2020 was an extraordinary year like no other. Due to the significant changes from the COVID-19 pandemic, there are numerous tax issues to be aware of this year. For example, many individuals received support in a variety of forms from various levels of government. Others may have changed how they carried on their employment duties or business operations, including working from home or using their vehicle for employment or business reasons.
COVID-19 Related Government Support Programs:
Official tax slips may have been issued for some, but not all. For support where no slip is available, details surrounding the amount and types of payment is required. Some of these benefits are taxable while others are not.
As no slips are provided specifically to these business related programs, it is your responsibility to track the amounts received and the period to which they relate.
Year-End Tax Planning Tips
As the new year is fast approaching, we have put together a list of tax planning considerations. Feel free to reach out to us for further details or to discuss whether these may apply to your tax situation.
- Certain expenditures made by individuals by December 31, 2020, will be eligible for 2020 tax deductions or credits including digital news subscriptions, registered journalism organization contributions, moving expenses, child care expenses, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional or like dues, carrying charges and interest expense. Ensure you keep all receipts that may relate to these expenses.
NEW– Digital News Subscription Tax Credit – A non-refundable tax credit based on up to $500 of amounts paid for a qualifying digital news subscription (primarily engaged in the production of original written news content) will qualify for this credit.NEW – Canada Training Credit (CTC) – A refundable tax credit may be available to reimburse up to half of eligible tuition and fees associated with work-related training for individuals aged 25 to 64 years old at the end of the year.
NEW – Many people have been working at home and using their kitchens, bedrooms and living rooms as their workspace. In response, the Canada Revenue Agency (CRA) has introduced a new temporary flat rate method to simplify claiming the deduction for home office expenses for the 2020 tax year. The new temporary flat rate method simplifies your claim for home office expenses. You are eligible to use this new method if you worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020 due to the COVID-19 pandemic. You can claim $2 for each day you worked from home during that period plus any additional days you worked at home in 2020 due to the COVID-19 pandemic. The maximum you can claim using the new temporary flat rate method is $400 (200 working days) per individual. We will discuss this new deduction in detail in a separate post shortly.
- No tax was withheld on Canada Emergency Response Benefit (CERB) payouts. Since these payments are taxable, taxes may be payable upon filing. If you received a retroactive payment from your employer in respect of a period for which you have received CERB, you may be required to pay the CERB back. You can use our tax calculator to get an idea about your 2020 taxes.
- There are benefit clawbacks (required repayments) associated with certain COVID-19 related employment insurance-like payments, depending on annual earnings. The amounts for 2020 are:
• Canada Recovery Benefit – $0.50 of every dollar earned in excess of $38,000
• Employment Insurance – $0.30 of every dollar earned in excess of $67,750
• Canada Emergency Response Benefit – No clawback
- A senior whose 2020 net income exceeds $79,054 will lose all, or part, of their Old Age Security pension. Senior citizens will also begin to lose their age credit if their net income exceeds $38,508. Consider limiting income in excess of these amounts if possible. Another option would be to defer receiving Old Age Security receipts (for up to 60 months) if it would otherwise be wasted due to high-income levels.
- If you own a business or rental property, consider paying a reasonable salary to family members for services rendered. Examples of services include website maintenance, administrative support, and janitorial services. Salary payments require source deductions (such as CPP, EI and payroll taxes) to be remitted to CRA on a timely basis, in addition to T4 filings.
- If you own a business or rental property, also consider making a capital asset purchase by the end of the year. Most capital assets purchased in 2020 will be eligible for accelerated depreciation (generally three times the deduction to which they would normally be entitled in the first year). For example, a piece of equipment normally eligible for a 10% deduction in the first year (Class 8), would be entitled to a 30% deduction. This benefit is available even if purchased and made available for use just before year-end.Some zero-emission electric vehicles purchased by businesses may be eligible for a 100% write-off (limited in some cases to the first $55,000). Alternatively, zero-emission vehicles purchased in 2020 may be eligible for a federal incentive rebate of up to $5,000.
- Consider selling non-registered securities, such as a stock, mutual fund, or exchange-traded fund, that has declined in value since it was bought to trigger a capital loss which can be used to offset capital gains in the year. Anti-avoidance rules may apply when selling and buying the same security.
- Consider restructuring your investment portfolio to convert non-deductible interest into deductible interest. It may also be possible to convert personal interest expense, such as interest on a house mortgage or personal vehicle, into deductible interest.
- If you have equity investments or loans made to a Canadian small business that has become insolvent or bankrupt, an allowable business investment loss (ABIL) may be available. For loans to corporations to be eligible, the borrower must act at arm’s length. ABILs can be used to offset income beyond capital gains, such as interest, business, or employment income.
- If a commercial debt you owe (generally a business loan) has been forgiven, special rules apply which may result in additional taxes or other adjustments to the tax return.
- You have until Monday, March 1, 2021, to make tax-deductible Registered Retirement Savings Plan (RRSP) contributions for the 2020 year. Consider the higher income earning individual contributing to their spouse’s RRSP via a “spousal RRSP” for greater tax savings.
- Individuals 18 years of age and older may deposit up to $6,000 into a Tax-Free Savings Account in 2020. Consider a catch-up contribution if you have not contributed the maximum amounts for prior years. An individual’s contribution room can be found online on CRA’s My Account.
- A Canada Education Savings Grant for Registered Education Savings Plan (RESP) contributions equal to 20% of annual contributions for children (maximum $500 per child per year) is available. In addition, lower-income families may be eligible to receive a Canada Learning Bond.
- A Registered Disability Savings Plan (RDSP) may be established for a person who is under the age of 60 and eligible for the Disability Tax Credit. Non-deductible contributions to a lifetime maximum of $200,000 are permitted. Grants, Bonds and investment income earned in the plan are included in the beneficiary’s income when paid out of the RDSP.
- Canada Pension Plan (CPP) receipts may be split between spouses aged 65 or over (application to CRA is required). Also, it may be advantageous to apply to receive CPP early (age 60-65) or late (age 65-70).
- Are you a U.S. Resident, Citizen or Green Card Holder? Consider U.S. filing obligations with regards to income and financial asset holdings. Filing obligations may also apply if you were born in the U.S.Information exchange agreements to have increased the flow of information between CRA and the IRS. Collection agreements enable CRA to collect amounts on behalf of the IRS.
- If income, forms, or elections have been missed in the past, a Voluntary Disclosure to CRA may be available to avoid penalties.
Despite this challenging year, you may be able to save a bundle on your taxes if you make the right choices. However, when you file your taxes online with CloudTax, you don’t have to worry about all this. We ask you simple questions and based on what you enter, we give you all the tax deductions and credits you’re eligible for. If you have tax questions, you can connect via live-chat with a Tax Expert. Get started now!