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Tax planning

Lots of people received the Canada Emergency Response Benefit (CERB) in 2020, and there was no tax withheld on those payments. CERB is taxable income and recipients will get tax slips in February that will likely lead to either a lower tax refund than they received in previous years, or even tax owing for some when people file their tax returns.

Generally, an employee who works primarily from home can claim home office expenses as a deduction on their tax return. With so many people working from home this year, there will be many who can claim a home office deduction. Canada Revenue Agency (CRA) introduced a simplified procedure for anyone who worked more than 50% of the time from home for at least four consecutive weeks. Eligible taxpayers can claim $2 for each day they worked from home, up to a maximum of $400. Some people may be entitled to a larger deduction using the detailed method for claiming home office expenses.

It isn’t too late to do some tax planning for the last calendar year. If you have Registered Retirement Savings Plan (RRSP) room and your income was moderate or high for 2020, you can make a RRSP contribution right up until Mon., March 1, 2021. Contributions made in the first 60 days of 2021 are deductible on your 2020 tax return, which is due in April.

I do not generally recommend people take out RRSP loans to top up their RRSP unless they had an extraordinarily high income in that tax year. If your income is going to be comparable in 2021 to 2020, rather than borrowing money and committing yourself to paying loan payments each month, consider setting up a regular monthly contribution to your RRSP for a comparable amount. You may have to wait another year to get the tax refund from your RRSP contributions, but saving will become part of your monthly budget without taking on more debt, and you will likely receive a tax refund next year that can then be contributed to your RRSP at that time. RRSP loans are often reactive, for people who have got behind on their savings, whereas a monthly RRSP contribution can be more proactive and avoids debt.

Investments

Some investors ignore their investments; or they don’t rebalance as the value of their investments fluctuates; or they leave cash sitting idle that could be invested.

As your 2020 year-end statements hit your inbox, this is a good time to review your investments and get properly set up for the year ahead.

This may be a good year to pay closer attention to your investment fees. We’re hit with relatively high fees on some retail mutual funds in this country, averaging about 2% and sometimes higher. Conservative investors who have a high allocation to bonds may be paying 2 per cent on their mutual funds to earn 2 per cent on their bonds. 2% minus 2% is, well, zero.

If someone has a Defined Contribution (DC) pension plan or group RRSP at work, they should make sure they review their investment options, and invest as aggressively as their risk tolerance allows to try to maximize their long-run returns. If there is a company match on contributions, maybe this is the year to try to maximize that free money by increasing contributions.