The amount you pay in income tax is most likely your biggest annual expense – even more than what you spend on housing, food, and transportation in a year. Keeping a close eye on income tax changes can help you to save money when it comes time to file your tax return in Canada.
For many Canadians, the surprising effects of COVID-19 in 2020 have many wondering about what their taxes will look like next year. In 2021, the tax filing deadline is April 30th. Here are the important tax changes Canadians need to know about in 2021- so you can plan now and keep more money for you and your family.
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Tax Changes for Canadians in 2021
Rates and Limits
There are several tax rates and limits that are changing in 2021. Here is a summary of what to look for:
- Employment Insurance (EI) Premiums are staying steady at 1.58%. Maximum insurable earnings will increase from $54,200 to $56,300.
- Maximum pensionable earnings is the amount used by the government to calculate Canada’s Pension Plan contributions for the year. In 2021, it is increasing to $61,600, up from $58,700 in 2020. The employee and employer contribution rates for 2021 will be increasing by 5.45%, up from 5.25% in 2020.
- The Canada Child Benefit will continue to be adjusted for inflation. In 2021, the maximum a parent can receive 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).
- Federal and provincial income tax brackets are increasing to keep up with inflation.
The federal income tax rates and brackets for 2020 and 2021 are:
| Tax Bracket 2020 | Tax Rate 2020 | Tax Bracket 2021 | Tax Rate 2021 |
|---|---|---|---|
| Up to $48,535 | 15% | Up to $49,020 | 15% |
| $48,536 to $97,069 | 20.50% | $49,021 to $98,040 | 20.50% |
| $97,070 to $150,473 | 26% | $98,041 to $151,978 | 26% |
| $150,474 to $214,368 | 29% | $151,979 to $216,511 | 29% |
| $214,369 and over | 33% | $216,512 and over | 33% |
Tax-Free Savings Account Contribution Limit Increased
In 2021, the annual contribution limit on your Tax-Free Savings Account (TFSA) is being raised. In 2019 the TFSA contribution limit was increased to $6,000 for the first time. Ditto for 2020 and 2021.
If you’ve been eligible to contribute since 2009, but have never put money into a TFSA, you’d have $75,500 in total contribution room.
As the name implies, your money grows tax-free in the TFSA. What differentiates it from a Registered Retirement Savings Plan (RRSP) is that you don’t have to pay income tax when you withdraw your money.
TFSA Contribution Limits Per Year
| Year | Limit | Total |
| 2021 | $6,000 | $75,500 |
| 2020 | $6,000 | $69,500 |
| 2019 | $6,000 | $63,500 |
| 2018 | $5,500 | $57,500 |
| 2017 | $5,500 | $52,000 |
| 2016 | $5,500 | $46,500 |
| 2015 | $10,000 | $41,000 |
| 2014 | $5,500 | $31,000 |
| 2013 | $5,500 | $25,500 |
| 2012 | $5,000 | $20,000 |
| 2011 | $5,000 | $15,000 |
| 2010 | $5,000 | $10,000 |
| 2009 | $5,000 | $5,000 |
Canada Training Benefit
The federal government introduced the Canada Training Benefit to help Canadians adapt to changes in the labor force caused by advances in technology. This refundable tax credit is designed to help workers pursue professional development opportunities. It’s goal is to provide financial support by paying for half of any tuition and training fees.
As a worker, you’ll be eligible to receive up to $250 annually as a tax credit. This amount goes into an account, which you can use for eligible courses and skills training.
To be eligible for the $250 per year, you must meet the following criteria:
- File a tax return for that year
- Be a Canadian resident during the year in question
- Be at least 26 years old, and no older than 65 years old at the end of the year
- Have eligible earnings between $10,000 and $150,000 in the year (this includes employment, self-employment, and maternity and parental benefits)
Your account balance will be communicated each year on the Notice of Assessment you receive after you file your income taxes. In any given year, you can claim the lesser of the balance in your account or half of eligible tuition and fees you paid.
Home Buyers’ Plan
The home buyers’ plan (HBP) assists first-time homebuyers afford a down payment sooner – an especially helpful bonus considering today’s skyrocketing house prices! If you are buying a home for the first time you can withdraw money from your RRSP without paying any tax.
Any money borrowed under the HBP must be paid back over 15 years, beginning in year 2 after your initial withdrawal was made.
As of March 19, 2019, Canadians eligible to participate in the program can withdraw up to $35,000 from their RRSP, up from $25,000 in previous years. If you are buying a home as a couple, together you can withdraw a combined $70,000 from your RRSPs to buy your first property.
The rules are also being updated so that the same $35,000 withdrawal limit is provided to individuals buying a home that’s more accessible and better suited for people with disabilities.
There are also new rules for individuals who suffer a marriage or common-law relationship breakdown and who have been living apart from their spouse for a minimum of 90 days.
If this is you, you may be eligible to participate in the HBP, even if the other eligibility criteria aren’t met. You could make a withdrawal from the HBP provided you are living separately from your spouse or partner at the time of withdrawal, and have been living on your own within the year of the withdrawal (or at any point in the previous 4 years).
However, you are only eligible to participate if you aren’t living in a home occupied by a NEW spouse or common-law partner.
Basic Personal Amount
The basic personal amount is a non-refundable tax credit that all taxpayers are eligible to claim. The basic personal amount is the amount you can earn without paying any income tax. The amount, was $13,229 in 2020 and rises annually with inflation.
However, the Liberal government has promised to increase it more quickly – by 15% over the next four years, reaching $15,000 in 2023.
Not everyone will be entitled to this tax break. Canadians in the second-highest tax bracket (those earning more than $150,473) will have the basic personal amount reduced. Canadians earning more than $214,368 will not be receiving any tax break at all for the basic personal amount.
Tax Breaks for Parents
Being a parent is an expensive adventure! Luckily Canadian new parents are eligible for the following tax breaks.
Starting back in 2020, the federal government made a pledge that any maternity or parental benefits received through EI will be tax-exempt at source. If you earn $45,000 a year, this means an extra $1,800 in EI benefits.
The Liberals are also promising a 15-week leave for adoptive parents receiving EI benefits, the same length as maternity leave.
The Canada Child Benefit is also slated for an increase. The tax-free benefit will increase for new parents with kids under one year old. The 15% boost will mean an increase of as much as $1,000 for some parents. In July 2020, the base benefit is expected to be $7,750.
For parents of disabled children, the Child Disability Benefit almost doubled. This increase could mean more than $2,800 extra for parents who are caring for a child under the age of 18 with disabilities..
Kinship Care Providers
Kinship care programs are an alternative to foster care offered by provinces and territories. Participants may now qualify for the Canada workers benefit tax credit, even if you receive financial help from a kinship care program.
As well, payments of financial assistance from a kinship care program are not taxable or to be included in income when determining tax benefits and credits.
Claiming Cannabis as a Medical Expense
Now that cannabis is legal in Canada, the federal government has amended the Income Tax Act (ITA) allowing you to claim a medical expense tax deduction for any cannabis products that you buy as a patient after October 16, 2018.
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Filing Your Tax Return in 2021
Whether your tax return is simple and straightforward, or you operate your own business or have rental income – companies like H&R Block give you the option to file online for free or get personalized help from one of their tax experts. You can discuss all the above tax changes and see what applies to you and your family.
Tax season isn’t everyone’s cup of tea! Researching now will save you time later on when you file your tax return. Knowing what new income tax changes affect your family could help you enjoy a generous tax refund.
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