Now that we are reaching the end of the tax year, it’s an excellent time to review your finances. We’ve listed below some of the critical areas to consider and provide you with useful guidelines.
We have divided our tax planning tips into five sections:
Individual tax issues
Family tax issues
Managing your investments
Tax Deadlines for 2020 Savings
December 31, 2020:
If you reached the age of 71 in 2020, you can’t contribute to your RRSP after this date
Use up your TFSA contribution room
Contribute to an RESP to get the Canadian Education Savings Grant (CESG) and the income-tested Canada Learning Bond (if eligible).
Contribute to an RDSP to get the Canada Disability Savings Grant (CDSG) and the income-tested Canada Disability Savings Bond (if eligible).
Investment counsel fees, interest and other expenses relating to investments
Some payments for child and spousal support
Fees for union and professional memberships
Student loan interest payments
Deductible legal fees
January 30, 2021
Interest on intra-family loans
The interest you must pay on employer loans to reduce your taxable benefit
March 1, 2021
Contributions to provincial labour-sponsored venture capital corporations
RRSP Repayment under Home Buyers Plan or Lifelong Learning Plan
Deductible contributions to a personal or spousal RRSP
Individual Tax Issues
To help Canadians deal with financial hardships due to job loss because of COVID-19, the Canadian government introduced several benefit programs. If you received any of these benefits, you should be aware of the tax ramifications.
The Canada Emergency Response Benefit (CERB) was the first benefit program issued by the government and ran until September 26, 2020. If you received the CERB at all during 2020, the government will issue you at T4A, showing how much money you received from the CERB program. You must then declare that as income when filing your 2020 income tax return. Since no tax was taken off at the source, be sure to put aside money to pay for potential income taxes on your CERB income.
As of September 27, 2020, the government offered three replacement benefit programs:
Canada Recovery Benefit (CRB) This is for people impacted by COVID-19 who work but are not eligible for EI (e.g. self-employed).
Canada Recovery Sickness Benefit (CRSB) This is for people who are employed cannot work due to COVID-19 and do not have access to paid sick leave.
Canada Recovery Caregiving Benefit (CRCB) This is for people who must miss work to care for a family member who has COVID-19.
For all three of these programs, the government will be withholding 10% in taxes upfront, but you may end up owing extra tax, depending on the rest of your income for 2020, so it’s important to set extra money aside for taxes.
Also, there is a unique condition for the CRB only. If you make over $38,000 in 2020 (excluding the CRB), you will have to pay back the CRB at a rate of 50 cents for each dollar of CRB you earned above the threshold.
If you paid interest on an eligible student loan in 2020, you can claim a non-refundable tax credit in the amount of interest you paid by December 31. In addition, you should be aware that student loan payments were frozen for six months – from March 30 to September 30. No interest accrued on student loans during that period.
Family Tax Issues
Check your eligibility for the Canada Child Benefit
(CCB) To receive the Canada Child Benefit in 2021/22, you need to file your tax returns for 2020 as the benefit is calculated using your family income from the previous year. Eligibility for the CCB depends on set criteria such as your family’s income, how many children you have, and how old they are. You may qualify for a full or partial amount, depending on whether you have full custody or shared custody.
Consider family income splitting
The CRA offers a prescribed low-interest rate on family loans. Therefore, it makes sense to consider setting up an income splitting loan arrangement with your family members. If you do this, you can potentially lock in a family loan at a low-interest rate of 1% and then invest the borrowed money into a higher return investment while benefitting from your family member’s lower tax status. Don’t forget to adhere to the Tax on Split Income rules.
Managing Your Investments
Use up your TFSA contribution room
If you can, it’s worth contributing the full $6,000 to your TFSA for 2020. You can also contribute more (up to $69,500) if you are 29 or older and haven’t made any previous TFSA contributions.
Contribute to a Registered Education Savings Plan (RESP)
The Registered Education Savings Plan (RESP) is a savings plan for parents and others to save for a child’s education. The Canada Education Savings Grant (CESG) will match up to 20% of your contributions up to a maximum of $2,500.
That means the CESG can add a maximum of $500 to an RESP each year. The grant room accumulates until your child turns 17. Therefore, any unused CESG amounts for the current year are automatically carried forward for possible use in the future years.
The income-tested Canada Learning Bond (CLB) is paid directly to a child’s RESP by the Canadian government to low-income families. No personal contributions are required to receive the CLB.
Contribute to a Registered Disability Savings Plan (RDSP)
The Registered Disability Savings Plan (RDSP) is a savings plan for parents and others to save for the financial security of a person who is eligible for the Disability Tax Credit (DTC). The government will pay a matching Canada Disability Savings Grant (CDSG) up to 300% – depending on the beneficiary’s adjusted family net income and amount contributed.
Also, low-income Canadians with disabilities may be eligible for a Canada Disability Savings Bond (CDSB). If you qualify, it will be paid directly to your RDSP.
The government will pay matching grants or bonds into the RSDP up to and including the end of the year the recipient turns 49. Be aware that there is a 10-year carry-forward of CDSG and CDSB entitlements.
Donate securities to charity
Donating by year-end will provide you with tax savings. If you donate eligible securities or mutual funds, capital gains tax does not apply, and you can receive a tax receipt for their full market value. Also, the charity gets the full value of the securities.
Think about selling any investments with unrealized capital losses
It might be worth doing this before year-end to apply the loss against any net capital gains achieved during the last three years. The last trading date for 2020 for Canadian and US publicly traded stocks will be Tuesday December 29th in order to record the gain or loss in the 2020 taxation year.
Conversely, if you have investments with unrealized capital gains that cannot be offset with capital losses, it may be worth selling them after 2020 to be taxed on the income the following year.
Consider the timing of purchasing of certain non-registered investments
Suppose you are considering purchasing an interest-bearing investment like a guaranteed investment certificate (GIC) with a maturity date of one year or more. In that case, you may consider delaying the purchase to the following year, so you don’t have to pay tax on accrued interest until 2021. You should also consider this with mutual funds that make taxable distributions before the end of 2020, consider delaying this until early 2021. Don’t pay taxes earlier than necessary.
Check if you have investments in a corporation
The new passive investment income rules apply to tax years from 2018 onwards. They state that the small business deduction is reduced for companies with between $50,000 and $150,000 of investment income. Therefore, the small business deduction has entirely stopped for corporations that earn a passive investment income of more than $150,000.
Note – At a provincial level, both Ontario and New Brunswick do not follow the federal rules to limit access to the small business deduction.
Make the most of your RRSP
The deadline for making contributions to your RRSP for the year 2020 is March 1, 2021. The deduction limit for 2020 is limited to 18% of the income you earned in 2020, to a maximum of $27,230. This maximum amount is impacted by the following:
Any pension adjustment
Any previous unused RRSP contribution room
Any pension adjustment reversal.
Remember that deducting your RRSP contribution reduces your after-tax cost of making said contribution.
Check when your RRSP is due to end
If you reach the age of 71 during 2020, you must wind up your RRSP this year. You must make your final contribution to it by December 31, 2020.
Convert to RRIF before year-end
If you turned 65 during 2020 or are already older than 65, you’re entitled to a pension credit that can fully or partly offset the tax on the first $2,000 of eligible income annually. Consider setting up an RRIF before year-end to pay out $2,000 annually if you don’t have any other eligible pension income.
If you have any questions about your taxes for 2020, contact us – we can help you!
The Key Differences Between a Defined Benefit and Defined Contribution Pension Plan
As an employer, you may be thinking about offering your employees a pension plan. If so, you have two main options: a defined benefit pension plan and a defined contribution pension plan. A defined benefit pension plan offers your employees a set amount of money when they retire, whereas a defined contribution pension plan does not.
There are four key areas you should be aware of for pension plans:
We will walk you through each of these to help give you a better understanding of the differences between the two types of pension plans.
In a defined benefit pension plan, both you, the employer, and the employee will contribute to the pension plan. The amount that you will have to contribute each year will depend on what kind of expenses the pension plan has, and the amount of funding it will require that year.
In a defined contribution pension plan, employees contribute a set amount each year into their pension. As an employer, you can choose to match or “top up” their contributions to a set amount that you define in advance.
For both types of plans, contributions are tax-deductible for the employee.
As an employer, you or your pension plan administrator will be responsible for managing the funds in a defined benefit pension plan. This applies whether the employee is actively contributing to the fund or has retired and is receiving funds from it.
With a defined contribution pension plan, you can let your employees choose how they want to invest their funds. This provides your employees with more flexibility and choice and takes the responsibility off you as the employer to manage pension funds. You will still need to arrange to have a selection of funds for your employees to select from.
In a defined benefit pension plan, an actuary will work with you (approximately every three years) to calculate how much money you will need to cover the pension expenses. The actuary must consider everything from cost of living adjustments to how many employees will be retiring.
In a defined contribution plan, the costs will be lower as less active management is required. Employees will receive whatever amount their investments are worth when they retire.
Both types of pension plans will help attract and retain employees. Since a defined benefit plan builds in value each year, it is more likely to attract employees interested in staying with your company for a long time. A defined contribution plan will still attract employees – but the pension will be less appealing than a defined benefit plan would be.
A defined benefit plan will cost you more to set up, maintain, and administer, but offers your employees more stability in their retirement. A defined contribution plan will give you and your employees more flexibility and cost you less to run.
Either type of plan will help you attract and retain employees.
Business owners are increasingly recognizing the key importance of implementing employee benefit plans in their organization and this is an area that has grown considerably in recent decades. Employee benefits comprise all of the additional things that you offer to your employees on top of their regular salary, which could include pension contributions, health cover / insurance policies, training and education programs etc. Employees are more and more interested in the total benefits package that a potential employer can offer them, rather than just being focused on a binary salary figure and recognizing and understanding this cultural shift in the modern working world is crucial to maintain your ability to recruit and retain the right talent for your business.
Many employees value the benefits that their employer offers, considering them an integral part of their take home pay, none more so than health cover. This benefit can provide financial and emotional security to your employees and their families, without the need for them to complete any health requirements to be on the plan. They are likely to benefit from a preferable level of cover and the plan may even provide them with insurance products such as long-term disability cover, which can be harder to gain outside of a group plan. What’s more, group plans often offer out-of-country emergency healthcare for employees which has the potential to save them money on personal travel insurance products.
Not only do these benefits provide a sense of security to your employees, they can also help them to feel valued as part of your organization, which may in turn foster higher morale and increased motivation within their roles. It is therefore worthwhile for business owners to encourage their teams to recognize the fact that the benefits package that you offer should be considered as an integral part of their take home pay, alongside their actual salary.
The 2019 budget is titled “Investing in the Middle Class. Here are the highlights from the 2019 Federal Budget.
We’ve put together the key measures for:
Individuals and Families
Business Owners and Executives
Retirement and Retirees
Farmers and Fishers
Individuals & Families
Home Buyers’ Plan
Currently, the Home Buyers’ Plan allows first time home buyers to withdraw $25,000 from their Registered Retirement Savings Plan (RRSP), the budget proposes an increase this to $35,000.
First Time Home Buyer Incentive
The Incentive is to provide eligible first-time home buyers with shared equity funding of 5% or 10% of their home purchase price through Canada Mortgage and Housing Corporation (CMHC).
To be eligible:
Household income is less than $120,000.
There is a cap of no more than 4 times the applicant’s annual income where the mortgage value plus the CMHC loan doesn’t exceed $480,000.
The buyer must pay back CMHC when the property is sold, however details about the dollar amount payable is unclear. There will be further details released later this year.
Canada Training Benefit
A refundable training tax credit to provide up to half eligible tuition and fees associated with training. Eligible individuals will accumulate $250 per year in a notional account to a maximum of $5,000 over a lifetime.
Canadian Drug Agency
National Pharmacare program to help provinces and territories on bulk drug purchases and negotiate better prices for prescription medicine. According to the budget, the goal is to make “prescription drugs affordable for all Canadians.”
Registered Disability Savings Plan (RDSP)
The budget proposes to remove the limitation on the period that a RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit. (DTC) and the requirement for medical certification for the DTC in the future in order for the plan to remain open.
This is a positive change for individuals in the disability community and the proposed measures will apply after 2020.
Business Owners and Executives
Intergenerational Business Transfer
The government will continue consultations with farmers, fishes and other business owners throughout 2019 to develop new proposals to facilitate the intergenerational transfers of businesses.
Employee Stock Options
The introduction of a $200,000 annual cap on employee stock option grants (based on Fair market value) that may receive preferential tax treatment for employees of “large, long-established, mature firms.” More details will be released before this summer.
Retirement and Retirees
Additional types of Annuities under Registered Plans
For certain registered plans, two new types of annuities will be introduced to address longevity risk and providing flexibility: Advanced Life Deferred Annuity and Variable Payment Life Annuity.
This will allow retirees to keep more savings tax-free until later in retirement.
Advanced Life Deferred Annuity (ALDA): An annuity whose commencement can be deferred until age 85. It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.
Variable Payment Life Annuity (VPLA): Permit Pooled Retirement Pension Plans (PRPP) and defined contribution Registered Retirement Plans (RPP) to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.
Farmers and Fishers
Small Business Deduction
Farming/Fishing will be entitled to claim a small business deduction on income from sales to any arm’s length purchaser. Producers will be able to market their grain and livestock to the purchaser that makes the most business sense without worrying about potential income tax issues. This measure will apply retroactive to any taxation years that began after March 21, 2016.
To learn how the budget affects you, please don’t hesitate to contact us.