When you calculate your household budget, factors like food, transportation, and rent/mortgage are typically top of mind. While these expenses definitely matter, the single biggest one for many Canadian households often goes overlooked: income tax.
Likewise, COVID-19 has taken a toll that will have to be accounted for. Not only has it killed millions but it’s ravaged the global economy and inflamed geopolitical tensions. The increased expenditures by governments to minimize the pandemic’s impact has resulted in huge deficits that will need to be accounted for. This means we can expect some significant tax modifications by the Canada Revenue Agency (CRA) in 2021 and beyond.
Let’s take a look at some of the most important tax changes.
Tax Changes for 2021: Rates and Limits
Changes in tax rates and limits
- Federal and provincial income tax brackets are increasing to keep up with inflation.
- Employment Insurance (EI) premiums remain fixed at 1.58%. Nevertheless, maximum insurable earnings will increase from $54,200 to $56,300.
- Maximum pensionable earnings (the figure used by the government to calculate Canada’s annual pension plan contributions) are increasing from $58,700 in 2020 to $61,600 in 2021. Likewise, the employee and employer contribution rates for 2021 will be increasing from 5.25% in 2020 to 5.45% this year.
- Similar to 2020, the Canada child benefit (CCB) will continue to be indexed to inflation. This year, the maximum receivable amount for a parent is $6,765 for children under age 6 (up from $6,639 in 2020) and $5,708 for children ages 6 to 17 (up from $5,602 in 2020).
Claims, Tax-Related Benefits, and Contributions
Canadians who began working from home during the pandemic may be eligible to claim up to $400 for home office expenses, including utility bills, office supplies, and more.
Under this relaxation of a rule introduced by the CRA, work-from-home employees can claim expenses under a temporary fixed-rate method that doesn’t require them to:
- Submit receipts or supporting documents
- Fill out and submit Form T2200S or T2200
- Calculate the workspace used at home
They can claim $2 for each day they worked from home in 2020, up to a maximum of $400 (or 200 workdays).
2. Canada Pension Plan Contributions
- The CPP contribution rate for workers has increased to 5.45% in 2021, or a total of 10.9% together with the employer rate.
- The highest pensionable earning is $61,600; a rise of $2,900 from $58,700 in 2020. The nominal exemption amount remains at $3,500.
- Expect to pay up to $3,166.45 in CPP contributions this year. For self-employed individuals, the maximum contribution is doubled to $6,332.90.
3. CERB and CESB Taxes
If you received the Canada Emergency Response Benefit (CERB) or the Canada Emergency Student Benefit (CESB) in the 2020 tax year, both are taxable. You’ll need to fill out a T4A from the CRA and record the received amount when you file your tax return. You may also need to pay taxes if you received any of the other income benefits as mentioned below:
- Canada Recovery Benefit (CRB)
- Canada Recovery Caregiving Benefit (CRCB), or
- Canada Recovery Sickness Benefit (CRSB)
While all these income benefits withheld 10% tax at source, your net taxable income bracket may levy additional taxes.
4. Canada Child Benefits
The CCB amount for the first half of 2021 is:
- A maximum annual amount of $6,765 for every child under age 6 and up to $5,708 per child between ages 6 and 17.
For the second half of 2021, it is:
- A maximum annual amount of $6,833 per child under age 6 and up to $5,765 for those aged between 6 and 17.
5. Recovery Benefits and EI Regular Benefits
On February 19, the federal government announced its plan to introduce regulatory and legislative changes to increase the number of weeks for recovery benefits and EI regular benefits.
The proposed changes would:
- extend the number of weeks available under the CRB and the CRCB by 12 weeks, from 26 up to 38.
- increase the number of weeks available under the CRSB through regulation from the present two weeks to four weeks.
- extend the tenure of EI regular benefits available by up to 24 weeks to a maximum of 50, for claims that are made between September 27, 2020, and September 25, 2021.
The government also intends to allow self-employed workers who have opted for the EI program to avail themselves of special benefits by using a 2020 earnings threshold of $5,000. This is compared to the previous threshold of $7,555. This changed benefit program would be applicable to claims made as of January 3, 2021, and remain valid until September 25, 2021.
6. GST/HST Changes
Under the present GST/HST rules, non-residents not running a business in Canada aren’t required to register, collect and remit the GST/HST. Therefore, the GST/HST is not collected and remitted on online purchases from non-resident vendors or made through digital or distribution platforms.
With the implementation of the new proposed GST/HST rules, non-resident vendors and digital or distribution platform operators may have to register, collect and remit the GST/HST on their business in Canada as of July 1, 2021.
According to the new proposed tax rules that were announced by the Government of Canada on November 30, 2020, GST/HST rules would be applicable to:
- non-resident vendors and digital or distribution platform operators, supplying digital products and services to consumers in Canada.
- non-resident suppliers of goods and operators of fulfillment warehouses.
There will be a temporary zero GST/HST rating on certain face masks and face shields. However, this will be applicable only for items made after December 6, 2020.
Basic Personal Amount
The basic personal amount is a non-refundable tax benefit that all taxpayers are eligible to claim. The claimable amount was $13,229 in 2020 and is set to rise annually with inflation. It is expected to increase by 15% over the next four years, reaching $15,000 in 2023.
Nevertheless, not everyone will be eligible for this tax break. While wealthy Canadians (those earning over $150,473) will have a reduced basic personal amount, those earning over $214,368 won’t receive any tax benefit.
Possible Effects of These Significant Tax Changes
According to some reliable sources, federal tax brackets have increased by 1.0% to keep up with the Consumer Price Index. This affects how much tax Canadians need to pay since most tax bracket thresholds have increased to keep up with the cost of living. Nevertheless, the inflation rate is computed on a federal basis and big cities with greater costs of living may have higher inflation rates. This is also applicable to the Canada child benefit, which increases with rising inflation. For many households, the rise in tax bracket thresholds and government benefits may not match their budgets.
The basic personal amount ensures that no tax is paid on a certain amount of income. This is to exclude individuals who are close to or below the poverty line from paying taxes. In previous years, changes to this amount were based on inflation. But it has been increased in 2021 by $579 (a 4.37% rise from last year’s amount) and is expected to rise to $15,000 by 2023.
For Canadians who earn less than the basic personal income exemption, this is important as some may receive a complete tax exemption. For Canadians in the middle-income brackets, the effects may not be as prominent. High-income earners may realize little to no benefit from the increase in basic personal income amount.
Understanding the new tax rates and benefits, your eligibility, and documentation procedures will help prevent any unpleasant surprises and expedite the tedious procedure that is tax filing. If you’re unsure of the newest tax rules, seek out professional guidance with your return.