2020 YEAR-END TAX PLANNING TIPS
- 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.
- 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.
- 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 claw back due to annual earnings is applicable
Higher levels of personal income are taxed at higher personal rates, while lower levels are taxed at lower rates. Therefore, individuals may want to, where possible, adjust income out of high income years and into low income years. This is particularly useful if the taxpayer is expecting a large fluctuation in income, due to, for example, an impending maternity/paternity leave, large bonus/dividend or sale of a company or investment assets.
In addition to increases in marginal tax rates, individuals should consider other costs of additional income. For example, an individual with a child may receive reduced Canada Child Benefit (CCB) payments. Likewise, excessive personal income may reduce receipts of OAS, GIS, GST/HST credit and other provincial/ territorial programs.
There are a variety of ways to smooth income over a number of years to ensure an individual is maximizing access to the lowest marginal tax rates. For example,
- Taking more, or less, earnings out of the company (in respect of owner-managed companies).
- Realizing investments with a capital gain/loss.
- Deciding whether to claim RRSP contributions made in the current year or carry-forward the contributions.
- Withdrawing funds from an RRSP to increase income. Care should be given, however, to the loss in RRSP room based on the withdrawal.
- Deciding on whether or not to claim CCA on assets used to earn rental/business income.
Dividends paid out to shareholders of a corporation that do not meaningfully contribute to the business may result in higher taxes due to the tax on split income rules.
Year-end planning considerations not specifically related to changes in income levels and marginal tax rates include:
- Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the personal tax is paid when cash is withdrawn from the company).   The effect on the Qualified Small Business Corporation status should be reviewed before selling the shares where large amounts of capital have accumulated. In addition, changes which may limit access to the small business deduction where significant corporate passive investment income is earned should be reviewed.
- If dividends are paid out of a struggling business with a tax debt that cannot be paid, the recipient could be held liable for a portion of the corporation’s tax debt, not exceeding the value of the dividend (Section 160 assessments).
- Year-end bonuses can affect the business’ Canada Emergency Wage Subsidy (CEWS) and the recipient’s Canada Emergency Response Benefit (CERB). If the bonus partially relates to a claim period, it could increase entitlement to CEWS. On the other hand, it could eliminate entitlement to a CERB claim if it pushes the individual’s earnings for the period above $1,000.
- Individuals that wish to contribute to the CPP or a RRSP may require a salary to generate “earned income”. RRSP contribution room increases by 18% of the previous years’ “earned income” up to a yearly prescribed maximum ($27,230 for 2020; $27,830 for 2021).
- Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby potentially providing greater access to the capital gain exemption.
- Consider paying taxable dividends to obtain a refund from the Refundable Dividend Tax on Hand account in the corporation. The amount of refund may be restricted if “eligible” dividends are paid. Eligible dividends are subject to lower personal tax rates.
- It is costlier, from a tax perspective, to earn income in a corporation from sales to other private corporations in which the seller or a non-arm’s length person has an interest. As such, consideration may be given to paying a bonus to the shareholder and specifically tracking it to those higher-taxed sales. Such a payment may reduce the total income taxed at higher rates.
- Recent changes to the tax regime will likely require more careful tracking of an individual shareholders labour and capital contribution to the business, as well as risk assumed in respect of the business. Inputs should be tracked in a permanent file. Dividends paid that are not reasonable in respect of those contributions may be considered split income and taxed at the highest tax rate. Several other exceptions may also apply.
- Recent changes will restrict access to the corporate small business deduction where more than $50,000 of passive income is earned in the corporation. Consider whether it is appropriate to remove passive income generating assets from the corporation and whether a shift in the types of passive assets held is appropriate. In some provinces it may actually be beneficial to have access to the small business deduction restricted. As many variables affect these decisions, consultation with a professional advisor is suggested.
- If you are providing services to a small number of clients through a corporation (which would otherwise be considered your employer), CRA could classify the business as a Personal Services Business. There are significant negative tax implications of such a classification. In such scenarios, consider discussing risk and exposure minimization strategies (such as paying a salary to the incorporated employee) with your professional advisor.
**This publication is a high-level summary of the most recent tax developments applicable to business owners, investors, and high net worth individuals. This information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents. For any questions… give us a call.