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
- 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
- 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.
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.
Self-Employed Individuals/Unincorporated Business Owners:
Investors:
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.
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 This will extend the time for purchasing a home and repaying the withdrawn amounts by a year. Withdrawn amounts must be repaid to RRSPs in 15 equal instalments, starting with the second taxation year following the year of withdrawal.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.
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.
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 Owners / Owner-Managers:
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.
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.
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.
Hold the investments with unrealized capital gains until 2021.
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.
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.
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.
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.
Review inter-company charges to ensure charges are reasonable and consider any adjustments to reduce the overall taxes of a related group.
Make charitable donations and political contributions before year-end.
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.
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.
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.
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.
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.
Estate freeze to be used to reduce taxes on death and to transfer the future growth of a business to family members.
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:
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%.
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.
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%.
Seniors who have a younger spouse can continue making RRSP contributions to a spousal RRSP until the year that the spouse turns 71.
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:
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.
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.
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.
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.
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.
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.
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.
Students who are at least 19 years of age should file an income tax return to be eligible for the GST/HST credit.
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.
Other Estate and Miscellaneous Planning:
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.
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.
Keep your insurance coverage updated and according to your financial position.
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