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We’re a little over a month away from the deadline for filing your 2021 taxes. For most individuals, the deadline is typically April 30, but because that falls on a Saturday this year, the Canada Revenue Agency (CRA) will accept filings until May 2, 2022 (check the CRA website for specific filing deadlines as they apply to you). And, if you’re looking to maximize your refund – or at least limit your taxes – and avoid last-minute stress, now is a good time to start getting ready.

There aren’t many new or expanded tax credits available to BC taxpayers this year, but there are some changes that could work in your favour. Here are three to look for followed by four strategies to make the most of your refund, if you receive one.  

Surging inflation lifts tax brackets

One of the most important factors affecting your tax payable is your income-tax bracket, which is indexed to inflation, based on changes in the consumer price index (CPI). (Canada started adjusting its tax brackets for inflation in 1974, which, like today, was a time of high inflation.)

These brackets are critical because your marginal rate (or the tax rate on the next dollar you earn) rises when your income climbs above certain thresholds. For example, the federal government will apply a 20.5% tax rate to the portion of your income between $49,020 and $98,040 in 2021, so every dollar within that range is taxed at 20.5%, rising to 26% on every dollar between $98,040 and $151,978, and so on.

Without indexing, your income would float into the next bracket and be taxed at a higher rate, even if it only matched the cost of living – a phenomenon known as “bracket creep”.

With higher inflation, tax brackets are rising faster than usual. For 2021, for example, you’d pay the federal government’s highest rate (33%) on income above $216,511, up 1% from 2020. But the government has also released brackets for 2022, and its top rate kicks in at $221,708, up 2% (or double the rate of increase from 2020 to 2021).

In BC, you’d enter the province’s highest tax bracket at $222,240 for 2021, also up 1% from 2020. But the province’s 2022 rate of $227,091 is also up double – 2.2% – from 2021.

It’s safe to assume these brackets will rise faster in 2023, with the CPI up 5.1% in January and likely to accelerate in light of rising energy costs spurred by the conflict in Ukraine.

Work-from-home tax credit jumps

If you’re a salaried employee, you likely know that the Canada Revenue Agency (CRA) has offered a tax credit during the pandemic that allows you to deduct some of the costs of your home office.

There are two ways to calculate the credit:

  • The flat-rate method, where you simply deduct $2 per day for each day worked at home, to a maximum of $500 (note that this total has risen from $400 in 2020). Under this method, you don’t need to keep any bills or receipts.
  • The detailed method, which is more work, but you may consider if you think your home-office deduction will exceed the maximum on the flat-rate method. You also have to have worked from home for at least 50% of the time for one month (or four consecutive weeks) or longer during the year.

    This method has some similarities to how self-employed workers deduct their home-office expenses: you measure out the percentage of your floor space that you devote to work, and then you can claim things like your power and heating bills, for example, in proportion to your workspace.

    You can also claim items like your Internet and cellphone bills but not capital expenses, such as office furniture. The CRA provides a list of qualifying expenses on its website.

No matter which method you use, you’ll have to fill out Form T777, and if you follow the detailed method, your employer will have to complete Form 2200S, stating you were required to work from home in 2021 and weren’t reimbursed for home-office expenses.

Finally, the government has announced that the tax credit will continue for the 2022 tax year.

Delayed carbon tax changes go into effect in July

Finally, looking a bit beyond tax time, the BC carbon tax is slated to rise on July 1, 2022, after being delayed last year.

The tax comes along with a tax credit that’s reduced as your family income rises (the BC government has published income levels on its website). Those payouts are made in July, October, January and April. Starting in July 2022, maximum yearly amounts will rise to $193.50 for each adult in the family, as well as for the oldest child, and $56.50 for each additional child. Previously, these amounts were $174 and $51, respectively.

To be sure, the increase won’t offset much of most people’s fuel costs, given today’s elevated prices. But if you rely more on public transit, or if you take advantage of BC’s incentives to buy an electric vehicle (which were outlined in our July 2021 LifeSpring Insights article), then you’d be able to keep more of this money in your pocket.

Four ways to maximize your tax refund

Now let’s look at four ways you can invest your refund to lower your debt, cut your tax bill and take the sting out of inflation and rising interest rates.

1. Roll your refund into your TFSA and collect tax-free dividends. As of January 1, your yearly TFSA contribution room rose by $6,000. Unused contribution room carries forward, whether or not you ever held a TFSA. So if you were 18 years old and a Canadian resident with a valid social insurance number when TFSAs debuted in 2009, you’re eligible for up to $81,500 in TFSA room.

If you have a spouse, you could have up to $163,000 in TFSA room between you, enough to generate significant income if you hold income-generating investments inside your accounts.

Contributions to your TFSA grow tax-free. But unlike an RRSP, you can’t deduct your contribution from your income. You can withdraw funds anytime, tax-free; you just can’t replace them in the calendar year in which you withdrew them.

You can hold a range of investments inside your TFSA, including stocks, bonds, exchange-traded funds and GICs.

A strategy here, then, could be to hold a portfolio of dividend-paying stocks and/or funds and add your tax refund to your holdings every year. That way you’re naturally increasing your income stream, helping offset rising inflation. And because you’re holding your investments in a TFSA, you can withdraw your dividends tax-free.

Advisor and client meeting in office

2. Pay down your mortgage – especially if you have a variable rate. The Bank of Canada is focused on raising interest rates to combat inflation, with economists estimating anywhere from four to seven hikes from the central bank this year.

The bank has already started, announcing the first increase on March 2nd. So anything you could do to lower your principal, particularly if you have a variable-rate mortgage, which rises in lockstep with Bank of Canada rate hikes, would help lower your overall interest expenses.

3. Get a jump on your 2022 RRSP contributions. One proven strategy is to redirect your tax refund into your registered retirement savings plan (RRSP), which, in turn, would boost your contributions for 2022.

And because you can deduct your RRSP contributions from your income, you could get an even bigger tax refund next year (plus your contributed tax refund could work with indexing to keep your income below the next tax bracket). You then continue the cycle, reinvesting your refund yearly, thereby expanding your tax refund and your retirement savings.

4. Donate your refund. Many charities have taken significant financial hits during COVID-19, with fundraising events largely cancelled (or moved online) and demand for their services rising.

You can help them, and reduce your tax burden in the future, by donating your refund this year. When you do, the first $200 of your donation will result in a 15% federal tax credit, plus a 5.06% credit from the province.

All donations above $200 get you larger credits, at 29% federally and 14.7% provincially. (Note that some of your donations above $200 can be credited at a 33% rate if your income is over $216,511 in 2021.) And you don’t have to claim your donations in the 2022 tax year – you can defer them for up to five years, which might be a better plan if your income will be lower in 2022.

Seek the advice you need

Tax season can feel like a race against the clock – tracking down and sorting documents, assessing what you can and cannot deduct, trying to keep up-to-date with changes from the CRA, and then looking for smart uses for your refund. It can make for a lot of work in a short span of time.

Depending on your circumstances, you may wish to seek in-depth advice from a tax professional and work towards a long-term tax plan – especially if you have complex matters such as business, property, or investment income to consider. Your financial advisor can help connect you with a tax expert who can address your needs. Whether you’re looking for ways to save on taxes or want to turn your return into an investment opportunity for future growth, a BlueShore advisor can offer strategies and insights on how to make that happen.

BlueShore Financial, Financial Advisor, Kanwar Chawla

Kanwar Chawla

Financial Advisor

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The information contained in this article/video was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. It is provided as a general source of information and should not be considered personal tax advice. We recommend that you seek independent advice from a tax accounting professional.