The year 2020 is approaching an end! This is the time of the year when you should not forget important tax planning to best optimize your 2020 income taxes in Canada.
We have compiled a brief list for the end of year tax planning for individuals in 2020.
Income Tax Effects of COVID-19 Benefits Received in 2020
Many individuals have received support from the government during the pandemic. The Canada Emergency Response Benefit aka CERB, Canada Emergency Student Benefit (CESB) or Canada Recovery Benefit (CRB) are some of these. CERB is one of the most used benefits here.
It is important to note the tax effects of the CERB on taxpayers in Canada.
- CERB is a taxable income and you can expect to receive T4A from the CRA after 12/31/2020.
- If you did not meet the $5,000 income threshold, you may have to return the whole amount. CRA has already sent out “education letters”. If you think you met the eligibility criteria, you can set aside those letters.
- If you received more than $1,000 in income other than CERB during those periods, you will have to return the CERB payments. CRA has already issued additional T4 reporting requirements for 2020 to detect such payments.
- Ensure that you have set aside the additional cash to pay the income taxes on CERB. If you had other sources of income during 2020, these CERB payments will be taxed at your highest income tax brackets.
Adjust your Income Tax Instalments for 2020
If you make quarterly tax instalment payments, the last tax instalment is due on December 15, 2020. If you have not sent enough amounts, make sure to pay the larger amount of the last instalment. If during the pandemic, you have a lower income, you can use current year estimated taxes to adjust instalments. If you do not send the required instalments, you may be charged interest and penalties.
Changing Provinces? Time it Properly!
If you are moving from one province to another one in Canada, compare the provincial and territorial tax rates for 2020. You are subject to income taxes based on your date of residence as of December 31. If your new province of residence has a higher income tax rate, you can defer the move. In case if the new province has a lower tax rate, you can move before 12/31/2020.
RRSPs to Optimize Income Taxes
The contributions to RRSPs allow a deduction from the income (a tax deferral) and can help optimizing personal income taxes in Canada.
- If you are having a higher income, RRSP contributions can result in significant tax savings. Of course, it depends on your contribution limit for 2020. Check your last notice of assessment from CRA.
- Getting a big bonus? If you have RRSP contribution room and your employer permits, consider getting it directly into your RRSP to avoid all or partial tax deductions.
- You can also consider an early withdrawal if 2020 affected your income. If you have a low-income year early withdrawal may not have a bigger tax impact.
- Not sure, wait until the end of the year to decide on RRSP contributions. You have until March 1, 2021, to make RRSP contributions to applied against your 2020 income.
Want to know the difference between TFSAs and RRSPs, read the basics here.
Home Office Expenses in 2020
During the pandemic, remote working became normal! Even for those who have never worked from home before.
For those who have not claimed this deduction before, home office expenses reduce the employment income. Depending on the amount of deduction, your income tax refund can be increased or tax payable is decreased. And, do not forget this deduction gives you tax savings at your top tax bracket.
You need T2200 from your employer to deduct home office expenses (or other employment expenses) and report these on T777. You can use either the “simplified method” or “detailed method” depending on your expenses. A new temporary flat rate method is introduced, along with simplified versions of T2200S and T777S.
Get the information on Home Office Expenses for 2020 here.
Make sure you get T2200 or T2200S from your employer.
Timing of Bonus
If you are expecting to receive a bonus from your employer and you are currently in a higher tax bracket, considering deferring the receipt in early 2021. On the other hand, if you expect a higher income in 2021, try to get it in 2020, if possible.
If you are an owner-manager, you can still accrue a bonus and get a corporate income tax deduction in the current year whereas receiving the bonus in 2021.
- If you have an employee loan and intend to pay interest on the same, make sure you pay it before January 30, 2021.
- The current prescribed rates for the fourth quarter are very low, take advantage of it for an employee home purchase loan.
Use of Employer’s Car
If the employer’s car is available for the use of the employee, there is a standby charge in addition to the operating cost.
Maintain the log for the vehicle use and try to keep the personal portion under 50%. Also, consider reimbursing your employer for some of the operating expenses to bring down the operating cost element of the benefit.
Standby charge on the employer’s car sometimes come as a big taxable benefit. You can reduce it by reducing the number of days the vehicle is available to you for use. Try leaving the car under the employer’s control when travelling or do not need it for personal use. Also, consider a low-value vehicle or have your employee sell and leaseback.
If you moved during 2020 to get close to your place of work, do not forget to claim moving expenses. Moving expenses deduction can help lower your income taxes. Read more about moving expenses here.
Employee Stock Options
- If you exchanged stock options for cash, you can elect to forgo tax deductions by your employer. This way you might be eligible to claim a stock option deduction (50%).
- If you have stock options of Canadian Controlled Private Corporation (CCPC), consider exercising them. You will be able to defer the tax when you sell the shares. You can plan it towards taking advantage of Lifetime Capital Gain Exemption.
- Keep in mind the newly proposed treatments where the government wants to put a 200k limit on employee stock options for current preferential treatment.
Planning to do some charitable contributions, last day for making charitable donations is December 31, 2020, for it to be included on your 2020 tax return.
- If you have not already done so, collect all the tax receipts from the charities.
- You can also make in-kind contributions and you should receive a tax receipt equivalent to the fair market value of assets contributed.
You can donate up to 75% of your net income.
Try to pay all your year-end expenses such as child care expenses, medical expenses, alimony or investment management fee before the year-end. Make sure you get the receipts!
Settle Shareholder Loans with your Corporation
If you owe your corporation or have taken a shareholder loan from the corporation, make sure to clear it on your corporation’s balance sheet before year-end.
Read more on the same in Our post about tax planning for corporations.
Review your Investments
If you have investments, review them before the year-end:
- Defer realizing capital gains if you are expecting that your marginal rate will be lower in 2021.
- If you have losses coming from market fluctuations, consider carrying them back for the past three years’ capital gains.
- Purchase the mutual funds after the mutual funds have made their distributions.
- Check the impact of TOSI rules if you have a Canadian private corporation and planning some income sprinkling.
- If you are a high-income earner, consider an investment holding company.
Prepare a Planner Tax return for 2020
If you are reading this post and 2020 is not yet finished, consider getting a planner income tax return done for you. A planner income tax return helps running multiple scenarios to best optimize your income taxes.
Maroof HS CPA Professional Corporation provides both income tax planning and individual income tax return preparation services in Toronto and Canada. Get in touch with us to get a tailored plan for yourself.
This post is for the general audience and cannot be considered as tax advice. Income tax planning should take into account all of your circumstances and, ideally, should be done in consultation with a tax professional in Canada.