Tax Guide for Estate Planning & Trusts in Canada

Yearly Planner

Annual Tax planning for Employees, Self-Employed, Investors, Business Owners, Seniors Students and others.

“Do what you can, with what you have, where you are.”
                                                                                                                -Theodore Roosevelt

It’s that time of the year again when you get ready for tax filing. Even with limited time left for tax planning, but you still have time to maneuver. Therefore, we would like to provide you with key takeaways for Tax Planning at the yearend.
This plan will provide individual taxpayers which include employees, self-employed individuals, students, investors, seniors, and others the guidelines to manage their taxes.
Let us check the planner in detail.
employees
Employees:
Timing of Certain Income Type:
Employees should consider accelerating receipt of certain employment income in 2020 if their personal tax rates will be substantially higher in 2021. On the other hand, consider deferring the receipts of income to 2021 if their marginal personal tax rates will be lower in 2021.
Deductions at Source:
To request a reduced payroll income tax withholding in 2021, employees with excess tax deductions or non-refundable tax credits that are not listed on Form TD1 (e.g., RRSP contributions, childcare expenses, support payments, carrying charges) in 2020 should consider filing Form T1213. One must complete and submit the form again for 2021 because it must be approved by the CRA each year.
Home Office Expenses:
Employees who have been working from home in 2020 due to COVID-19 can pick to:
  1. Deduct up to $400 (based on a per diem amount for the number of days working from home), with no requirement to track or report detailed expenses or obtain a signed Form T2200; or
  2. Use their records and receipts to calculate their actual home office expenses and obtain a signed Form T2200 from their employer. Employees should ask their employer to consider issuing a Form T2200 and gather records and receipts for workspace expenses (i.e., utility cost, maintenance invoices and receipts for eligible home office supplies etc) to determine which option will be more beneficial in their circumstances.
Employee Loans payments:

Make sure that any interest on employee loans for 2020 is paid on or before January 30, 2021, so that these borrowed funds would not be considered as taxable employment benefits. The taxable benefit attributable to a low-interest employee loan is equal to the interest for the period of the loan at the prescribed rate less the interest paid during the year or within 30 days after year-end.

Shares and Stock Options:
Consider exercising Canadian-controlled private corporation (CCPC) stock options and claiming the lifetime capital gains exemption, if available. To claim the lifetime capital gains exemption (LCGE) shares must be held for at least 24 months.
Company Vehicles:
To reduce the operating cost benefit, employees can: reimburse the employer for some/all of the personal-use portion of the operating costs if business use of the vehicle is less than 50% and/or reduce personal use to less than 50% of total use. To reduce the standby charge benefit, employees can: reduce the number of days the car is available to them and/or decrease their personal use of the vehicle.
Employment-Related Assets:
As an employee, you might be entitled to deduct capital cost allowance (for automobiles, and musical instruments etc.) and are considering purchasing a new asset should consider accelerating the purchase of the asset before year-end. Also, employed tradespersons and apprentice mechanics should consider purchasing eligible tools before year-end to qualify for a tax deduction.
Employment-Related Expenses (School Supplies):
Teachers can purchase eligible school supplies before the end so that to claim the eligible educator school supply tax credit.
GST/HST Rebate:
Even it’s not material but still, Employees can claim a GST/HST rebate to recover GST/HST included in employment expenses that have been deducted for tax purposes (e.g., home office expenses, automobile expenses, supplies, etc.).
Moving Expenses:
Individuals who moved to be closer to work in 2020 may be able to deduct eligible moving expenses for tax purposes. These eligible expenses include transportation and storage costs (packing, movers, insurance etc.), travelling expenses, meals, and transitional accommodation etc.
Home Accessibility Tax Credits:
You can spend for home renovation that allows seniors and those who are eligible for the disability tax credit to gain access to, or for easy mobility and/or safety within the home before the end of 2020 to claim the Home Accessibility Tax Credit (HATC) for 2020. The limit for the year equals 15% of expenses up to $10,000.
Miscellaneous Expenses:
Adoption expenses, childcare expenses, investment counsel fees, deductible accounting and legal fees, medical expenses, political contributions, union and professional membership dues, spousal support payments, tuition fees and interest on student loans should be paid by December 31, 2020, to claim a tax deduction or credit for 2020. It is recommended accelerating any early 2021 payments into 2020 if you have incurred additional income in 2020 to offset again higher income.
Charitable Donations:
Obtain a tax receipt for the charitable donations contributed during 2020 which allows applying for the donation tax credit for 2020. Individuals who own publicly traded securities (including mutual funds and segregated funds) with accrued capital gains should consider donating them to a registered charity or foundation since capital gains realized on gifts of publicly traded securities are not subject to tax.
Medical Expenses:
The taxpayer should gather their medical receipts and consider claiming the medical expense tax credit (METC) where total family medical expenses are more than the lesser of 3% of net income or $2,397. Since the METC may be claimed for eligible medical expenses paid during any 12-month period that ended in 2020, individuals should also consider any unclaimed medical expenses paid in 2019 when determining eligibility for the METC.
RRSP Contributions:
It’s highly recommended to make your own or spousal RRSP contributions as early as possible to maximize tax-deferral. The deadline for making tax-deductible RRSP contributions for 2020 is March 1, 2021. The RRSP contribution limit for 2020 is 18% of 2019 earned income, to a maximum contribution of $27,230 less any pension adjustment (plus any unused RRSP carry forward room).
RPP Contributions:
Make RPP contributions by December 31, 2020, to claim a deduction for 2020.
RESP Contributions:
Consider making RESP contributions for a child or grandchild before December 31, 2020. There is no annual RESP contribution limit; however, there is a lifetime contribution limit of $50,000/child. Plan for the RESP to receive the maximum lifetime Canada education savings grant (CESG) of $7,200, which depends on the amount of annual RESP contributions and the beneficiary’s age.
business-man

Self-Employed Individuals/Unincorporated Business Owners:

Payroll:
Pay yourself and, family members who provide services to the business, a reasonable salary before year-end. This income will provide additional room for the 2021 RRSP contribution and provides a tax deduction to the business in 2020.
 
Capital Assets:
Purchase of new assets in 2020 will allow capturing increased CCA deduction because of Accelerated Investment Incentive (AII) for the first year, to use as a tax benefit.
 
Capital Gains Reserve:
If you are in a real estate or shares business, structure the sale of capital property in a way that proceeds are received over several years to defer a portion of the capital gain by claiming a reserve (ITA 40(1)(a)(iii)).
 
Tracking Motor Vehicle Use:
Maintain your automobile logbook to support motor vehicle expense and taxable benefit calculations. A logbook maintained for a sample period will be sufficient for CRA purposes in certain circumstances.
Quarterly Tax Instalments:
The final quarterly instalment of tax for individuals is due on December 15, 2020.
Private Health Service Plan Premiums:
Determine the deduction of private health service plan (PHSP) premiums paid. If premiums are not deductible then these paid premiums could be claimed as a medical expense.
Employment Insurance:
Due to COVID-19, the EI program has been temporarily enhanced by easing eligibility requirements. Consider electing the EI program to be eligible for maternity, parental, sickness, or compassionate care benefits.
Pooled Registered Pension Plan:
Join a pooled registered pension plan (PRPP), which is a voluntary saving plan like a defined-contribution RPP or group RRSP.
Incorporation of Business:
Incorporating your business could give you the advantage of potential tax and commercial benefits.
Investor Tax Guide

Investors:

Investment Portfolio:
Decide the ideal mix of investments in your portfolio to get the best after-tax returns because different types of investments are taxed differently. Consider the treatment, whether it is more beneficial to hold an investment for dividends or to get capital gains by selling it.
Investment Expenses:
Investment counselling fees for registered plans (e.g., RRSP, RRIF, TFSA, RESP, etc.) are not tax-deductible. Make sure that interest on investment loans and investment counselling fees for non-registered accounts is paid by December 31, 2020, to claim a deduction for 2020.
Capital Gains and Losses:
Individuals should generally delay selling investments with unrealized capital gains until 2021 unless they have capital losses to use. Capital losses may be carried back 3 years or carried forward for an indefinite period to offset capital gains in other years. Investments with unrealized losses should be sold before year-end to offset any capital gains realized in the year (or in the three previous years). In order for the loss to be available for 2020 (or one of the previous 3 years), the trade date must be no later than December 29, 2020, for both Canadian and U.S. securities. Due to the “superficial loss” rule, individuals must wait 30 days after selling a share with a loss to repurchase the share.
Allowable Business Investment Losses:
Allowable business investment loss (ABIL) could be claimed by selling the shares or debt of a small business corporation (SBC) that is in a loss position, to an unrelated person before year-end. This loss (ABIL) can be deducted against any source of income.
Tax-Free Savings Accounts (TFSA):
TFSA contributions are not tax-deductible, but withdrawals and income earned in a TFSA are tax-free. Withdrawals from TFSA should be made before the end of 2020 instead of early 2021 because withdrawn amounts are not added to the TFSA contribution room until the beginning of the year following the withdrawal. Contribute for 2020 (up to $6,000) and catch up on any unused TFSA contribution room from 2009 to 2019. Also consider loaning or gifting funds to a spouse, common-law partner, or adult child to contribute to a TFSA.
Lifetime Capital Gains Exemption:
Individuals who have held shares of a qualified small business corporation (QSBC) for at least 24 months should consider selling the shares at fair market value to a spouse or common-law partner, a third party, or a corporation controlled by the individual in order to claim the $ 800,000-lifetime capital gains exemption on the sale (indexed for years after 2014).
Mutual Funds:
Many mutual funds distribute income and capital gains in December, consider deferring the purchase of mutual funds to early 2021 or selling them before year-end to minimize the allocation of taxable income for 2020.
Prescribed Rate Loans:
Give a prescribed-rate (1%) loan to a low-income family member before December 31, 2020. The investment income earned on the loaned funds will be taxed in the family member’s hands if the accrued interest for each calendar year is paid annually by January 30 of the following year.
Charitable Donations:

Investors owning publicly traded shares with accrued capital gains should consider donating the shares to a registered charity or foundation. Capital gains realized on gifts of publicly traded shares are not subject to tax and the donor will receive a tax credit for the donation.

Consider using a Donor Advised Fund (DFA) account at a public foundation to realize your charitable giving objectives. A DAF is a charitable giving vehicle that allows donors to have an advisory role on charitable granting after the donation is made to a public foundation.

Home Buyers’ Plan:

If you are planning to use the HBP towards year-end, better to consider deferring the withdrawal until after December 31. This will extend the time for purchasing a home and repaying the withdrawn amounts by a year. Withdrawn amounts must be repaid to RRSPs in 15 equal instalments, starting with the second taxation year following the year of withdrawal. HBP withdrawal limit has been increased to $35,000 from March 19, 2020.

HBP Repayments:

If you joined the HBP before 2018, you should make at least the minimum required repayment by contributing to their RRSP on or before March 1, 2021, and designating the contribution as an HBP repayment.

Tax Shelters:

Consider purchasing a tax shelter like LP units or flow-through shares before year-end, by comparing the investment potential of the tax shelter and the tax savings.

business-woman

Business Owners / Owner-Managers:

Determining Salary/Dividend Mix:
Find the best combination of salary and dividends for the owner-manager and other family members for 2020. Major factors to look for before making a decision are marginal tax rate, the corporation’s tax rate, payroll taxes, RRSP and CPP contributions and deductions and credits like donations and childcare expenses etc. Consider retaining income in the corporation if possible.
Family Members’ salary:

Pay family members who provide services to the business, a reasonable salary before year-end. This income will provide additional room for the 2021 RRSP contribution and provides a tax deduction to the business in 2020.

Family Members’ Dividends:

Adult family members shareholders who are in a lower tax bracket should be considered for paying dividends. Individuals with no other income can receive up to approximately $53,000 in eligible dividends in 2020 before federal tax is payable. Also, consider applying the tax on split income (TOSI) before paying dividends to any family members.

Stock Option Plans:

Companies that have stock options in their compensation plans should consider whether the proposed new stock option rules may apply to begin July 1, 2021. The rules propose to limit the amount of employee stock options eligible for the stock option deduction to $200,000 for options granted after June 2021. The limit will not apply to stock options granted by CCPCs or by non-CCPCs with annual gross revenue not exceeding $500 million.

Capital Gains:

Hold the investments with unrealized capital gains until 2021.

Remuneration Planning:

Payroll and bonuses should be accrued before the year-end and should be paid within 179 days after the company’s year-end. This will permit a deferral of tax on salaries. Sufficient remuneration should be paid before year-end to maximize the owner-manager’s 2020 pension contribution room likes of RRSP, EPSP, RCA, IPP, etc.

Corporate Withdrawals:

Make tax-effective corporate withdrawals by paying dividends or non-taxable capital dividends, returning capital or repaying shareholder loans from the corporation before year-end as.

Passive Investment Income:

Consider planning to reduce passive investment income before year-end by monitoring the corporation’s passive investment income, if needed. For 2018 and later taxation years, CCPCs with “adjusted aggregate investment income” (AAII) above $50,000 (on an associated group basis) will be subject to a reduction in the amount of small business deduction that can be claimed. AAII normally includes rent, royalties, interest, portfolio dividends, dividends from foreign corporations that are not FAs, and taxable capital gains from the disposition of passive investments.

Depreciable Assets:

Purchase new business equipment, office furniture, etc. before year-end. The accelerated investment incentive (AII) allows for an increased first-year CCA deduction for most depreciable assets acquired after November 20, 2018, and available for use before 2028. Hold any depreciable assets that will be subject to recaptured depreciation, until after year-end.

Intercompany Charges:

Review inter-company charges to ensure charges are reasonable and consider any adjustments to reduce the overall taxes of a related group.

Donations:

Make charitable donations and political contributions before year-end.

Shareholder Loans:

Make sure that shareholder loans are repaid by the end of the corporation’s taxation year following the taxation year in which the loan was received.

Individual Pension Plan:

Set up an Individual Pension Plan (IPP) to save for retirement for an owner-manager who earns significant employment income and is at least 40 years of age. An IPP can provide both year-end corporate income tax deductions and a structured retirement savings plan for an owner-manager, and for certain family members who are employees. The new passive investment income rules do not apply to investment income earned in an IPP.

Corporate Tax Balances:

Pay final corporate income tax balances within two months (it is three months for certain CCPCs) after year-end to avoid interest charges. Check if any COVID-19 payment extensions are available.

SR&ED:

Any claims for SR&ED expenditures or ITCs should be filed by 18 months after the corporation’s year-end. Consider whether any COVID-19 payment extensions are available to the company.

Lifetime Capital Gains Exemption:

Small business corporations’ shares are eligible for the lifetime capital gains exemption. Crystallize the lifetime capital gains exemption and/or restructuring to multiply access to the exemption with other family members.

Succession Planning:

Estate freeze to be used to reduce taxes on death and to transfer the future growth of a business to family members.

Lifetime Capital Gains Exemption:

Small business corporations’ shares are eligible for the lifetime capital gains exemption. Crystallize the lifetime capital gains exemption and/or restructuring to multiply access to the exemption with other family members.

seniors

Seniors:

Pension Credit:
Pensions income of at least $2,000 is required to claim the maximum pension income credit for seniors, age 65 and over.
Inter Vivos Trust:
Seniors over age 64 who live in a province with high probate fees should consider establishing an inter vivos trust as part of their estate plan
Old Age Security (OAS):
With income higher than the eligibility to receive OAS benefits, you should consider options to reduce or defer income. You can defer starting OAS benefits for up to 60 months after age 65. This will increase the monthly payment by 0.6% for every deferred month.
Pension Income Splitting:

If you are eligible for the pension tax credit, consider allocating up to half of the income to your spouse or common-law partner. Also, if it is helpful to withdraw additional amounts from your RRIF for pension income-splitting purposes. For 2020, the government has reduced the minimum required annual withdrawal payments from RRIFs by 25%.

Canada Pension Plan (CPP):

Seniors ages 60 to 70 who are not collecting CPP payments should decide the best time to start receiving them. Benefits are reduced if you start before age 65 and increased if you start after age 65. It may be beneficial for some due to health requirements, to begin CPP at the age of 60. If you receive CPP then consider splitting it with your spouse or common-law partner.

Collapse RRSP:

Convert your RRSP to an RRIF, life income fund or registered annuity before year-end to defer taxes on the RRSP income if you turn 71 in 2020. Seniors may consider withdrawing less from their RRIF in 2020 as the government has reduced the minimum required annual withdrawal payments from RRIFs by 25%.

Spousal RRSP:

Seniors who have a younger spouse can continue making RRSP contributions to a spousal RRSP until the year that the spouse turns 71.

Home Accessibility Renovation Expenses:

Consider paying for home renovation expenses to gain access to, or too easy mobility and/or safety of the senior within the home before the end of 2020 in order to claim the home accessibility tax credit for 2020, equal to 15% of up to $10,000 of expenses per year.

students

Students:

Tuition:
Claim education, tuition, and textbook tax credits if you attended post-secondary level school in 2020. For individuals 16 years of age or older, a course that develops or improves skills in an occupation at a certified educational institution can also be eligible to claim a tax credit.
Canada Training Credit:
Beginning in 2020, eligible workers ages 25 to 65 who are enrolled at an eligible educational institution can claim this new federal refundable tax credit on tuition and fees associated with training. The credit accumulates at a rate of $250/year, up to a lifetime training amount limit of $5,000.
Tuition Transfer or Carry-Forward:
If you are unable to use your tax credits, the unused 2020 tuition credits (up to $5,000 max) can be transferred to a spouse or common-law partner, parent/grandparent, or spouse or common-law partner’s parent/grandparent. Unused tuition credits can be forward to use in future taxation years for an indefinite time.
Interest Paid on Student Loans:

A tax credit can be claimed for interest paid on student loans from Canada Student Loans Act, the Canada Student Financial Assistance Act, the Apprentice Loans Act, or similar provincial or territorial laws for post-secondary education. This interest can be carried forward and apply it in any of the next 5 years if students have no tax payable for 2020.

Students considering renegotiating or consolidating student loans to obtain a lower interest rate should compare the tax savings resulting from this tax credit to the savings achieved with a lower interest loan.

Scholarships, Fellowships & Bursaries:

Qualifying students should exclude annual scholarships, fellowships, bursaries, and certain awards from their income as these are tax-free amounts. For non-qualifying students, first, $500 of post-secondary awards received in the year is generally tax-free and what’s left is taxable.

Research Grants:

Only a research grant that exceeds the student’s allowable expenses (travel expenses, assistant fees, equipment and supplies, and laboratory fees and charges) can be included in income.

Moving Expenses:

Full-time students in a post-secondary program at a university, college or other educational institution who moved to be closer to school in 2020 may deduct eligible moving expenses (transportation, packing, movers, insurance, travelling expense, meals, and transitional accommodation etc.) for tax purposes.

Child Care Expenses:

Students may be able to deduct childcare expenses (day nursery schools, daycare centres, caregivers, etc.) paid for taking care of their child while attending school. For married or in a common-law relationship student, normally the spouse or common-law partner with lower net income should claim the childcare expenses.

Lifelong Learning Plan (LLP):

To finance full-time training or post-secondary education for student or for their spouse or common-law partner, funds could be withdrawn from RRSP under the lifelong learning plan (LLP). These withdrawn amounts do not include in income but must be repaid in instalments over a maximum of 10 years.

Registered Education Savings Plan (RESP) Amounts:

Make Educational Assistance Payments (EAPs) from the RESP before the end of 2020 for RESP beneficiaries who attended post-secondary school in 2020. Consider making final EAPs to the beneficiary who stopped attending post-secondary school in 2020, within six months of leaving school. EAPs, consist of the income and government grants accumulated in the RESP must be reported on the beneficiary’s tax return in the year received.

GST/HST Credit:

Students who are at least 19 years of age should file an income tax return to be eligible for the GST/HST credit.

Filing Tax Returns:

To create an RRSP room, students should file an income tax return for the year they have earned income. This return will also be useful to transfer or carry forward tuition credits, to receive the GST/HST credit, and to increase their Canada training credit limit.

estate

Other Estate and Miscellaneous Planning:

Sale of Principal Residence:
Sale of the principal residence must be reported on the personal tax return. Failure to disclose this may result in the loss of the principal residence exemption on any capital gain that arises from the sale.
Family Trusts:

Where applicable, review your family trust’s tax situation before year-end. Income earned by a discretionary trust must be paid or made payable to beneficiaries by December 31, 2020, to be included in a beneficiary’s income for 2020.

Individuals with family trusts should gather information for the new trust reporting requirements, applicable to taxation years that end on or after December 31, 2021, even if the trust has no income and no activity. These additional reporting requirements include the name, address, date of birth, jurisdiction of residence and taxpayer identification number (e.g., SIN) of the settlor, trustees, beneficiaries (including contingent beneficiaries) and protector.

Will & Estate Planning:

Maintain a regular review of wills and estate plans, ideally annually, to ensure that the documents remain valid and effective, to match any changes in your personal circumstances and the tax rules.

Life Insurance:

Keep your insurance coverage updated and according to your financial position.

Moving Within Canada:

Plan well if you are moving to a province or territory with a lower tax rate, move before year-end. On the contrary, delay the move until early 2021 if you are moving to a province or territory with a higher tax rate.

Please contact us if you need further assistance: info@pkfantares.com