Crowe MacKay LLP's trusted advisors work for you – this means we take the time to know our clients. Whether it's your first time filing taxes, or you consider yourself a pro, Crowe MacKay's tax team is here to ensure you are getting the most from your return. We highlight common areas where you may be eligible to impact your tax bill.
Accounting fees and legal fees
Certain accounting or legal fees such as the cost of representation on tax disputes are deductible in the year paid. If you have these costs be sure to pay them before the end of the year.
Charitable or political donations
If you are planning to give money to a charity or political party, make sure the gift is made before December 31, 2020 to ensure you can claim the tax credit on your 2020 return.
If you have equipment you are planning to purchase for your business early next year, consider purchasing it before December 31, 2020 or before your corporate year end as applicable. The tax depreciation only starts when the equipment is available for use in your business. Similarly, if you are going to sell equipment, consider doing so early in 2021 rather than in 2020. Tax depreciation can only be deducted on equipment that is owned as at December 31, 2020.
Ensure that any desired distributions to or from a family trust are made by December 31, 2020. If distributions are planned, ensure appropriate dividends are paid through the trust by year end. Payments by cheques deposited and distributed before the end of the year are required, unless detailed steps are completed.
New tax reporting requirements are coming for trusts that have taxation years ending on December 31, 2021. You will need to disclose additional information about your trust including the names, addresses, dates of birth, tax residency, and identification number of the settlor, trustees and beneficiaries, even if your trust has no income or activity for the year. If you do not already have this information on hand, we recommend that you begin gathering it.
The “tax on split income” rules introduced in 2018 remain in effect and may significantly impact certain tax benefits associated with using family trusts for income-splitting purposes. Please contact your Crowe MacKay tax advisor for more details on how these new rules may affect you and to identify opportunities that may be available to plan around the new rules.
If you are an individual using a home office as your principal place of business (more than 50%), or exclusively for earning business income and on a regular and continuous basis for meeting clients or customers, then you may be able to deduct home expenses related to the office space. Such expenses include the business portion of rent, mortgage interest, property taxes, utilities, insurance, repairs, and telecommunications. The home office expenses you can deduct depend on whether you are an employee, a commissioned employee, or self-employed.
If you have realized capital gains in the current year, consider selling investments with unrealized capital losses before year end. This strategy could reduce your tax bill as capital losses can be offset against capital gains. The key is to trigger these losses in 2020 so the last settlement day for 2020 must be considered. Where a loss has been triggered, you or an affiliated party cannot acquire the same or an identical investment within 30 days before or after the sale or the loss will be disallowed. We recommend that you consult your Crowe MacKay tax advisor and your investment advisor prior to undertaking this strategy.
Transfer of dividend income from taxable Canadian corporations to a spouse
If you are entitled to a spousal tax credit for your spouse or common-law partner, you may be able elect to include all of your spouse's dividends from a taxable Canadian corporation in your income if doing so will allow you to claim or increase the claim, for the spousal tax credit. The election should only be made if it results in lower overall taxes. It might not always be beneficial to transfer this income between you and your spouse. Please contact your Crowe MacKay advisor to discuss this in further detail.
Old Age Security (OAS) claw back
If you are collecting OAS and your net income in 2020 is over $79,054, you are required to repay some or all of your OAS benefits. This “claw back” is the lesser of your OAS benefits received in the year and 15% of your net income that is over $79,054. The OAS claw back is calculated solely on your net income and is not affected by your spouse's income. Note that if your net income is $128,149 or greater in 2020 you will be required to repay all of your OAS benefits. If you are eligible to receive OAS but are subject to a full claw back, you may consider deferring receiving OAS until a year in which the claw back is reduced or eliminated. Deferring the receipt of OAS will increase your OAS entitlement when you begin to collect it and it will increase your maximum annual net income to receive OAS. Contact your Crowe MacKay tax advisor if you have any questions about OAS.
If you are earning eligible pension income you may be able to split up to 50% of this income with your spouse or common-law partner. Eligible pension income excludes Canada Pension Plan, Old Age Security, and certain foreign pension income. This pension income-splitting may be done by filing a joint election with your income tax return and can result in significant tax savings if your spouse or common-law partner is in a lower tax bracket. Your spouse or common-law partner may also be able to claim the pension income amount tax credit on the income that he/she is deemed to have received (see below).
If you are collecting Canada Pension Plan, you may be eligible to pension share this income with your spouse. If a taxpayer's spouse is in a lower marginal tax bracket, this may be an effective means of income splitting and reducing the couple's overall tax bill. Individuals must apply through Services Canada by completing form ISP1002.
Pension tax credit
A $2,000 pension tax credit is available if you earn eligible pension income, which typically includes income from a registered pension plan, income from a registered retirement income fund (RRIF) and annuity payments from an RRSP. If you are eligible to receive pension income and are not currently doing so, you may consider converting a portion of your RRSP to a RRIF in order to receive eligible pension income on which the pension tax credit can be claimed. Please contact your Crowe MacKay advisor to discuss the age restrictions that apply to your circumstances.
Registered Disability Savings Plan (RDSP)
The RDSP is a registered long-term savings plan specific to people with disabilities who are eligible for the disability tax credit. Contributions may be made by the beneficiary, a family member, or by any other authorized contributor. There is no annual limit on contributions; however, there is a lifetime contribution limit of $200,000. Currently, there are restrictions in place that limit an individual's use of an RDSP if their eligibility for the disability tax credit changes and the Government intends to remove some of these restrictions effective 2021.
Although contributions to the plan are not tax-deductible, income earned inside the plan is not taxed until it is withdrawn by the beneficiary. Contributions can be made until the end of the year in which the beneficiary turns 59 and payments from the RDSP must begin by the end of the year in which the beneficiary turns 60.
There are currently two income-based programs in place to enhance the funds that are contributed to the RDSP. The Canada Disability Savings Grant Program, and the Canada Disability Savings Bond Program.
The rules related to RDSPs can be complex and we recommend you speak with your Crowe MacKay tax advisor if you believe this program may be right for you or a family member.
Registered Education Savings Plan (RESP)
Make contributions to a RESP before December 31 to qualify for any 2020 grants you may be eligible for. As in years past, beneficiaries under the age of 18 qualify for the Canada Education Savings Grant (CESG) which is equal to 20% of annual contributions made for a beneficiary, subject to a $500 annual cap and a $7,200 lifetime maximum. Additional grants are possible where there is unused grant room from a previous year and for families with lower net income.
Registered Retirement Savings Plan (RRSP)
Regular and spousal contributions for the 2020 taxation year may be made up to March 1, 2021. Similarly, if you must repay a portion of your Home Buyers' Plan or your Lifelong Learning Plan, payments must be made by that same date.
Overall tax savings are most significant for individuals who are currently in a high tax bracket but will be in a lower bracket when the RRSP money is withdrawn.
There may be an opportunity to income-split with your spouse if you contribute to a spousal RRSP, and they make a withdrawal from that spousal RRSP in a subsequent year. Be careful of attribution rules that will apply if the funds are withdrawn within three years of your last contribution to a spousal RRSP. If you turn 71 and can no longer contribute to your own RRSP, you can still make contributions to a spousal RRSP until the end of the year in which your spouse turns 71.
The Home Buyers' Plan and Lifelong Learning Plan are also useful RRSP tools as they allow you to withdraw funds from your RRSP on a tax deferred basis to help fund a home purchase, full-time training, or education. Please be aware if the required repayments under these plans are not made by the RRSP deadline, then the amounts will be included in your income for the 2020 tax year.
We suggest that you contact your Crowe MacKay tax advisor if you have any questions about RRSPs.
The RRSP contribution limit is $27,230 for 2020 and $27,830 for 2021.
If you have a shareholder loan from your company that has been outstanding since the December 31, 2019 year end (i.e. it is at risk of showing up as a receivable on two consecutive balance sheets), ensure it is repaid by December 31, 2020 or it may result in a deemed taxable benefit to the shareholder. Consult your Crowe MacKay tax advisor to determine if the amount must be repaid and to discuss repayment methods such as dividends or net wage compensation.
Family income splitting loans
If you have a spousal or family income splitting loan, ensure the interest is paid by January 30, 2021 by a “documented” method such as a deposited cheque. These loans with interest at the prescribed rate (currently 1%) are typically used for income-splitting where families have large investment pools (generally over $1M).
Tax Free Saving Account (TFSA)
Canadian residents age 18 and over are eligible to open a TFSA. Income earned in a TFSA is not taxable as it is earned nor is it taxable when withdrawn from the account. Contributions to a TFSA are not tax deductible.
For 2020, the maximum contribution is $6,000 plus any outstanding contribution room carried forward. The cumulative contribution room granted to Canadians since the start of the TFSA program is $69,500 to December 31, 2020. Please contact CRA, check your online CRA My Account and/or contact your investment advisor for the maximum contribution you may make for 2020.
If you are considering a withdrawal in the foreseeable future, it is preferable to withdraw these funds in 2020 rather than early 2021. Withdrawals are added back to the taxpayer's contribution limit at the beginning of the calendar year after the year of withdrawal.
Auto benefit – If you drive an automobile that is owned or leased by your employer, you may be subject to a taxable benefit for your personal use of the automobile. You may reduce this taxable benefit by reimbursing your employer for the amount paid for your personal use of the automobile. The deadline for the reimbursement is February 14, 2021.
Interest benefit – If your employer provided you with an interest-free loan or a loan at an interest rate that is lower than CRA's prescribed rate (excluding a home relocation loan), you may be subject to a taxable benefit. You may reduce this taxable benefit by paying the interest to your employer at the prescribed interest rate (currently 1%). The deadline for this interest payment is January 30, 2021.
Tax on Split Income (TOSI)
The rules introduced by the Government in 2018 with respect to income splitting between family members remain in effect in 2020. In general terms, the TOSI rules will apply where an individual has received income from a private corporation that carries on a business in which a related individual is active but has not worked or contributed much in the business. We suggest that you contact your Crowe MacKay tax advisor if you have any questions regarding the application of TOSI rules to your particular situation and to identify opportunities that may be available to plan around the new rules.
Moving provinces or territories
Generally speaking, Canadian individuals pay provincial or territorial taxes based on their province or territory of residence as at December 31. If an individual is moving provinces or territories towards the end of the year, it is worth trying to time the move before year-end if it is a move to a province or territory with lower tax rates, and after year-end if it is a move to a province or territory with higher tax rates.
Originally Published by Crowe MacKay, February 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.