become more comfortable with tax season. Maybe it’s the fact that I’ve been freelancing for years and I’ve had to learn about what I can and can’t claim as business expenses. Or maybe, I’m just older and I’ve realized that there are worse things than doing my taxes, such as waiting on hold for customer service when I need to renew my insurance.

I believe that it was my lack of understanding about how taxes work that caused me to stress out. So, if you tend to get anxious during tax season like I do, here’s everything you need to know to make filing stress-free.

When does tax season start in Canada?

Many people wonder when tax season starts in Canada. Technically speaking, you can begin filing online in late February, so that’s when many people consider tax season to be open. That said, there are various dates you need to be aware of to keep you on track.

• March 1 - RRSP contribution deadline

• February 28 - Last date for employers to issue T4s, T4As and T5s

• April 30 - The filing deadline for individuals

• April 30 - Balance due deadline for individuals and those who are self-employed

• June 15 - The filing deadline for those who are self-employed

For most people, the two most important dates will be March 1st, the Registered Retirement Savings Plan (RRSP) contribution deadline, and, April 30th when your taxes are due. Although that’s plenty of time to get things sorted out, quite often, people wait until the last minute to file.

Self-employed individuals get a little longer to file their taxes, but they have to pay any outstanding balances by April 30th. Since you won’t know how much you owe until you file, you’ll probably want to get things done well before the 30th.

"For most people, the two most important dates will be March 1st, the Registered Retirement Savings Plan (RRSP) contribution deadline, and, April 30th when your taxes are due."

Documents needed

I found that I would stress out during tax season because I had to gather so much paperwork. Realistically speaking, most people will only have to deal with a handful of documents when filing their taxes. The following is what you’ll need to get your taxes done:

• Your Social Insurance Number and other personal information

• Any income T-slips (T4, T5, etc.)

• Any records of additional income (freelance work, capital gains, foreign income, etc.)

• Tax receipts for deductions (Charitable donations, childcare, medical expenses, etc.)

• RRSP contribution slips or repayments for the Home Buyers Plan or Lifelong Learning Plan

• The tax package sent to you, which includes your netfile access code

Prepare yourself by setting up a folder that can be physical or electronic. As you get your documents, put them inside the folder, so you don’t lose track of them. Remember, employers have until February 28th to issue T-slips, so if you don’t have them by March, start making inquiries.

The records of additional income are often forgotten since many people don’t even realize they have them. Did you make any interest on your savings in your bank account this year? If so, you need to log in and see if any tax documents are waiting for you as your financial institution likely won’t send you a physical copy. The same thing applies to any capital gains you made on your investments.

Once you have all your documents on hand, you can start filing. It’s always best to file early, so you’re not scrambling at the last minute. Plus, you’ll get your tax refund (if any) quicker.

How do RRSP contributions work?

Okay, so you know how I said the RRSP contribution deadline is March 1st? Technically speaking, there is no RRSP deadline. The March 1st deadline is for the previous tax year. What that means is that if you want to make a contribution and claim it in the prior tax year, you need to do so before March 1st.

You can contribute to your RRSP whenever you want, but there are a few things you’ll want to know. Your RRSP contribution limit is based on your previous year’s income. That means if this is the first year you’re filing your taxes, you won’t have any contribution room.

Any unused contribution room gets carried forward, so there’s no reason to panic if you haven’t made any contributions in any given year.

The main benefit of RRSP contributions is that you get a tax break. For every dollar you contribute, you reduce your taxable income by an equivalent amount. Let’s say you earned $50,000 last year in taxable income, and you contributed $5K to your RRSP. That means your taxable income is actually $45,000. When you file your taxes, you will get back any excess taxes you’ve paid.

Any income you make from your investments within your RRSP isn’t taxed until you withdraw it. For most people, this will be in their retirement years where their income is low. As a result, they would pay fewer taxes. There are obviously many other factors to consider, but this is a crash course to help you understand how RRSP contributions affect your taxes.

"The main benefit of RRSP contributions is that you get a tax break. For every dollar you contribute, you reduce your taxable income by an equivalent amount."

Commonly missed tax deductions

While I don’t have a problem paying my fair share of taxes, I also don’t want to pay more than I have to. Canadian tax laws allow you to claim various deductions, and often people don’t even realize it. Things to consider include:

• Medical expenses

• Moving expenses

• Charitable donations

• Childcare expenses

• Student loan interest

• Work from home expenses

Medical expenses is arguably the deduction that most people miss out on. Many people don’t realize the list of tax deductible medical expenses is quite extensive. For example, you can claim prescription drugs, diapers, fertility procedures, ambulance services, and more. Certain conditions apply, but the main thing to know is that you should hang onto any prescriptions and receipts that could be considered a medical expense.

Since COVID-19 has forced many people to work from home, the Canadian government has simplified the process when claiming the home office tax deduction. Every individual can now claim up to $400 in expenses if you worked from home.

It’s important to note that tax rules and deductions can change every year. It’s always a good idea to do a bit of research around tax season to see if any new policies affect you. Some of these deductions may not sound like a lot, but every dollar counts.

Is CERB/CRB taxable?

Both the Canada Emergency Response Benefit (CERB) and Canada Recovery Benefit (CRB) are taxable, but there’s a few things to note about both. If you were on CERB, no taxes were taken from the source. That means you would be responsible for paying any outstanding taxes when you file.

On the other hand, 10% of CRB was withheld at the source for taxes. Depending on how much you ended up making in the 2020 tax year, you may end up owing more in taxes. Regardless if you were on CERB, CRB or both, it’s taxable income, so you’ll need to pay your fair share.

It’s still possible that you may qualify for a tax refund, but that depends on your individual situation. Once you file, you’ll know exactly how much you owe or how much you’ll be getting back.

Canadian income tax brackets

When speaking to friends, quite often they’re a bit confused about how Canada’s tax system works. Canadians have a marginal tax rate at the provincial and federal levels. As you earn more, you’ll pay more taxes. However, that increase in taxes only applies to the specific bracket. Let’s take a look at the federal tax rates for 2021:

• 15% on the first $49,020 of taxable income, plus

• 20.5% on the portion of taxable income between $49,021 and $98,040, plus

• 26% on the portion of taxable income between $98,041 and $151,978, plus

• 29% on the portion of taxable income between $151,979 and $216,511, plus

• 33% of taxable income over $216,511

You also pay taxes to the province or territory that you live in. That’s in addition to what you pay federally. For example, the tax rate in Ontario for 2021 is as follows:

• 5.05% on the first $45,142 of taxable income, plus

• 9.15% on the next $45,145, plus

• 11.16% on the next $59,713, plus

• 12.16% on the next $70,000, plus

• 13.16% on the amount over $220,000

Let’s assume that you’re a Toronto resident and your taxable income in 2020 was $43,000. That means your tax rate would be 20.05% after combining the federal and provincial tax rates. If you made $250,000, you would be in the highest tax bracket, so the income you earned above $220,000 would be taxed at 46.16%.

That may sound like a lot of taxes, but remember, your taxes only increase for additional income earned in the specific bracket. In other words, you can never make less by working more. Yes, you’ll pay more taxes if you earn more, but you’ll also be making more money.

There are various income tax calculators available online so you can estimate how much you’re paying in taxes.

How to file your taxes

The actual process of filing your taxes has become effortless over the years. You can technically still do things by hand if you want, but why would you when you can use certified tax software? If your return is simple, you can likely have it done in an hour with tax software.

Which software you use is a personal preference, but note that there are both free and paid softwares available. When filing, the software will walk you through the process. They’ll ask you to fill in information which is found on all the documents you’ve gathered. They’ll also prompt you about anything that you may have missed.

What’s interesting to note about tax software is some of them give you the option to speak with an expert if you have any questions. You can even have that expert file on your behalf directly through the software. These extra options come at a cost, but it’s likely worth it for those who get stressed out during the tax season.

The entire process is basically reporting your income; and then claiming deductions, tax credits and expenses. Once you’re done, you send off your tax return. You’ll usually know right away how much you’ll be getting back or what you owe. That said, the CRA will send you a notice of assessment, which is the finalized version of your return with the exact numbers.

If you’re still intimidated by the process, you can always hire a tax preparer or accountant to do everything for you.

"Canadians have a marginal tax rate at the provincial and federal levels. As you earn more, you’ll pay more taxes."

Are freelancer taxes different?

Freelancer taxes are very similar to filing as individuals, there’s just more paperwork. As a freelancer, you need to keep track of all your income as it likely comes from multiple sources. Not all your clients will issue T-slips, so you’ll need to manually record how much you’re making.

The nice thing is that freelancers can claim many business expenses such as:

• Advertising

• Insurance

• Interest and bank charges

• Office expenses

• Rent

• Travel

The expenses you claim must be directly related to your business. Let’s say you’re self-employed and work at home. Your office takes up 10% of the space, and 25% of your internet usage is work-related. That means you could claim 10% of your rent/mortgage and 25% of your internet bill as business expenses.

Since taxes aren’t taken off at the source as a freelancer, you need to set aside some money in advance. Generally speaking, I put aside 25% of any income I make into a separate account that’s just for repaying taxes. If I’m having a good year, I’ll set aside even more as I’ll likely be in a higher tax bracket.

Keep in mind that if you’re self-employed, you need to register for a GST/HST number once you earn $30,000 in any given year. From there on, you need to collect taxes, which need to be repaid to the CRA. If this applies to you, make sure you’re setting aside that amount as it’ll have to be repaid later.

As long as you have a good paper trail of all your income and expenses, doing your taxes as a freelancer should be straightforward.

When will I get my tax refund?

The most exciting part about doing your taxes is receiving your tax refund (if any). Assuming you filed online and have direct deposits set up, you could get your refund within 2 weeks. For those doing their taxes with a paper return, it could take up to 8 weeks before you see your money.

While those are the expected timelines for refunds, it might take longer if your tax return is being audited.

How do I pay any outstanding balance?

While getting a refund is great, sometimes you’ll owe a balance (especially if you’re a freelancer). The easiest way to pay your taxes is via online banking with your financial institution. The CRA can be set up as a payee. There are multiple CRA payees, so you would choose the one that applies to you. E.g. tax amount owing, current-year tax return, Canada emergency benefit repayment, etc.

Alternatively, you could log in to your CRA account and choose My Payment which allows you to make a payment directly. For those who prefer to do things in person, you can do so at your financial institution or at a Canada Post office.

You should always file your taxes on time to avoid the late-filing penalty on any balance owing. That said, you would still pay interest on any balance owing if it’s not paid off by April 30th.

If you can’t repay the CRA right away, be sure to contact them and let them know your situation. Quite often they will be accommodating, and come up with a plan that you can afford. For example, let’s say you owe $600. They may only require you to pay $50 a month for 12 months.

The bottom line

I know, it’s a lot to take in. However, as you’ve gone through each section of this post, you’ve likely realized that tax season in Canada doesn’t have to be stressful. Gather your documents, set aside some time to do your taxes, and file them.

There’s no reason why you can’t get things done on your own. Even if you need some help, you’ve got options. Think of it this way — the quicker you file your taxes, the quicker you’ll get your tax refund back in your pocket. With that money, you can pay down debt, invest, or even spend a bit of it on yourself.

If you owe taxes, don’t worry. Hopefully you’ve been setting aside some money so you can pay your fair share. If you're short on funds, contact the CRA about a repayment plan and prepare yourself for the following year.

Regardless of how you’re feeling about tax season this year, you now have the knowledge to help ease the stress of filing. You’ve got this.