Insightful tips on 2020 year-end tax planning.
Recieptients of COVID-19 benefits
The government has provided several benefits to help individuals who have been impacted by COVID-19. These are some of the benefits which have been implemented:
Canada Emergency Response Benefit (CERB)
Canada Recovery Benefit (CRB)
Canada Recovery Sickness Benefit (CRSB)
Canada Recovery Caregiving Benefit (CRCB)
Please visit the CRA’s COVID-19 benefits and services page for details relating to each of these benefits.
The aforementioned benefits are all taxable and are required to be reported on your 2020 income tax return. Of all the benefits noted above, only CERB is not subject to withholding tax. Instead, CERB recipients will be issued a T4A tax slip indicating the amount of CERB benefit received. The amount reported on the T4A slip is taxable and is to be reported on the 2020 income tax return.
Individuals in receipt of the CRB benefit will be required to pay back the CRB benefit if their income for 2020 (excluding CRB payments) is more than $38,000. The pay back amount will be $0.50 for each dollar of CRB benefit above $38,000. Furthermore, all other COVID-19 benefits including CRB are subject to 10% withholding tax.
Depending on your marginal tax rate you can be liable to pay tax on the above benefits. As we head towards the final weeks of 2020 it is critical that you estimate your total income from all sources (including benefits payments) and approximate what your marginal rate for 2020 would be. Thereafter, you should set aside funds to cover your potential tax payments for the year.
Families and students
Delay RRSP withdrawals under HBP or LLP plan
Withdrawals from RRSP prior to retirement are taxable, except if the funds are withdrawn under the home buyers’ plan (HBP) or lifelong learning plan (LLP). However, these funds need to be repaid in future annual installments, based on the year they were withdrawn.
As a means to defer repayment by one year, consider withdrawing from these plans in early 2021 rather than late 2020.
Contribute to RESP
RESP (Registered education savings plan) is a savings plan registered with the CRA and is designed to help save for your child or grandchild’s post-secondary education - up to a lifetime maximum of $50,000. The first $2,500 you put into an RESP each year is matched up to 20 percent ($500) through the Canada Education Savings Grant (CESG).
Although, unused grant money can be carried forward to future years, the maximum that can be paid out in a single year in grants is $1,000 - requiring you to contribute $5,000 for the year instead of $2,500.
Businesses
Income Splitting
It is a wise year-end tax strategy for business owners to determine the amount of salaries and/or dividends to pay their family members. In order to derive the optimal amounts of remuneration, consider factors such as each individual’s marginal tax rate, need for cash, corporation’s tax rate and benefits of deferral.
Although income splitting has become somewhat restrictive since 2018, there are still strategies available through which income can be split in a tax-efficient manner. A permissible option is to pay wages for actual work performed. If your children work for the business, consider paying them salaries for work performed in 2019. However, in doing so the pivotal condition to keep in mind is salaries have to be of reasonable amounts; possibly think what you would have paid a third party.
Furthermore, salaries and bonuses earned in 2019 must be paid within 179 days of the business’s year end for the amounts to be deductible in 2019. This results in your business getting a deduction in 2019, and your family members not having to pay tax on it until 2020.
Purchase depreciable assets
If you are thinking of purchasing depreciable assets for use in your business, there can be a tax benefit if acquisition is made by December 31, 2019. Tax depreciation (Capital Cost Allowance) can be claimed on assets owned (or purchased) on December 31, 2019; this in turn would reduce your business income for the year. Remember, in order to qualify for the deduction asset needs to be put in use (available for use) before year-end.
Delaying asset sale
When planning to dispose off your business’s depreciable assets, real property that is capital property, and investments, consider delaying the sale until 2020. This qualifies your business to claim an additional year of CCA and postpone tax on recaptured CCA (excess tax depreciation) and capital gains by one year.
Investors
Tax-loss selling
In most instances, investment assets move in tandem with the specific underlying measure to which they relate - i.e. stock market would generally rise if overall economic outlook is perceived to be positive, and vice versa if there is uncertainty and panic amongst investors. With 2020 being a volatile year for the stock market, if you realized gains on some of your holdings while losses on others, you can lower your tax bill by taking advantage of a strategy called tax loss selling.
Tax-loss selling involves selling investments that have declined in value at a loss, and offsetting them by selling investments which have gained in value. This strategy helps to lower the tax burden resulting from the appreciation in your aggregate investment assets. Any net capital loss that cannot be used in the current year may either be carried back three years or forward indefinitely - to offset net capital gains in those years.
In order for the loss to be available in 2020 or one of the previous three years, the settlement must take place in 2020. The settlement will be completed by December 31 if trade date is no later than December 29, 2020.
TFSA (Tax free savings account) withdrawals
TFSA allows you to put money into investments and have those savings grow tax-free throughout your lifetime. Interest, dividends and capital gains earned inside a TFSA are tax-free for life. Your TFSA savings can be withdrawn from your account at any time, with all withdrawals being tax free!
From a tax planning perspective, a withdrawal made from a TFSA is added back to your contribution room in the following year. Therefore, if you are contemplating a withdrawal from TFSA, do it before December 31, 2020.
Pay investment expenses
Certain investment expenses are to be paid by year end to claim a deduction or credit in 2020. This requirement applies to expenses such as interest paid on money borrowed for investing and investment counseling fees for non-registered accounts.
Tax gain donating
If you own publicly traded securities (including mutual funds) with accrued capital gains, consider gifting them to a registered charity or a foundation. Doing so not only entitles you to a tax receipt for the fair market value of donated security, but would also relieve you from capital gains tax.
All said and done, be aware that donating your appreciated securities should make sense from an overall investment perspective and not just with the goal of minimizing tax.
For professional advice contact Alpha Accountzy, Accounting & Tax Solutions.
