Tax season is upon us again, dear E7 readers. And filing taxes — well, it’s the one obligation no one can dodge no matter your employment status. I personally think doing and filing taxes get better with time and knowledge. Once you find your system and know-how, it would seem to be a simple errand that can take a few minutes (well, maybe not really a few minutes). BUT! Doing your taxes, and filing them, can surely feel like walking blindfolded in the dark during your first time, especially when there’s no one to guide or help you. There are lots of forms and terms that just go right past your head, it’s overwhelming!
Now, if it’s your first time filing your taxes this 2022, congratulations! That’s proof you’re getting them dollars! And don’t worry. There may be a lot of tax filing terms, rules, forms, and all that jazz; but we’ve got you covered! I’ve spoken with personal finance expert Nora Dunn from NerdWallet Canada to help us, first-time (and even recurring) tax filers, with doing our taxes. Specifically, she enlightened me on all things tax credits and deductions most of us may not know.
First time doing your taxes this year? Continue reading to find out these important infos when filing your taxes!
The difference between tax credits and tax deductions
Tax credits are incentives the provincial and federal governments offer, based on personal circumstances or financial criteria, or both. They reduce the amount of tax you need to pay on your taxable income; in some cases, it can also result in a tax refund. By contrast, tax deductions (aka write-offs) are legitimate items you can claim to reduce your overall taxable income. The two go hand-in-hand in that if you have tax deductions that reduce your taxable income to a certain amount, you may qualify for resulting (low-income) tax credits.
In short, a tax deduction reduces the amount of income that can be taxed; tax credit reduces the amount of tax you pay on your taxable income.
You can claim your home for a tax deduction if you’re working from home or remotely!
“Because the pandemic required so many people to work from home, a special working-from-home tax credit (it’s actually a tax deduction despite the name) was developed to reimburse employees for home office expenses,” says Nora.
There are two different ways to calculate the working-from-home tax credit and various criteria for each.
One is a flat rate of $2 for each day you worked from home, up to a maximum of $500. The other, more detailed method allows you to deduct a portion of home expenses — like utilities, internet, and rent — based on specific criteria and additional forms that you and your employer would have signed. Employees who worked from home prior to the pandemic has actually used this deduction method ever since.
“It’s important to note that this ‘credit’ is only for employees who are required to work from home. If you are self-employed or a freelancer, the business-use-of-home deductions and credits are a whole other ballgame,” reminds Nora.
TFSA vs RRSPs
Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) are both types of accounts that allow your money to grow and compound tax-free. Its biggest difference lies, however, in how they tax your contributions and withdrawals.
The money you invest in a TFSA is after-tax; as in, you can’t file tax deductions for putting money in your account. The money you withdraw from your TFSA, however, is 100 percent tax-free with no limitations on how much you withdraw or when.
On the other hand, the money you invest in an RRSP is tax-deductible; meaning, you can file your contributions as tax deduction to reduce your income tax. However, every dollar you withdraw from your RRSP is subject to income tax.
When asked which account is better to put money into, Nora says it depends on various things; particularly, on the income, financial goals, and to an extent, one’s self-discipline.
Let’s get to the specifics:
TFSA is flexible. You can use it for both short-term goals (saving for a home downpayment or a vacation) and long-term goals like retirement. When you withdraw money, that amount is added back to your contribution room the following year.
RRSP is solely for retirement. You could also get hefty tax consequences when you withdraw money from your RRSP early and lose your contribution room forever.
“When you look at it purely from a tax point of view, TFSAs are generally a better deal. Even though you don’t get the tax deduction on your contribution up front, the value of tax-free compound growth and tax-free withdrawals is substantial,” Nora surmises.
“Here’s the but,” she cautions. “If you are using your TFSA for retirement savings, but you know you lack the discipline to leave it in there for the long-haul, then RRSPs might be a better way to save for retirement.”
TFSAs have contribution limits. How can you find out yours?
Unlike RRSP contribution limits, which are dependent on your income, TFSA contribution limits are universal, and you’ve been accumulating contribution room for every year since 2009 that you’ve been 18 years old and have had a SIN number.
“As of 2022, the total lifetime contribution limit for a TFSA is $81,500. The easiest way to find your personal contribution limit is to log into the My CRA Account website,” says Nora.
There are more complexities to it though, which Nora explained in this article.
Tax credits and deductions are available if you’re a first-time home buyer
There are three main incentives available to help people buy their first home.
The First Time Home Buyer Incentive is a tax-free, interest-free loan from the government to help with your downpayment. It is 5 percent or 10 percent of the purchase price, and you need to pay it back in 25 years or when the home sells.
The Home Buyers’ Plan allows you to withdraw up to $35,000 from your RRSP tax-free to use for your downpayment. But, you must repay this to your RRSP annually over a period of 15 years, or earlier if you want and can.
Lastly, the Home Buyers’ Tax Credit is a $5,000 non-refundable tax credit, which ultimately results in a $750 rebate. It’s worth noting that this amount will reduce the tax you owe but will not result in a refund.
There are also other incentives, like the GST/HST New Housing Rebate for people buying newly constructed homes. Some provinces also have programs to offset the costs of purchasing a home for the first time; for instance, both British Columbia and Ontario have a land-transfer tax refund program.
How can you find out beforehand how much tax you owe?
Unfortunately, until you file your tax return, there’s no easy way to find out how much tax you will owe or get back. There are some rudimentary online tax calculators, though, that will give you an estimate based on your total income, taxes paid, RRSP contributions, and province of residence. Once you have filed your tax return, the My CRA Account will show you your balance owing (if applicable).
(Story by Assistant Editor, Carmela Valencia)