While 2021 was another year in which the pandemic presented many challenges in our daily lives, it also brought about tax changes that you should be aware of. We have compiled a summary of the most significant federal tax changes that may affect your 2021 personal income tax return, as well as changes that may help you save taxes in 2022 and beyond.
Taxable COVID-19 support
Many COVID-19 benefits offered by the federal government are taxable. This includes the Canada Recovery Benefit (CRB), Canada Recovery Caregiving Benefit (CRCB), Canada Recovery Sickness Benefit (CRSB), and the new Canada Worker Lockdown Benefit (CWLB). If you've received these benefits, the Canada Revenue Agency (CRA) will issue a T4A slip to report amounts paid to you under these programs, which you will need to include in income on your 2021 tax return.
The T4A slip will also report the 10% income tax withheld on the CRB, CRCB, CRSB, and CWLB. You should know that depending on your total income, deduction and credits for the year, you may end up owing income tax when your return is due. There is also a clawback of the CRB if your adjusted net income is more than $38,000. It would be prudent to set aside sufficient funds to cover this tax liability and ensure you pay any taxes owing by May 2, 2022 (as April 30 falls on a Saturday) to avoid interest and penalties.
Some COVID-19 benefits offered by the provincial governments are also taxable. You should check to make sure that you have the relevant slips from your provincial government and include the taxable amounts in income on your 2021 tax return.
Repayment of federal COVID-19 benefits
If you repaid an amount in 2021 related to the federal COVID-19 benefits that you received in 2020, such as the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), CRB, CRCB or CRSB, the CRA has indicated that the amount repaid will be included in your T4A slip.
You can choose to claim a deduction for the repaid amount in the year that the benefit was received or in the year that the benefit was repaid. You also have the option of splitting the deduction between these two years, provided you don't deduct more than your repayment.
This choice in the timing of your deduction can affect your taxes depending on your income, deductions, and credits available in each of the two years. Where it is beneficial for you to deduct the repayment in your 2020 return, but it has already been assessed, you can request a T1 adjustment for 2020. For more details, read our related article.
Home office expense deduction
Similar to 2020, if you worked more than 50% of the time from home for a period of at least four consecutive weeks in 2021 due to COVID-19, you may be eligible to claim a home office expense deduction on your tax return. Eligible employees have the option of choosing between two methods for claiming a home office expense deduction for 2021. The two methods are as follows:
- Temporary flat rate method ─ provides a deduction of $2 per day for each day the eligible employee worked from home, up to a maximum of $500 (increased from $400), with no need to track expenses or obtain forms from your employer.
- Detailed method ─ allows an eligible employee to claim the employment portion of actual home office expenses paid, which would require itemizing expenses and obtaining a signed form T2200S or T2200 from your employer.
To find out more about eligibility and which option would give you a higher deduction in your specific circumstances, read our Tax Alert, Claiming a home office expense deduction for 2021 and 2022.
Canada Workers Benefit
The Canada Workers Benefit (CWB) is a non-taxable refundable tax credit that supplements the earnings of low and modest-income earners. Previously, the CWB increased by 26 cents for every dollar of “working income” in excess of $3,000, up to a maximum of $1,395 for single individuals without dependants or $2,403 for families. The benefit is then reduced by 12% of adjusted net income in excess of $13,194 for single individuals without dependants or $17,522 for families.
Beginning for 2021, the CWB has been enhanced by:
- Increasing the phase-in rate from 26% to 27% for single individuals without dependants and families
- Increasing the phase-out threshold from $13,194 to $22,944 for single individuals without dependants and from $17,522 to $26,177 for families
- Increasing the phase-out rate from 12% to 15%
- Making corresponding changes to the disability supplement's phase-in and reduction rates as well as the reduction threshold
In addition, there is a new “secondary earner exemption” to the CWB. This exemption allows up to $14,000 of working income (of an eligible spouse with the lower working income) to be excluded in calculating adjusted net income for the family for purposes of the phase-out of the benefit.
Climate Action Incentive
The Climate Action Incentive (CAI) was a refundable tax credit paid to residents of Alberta, Saskatchewan, Manitoba, and Ontario to offset the cost of federal carbon pricing. Beginning with the 2021 tax year, the CAI will no longer be claimed annually on the personal income tax return. Instead, the CAI will be paid as a quarterly benefit starting in July 2022. However, individuals would still need to file a tax return to receive CAI payments and indicate on the return if they are eligible to receive the 10% rural supplement for the upcoming year.
Enhanced Canada Pension Plan
As you are likely aware, your Canada Pension Plan (CPP) contributions have been increasing annually since 2019 and will continue to increase every year until 2023 (or 2024 if your income exceeds a new earnings ceiling). Similar enhancements were made to the Quebec Pension Plan (QPP).
When you file your personal income tax return for the 2021 tax year, remember that your CPP/QPP contributions consist of a base amount and an enhanced amount, which is consistent with 2020. While a non-refundable tax credit on the CPP/QPP base amount continues to be available, a tax deduction can also be claimed on the enhanced portion of the CPP/QPP. The maximum amount of the tax deduction for 2021 has increased to $290.50.
Tax-free savings account contribution limit
For 2022, the tax-free savings account (TFSA) annual contribution limit remains at $6,000 and any unused contribution room will carry forward. Contributions to a TFSA aren't tax deductible and when money is withdrawn, the accumulated contributions and income received are not taxable.
If you have any questions about these tax changes, or how they may apply to your situation, please contact one of our trusted BDO advisors.
The information in this publication is current as of January 22, 2022.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.