Alan Roth, Toronto
Have you ever found yourself looking for tax savings while completing your tax return in April? If so, you’ve probably realized that at that point there’s not much you can do to reduce your balance owing or increase your refund balance. By the time you prepare your tax return, you’re looking back and simply reporting on the year that has ended.
But don’t worry. As we approach the end of the year, there’s still some time left for forward-looking planning. You can approach year-end planning by asking yourself questions, going through a checklist, considering a framework or using all three methods.
Taking time out of your busy December to think about these questions can help you find better answers that may save you money on your 2020 tax bill and beyond:
Did you receive COVID-19-related relief benefits from the government in 2020?
Various COVID-19-related relief benefits provided by the government, such as the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB) are taxable.
Financial assistance payments received under a provincial or territorial COVID-19 relief program are also taxable. If you received benefits under any of these programs in 2020, you will be required to include the total amount in income on your 2020 income tax return.
If you operate an unincorporated business in 2020 and received any benefits under the Canada Emergency Wage Subsidy (CEWS), the Temporary Wage Subsidy (TWS) or the Canada Emergency Rent Subsidy (CERS) programs, the amounts received are deemed to be government assistance, and therefore taxable2, and will need to be reported on your 2020 income tax return as well.3
Because these benefits are all taxable, you will need to take them into account when estimating the amount of taxes you’ll owe for the 2020 taxation year.4
For information about the CERB program, see EY Tax Alert 2020 Issue No. 26, Canada Emergency Response Benefit and Work-Sharing Program update, and No. 31, Canada updates the CERB. For details about the transition from the CERB to EI and the CRB, CRSB and CRCB, see EY Tax Alert Issue 2020 No. 45, Transition plan for the CERB announced, and TaxMatters@EY, November 2020, Transition from the Canada Emergency Response Benefit. Bill C-4 receives Royal Assent.
For further information about the TWS and the original version of the CEWS before it was revised, see TaxMatters@EY, May 2020, COVID-19 tax measures available to owner-managed businesses and individuals, TaxMatters@EY, June 2020, More details emerge on the Canada Emergency Wage Subsidy, and EY Tax Alert 2020 Issue No. 24, Federal Wage Subsidy Program. See EY Tax Alert 2020 Issue No. 42, Redesign and extension of the Canada Emergency Wage Subsidy, for information about the revised CEWS program. See EY Tax Alert 2020 No. 52, Bill C-9 introduced to implement new rent subsidy and amend current wage subsidy, for information on the CERS and updates to the CEWS program.
Have you been working from home as a result of the COVID-19 pandemic?
If you’ve worked from home in 2020 like many Canadians as a result of the lockdowns associated with the COVID-19 pandemic, you may wonder to what extent you may deduct any related home office expenses. The Income Tax Act specifies the types of expenses incurred in a home office that employees or the self-employed may deduct and the conditions that must be first met to be able to deduct them.
For more information, see the following article by David Robertson and Laura Jochimski of EY Law: Could home office quarantine mean home office deductions?
The federal and provincial governments have been relatively silent on their willingness to amend the rules for the deduction of home office expense in any way or even to provide clarifications to the rules in light of the circumstances that have arisen in the face of the COVID-19 pandemic.5 However, the federal fall economic statement, delivered on November 30, 2020, noted that the Canada Revenue Agency (CRA) will permit employees who have been working from home in 2020 as a result of the pandemic to claim up to $400 in home office expenses. The claim would be based on the amount of time spent working from home, without the need to track detailed expenses. The CRA will generally not request that employees provide a signed form from their employers (e.g. a Form T2200) for these costs. Further details will be communicated by the CRA in the coming weeks. See EY Tax Alert 2020 Issue No. 57.
The CRA has recently provided information on the taxation of certain benefits provided by employers to employees working from home as a result of the pandemic. The CRA stated earlier in the year that the reimbursement of up to $500 for all or part of the cost of purchasing personal computer equipment to enable an employee to work remotely as a result of the COVID-19 pandemic would be considered a tax-free benefit if the purchase is supported with receipts. At the October 2020 Canadian Tax Foundation virtual conference CRA Roundtable, the CRA confirmed that this position would be expanded to include home office furniture such as desks and chairs provided that they are needed for the employee to carry out their duties of employment from home.
The CRA also noted at another recent webinar that if your regular place of employment is closed during the pandemic, the CRA will not consider employer-provided parking at that location to be a taxable benefit to you. If you are still going to your employer’s place of business to work, the CRA noted that it would not consider a reimbursement or reasonable allowance for travel expenses related to commuting in a motor vehicle from an employee’s home to a regular place of employment to be a taxable benefit if your presence at the office is required and the office is closed. If the office is open, “additional travel costs” to pick up home office equipment, for example, would not be a taxable benefit. For example, if you normally commute via public transit, the extra cost incurred to use your car for safety reasons would be considered an additional travel cost in this context.
In addition, travel expenses incurred from the employee’s home to their place of work using a motor vehicle provided by the employer under similar circumstances to those outlined above will be considered business mileage and, therefore, not included as a taxable benefit.6
For further information, see EY Tax Alert 2020, Issue No. 50, CRA update on CEWS and employee benefits.
If your employer reimbursed you for computer equipment or furniture to enable you to work from home during the pandemic, ensure that you keep your receipts from your purchases. If you have been going to work at your employer’s place of employment, ensure that you also retain a log of kilometres driven that were related to your travel from home to work.
Are there any income-splitting techniques available to you?
You may be able to reduce your family’s overall tax burden by taking advantage of differences in your family members’ marginal income tax brackets using one or a combination of the following:
- Income-splitting loans – You can loan funds to a family member at the prescribed interest rate of 1% (for 2020 loans created after June 30, 20207). The family member can invest the money and the investment income will not be attributed to you (i.e., treated as your income for tax purposes), as long as the interest for each calendar year is paid no later than January 30 of the following year.
- Reasonable salaries to family members – If you have a business, consider employing your spouse or partner and/or your children to take advantage of income-splitting opportunities. Their salaries must be reasonable for the work they perform.8 However, other income splitting opportunities involving your business may be limited (see below re: income-splitting private corporation business earnings).
- Spousal RRSPs – In addition to splitting income in retirement years, spousal RRSPs may be used to split income before retirement. The higher-income spouse or partner can get the benefit of making contributions to a spousal plan at a high tax rate and, after a three-year non-contribution period, the lower- or no-income spouse can withdraw funds and pay little or no tax.
Have you paid your 2020 tax-deductible or tax-creditable expenses yet?
- Tax-deductible expenses – A variety of expenses, including interest and child-care costs, can only be claimed as deductions in a tax return if the amounts are paid by the end of the calendar year.
- Expenditures that give rise to tax credits – Charitable donations, political contributions, medical expenses, home accessibility renovation expenses and tuition fees must be paid in the year (or, in the case of medical expenses, in any 12-month period ending in the year) in order to be creditable.
- Consider whether deductions or credits may be worth more to you this year or next year – If you can control the timing of deductions or credits, consider any expected changes in your income level and tax bracket or marginal tax rate.
Have you considered the impact of any recent changes to personal tax rules9?
Employee stock options grants – Proposed amendments will limit the availability of the 50% employee stock option deduction10 to an annual maximum of $200,000 of stock options that vest in a calendar year, based on the fair market value of the underlying shares on the date of grant. However, these amendments will not apply to options granted to employees of “startup, emerging, or scale-up companies.” The government is expected to provide definitions in the near future on what these terms mean in this context.11
The following example illustrates the impact of these proposed measures. Your employer, a long-established public company, grants you 10,000 options (which vest immediately) to purchase shares of the company for $100 per share at a time when the fair market value of the shares is also $100 per share. Therefore, the value of the shares represented by the options at the time of grant is $1,000,000. If you exercise the 10,000 options in a particular year, the stock option deduction will only apply to 2,000 ($200,000/$100) of the options granted.
The proposed rules were originally intended to apply to stock options granted on or after January 1, 2020 by corporations that are not CCPCs. However, on December 19, 2019, the Department of Finance stated that further details on the proposals would be announced in the 2020 federal budget and, therefore, the proposed changes would not come into effect on January 1, 2020. See EY Tax Alert 2019 Issue No. 42: Proposed changes to employee stock option rules delayed.
The 2020 budget was delayed due to the COVID-19 pandemic and as of the time of writing no date has been announced for the release of that budget.
In its September 23, 2020 Speech from the Throne, the federal government confirmed its intention to proceed and conclude its work on this matter. In its fall economic statement delivered on November 30, 2020, the federal government provided further details on the proposed rules, confirming that they would take effect for stock options granted on or after July 1, 2021 (other than qualifying options granted after June 2021 that replace options granted before July 2021). The existing rules will continue to apply to stock options granted before then. To the extent that you have control over the timing of the granting of options, it may be prudent to consider having the options granted prior to July 2021 to ensure that the existing rules still apply to them. See EY Tax Alerts 2020 Issue No. 57 and Issue No. 59.
For further details, see also EY Tax Alert 2019 Issues No. 26, Proposed changes to employee stock option rules (June 2019 update) and No. 14, Federal budget 2019-20: proposed changes to the stock option deduction.
Holding passive investments in your private corporation – Amendments effective for taxation years beginning after 2018 may limit a Canadian-controlled private corporation’s (CCPC’s) access to the small business deduction and, accordingly, the small business tax rate12 in a taxation year to the extent that it holds passive investments that generate more than $50,000 of income13 in the preceding year. Consult your tax advisor for possible strategies to mitigate the adverse impact of these rules.
For example, if you are considering realizing accrued gains in the company’s investment portfolio before its 2020 taxation year end and the company is likely to cross the $50,000 income threshold by doing so, consider deferring the gains to the following year so that the 2021 taxation year is not impacted. You may also consider the pros and cons of holding a portion or all of the portfolio personally instead of in the company.
The impact of these rules on CCPCs subject to taxation in Ontario or New Brunswick is smaller because both provinces have confirmed that they are not adopting them for purposes of their respective provincial small business deductions.
For more information, see TaxMatters@EY, May 2018 “Federal budget simplifies passive investment income proposals."
Digital news subscriptions – Recent amendments introduced a new temporary 15% non-refundable tax credit on amounts up to $500 paid by individuals for eligible digital news subscriptions annually (a maximum annual tax credit of $75) beginning in 2020. Certain conditions apply. For example, the subscription must entitle you to access content provided in digital form by a qualified Canadian journalism organization (QCJO)14 and that content must primarily be original written news15. In addition, the credit is limited to the cost of a standalone digital news subscription where the subscription is a combined digital and newsprint subscription. If there is no such comparable subscription, you are limited to claiming one half of the amount actually paid. The credit applies to eligible amounts paid after 2019 and before 2025.
Tuition fees associated with training – Recent amendments introduced a new refundable tax credit, the Canada training credit. Effective for 2020 and later taxation years, the credit assists eligible individuals who have either employment or business income to cover the cost of up to one-half of eligible tuition and fees associated with training. Beginning in 2019, eligible individuals can accumulate $250 each year in a notional account which can be used to cover the training costs. A number of conditions must be met to be eligible.16
The amount of the refundable credit that can be claimed in a taxation year is equal to the lesser of one-half of the eligible tuition and fees paid in respect of the year and the individual's notional account balance. For purposes of this credit, tuition and fees do not include tuition and fees levied by educational institutions outside of Canada.
The portion of eligible tuition fees refunded through the Canada training credit reduces the amount that would otherwise qualify as an eligible expense for the tuition tax credit. The first credit can be claimed for the 2020 taxation year.
Do you income-split private corporation business earnings with adult family members?
Recent amendments may limit income splitting opportunities with certain adult family members17 through the use of private corporations in 2018 and later years.
For example, a business is operated through a private corporation, and an adult family member in a low income tax bracket subscribes for shares in the corporation. A portion of the business’s earnings is distributed to the family member by paying dividends. These rules apply the highest marginal personal income tax rate (the tax on split income) to the dividend income received unless the family member meets one of the legislated exceptions to the application of this tax. For example, if the adult family member is actively engaged in the business on a regular basis by working an average of at least 20 hours per week during the year (or in any five previous but not necessarily consecutive years), the tax on split income may not apply.
Consult with your tax advisor to learn more.
For more information about these rules, see EY Tax Alert 2017 Issue No. 52, Finance releases revised income splitting measures, TaxMatters@EY, February 2018, Revised draft legislation narrows application of income sprinkling, TaxMatters@EY, February 2020, “Tax on split income: CRA provides clarifications on the excluded shares exception,” and TaxMatters@EY November 2020, “Tax on split income: The excluded business exception.”
Have you maximized your tax-sheltered investments by contributing to a TFSA or an RRSP?
- Tax-free savings account (TFSA) – Make your contribution for 2020 and catch up on prior non-contributory years. You won’t get a deduction for the contribution, but you will benefit from tax-free earnings on invested funds. Also, to maximize tax-free earnings, consider making your 2021 contribution in January.
- TFSA withdrawals and re-contributions – TFSA withdrawals are tax free and any funds withdrawn in the year are added to your contribution room in the following year. But if you have made the maximum amount of TFSA contributions each year18 and withdraw an amount in the year, re-contributions made in the same year may result in an overcontribution, which would be subject to a penalty tax. If you have no available contribution room and are planning to withdraw an amount from your TFSA, consider doing so before the end of 2020, so that it’s possible to re-contribute in 2021 without affecting your 2021 contribution limit.
- Registered retirement savings plan (RRSP) – The earlier you contribute, the more time your investments have to grow. So consider making your 2021 contribution in January 2021 to maximize the tax-deferred growth. If your income is low in 2020, but you expect to be in a higher bracket in 2021 or beyond, consider contributing to your RRSP as early as possible, but holding off on taking the deduction until a future year when you will be in a higher tax bracket.
Are you considering making an RRSP withdrawal under the Home Buyers’ Plan?
If you’re a first-time home buyer,19 the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,00020 from your RRSP to finance the purchase of a home. No tax is withheld on RRSP withdrawals made under this plan. If you withdraw funds from your RRSP under the HBP, you must acquire a home by October 1 of the year following the year of withdrawal, and you must repay the withdrawn funds to your RRSP over a period of up to 15 years, starting in the second calendar year after withdrawal. Therefore, if possible, consider waiting until after the end of the year before making a withdrawal under the HBP to extend both the home purchase and repayment deadlines by one year.
Have you maximized your education savings by contributing to an RESP for your child or grandchild?21
Contributions – Make registered education savings plan (RESP) contributions for your child or grandchild before the end of the year. With a contribution of $2,500 per child under age 18, the federal government will contribute a grant (CESG) of $500 annually (maximum $7,200 per beneficiary).
Non-contributory years – If you have prior non-contributory years, the annual grant can be as much as $1,000 (in respect of a $5,000 contribution).
Is there a way to reduce or eliminate your non-deductible interest?
Interest on funds borrowed for personal purposes is not deductible. Where possible, consider using available cash to repay personal debt before repaying loans for investment or business purposes on which interest may be deductible.
Have you reviewed your investment portfolio?
Accrued losses to use against realized gains – While taxes should not drive your investment decisions, it may make sense to sell loss securities to reduce capital gains realized earlier in the year. If the losses realized exceed gains realized earlier in the year, they can be carried back and claimed against net gains in the preceding three years and you should receive the related tax refund. Note that the last stock trading date for settlement of a securities trade in 2020 is Tuesday, December 29, 2020 for securities listed on both Canadian and US stock exchanges.
Just remember to be careful of the superficial loss rules, which may deny losses on certain related-party transactions.
Realized losses carried forward – If you have capital loss carryforwards from prior years, you might consider cashing in on some of the winners in your portfolio. As noted above, be aware of the December 29, 2020 deadline for selling securities listed on a Canadian or US stock exchange to ensure that the trade is settled in 2020. Or consider transferring qualified securities with accrued gains to your TFSA or RRSP (up to your contribution limit). The resulting capital gain will be sheltered by available capital losses, and you will benefit from tax-free (TFSA) or tax-deferred (RRSP) future earnings on these securities.
Alternatively, you could consider donating publicly traded securities (e.g., stocks, bonds, Canadian mutual fund units or shares) with accrued gains to a charitable organization or foundation. If you do, the resulting capital gain will not be subject to tax and you will also receive a donation receipt equal to the fair market value of the donated securities.
Can you improve the cash flow impact of your income taxes?
Request reduced source deductions – If you regularly receive tax refunds because of deductible RRSP contributions, child-care costs or spousal support payments, consider requesting CRA authorization to allow your employer to reduce the tax withheld from your salary (Form T1213). Although it won’t help for your 2020 taxes, in 2021 you’ll receive the tax benefit of those deductions all year instead of waiting until after your 2021 tax return is filed.
Determine requirement to make a December 15 instalment payment – If you expect your 2020 final tax liability to be significantly lower than your 2019 liability (for example, due to lower income from a particular source, losses realized in 2020 or additional deductions available in 2020) you may have already paid enough in instalments. You are not required to follow the CRA’s suggested schedule and are entitled to base your instalments on your expected 2020 liability. However, if you underestimate your 2020 balance and your instalments end up being insufficient or the first two payments were low, you will be faced with interest and possibly a penalty.
Have you thought about estate planning?
Review your will – You should review and update your will periodically to ensure that it reflects changes in your family status and financial situation, as well as changes in the law.
Consider your life insurance needs – Life insurance is an important tool to provide for the payment of various debts (including taxes) that may be payable as a result of your death, as well as to provide your dependants with money to replace your earnings. Review your coverage to ensure that it remains appropriate for your financial situation.
Consider an estate freeze to minimize tax on death and/or probate fees – An estate freeze is the primary tool used to reduce tax on death and involves the transfer of the future growth of a business, investments or other assets to family members. Consider the impact of the revised rules for the taxation of testamentary trusts and charitable planned giving, and the impact of the revised tax on split income rules (see above – Do you income-split private corporation business earnings with adult family members?) on income-splitting strategies using estate freezes.
For example, an estate freeze is set up where parents transfer the future growth in value of a business to the next generation. Dividends paid in 2018 or later years to an adult child may be subject to the highest marginal personal income tax rate under these rules unless the individual meets one of the legislated exceptions to the application of this tax.
For details, see EY Tax Alert 2017 Issue No. 52, Finance releases revised income splitting measures.
Consider a succession plan for your business – A succession plan involves devising a strategy to ensure that the benefit of your business assets passes to the right people at the right time.
These questions may seem familiar, but as tax rules become more complex, it becomes more important to think of the bigger tax picture continuously throughout the year, as well as from year to year as your personal circumstances change. Start a conversation with your tax advisor to find better answers.