 Guide to Preparing 2021 Personal Tax Returns
 What's new for 2021?
COVID-19 economic relief measures
Personal tax calendar (2022) Personal tax rates and tools
Filing tips for 2021 personal tax returns
Chapter 1 – The T1 return – Getting started
 Chapter 2 – Total income
Overview Amounts not taxed What's new for 2021? Amounts exempt by statute Application of the guidelines in the context of COVID-19 COVID-19 recovery benefits Social assistance payments Payments under formal care programs (including foster care) Payments under informal care programs (kinship care) Damages for personal injury or death Amounts related to military service or wartime Expense allowances, travel allowances, and volunteer service payments COVID-19-related payments Payments in the 2021 taxation year Payments in the 2020 taxation year Annotations Employment income Line 10100 – Employment income What's new for 2021? What to include on Lines 10100, 10105, 10120, and 10130 Exemptions from employment income Volunteer firefighters and search and rescue workers Employment-related benefits and allowances Automobiles Employee's own vehicle – Automobile allowance provided by employer Employee's own vehicle – No allowance provided by employer Employer-provided automobile – Standby charge Employer-provided automobile – Operating expense benefit Vehicle commuting costs during the COVID-19 pandemic Aircraft Commuting costs during the COVID-19 pandemic Board and lodging Employment at a special (temporary) work site or remote location Employee discounts Low-interest or interest-free loans Home purchase or home relocation loans Housing subsidies other than housing loans Security option benefits Security options granted by a non-CCPC Security options granted by a CCPC Change in the corporation's status Cashout of security options Moving expense reimbursements General rule Housing loss Cellphones, computers, and related services Bring your own device Salary deferral arrangements Tax consequences Deferred salary leave plan maximum deferral period and minimum leave period Employment expenses Reporting Non-residents Canadian-source employment income Annotations Line 10400 – Other employment income What's new for 2021? Net research grants Eligible expenditures Research assistants Capital expenditures Personal and living expenses Travel costs Documentation Foreign employment income Determination of foreign-source employment income Canadian-resident cross-border employees Employer reimbursement of temporary living costs GST/HST and QST rebates Non-residents Annotations Investment income Line 12000 – Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations Eligible dividends Gross-up amount Integration mechanism Documentation Acceptable notification and documentation of eligible dividends Split income Dividends received by a spouse or common-law partner Carrying charges and interest Non-Residents Annotations Line 12100 – Interest and other investment income Foreign-source investment income Offshore investment fund property and foreign investment entities Interest income – Accrual rules Bank accounts Term deposits, guaranteed income certificates (GICs), and similar investments Canada Savings Bonds Treasury bills (T-bills) Mutual funds Segregated fund investments Income trusts and real estate investment trusts Earnings on life insurance policies Split income Shareholder debt Derivative forward agreements Derivatives – Mark-to-market election Sales of linked notes Carrying charges and interest Documentation Non-residents Annotations Line 12200 – Net partnership income: limited or non-active partners only Tax shelters Carrying charges and interest Non-residents Annotations Capital gains (Line 12700) What's new for 2021? Overview Capital gains, losses, and property Historical perspective Transitional rules Capital gain and capital loss Capital property Income versus capital determination Exclusions from capital gain and capital loss Inclusions in capital gain and capital loss Capital gains and losses in respect of foreign currency Disposition of Canadian securities Deduction from business investment loss Recovery of bad debts related to previous dispositions of eligible capital property Repayment of government and other financial assistance Taxable capital gains and allowable capital losses Dispositions Specific inclusions Specific exclusions Transfers of property that do not result in a change in beneficial ownership Transfers of property between trusts Certain payments in respect of a capital interest in a trust Transfers of property for securing a debt or loan Transfers of property to a trust to effect payment under a debt or loan Partitions of jointly owned property Date of disposition Deemed dispositions Death Remainder interests in real property Immigration Emigration Bad debt Shares of a bankrupt corporation Dispositions subject to warranty, covenant, or other contingent obligation When a small business corporation becomes public Granting or expiry of an option Gifts of capital property Change in use Synthetic dispositions Deemed gain – Negative adjusted cost base General rule Deemed gain for limited and non-active partners Destruction, loss, or expropriation of property Changes in terms of securities Debt securities Equity securities Computation of capital gains and losses Proceeds of disposition General definition Specific exclusions from proceeds of disposition Gifts, inadequate consideration, and excessive consideration Distribution by a personal trust Adjusted cost base General definition Property on hand – December 31, 1971 Valuation dates and V-day values Neutral or tax-free zone Laid-down costs Incidental or additional costs Cost of property for which 1994 capital gains exemption election was made Cost of certain properties Dividends in kind Stock dividends Other special rules Adjustments in determining ACB Additions and deductions to ACB of non-depreciable property General additions Additions relating to shares of a corporation Additions relating to units or interests in a trust General deductions Deductions relating to shares of a corporation Deductions relating to units or interests in a trust ACB of an interest in a partnership ACB of identical properties General rule Bonds, debentures, bills, notes, or similar obligations Property before and after valuation day Costs of disposition Capital gains and losses – Special rules Personal-use property Definition General rules Rules applicable to part dispositions Sets Debts Listed personal property Net gain and listed personal property losses Principal residence Ceasing to be resident in Canada Depreciable property Dispositions – Land and building Eligible capital property Post-2016 dispositions of former eligible capital property Foreign property Security option shares or units – Identical property Charitable gifts of capital property Publicly listed securities Flow-through shares Options to acquire property Exercising an option Extension or renewal of an option Sale of option to third party Restrictive covenants Wins and losses on lotteries Election on disposition of Canadian securities Tax on split income Loss denials and limitations Lottery losses or gains Superficial loss Superficial loss defined Identical properties Exceptions to the superficial loss rules Allocation of disallowed loss Pro rata denial of loss Loss on share redemption Loss on the disposition of shares of certain corporations Loss on shares where dividends were received Loss on shares held by an individual Loss on shares held by an individual's estate Loss on shares held by an individual who emigrates from Canada Loss on personal-use property Loss on transfer to a deferred income plan Loss on transfer of debt to a related person Loss on debt settlement Loss on the disposition of debt for non-income-producing purposes Principal residence exemption Principal residence defined Land as part of the principal residence Ownership Ordinarily inhabited Designation by an individual Making the designation Capital gains reduction – Principal residence exemption Pre-1982 properties and alternative calculation Reduction for previously claimed capital gains exemption Change in use Residential to rental Rental to residential Partial changes in use Disposition of part of a principal residence Farm property Principal residence exemption for a non-resident Capital gains exemption Overview Calculating entitlement to the capital gains exemption Part-year residents Qualified property Qualified small business corporation shares Small business corporation test Holding-period test Active business asset test and stacking rules Connected corporations Special rules – Related persons and partnerships Special rules – Value of corporate-owned life insurance policies Special rules – Identical shares Small business corporations going public Purification techniques Qualified farm or fishing property Transferring qualified farm or fishing property to a child Capital gains deduction – Limitation of claim Unused lifetime exemption limit Annual gains limit Cumulative gains limit Cumulative net investment loss Allowable business investment loss Alternative minimum tax Failure to report gain Capital gains deduction and tax on split income Anti-avoidance rules Corporate reorganizations Gain attributable to insufficient dividends Disproportionate allocation or distribution of gains Trusts and partnerships Designation to beneficiaries of trusts Deduction available to certain spousal trusts for taxation years prior to 2016 Flow-through to partners of partnerships Capital gains deferrals Capital gains deferral for investment in small business Overview Capital gains deferral – General rule Qualifying disposition Eligible small business corporation shares Active business corporation Excluded corporations Eligible reinvestment Calculating the capital gains deferral Adjusted cost base reduction Replacement property rules Involuntary dispositions Voluntary dispositions Replacement property Deferring the gain Election Capital gains reserves Overview Where the reserve is not available Promissory notes Reserves on foreign property Reserve for a gift of a non-qualifying security Earnout arrangements Convertible property Convertible securities Convertible debt Transfer of farm or fishing property to a child or grandchild Used principally in the business of farming or fishing Deferral Similar intergenerational rollovers Transfer of farm or fishing property to a parent Property transferred between spouses or common-law partners Rollovers and reorganizations Qualifying dispositions to a trust Qualifying exchanges for mutual funds Qualifying transfers for segregated funds Transfer of capital property to a corporation or partnership Share-for-share exchange Amalgamation Non-residents Tax payable by non-residents Dispositions of taxable Canadian property Taxable Canadian property defined Real or immovable property situated in Canada Property used in carrying on a business in Canada Shares of a corporation Interests in a partnership Interests in a trust Interests and options Other taxable Canadian property Compliance requirements Section 116 filing requirement Obligations of the non-resident vendor Obligations of the purchaser Application for clearance certificate for other property Gifts of property by a non-resident person Processing time Penalties for not filing Quebec clearance certificate Requirement to file a Canadian T1 return Treaty relief Dispositions of treaty-protected property Annotations Rental income (Line 12600) Income from a business or income from property? Extent of additional services provided Management and supervision of rental properties Incidental business Rental operations owned by a partnership Reporting Calculation of gross rental income Accrual or cash method? Rents received in advance Payment of rent in kind Other related income Rental expenses Current versus capital expenditures Capital expenses Landscaping costs Alterations to rental property to assist a person with a disability Devices and equipment to assist a person with a disability Current expenses Advertising Insurance Interest and financing fees Legal, accounting, and other professional fees Management and administration fees Motor vehicle expenses Office expenses Property taxes Repairs and maintenance Salaries, wages, and benefits Travel Utilities Other expenses Landscaping costs Undeveloped land Lease cancellation payments Leasehold inducements Condominiums and condominium fees Non-deductible expenses Capital cost allowance Purpose Reporting CCA rules and restrictions Rental building costing $50,000 or more Changing from personal to rental use Grants, subsidies, and other incentives or inducements Non-arm's length transactions Selling the rental property Replacement property Rental losses Special situations Principal residence Renting below fair market value Farmland rental by individuals Surface rental by farmers Non-residents Rental property outside Canada Annotations Business and professional income (Lines 13500–14300) What's new for 2021? Overview Taxation of business and professional income Classification of income by source Business income versus property income What is a business? What is a property? Distinguishing between business and property income Business income (self-employment income) versus employment income Wiebe Door test Evidence of relationship Specific income tax consequences arising from the classification Deductible expenses Business income versus capital gain What is profit? Timing of deduction Timing of income recognition Accrual basis or cash basis? Business income – Inclusions Gross sales and professional fees Amounts received Election to transfer customer deposit to purchaser under asset sale Amounts receivable Work in progress Other income Payments based on production or use Damages for breach of contract Damages for loss of business income Insurance proceeds expended Inducement payments, reimbursements, and other amounts Types of reimbursements, inducements, and similar amounts COVID-19-related government assistance Timing of receipt Restrictive covenants Investment tax credits Gain on settlement of debt Provisions or reserves from previous years Income in special situations Sales made with a right of return Construction contract income Accounting treatment of contract revenue Tax treatment of contract revenue Progress method of revenue recognition Fixed-total-price contracts Cost of goods sold Meaning of inventory Inventory valuation methods What is cost? Overhead allocation Depreciation in inventory What is fair market value? Change in inventory valuation method Inventory valuation for adventures in the nature of trade Parts or supplies Inventory obsolescence reserves Artists Work in progress of a professional Non-residents Derivative instruments Business income – Deductions Deductibility of an expense General limitations 1. The expense must be incurred to earn business income 2. The expense must not be on capital account 3. The expense cannot be a personal or living expense 4. The expense must be reasonable in the circumstances 5. The expense cannot be part of a transaction to which GAAR applies Specific limitations Payments under different acts Political contributions Prepaid expenses Recreational facilities and club dues Recreational property and facilities Club dues Safety deposit box fees Straddle transactions Expenses deductible on Form T2125 Advertising expenses Newspapers Periodicals Broadcasting Online Meals and entertainment Exceptions Conferences and conventions Amounts included in air, train, or bus fares Entertainment expenses at golf clubs Long-haul truck drivers Bad debts Assessing collectibility Interest Interest paid or payable Reasonable rate of interest Funds used Reasonable expectation of income Mortgage interest and home offices Interest deemed paid Financing fees Motor vehicle expenses Definitions of passenger vehicle and automobile Deductible motor vehicle expenses Zero-emission vehicles Maximum capital cost allowance on purchased vehicles Maximum deduction for leased vehicles Interest expense Mileage allowances Capital cost allowance Class 14.1 property Private health services plan premiums Conditions for deduction Amount of deduction Other expenses Conventions Disability-related modifications to buildings Disability-related equipment Landscaping Site investigation Utilities service connection Reserves Reserves for goods or services to be provided after year-end Warranty reserves Food, drink, or transportation reserves Prepaid rent reserves Returnable container reserves Reserves for amounts due from the sale of property Doubtful debt reserves Workspace at home Workspace at home during the COVID-19 pandemic Limitation Carryforward of expenses Business losses Internet business activities Selection of business year-end Taxation of farming and fishing income Non-residents Carrying on business in Canada Non-resident actors Annotations Capital cost allowance Overview Purpose Application Current versus capital expenditures CRA's administrative guidelines Asset capitalization threshold Summary Capital cost allowance (CCA) system Post-2016 rules for eligible capital property Mechanics Eligible depreciable property Listed in a class Ownership Property held by a partnership Available for use Buildings Other properties (including leaseholds) Election for long-term projects Non-arm's length transfers Anti-avoidance rule Exceptions Costs otherwise deductible Specifically disallowed depreciable property Calculation of CCA Formulas Declining-balance classes Other classes Additional allowances – Transitional measures for Class 14.1 Additional allowances Acceleration of CCA for eligible property Accelerated investment incentive property Accelerated investment incentive property acquired in the year Full expensing of M&P machinery and equipment Full expensing of clean energy equipment Accelerated investment incentive Zero-emission vehicles General restrictions Half-year rule Exceptions to the half-year rule – Excluded assets Exceptions to the half-year rule – Non-arm's length transactions Short taxation years Separate classes for similar properties Capital cost Meaning of capital cost Special rules Apportionment of cost Cost incurred in foreign currency Property manufactured or produced for own use Deemed capital cost and adjustments to capital cost Property with a dual purpose Change in use of assets Business-use property converted into non-business-use property Non-business-use property converted into business-use property Election not to apply the change-in-use rules Property with change in relative use Property with a change in use from one income-producing purpose to another Non-arm's length transfers Where vendor is a Canadian-resident individual or partnership Where vendor is a corporation or non-resident Eligible capital property – Additional relief for Class 14.1 Potential recapture Death of an individual Passenger vehicles Grant, subsidy, credit, inducement, or other assistance Government assistance Investment tax credit Debt forgiveness GST/HST credits and rebates on depreciable property QST credits on depreciable property Other inducements or reimbursements Townsite costs related to a mine and payments for other prescribed property Trade-ins Gift or bequest Building under construction, renovation, or alteration Election to capitalize borrowing costs Undepreciated capital cost Meaning of undepreciated capital cost Cumulative account Resulting UCC balance UCC balance of Class 14.1 Allocation of total capital cost between properties Opening UCC and amount deemed allowed as CCA Taxation years straddling January 1, 2017 Disposition Meaning of disposition Meaning of proceeds of disposition Involuntary dispositions – Time of disposition and receipt of proceeds Recapture and terminal loss Recapture Temporary negative UCC balance Disposition of eligible capital property on or after January 1, 2017 Acquisition of former eligible capital property from non-arm's length person Replacement property rules Recapture deferral calculation Limited-period franchises, concessions, or licences Terminal loss Depreciable property of a discontinued business Passenger vehicles costing more than the prescribed amount Zero-emission passenger vehicles costing more than the prescribed amount Former business property of another person Class 14.1 asset Transfer of depreciable property from one class to another Disposition of depreciable and non-depreciable property Disposal of land and building in the same year Cost amount Disposal of land and building in different years Suspended loss rules Affiliated persons Application of rules to transferor Triggering events Application of rules to transferee Excluded dispositions Goodwill Rules as of January 1, 2017 Acquisitions and dispositions of goodwill Deemed goodwill – Outlays not relating to property Capital receipts not relating to property Bad debts arising from dispositions of depreciable property Specific CCA restrictions Luxury automobiles Operation of the CCA restriction Definition of passenger vehicle Separate classes, recapture, and terminal loss Transfer of vehicle to non-arm's length parties Joint ownership arrangements Zero-emission passenger vehicles costing more than the prescribed amount Joint ownership arrangements Rental properties Operation of the CCA restriction Definition of rental property Expanded definition of rent Leasing properties Operation of the CCA restriction Definition of leasing property Expanded definition of rent Separate class required Specified leasing properties Definition of specified leasing property Expanded definition of rent Separate class required Operation of the CCA restriction Available-for-use rule Anti-avoidance rules Special rules Acquisitions of specified leasing property Other rules Computer tax-shelter properties Definition of computer tax-shelter property Operation of the CCA restriction Separate class required Specified energy properties Definition of specified energy property Exception – Non-arm's length acquisitions Exception – Replacement property Operation of the CCA restriction Separate class required Special CCA rules for lessees Election to capitalize leased property Application of rules Acquisition of leased property Lease-option agreements CCA classes Additions and alterations Non-arm's length transfers Separate classes General rule – Separate businesses Separate class rules Rental property costing less than $50,000 Rental property costing $50,000 or more Multiple-unit residential buildings Passenger vehicles Limited-period franchise, concession, or licence Other assets Separate class elections Outdoor advertising sign Rapidly depreciating electronic equipment Manufacturing or processing property Class 43.1 and 43.2 M&P property Non-residential buildings Transfers between classes Calculation Elections Election to include properties in Class 1 Election to include properties in Class 2, Class 4, or Class 17 Election to include properties in Class 8 Election to include properties in Class 37 Election to make certain transfers – Acquisitions made before or after May 26, 1976 Election to make certain transfers – General rule Election to include properties in Class 1, Class 3, or Class 6 Election not to include properties in Class 44 Election to include properties in Class 35 Election not to include properties in Class 54, Class 55, or Class 56 Five-year rule for Class 8 or Class 43 separate class elections Misclassified properties Annotations Pension and other income Line 11300 – Old age security (OAS) pension What's new for 2021? Non-residents Annotations Line 11400 – CPP or QPP benefits Retirement pension Disability benefits Survivor benefits Post-retirement benefit Non-residents Annotations Line 11500 – Other pensions or superannuation What's new for 2021? Superannuation or pension benefits RPPs RRIFs, PRPPs, and annuities Saskatchewan pension plan Foreign Pensions US IRAs and Roth IRAs US social security Non-residents Annotations Line 11600 – Elected split-pension amount What's new for 2021? Election to split pension income Benefits of pension splitting Annotations Line 11700 – Universal child care benefit What's new for 2021? Overview of the UCCB Eligibility for UCCB Eligible individual Eligible child Inclusion in income – Who must report the UCCB? Two-parent families Single-parent families Repayment of UCCB UCCB amounts for previous years Exclusion of UCCB from the calculation of certain income bases Attribution rules Administration Non-residents Annotations Line 11900 – Employment insurance and other benefits Lump-sum payment Quebec parental insurance plan Extension of EI special benefits to self-employed individuals Non-residents Annotations Line 12500 – Registered disability savings plan income What's new for 2021? Contributions RDSP payments Specified disability savings plan Impact of cessation of disability tax credit eligibility Non-residents Annotations Line 12800 – Support payments received Child support amount Tax treatment Support amount Allowance Periodic basis Tax treatment Non-residents Annotations Line 12900 – RRSP income Additional amounts included on Line 12900 Spousal or common-law partner RRSP Home buyers' plan and lifelong learning plan Non-residents Annotations Line 13000 – Other income What's new for 2021? COVID-19 financial assistance payments Apprenticeship incentive grants Death benefits CPP or QPP death benefits Federal income support grant for parents of young victims of crime Lump-sum payments received in lieu of health or dental coverage Registered disability savings plan payments Registered education savings plan payments Educational assistance payments Accumulated income payments Retirement compensation arrangements Retiring allowances Restrictive covenants Tax-free savings account payments Tax informant program payments Non-residents Annotations Line 13010 – Taxable scholarships, fellowships, bursaries, and artists' project grants Awards Award versus employment income Scholarships provided to employees' dependants Fellowships versus research grants Post-graduate educational fellowships Post-doctoral fellowships Art production grants Prizes Prescribed prizes Scholarship exemption Limitations of scholarship exemption Exemption amount Restriction for part-time courses Reporting Non-residents Annotations Lines 14400 to 14700 – Other benefits (workers' compensation, social assistance, net federal supplements) Non-residents Annotations Chapter 3 – Net income deductions
Chapter 4 – Taxable income
Chapter 5 – Federal non-refundable tax credits
Chapter 6 – Federal tax payable or refundable
Chapter 7 – Provincial and territorial tax
Chapter 8 – Quebec provincial income tax
Chapter 9 – Special situations and tax planning
Chapter 10 – Taxation of immigrants, emigrants, and non-residents
Chapter 11 – Administration
Appendices
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