Checklist 2020: Save on your personal taxes

December 01, 2020

As we approach the end of a very challenging year, it's a good idea to think about personal income tax planning now so that you can maximize tax savings in 2020 and be prepared when final tax payments are due.

Since individuals are taxed on a calendar year basis, Dec. 31, 2020 is generally the last date for transactions that affect 2020 personal income taxes. So even though your personal tax return won't be due until April 30, 2021 (or June 15, 2021 if you or your spouse is self-employed), there are good reasons to consider a number of tax planning opportunities now before it's too late.

Below are some strategies to help you manage your tax costs. Keep in mind that while not all of these strategies may apply to your particular situation, a trusted BDO advisor can assist you with your tax planning needs.

The federal government has offered many financial relief programs during the COVID-19 crisis. If you've received the Canada Emergency Response Benefit (CERB), you should remember that the amounts are taxable. Since no income taxes were withheld at the time of payment, depending on whether you have other sources of income for the year, you may want to estimate the taxes that will be due and set aside the funds now.

Similarly, if one of your family members received the Canada Emergency Student Benefit (CESB), the amounts are also taxable to them but no income taxes were withheld. While the average student may not end up needing to pay tax, it is wise to plan ahead if they received other sources of income so that there are no surprises when their tax return needs to be filed.

If you've received the new Canada Recovery Benefit, Canada Recovery Sickness Benefit, and Canada Recovery Caregiving Benefit, payments are also taxable. But unlike the CERB and CESB, taxes were withheld at 10% of the benefits under these programs. However, depending on your 2020 marginal tax rates, the amount of taxes withheld may not be sufficient to cover your tax liability on these payments and you may need to pay additional tax in the spring.

While the government will be issuing a T4A slip showing the total amount of COVID-19 support each individual received in 2020, you should also keep records to support eligibility for these government programs in case the Canada Revenue Agency (CRA) asks for them.

If you've realized capital gains in 2020 or in one or more of the last three years, consider selling assets with an accrued loss to offset these gains. To include a disposition of marketable securities in your 2020 tax year, you need to sell them on or before the stock exchange's last trading day for settlement in 2020. The last trading day for settlement in 2020 will generally be Dec. 29 for Canadian exchanges. For other transactions, legal ownership must be transferred before the end of the year.

If you do decide to undertake a tax-loss selling strategy, you should be aware that rules (known as the superficial loss rules) may apply to deny losses on certain dispositions of property. In particular, the loss will be denied if you (or your spouse or a company you or your spouse control) repurchase the asset you disposed of for a loss within 30 days of the disposition.

Many items that are creditable or deductible for tax purposes must be paid by the end of the year. These amounts include alimony and maintenance, childcare expenses, investment counsel fees, professional dues, charitable donations, medical expenses, and political contributions. To ensure that you will benefit from the tax deduction or credit in 2020, be sure that you pay these amounts by Dec. 31.

Managing your medical expenses

In the case of medical expenses, only amounts in excess of $2,397 (limit may vary by province or territory) or 3% of net income (whichever is less) are eligible for a credit. In Quebec, eligible medical expenses must be reduced by 3% of family income.

If your medical expenses for the current year are already in excess of the threshold and you anticipate that you won't have medical expenses in excess of the threshold next year, consider paying now for additional expenses that will arise in the near future.

Although most medical expenses are only paid as the medical services or supplies are required, some can be paid in advance. Glasses and contact lenses are two common examples. If you're paying for a major expense such as braces on an instalment basis, consider paying the balance owing early to maximize your medical credit claim.

You may have no medical expenses that can be paid in advance. In that case, keep in mind that you can claim eligible medical expenses paid in any 12-month period ending in a given year. For example, consider this scenario:

  • Your medical expenses incurred in the 2020 calendar year don't exceed the threshold.
  • You need major dental surgery.
  • Those dental procedures will run from October 2020 to March 2021.
  • The total cost will be about $5,000, split evenly between 2020 and 2021.
  • Your other eligible medical expenses will total about $1,000 in each of 2020 and 2021.

In this scenario, you wouldn't claim any medical expense in 2020, and you could choose the 12-month period ending on Sept. 30, 2021 as the period to claim medical expenses on your 2021 income tax return. You can then claim all of the dental expenses incurred over the annual threshold, plus the other $1,000 of regular medical expenses incurred in the 12-month period ending Sept. 30, 2021. Note also that medical expenses eligible for the tax credit evolve over time and you should check the CRA website for a list of common medical expenses that qualify for the credit.

If you were working from home during the pandemic, you may qualify for a home office expense deduction for 2020. In the 2020 Fall Economic Statement, the federal government announced that the home office expense deduction will be simplified for employees who worked from home in 2020 due to COVID-19. These employees will be permitted to deduct up to $400 in home office expenses, based on the amount of time working from home, without the need to track detailed expenses. The CRA will also generally not request taxpayers to provide a signed Form T2200, Declaration of Conditions for Employment, from their employers in these circumstances. Further detail is expected from the CRA in the coming weeks.

If you are self-employed, you have much more flexibility and can generally deduct reasonable expenses incurred to earn business income, such as stationery supplies used in the business. Self-employed individuals can also deduct workspace in home expenses if the workspace is either:

  1. The individual's principal place of business; or
  2. Used exclusively to earn business income and used on a regular and continuous basis for meeting clients, customers, or patients of the individual in respect of the business.

Where one of these conditions are met, deductible amounts include the business use portion of a reasonable allocation of expenses related to your home office, including capital cost allowance, mortgage interest and property taxes.

In light of new challenges faced by employees during the pandemic, the CRA has provided administrative guidance that may impact you:

Home office equipment and furniture

Earlier this year, the CRA announced that up to $500 in employer reimbursements for the purchase of computer equipment and home office furniture to enable an employee to work from home will not be considered a taxable benefit in 2020. However, remember that you need to provide your employer with receipts to support the reimbursement. If your employer provides more than $500 to cover such expenses, only the amount in excess of the $500 limit will be considered a taxable benefit to you.

Home internet or cellphone fees

The CRA confirmed that if an employer reimburses an employee a reasonable amount for home internet costs or for use of a cellphone during the pandemic, the portion used for employment purposes will not be a taxable benefit.

Commuting

Recognizing that employees may need to incur additional costs to safely travel to the employer's place of business during the pandemic, the CRA announced that a reasonable allowance or reimbursement from the employer for travel expenses related to commuting from home to a regular workplace during the pandemic will not be considered a taxable benefit.

Parking

Similarly, the CRA clarified that employer-provided parking at the employee's regular workplace will not be considered a taxable benefit where the regular place of employment is closed during the pandemic.

Starting in 2020, you may be able to claim the new refundable Canada Training Credit (CTC) for eligible tuition and fees paid for courses taken in the year. An eligible individual accumulates $250 each year in their notional CTC account, which started in 2019, up to a lifetime maximum of $5,000. You can check your eligibility and CTC limit by referring to your 2019 notice of assessment or logging into CRA's My Account portal. Note that individuals under the age of 26 or over the age of 65 at the end of the year cannot claim the CTC for that year.

The amount of the CTC, which is claimed on your income tax return, is the lesser of 50% of the eligible tuition and fees paid in respect of the year, and your CTC limit for the year (which is $250 for 2020 for eligible individuals). Eligible tuition for purposes of the CTC are generally the same as tuition that would qualify for the tuition tax credit, and where the individual qualifies for both the CTC and the tuition tax credit, the CTC will reduce eligible tuition for purposes of the tuition tax credit.

If you haven't enrolled in a course offered by an eligible educational institution, you may want to do so and be sure to pay for the eligible tuition fees before the end of the year to take advantage of the CTC in 2020.

In order to be deductible for 2020, your registered retirement savings plan (RRSP) contribution must be made on or before March 1, 2021. If you want to know how much you can contribute for 2020, check your RRSP contribution limit on your 2019 notice of assessment, online using the CRA's My Account service, or the MyCRA mobile app.

Your contribution limit for 2020 is 18% of your 2019 earned income (to a maximum of $27,230) less your 2019 pension adjustment, if any, plus any RRSP room carried forward from prior years.

Also, remember that if you turn 71 on or before Dec. 31, 2020, you must collapse your RRSP by the end of the year. At that time, you can pay tax on the fair market value of the plan's assets, purchase an annuity, or transfer your RRSP into a registered retirement income fund (RRIF). No tax is paid at the time of the purchase of the annuity or at the time of conversion into an RRIF. Note that despite collapsing your own RRSP, you may still be able to contribute to a spousal or common-law partner RRSP, provided that such contributions are made no later than the end of the year in which your spouse or common-law partner turns 71.

There are specific rules as to the types of assets your RRSP can hold. If you have a self-directed RRSP, you may have purchased assets that don't qualify, referred to as non-qualifying investments. Qualified investments generally include money, guaranteed investment certificates, bonds, mutual funds, and securities listed on a designated stock exchange.

If non-qualifying investments are acquired or existing investments become non-qualified, a tax equal to 50% of the amount of such investments will apply to the RRSP holder. Where the non-qualifying investment is disposed of, the tax will be refunded if certain conditions are met. If the purchase and sale are in the same year, the tax and the refund will generally be offset. If you find that you have non-qualifying assets in your RRSP, it will be beneficial to dispose of the non-qualifying assets before Dec. 31.

If you participated in the Home Buyers' Plan (HBP) prior to 2019, you may have a repayment due in the 2020 taxation year.

Generally, you have up to 15 years to repay the HBP loan from your RRSP. The CRA issues an annual HBP statement of your account, and your required repayment amount will be shown on that statement. Your 2020 minimum repayment amount will be shown on the statement, which would have been received with your 2019 notice of assessment.

If the minimum repayment isn't made, you will be required to include the shortfall from the minimum payment in your income. To ensure the minimum annual HBP repayment isn't included in your taxable income for 2020, the required amount must be repaid to your RRSP on or before March 1, 2021.

A repayment is made by making a regular contribution to your RRSP. Repayments to your HBP don't affect your RRSP deduction limit. This means that you can still contribute to your RRSP and designate that amount as a repayment under the HBP, even if your RRSP deduction limit is zero.

If you are eligible to participate in the HBP, you should keep in mind that the government increased the withdrawal limit to $35,000 from $25,000 in respect of withdrawals after March 19, 2019. In addition, the government announced changes to extend access to the HBP to individuals after the breakdown of a marriage or common-law partnership for withdrawals made after 2019.

If you have entered into an income-splitting arrangement with family members by loaning your personal after-tax funds to a spouse or common-law partner, a minor child, or a family trust at the CRA's prescribed rate, you should pay the interest before Jan. 30, 2021. If the interest isn't paid on time, the loan will be subject to the attribution rules and the income earned by the family member who received the loan will be taxed in your hands.

Also, if you received a low-interest loan from your employer during any point in the year, you should ensure that interest is paid before Jan. 30, 2021 in order to avoid a deemed taxable employment benefit. This benefit will also be calculated at the CRA's prescribed rate for the period that the loan was outstanding, less any interest actually paid. The CRA's prescribed rate has been 1% since July 1, 2020. Before this date, the rate was set at 2% since April 1, 2018.

Note that if you received a loan by virtue of your shareholdings rather than employment, a different set of rules will apply. In addition, since Jan. 1, 2018, the tax on split income rules were expanded and could affect loans from private corporations to certain family members. If you or your family members borrowed money from your corporation, contact your BDO advisor to discuss whether there are any income tax implications arising from the loan.

If your employer provides you with a company car, a taxable benefit will be included on your T4 slip.

The actual benefit is made up of two parts:

  • A standby charge for making the automobile available for your use. It's calculated based on a percentage of the original cost or the monthly lease payments for the automobile. This benefit is calculated on a daily basis for each day that the car is made available to you. As such, to lower the amount of the taxable benefit, you should consider reducing the number of days between now and the end of the year that the car is available to you and limiting personal driving to less than 50% of the total number of kilometres driven, where it is practical to do so.
  • An operating benefit that applies if your employer pays the automobile's operating expenses, such as gasoline and maintenance. A portion of the employer-paid operating expenses will be a taxable benefit if you've driven the automobile for personal purposes. In 2020, this benefit is equal to $0.28 per personal kilometre driven.

The standby charge and the operating benefit are reduced by the amounts you pay to your employer. For a standby charge reduction, your payment must be made on or before Dec. 31, 2020. For an operating benefit reduction, you will have until Feb. 14, 2021 to make a reimbursement to your employer to reduce your taxable benefit.

If you're required to pay tax instalments, now is a good time to check to see if you're up to date on your 2020 payments. If you've paid the instalments on the notices sent to you by the CRA for 2020 and plan to make the required final payment by Dec. 15, 2020, then you are up to date. Note that the June 15 and Sept. 15 instalment due dates were changed to Sept. 30 this year.

If you paid less than the amount on the CRA notice because you thought that your income for 2020 would be less than 2019, you should check to see if you have paid enough.

If you haven't paid your tax instalments, the CRA will charge you interest at the current rate of 5%. If you find that you haven't paid enough for your estimated income for 2020, you can make an overpayment on your instalment account to generate an offset to some or all of the interest charges that will otherwise be assessed. Check with your BDO advisor for assistance in making a determination as to whether this would be a good strategy for you.

Note that individuals whose main source of income is self-employment income from farming or fishing are only required to make one instalment payment, which is due by Dec. 31.

It's not too late to save on your 2020 taxes

Tax planning shouldn't be something that only happens when you file your tax return. By investing some time to review your personal tax situation during the year, and especially as you near the end of the year, you may find some easy ways to save on your annual personal tax bill.

Contact your local BDO office today to see which year-end strategies work best for you.


The information in this publication is current as of December 01, 2020.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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