Checklist 2021: save on your personal taxes

November 01, 2021

As we approach the end of the year, it’s a good idea to think about personal income tax planning now so that you can maximize tax savings in 2021 and be prepared when final tax payments are due.

Since individuals are taxed on a calendar year basis, Dec. 31, 2021 is generally the last date for transactions that affect 2021 personal income taxes. So even though your personal tax return won't be due until May 2, 2022 since April 30 falls on a Saturday (or June 15, 2021 if you or your spouse/common-law partner 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 pandemic. If you received the Canada Recovery Benefit, Canada Recovery Sickness Benefit, or Canada Recovery Caregiving Benefit in 2021, the payments are taxable. Even though taxes were withheld at 10% of the benefits under these programs, depending on your 2021 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. In this case, you should consider estimating the amount of taxes that will be due and setting aside the funds now.

On the other hand, if you repay any amounts under these programs, the government will allow you the option of claiming a deduction for the repaid amount in the year in which the benefit amount was received rather than in the year in which the repayment is made, as long as the repayment is made before the end of 2022. You may also split the deduction between the two years provided that the total deduction does not exceed the amount repaid. These options are also available in respect of repayments of the Canada Emergency Response Benefit (CERB) that was available in 2020.

If you made repayments in 2021 in respect of benefits received in 2020, but did not claim a deduction on your 2020 tax return, you can choose to either take all or a portion of the deduction on your 2021 tax return, and/or request a change to your 2020 tax return. You should determine which option gives you the best tax result by comparing your marginal tax rates in each of the two years, as well as taking into account whether any of your federal and provincial income-tested benefits and credits would be impacted based on your net income from the previous year.

The government will issue a T4A slip showing the total amount of taxable COVID-19 benefits each individual received in 2021, as well as repayments made in the year. It’s important to remember that if you’ve already taken a deduction for a repaid amount last year, you cannot claim a deduction for the same repayment on this year’s return. You should keep good records to support eligibility for these government programs, amounts received and repayments made by year, and compare them to your T4A slip. This information is also useful to have on hand in case the Canada Revenue Agency (CRA) asks for them.

If you've realized capital gains in 2021 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 2021 tax year, you need to sell them on or before the stock exchange's last trading day for settlement in 2021. The last trading day for settlement in 2021 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/common-law partner or a company you or your spouse/common-law partner 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 2021, be sure that you pay these amounts by Dec. 31.

Consider donating securities

If you plan to donate money to a registered charity, you should consider donating publicly listed securities you own instead of cash. If there is an accrued gain on your securities, by donating the shares directly to the charity, you can save on capital gains tax that you would otherwise incur. For more information on this tax planning strategy, read our “How donating securities to charity saves you tax” article.

Manage your medical expenses

In the case of medical expenses, only amounts in excess of $2,421 (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 2021 calendar year don't exceed the threshold;
  • you need major dental surgery;
  • those dental procedures will run from October 2021 to March 2022;
  • the total cost will be about $5,000, split evenly between 2021 and 2022; and
  • your other eligible medical expenses will total about $1,000 in each of 2021 and 2022.

In this scenario, you wouldn't claim any medical expense in 2021, and you could choose the 12-month period ending on Sept. 30, 2022 as the period to claim medical expenses on your 2022 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, 2022. 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 worked from home last year due to COVID-19, you may have taken advantage of the new simplified flat-rate method for claiming a home office expense deduction when you filed your 2020 tax return. This method allowed a deduction of up to $400 in home office expenses, based on the amount of time you worked from home, without the need to track detailed expenses or the requirement for a signed Form T2200 from your employer.

The re-elected federal government has indicated that it will extend access to the simplified method for claiming home office expenses for an additional two years through to 2022 and the maximum deductible amount will be increased to $500 from $400. More details are expected from the government, especially regarding questions that many employees have on eligibility where they are choosing, and not necessarily required, to work under a hybrid work arrangement.

As with previous years, 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.

The government has promised to move ahead with implementing a new 10% luxury tax on the purchase of cars and personal aircraft that retail for more than $100,000, as well as boats for personal use that retail for more than $250,000, beginning Jan. 1, 2022. If you’re planning to purchase or lease these goods, you may want to make your purchase before the end of 2021. For more information, see our accompanying article on this matter.

In order to be deductible for 2021, your registered retirement savings plan (RRSP) contribution must be made on or before March 1, 2022. If you want to know how much you can contribute for 2021, check your RRSP contribution limit on your 2020 notice of assessment, online using the CRA's My Account service, or the MyCRA mobile app.

Your contribution limit for 2021 is 18% of your 2020 earned income (to a maximum of $27,830) less your 2020 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, 2021, 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 2020, you may have a repayment due in the 2021 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 2021 minimum repayment amount will be shown on the statement, which would have been received with your 2020 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 2021, the required amount must be repaid to your RRSP on or before March 1, 2022.

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 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, 2022. 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, 2022 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 2021, this benefit is equal to $0.27 per personal kilometre driven.

You may already be familiar with government’s temporary rules in response to COVID-19 that apply for 2020 and 2021. If you have driven your automobile for business purposes for more than 50% of the time in 2019, you would also be considered to have used your vehicle for more than 50% for business purposes in 2020 and 2021. These special rules apply for determining your eligibility for a reduced standby charge and/or the optional method of calculating an operating expense benefit and continue to be available for 2021.

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, 2021. For an operating benefit reduction, you will have until Feb. 14, 2022 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 2021 payments. If you've paid the instalments on the notices sent to you by the CRA for 2021 and plan to make the required final payment by Dec. 15, 2021, then you are up to date.

If you paid less than the amount on the CRA notice because you thought that your income for 2021 would be less than 2020, 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 2021, 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 2021 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.

Rachel Gervais, GTA Tax Service Line Leader

Greg London, Eastern Canada Tax Service Line Leader

Bruce Sprague, Western Canada Tax Service Line Leader

The information in this publication is current as of Oct. 25, 2021.

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.

This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our privacy statement for more information on the cookies we use and how to delete or block them.