Tax planning is an ongoing, continuous process. No matter how much foresight you had in January this year, chances are you are still open to a few year-end tax tips for 2021. Things change throughout the year, and this year has certainly been no exception. So, here are some year-end tax tips for December 2021, so doing your Canadian taxes in 2022 gives you the best possible return, and you pay the lowest possible taxes.
Year-End Tax Tips to Consider as an Employee
Planning Your Income
Now is the time to look ahead to 2022. If 2021 has been good for you, you might want to deter any income you can into 2022. If you are likely to have a lower income in 2022, shift your bonus payment or other income into January. On the other hand, if 2022 is likely to be a better year for you, income-wise, check with your employer to see if you can shift some of your income into December 2021 and pay your taxes this year.
Lower Source Deductions
If you end up with a big refund every year, it might be time to reconsider your source deductions. Perhaps you are making contributions to your RRSP, have some childcare expenses or home office expenses to write off or are making regular donations to a charity. All of these (and several others!) reduce the taxes you pay. So, if you want your employer to deduct less tax from your pay in 2022, complete a Form T1213. A Request to Reduce Tax Deductions at Source form is submitted to your employer. Then, they take less tax off your paycheques, increasing your take-home pay but decreasing your tax refund. If you like using your tax refund as a sort of savings account, keep letting your employer take off the taxes at the source.
Write Off Your Home Office
Working from home is far more common than it was. You can claim a deduction for those times if you work from home, even for part days or for part of the year. To be eligible, you need to have spent at least half your hours working remotely for four consecutive weeks during 2021- full or part-time. CRA simplified the system so you can just deduct $2 a day without your employer filling out the T2200 or T2200S forms. But check to see what the maximum is for 2021 on the CRA website, as this amount may go up for 2021 taxes. You can still use the other (old) method of tallying all your receipts if that ends up working out better for you, but your boss will need to fill out the paperwork.
Employer Gifts and Awards
Non-cash gifts and awards every year of $500 or less are not taxable to you. Plus, you can receive a special service award bonus of $500 or less every five years tax-free, too. These types of bonuses make excellent morale boosters for employees. So, if your employer doesn’t offer them yet, you might want to mention them as a year end bonus for 2021 or starting up in 2022.
Stock Options for Employees
If you qualify for the lifetime capital gains exemption and have stock options in a Canadian-controlled private corp, consider exercising your stock options. Claim the lifetime capital gains exemption in 2021. The rules say you need to have owned the shares – not just the stock options – for two years or longer to be exempt from the taxes.
As an employee, you can deduct the capital cost allowance (CCA) on any personal assets you use for work. This includes things like automobiles or musical instruments. Consider making new purchases before the end of December. Then half of the year’s CCA is deductible for 2021. Also, anyone employed in a trade or apprentice mechanics should look at buying any eligible tools in December of 2021 to be able to write off the expenses.
To learn more about deducting working from home expenses, see: ‘Work from Home: Which way to go?’
Moving at least 40 kilometres closer to work or school in 2021 may make you eligible to deduct your moving expenses. Also, remember that you pay taxes in the province or territory where you live on December 31st. So, moving to a province or territory with lower taxes is best done early (before the end of 2021). If you are moving somewhere that the taxes are higher, even a few days delay into January 2022 can save you a few bucks on taxes for 2021.
Year-End Tax Tips for Registered Investment Accounts
Withdrawing from Your TFSA
Once you turn 18, contribute to a TFSA and use up as much accumulated contribution room as you can. If you plan to make a TFSA withdrawal soon, doing so before December 31st, 2021, can be a good idea. Withdrawals don’t get added to the TFSA contribution room until the year after the withdrawal. So, if you withdraw in 2021, by 2022, you can redeposit the amount you withdraw with no overcontribution penalties. Transfer funds or securities between TFSAs using a direct transfer, not a withdrawal and re-contribution. The TFSA limit in 2021 is $6,000, but there are no deadlines for TFSA contributions. If you have never had a TFSA before, are at least 18, and a Canadian resident since 2009, the total contribution room would be $75,500 for 2021.
RRSP Contributions and Withdrawals
No need to rush, as you can make your RRSP contributions any time before March 1st, 2022, for the 2021 tax year. Of course, the earlier, the better as your contributions make tax-deferred growth every day you have them invested.
If you plan to withdraw from an RRSP under the rules for the Home Buyers’ Plan, consider waiting until after year end to extend, by one year, the time for buying your home and repaying the amounts withdrawn. You can withdraw up to $35,000 as a first-time home buyer from your RRSP without paying taxes under the Home Buyer’s Plan. You can withdraw up to $20,000 on the Lifelong Learning Plan for post-secondary education. You have to replace your retirement funds in the future with annual instalments, based on when you withdraw the funds. Delay the requirement for repayment by a year by just making the withdrawal a few days later in January 2022.
Converting an RRSP to an RRIF
If you were born in 1950, so you turned 71 in 2021, you can still contribute to your RRSP until the end of December. Then you’ll need to convert it to an RRIF or registered annuity. Consider making an overcontribution just this one if you will have contribution room in 2022 from your earned income in 2021. There is a penalty of 1% on any amount over $2,000 in overcontributions. Still, the penalty tax ceases when your new RRSP room opens up on January 1st, 2022. Then, deduct the overcontributed amounts on 2022’s or other future year’s tax return. However, it might not be necessary if your spouse or partner is younger than you are because you can use contribution room after 2021 to contribute to a spousal RRSP until they turn 71.
An RESP is a great, tax-efficient way to save for a child’s post-secondary education. The Canadian government deposits a Canada Education Savings Grant (CESG) of 20% of your first $2,500 ($500 max) of RESP annual contributions for each child. Unused CESG carries forward until the beneficiary turns 17 years old. Still, sometimes it is beneficial to make your child’s RESP contribution by the end of the tax year.
Each child with unused CESG room being carried forward can have up to $1,000 of CESGs paid into their RESP annually, up to $7,200 for their lifetime until they turn 17. If you make catch-up contributions totalling $5,000 (2 deposits of $2,500 each) over seven years, the extra $7,200 is deposited, too. If your (grand)child is over 10 years old already and you haven’t maxed RESP contributions, consider a contribution this year. Also, if your (grand)child is 15 and never had an RESP, you forgo the CESG completely unless you contribute at least $2,000 by the end of the year. Making a $2,000 contribution this month is certainly worth the $7,200 the federal government will contribute to your (grand) child’s education.
If your (grand)child is currently attending a post-secondary institution and has an RESP, have the Educational Assistance Payments (EAPs) withdrawn before the end of 2021. The EAP is included in the student’s income, but most students have sufficient tax credits to make the EAP effectively tax-free. If they stopped attending university or college in 2021, the EAPs must be paid out within six months after they left school. So, make those final EAPs from their RESPs so they get the benefit of the funds.
Student Loan Interest
The student loan interest you paid in 2021 is a non-refundable tax credit. You need to have received the student loans under the Canada Student Financial Assistance Act, the Canada Student Loans Act, the Apprentice Loans Act or another similar governmental law in your province or territory. Only the student will be allowed to claim the tax credit for the student loan interest. Anyone can pay the interest to help the student (or graduate) out. Parents and grandparents often make contributions to help (grand) children pay off their student loans, but you can’t write off the interest.
Year-End Tax Tips for Investors
December is a good time to look at rebalancing your portfolio. Adjust your risk level by shifting your asset allocation for 2022. Consider keeping interest-bearing investments with high tax rates in registered plans to keep it tax-sheltered. Hold growth investments outside your registered plans to take advantage of capital gains.
Expenses on Investment Accounts
Remember to deduct any investment consultant fees, interest on your investment loans, or carrying charges relating to your non-registered investments. Be sure to pay those before the end of the year. Fees on registered plans are not tax deductible.
If you pay non-deductible interest, look at cash or withdrawing investments to reduce your debt. Then you can reborrow to earn income by replacing the investment. Borrowing to earn investment income lets you deduct interest fees. Be sure to make these shifts before the end of December to maximize the interest deductions for 2021 and going forward into 2022 and beyond.
Capital Gains and Losses
If you plan to sell investments before December 31st, 2021, at a profit, consider delaying until January 2022, so your capital gains aren’t taxable until next year. But if you have capital losses available to use up or have little other income, you may find selling this year makes sense. If your investments dropped in value, consider realizing the capital losses before December 31st, if you have any capital gains in 2021 or in the past three years, from 2018 to 2020, to apply against the losses. You might even recover some taxes paid previously in those years.
Charity Donations of Securities
While you might be more familiar with the idea of donating cash or making in-kind donations, eligible securities that have appreciated can eliminate the taxable capital gain payable on the securities. You still get the tax write-off for the donation, so it works out as a double benefit for your 2021 taxes.
Year-End Tax Tips for Family Members with Disabilities
Renovations for Accessibility in the Home
The Home Accessibility Tax Credit, or HATC, is a non-refundable tax credit to assist seniors and anyone eligible for the Canadian disability tax credit when they undertake specific renovations on their homes. You can get a tax credit of 15% for up to $10,000 of the amount you spend every year on any renovations and household changes to help individuals access or be more functional or mobile within the home. Any changes that reduce the risk of injury or harm in the home or while entering the home are eligible. The HATC applies to any payments you make before the end of December. Any single payment may qualify as an expense under HATC and as a medical expense, and you can claim it in both places.
Registered Disability Savings Plan (RDSP) Contributions
An RDSP is a tax-deferred savings plan open to Canadian residents who qualify for the Disability Tax Credit. The beneficiary, or anyone else, can contribute up to $200,000 until the beneficiary has their 59th birthday. There are no annual contribution limits, and RDSP contributions are not tax-deductible. The earnings in an RDSP accrue on a tax-deferred basis. Plus, the Canadian federal government assists with Canada Disability Savings Grants (CDSGs), with matching amounts based on the contributions to the RDSP. The federal government Canada Disability Savings Bonds (CDSBs) can go directly into the RDSP until the beneficiary’s 49th birthday. The federal government could contribute up to a max of $3,500 for the CDSG and $1,000 for the CDSB each year the beneficiary is eligible, depending on the family’s income. Contribute to the RDSP before the end of the year to receive the grants and savings bonds for this year. The carryforward for CDSG and CDSB entitlements is a full ten years. Still, RDSP beneficiaries with shortened life expectancies are allowed to withdraw up to a maximum of $10,000 each year without repaying the bonds and grants. You’ll need to file a special election with CRA by December 31st for a 2021 withdrawal, so get that done quickly!
Family Medical Expenses
If total eligible medical expenses are more than 3% of your net income or $2,421, whichever is less, you can claim a non-refundable tax credit. You can also add any unclaimed expenses before 2021. The medical expense tax credit (METC) includes medical expenses paid during any 12-month time period ending in the calendar year. The time period is extended to 24 months if the taxpayer died in that year. These expenses are not limited to those with a disability. Any Canadian can claim medical expenses for themselves or family members.
These year-end tax tips highlight several ways you can still benefit from additional tax savings if you act now. When you file a 2021 tax return, carefully look at each deduction and tax credit to be sure you get the full refund you deserve. Of course, tax planning is something that is best done both in advance and constantly considered throughout the year. Consider how your 2022 taxes will look as you complete your 2021 return, so you can work through any changes that may reduce your tax bill next year. Completing a personal tax return can get fairly complex when you start to take advantage of the deductions and tax credits the federal and provincial governments offer. That is why CloudTax keeps track of all the details you need to continue to follow the Canadian tax laws and pay the lowest amount of taxes possible.