Episode #52: 10 Tax Write-offs That Aren’t Just For Entrepreneurs
I love creating lessons about our Canadian tax system, because filing taxes is something that everyone here needs to do, and yet almost none of us are taught how to do it! Tax season causes so many people so much stress every year, AND it also costs a lot of us way more money than we actually need to be paying for our taxes simply because many of us do not understand how the Canadian tax system works.
Last week I released an episode that was a beginners guide to filing taxes in Canada, and this week I’m following up with an episode all about how you can save money on your taxes by using tax deductions and tax credits. Before you click away saying ‘yeah but I don’t run a business, I can’t write things off’, let me tell you that even if you’re not an entrepreneur you’re eligible for a lot of different tax deductions and tax credits that you can use to lower your tax bill. So, if you want to learn more and save some money this year at tax time, scroll through this article for a list of 10 write offs you can use to lower your taxes this year even if you’re not an entrepreneur.
Before I dive into this list though I want to give a very quick overview of tax deductions and tax write offs’.
Tax deductions are used to lower your taxable income. This is what most people think of when they consider entrepreneurs who can use their business expenses to lower their taxable income and therefore pay less tax. If you make $100,000.00 as an entrepreneur, and you claim $20,000.00 worth of tax deductions then you lower your taxable income to $80,000.00 This means the government only asks you to pay tax on $80,000 instead of $100,000.
Tax credits on the other hand are used to lower the amount of tax that you owe, and there are two different types of tax credits. There are refundable tax credits and non refundable tax credits.
- Refundable tax credits mean you can lower your tax bill to such an amount that the government actually owes you money back.
- Non-refundable tax credits on the other hand can be used to lower your tax bill all the way down to zero, but no lower than that.
As a Canadian who files a tax return you are eligible for a wide variety of tax deductions and tax credits that you can use to pay less tax on your income. There’s a whole list of these on the CRA website, but it can take a while to read through this list, and then read and understand the requirements to be eligible for these tax deductions, so I’m going to walk you through ten of the most common federal tax deductions which you may very well be eligible for.
#1 - The RRSP Tax Deferral
RRSP stands for registered retirement savings plan. This is a special type of saving and investing account that’s designed to help Canadians save and invest for their retirement. To incentivise Canadians to use this account, the government offers us a pretty substantial tax perk for contributing some of our money to our RRSP’s. Contributing money to your RRSP provides you with the chance to claim what’s known as a tax deferral, which means you don’t pay taxes on the money that you contribute to this account. You do pay tax on that money when you take it out in your retirement, but the idea is that you’ll be in a lower tax bracket then, so dollar for dollar you’ll pay less tax on that money. So, here’s how you can use an RRSP to reduce your tax bill this year.
Let’s say you earned $100,000 last year. That means that this year you’re allowed to contribute $18,000.00 to your RRSP. This year you make $100,000 again, and you contribute that $18,000 to your RRSP. Your taxes are deferred on the $18,000 that you contributed, and what happens on your taxes this year is that your taxable income is lowered by that amount. Now your taxable income is only $82,000.00, and that’s the amount that you’ll be asked to pay tax on as opposed to the $100,000 that you actually earned.
There are a tonne of other perks to using an RRSP that I can’t get into in this episode, but please go and checkout the beginners guide to RRSP’s that I released a little while ago to learn all about these accounts and how you can use one, I’ll link that in the episode description below.
#2 Donations
If you donate money to a cause and get a tax receipt from that donation then you can use that as a non-refundable tax credit. This means you can lower the amount of tax you have owing. To take advantage of this tax credit you need to have donated to a registered charity, and received a tax receipt for your donation. If you’re not sure if your donation was made to an eligible registered charity then you can check with the CRA about this.
#3 Basic Personal Amount
The basic personal amount is a tax deduction that applies to absolutely everyone who files taxes in Canada. This is a specified amount that you can claim as a deduction to lower your taxable income. The amount varies based on what your income is.
If your net income is less than $151,978.00 then you can claim the basic personal amount of $13,808 and lower your taxable income by that amount. If your income is higher than $216,511 then you can claim the basic personal amount of $12,421, and lower your taxable income by that amount. Remember, lowering your taxable income means you pay tax on less money than you actually earned.
Essentially what this does is give you the first $13,808 that you earned free and clear of taxes.
#4 Student Loan Interest
If you took out student loans then there are some cases where you can claim the interest from your student loans as a non refundable tax credit. The CRA requires that you have received your student loan from specific student loan programs, instead of just taking out a line of credit for example and calling that a student loan.
You’re allowed to claim the student loan interest payments that you made over the past year, stretching back to 5 years previously. After that 5 year timeline is up then you can no longer claim that interest. That being said, because it’s a non-refundable tax credit it’s not worth claiming if you’re still a student not making any income because then you’re just throwing away that tax credit. Once you start earning money though then it’s a great way for a lot of people to reduce their taxes.
#5 First Time Homebuyers Credit
The first time homebuyers tax credit can reduce your income tax payment by up to $750.00 (or provide a $750.00 rebate). This credit is for people who have bought a new home as their primary residence. It has to be your first home, or you cannot have lived in a home owned by you or your partner for four years previous to buying your new home. This credit can only be claimed once for each home, so if you buy with your partner only one of you can claim it or you can split it in your taxes. The catch to this credit is that it must be claimed in the year that you bought your first house. If you forget to claim it in your taxes that year then you cannot carry it forward it claim it the following year.
#6 Child Care Deduction
Some childcare expenses can be claimed on your taxes. As a general rule these are expenses incurred so that you can go to work, run a business, or go to school, and have your child cared for while you are doing so. This can include things like daycares and day camps that are primarily there for childcare purposes. This functions as a tax deduction, and there are limits as to the amount of deduction that you can claim based on things like the age of the child, and what income tax bracket you or your partner are in. You do need receipts to claim this childcare, this is important to note because there are a lot of people still who pay cash for childcare, and you can never claim anything without a receipt papertrail to prove your claim. So if you want to pay cash then you can’t also claim the tax deduction.
#7 Moving Expenses
You can use some eligible moving expenses as a tax deduction IF you moved for your job or business and your new residence is at least 40 km closer to your place of work than your old residence was. This means that if you moved way out of the city for remote work and then are called back to the office once day, you can likely claim some moving expenses. If you just decide to move within the same neighborhood however to upsize or downsize, then your moving expenses will not be eligible. There are quite a few direct moving costs that you can deduct for example the cost of travel between locations, hiring movers, or temporary housing for a few days, while there are conversely other thing that you think you might be able to deduct but that aren’t eligible for example the cost of prepping your old home for sale, or travel expenses to go house hunting before you move. If you have moving expenses just make sure you have your receipts organized for everything, and check that you can claim each expense on the CRA website or with your accountant before you do.
#8 Home Office Expenses
With the move to remote work because of the pandemic, suddenly home office expenses are something that a lot of traditionally employed people are eligible to write off. To qualify to be allowed to use this deduction, in 2021 you need to have had to work from home more than 50% of the time, for a period of more than 4 consecutive weeks. You’re eligible to write off $2.00 a day for every day worked from home, up to a maximum of $500.00 for the year. So, if you’ve been working your job from home because of the pandemic, make sure you’re using this tax deduction when you file your taxes this year.
#9 Medical Expenses
Some medical expenses are eligible to be claimed on your taxes. The CRA states that these eligible expenses can be claimed if they were paid during any 12 month period ending in 2021, or if you missed claiming them on your 2020 taxes. There’s an exhaustive list of eligible medical expenses on the CRA website, but a quick run through some of the more common ones includes: dental services, some fertility programs, medical marijuana, some rehab therapies, and the list goes on. I recommend taking a scan through the list if you had any type of medical expenses at all over the past year, and see where you might be able to write some things off.
#10 Dividend Tax Credit
If you are an investor and own shares in a company that pays you dividends, then you should be aware of this tax credit if your dividend earnings are reported as part of your income for the year. There are what’s classified as ‘eligible’ and ‘other than eligible’ dividends that are credited differently, and the T5 investment income statement you receive will designate whether they’re eligible or other than eligible. There’s some math behind how the dividend tax credit actually works that isn’t too important to get into for the scope of this lesson, but the important thing to note is that you end up paying less tax on your dividend income. This dividend tax credit is one of the reasons why it’s very tax advantageous to earn income through investments as opposed to solely through traditional employment income.
So, as you can see from this list, there are multiple tools available to you to help lower your taxable income, regardless of whether or not you run your own business. Write-off’s are not just for entrepreneurs. The government gives us these tools, they want us to use them, but it’s on each of us to have a general understanding of how our tax system works, as well as what types of deductions, credits, and deferrals are available to us so that we can use them properly. I just chose 10 items here to talk about in today’s episode, but you can find tonnes more over on the CRA website, it’s very worth taking a scroll through before you file your taxes or send all your documents off to your accountant this year.
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