Tax Tips for Investors, Small Business Owners & Families in Canada
It’s a TAX time!!!
“The only difference between Tax man and Taxidermist is that Taxidermist leaves the skin”
– Mark Twain
As we enter the last weeks of 2021, now is good time to review your personal finances and take advantage of any tax planning opportunities.
Tax-loss selling involves selling investments with accrued losses at year end to offset capital gains realized elsewhere in your portfolio. Any net capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset net capital gains in other years.
For your loss to be immediately available for 2021 (or one of the prior three years), the settlement must take place in 2021. The trade date must be no later than December 29, 2021 to complete settlement by December 31st.
If you plan to repurchase a security you sold at a loss, beware of the “superficial loss” rules that apply when you sell property for a loss and buy it back within 30 days before or after the sale date. The rules apply if property is repurchased within 30 days and is still held on the 30th day by you or an “affiliated person”, including your spouse or partner, a corporation controlled by you or your spouse or partner, or a trust of which you or your spouse or partner are a majority beneficiary (such as your RRSP or TFSA). Under the rules, your capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security. That means any benefit of the capital loss could only be obtained when the repurchased security is ultimately sold.
Transfers and swaps
While it may be tempting to transfer an investment with an accrued loss to your RRSP or TFSA to realize the loss without disposing of the investment, the loss is specifically denied under our tax rules. There are also harsh penalties for “swapping” an investment from a non-registered account to a registered account for cash or other consideration.
To avoid these problems, consider selling the investment with the accrued loss and, if you have the contribution room, contributing the cash from the sale into your RRSP or TFSA. If you want, your RRSP or TFSA can then “buy back” the investment after the 30-day superficial loss period.
Make TFSA contributions
The TFSA dollar limit for 2021 is $6,000 but there is no deadline for making a TFSA contribution. If you have been at least 18 years old and resident in Canada since 2009, you can contribute up to $75,500 in 2021 if you haven’t previously contributed to a TFSA.
Take TFSA withdrawals
If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following calendar year, assuming the withdrawal was not made to correct an over-contribution.
Be careful, however, because if you withdraw funds from a TFSA and then re-contribute in the same year without having the necessary contribution room, over-contribution penalties can result. If you wish to transfer funds or securities from one TFSA to another, you should do so by way of a direct transfer, rather than a withdrawal and re-contribution, to avoid an over-contribution problem.
If you are planning a TFSA withdrawal in early 2022, consider withdrawing the funds by December 31, 2021, so you would not have to wait until 2023 to re-contribute that amount.
Pay investment expenses
Certain expenses must be paid by year end to claim a tax deduction or credit in 2021. This includes investment-related expenses, such as interest paid on money borrowed for investing and investment counseling fees, for non-registered accounts.
Use a prescribed rate loan to split investment income
If you are in a high tax bracket, you may wish to have some investment income taxed in the hands of family members (such as your spouse, common-law partner or children) who are in a lower tax bracket; however, if you simply give funds to family members for investment, the income from the invested funds may be attributed back to you and taxed in your hands, at your high marginal tax rate.
To avoid attribution, you can lend funds to family members, provided the rate of interest on the loan is at least equal to the government’s “prescribed rate,” which is 1% until at least March 31, 2022.
If you implement a loan before that date, the 1% interest rate will be locked in and will remain in effect for the duration of the loan, regardless of whether the prescribed rate increases in the future. If you previously entered a prescribed rate loan at a higher interest rate, our report, “Prescribed rate loans: The one per cent solution” provides some tips (as well as some cautions) that may allow you to take advantage of the current 1% rate while it is in effect.
Note that interest for each calendar year must be paid annually by January 30th of the following year to avoid attribution of income for the year and all future years.
When a family member invests the loaned funds, the choice of investments will affect the tax that is paid by that family member. It may be worthwhile to consider investments that yield Canadian dividends, since a dividend tax credit can be claimed by individuals to reduce the tax that is payable. When the dividend tax credit is claimed along with the basic personal amount, a certain amount of dividends can be received entirely tax-free by family members who have no other income.
For household making renovations for home accessibility
The non-refundable Home Accessibility Tax Credit (HATC) assists seniors and those eligible for the disability tax credit with certain home renovations.
The tax credit is equal to 15% of up to $10,000 of expenses per year towards renovations that permit these individuals to gain access to, or to be more mobile or functional within, their home, or reduce their risk of harm within their home or from entering their home.
The HATC will apply in respect of payments made by December 31st for work performed or goods acquired in 2021. A single expenditure may qualify for both the HATC and the medical expense tax credit, and both may be claimed.
For household contributing to a Registered Disability Savings Plan (RDSP)
RDSPs are tax-deferred savings plans available for Canadian residents eligible for the Disability Tax Credit. Up to $200,000 can be contributed to the plan until the beneficiary turns 59, with no annual contribution limits. While RDSP contributions are not tax deductible, all earnings and growth accrue on a tax-deferred basis. Federal government assistance in the form of Canada Disability Savings Grants (CDSGs), which are based on contributions, and Canada Disability Savings Bonds (CDSBs) may be deposited directly into the plan up until the year the beneficiary turns 49. The government may contribute up to a maximum of $3,500 CDSG and $1,000 CDSB per year of eligibility, depending on the net income of the beneficiary’s family. Eligible investors may wish to contribute to an RDSP before December 31 to get this year’s assistance. There is a 10-year carryforward of CDSG and CDSB entitlements.
RDSP holders with shortened life expectancy can withdraw up to $10,000 annually from their RDSPs without repaying grants and bonds. A special election must be filed with the Canada Revenue Agency (CRA) by December 31 to make a withdrawal in 2021.
For families with medical expenses
A tax credit may be claimed when total eligible medical expenses exceed the lower of 3% of your net income or $2,421 in 2021.
For medical expenses, it may be worthwhile to look for unclaimed expenses prior to 2021 as well. The medical expense tax credit (METC) may be claimed for eligible medical expenses that were paid during any 12-month period that ended within the calendar year (extended to 24 months when an individual died in the year.)
For families with charitable donations
Both the federal and provincial governments offer donations tax credits that, in combination, can result in tax savings of up to 54% of the value of your gift in 2021, depending on your province or territory of residence.
With total cash donations up to $200 in a year, the federal donation credit is 15% of the donation amount. For total donations exceeding $200 in a year, the federal donation credit jumps to 29% (33% to the extent taxable income exceeds $216,511) of the donation amount. Provincial donation credits are also available, and the total credit may be up to 54% once total annual donations exceed the $200 in a calendar year.
December 31 is the last day to donate and get a tax receipt for 2021. Keep in mind that many charities offer online, internet donations where an electronic tax receipt is generated and emailed to you instantly.
Personal Tax Rates
No new personal income tax rate changes have been announced in this year’s budget.
When Alberta accelerated the reduction of the general corporate tax rate, the dividend tax credit on eligible dividends was adjusted to preserve integration of the Alberta taxes.
The top marginal personal income tax rate for Alberta is 15 percent for 2021 on income more than $314,929. The top combined federal and Alberta marginal rates for 2021 are as follows:
|Type of Income||2020||2021|
|Salary, business income, interest||48.0%||48.0%|
Alberta paused the annual indexation of non-refundable tax credits and tax bracket thresholds and will carry forward 2019 amounts for the 2020 and future taxation years. The province also indicated that it would resume indexing the tax system once it achieves the required economic and fiscal conditions.