Some year-end tax planning considerations for 2020

Canadian Emergency Response Benefit

In March of this year, in response to the pandemic, the federal government announced and rolled out a number of benefit programs to assist individuals who had experienced a pandemic-related interruption in earnings.

The most widely used of those benefits was the Canada Emergency Response Benefit, or CERB, which was received by over 8 million individual Canadians. That CERB benefit, of $500 per week, ran from mid-March until the end of September, meaning that those who were eligible for CERB for that entire period could have received as much as $14,000.

When the CERB program was launched, the priority for the federal government was getting the benefit into the hands of Canadian as quickly as possible. Consequently, although the CERB represented taxable income to those who received it, no tax was deducted from the benefits paid. As a result, anyone who received CERB (and did not repay it) will receive a T4A slip for that income, will need to report it on their income tax return for 2020 and will have to pay tax on that income when the return is filed in the spring of 2021.

While that filing and payment deadline is still months away, it would be prudent for CERB recipients to at least determine how much tax will be payable and to start to make provision for setting that money aside. The amount of tax owed on CERB benefits will depend, of course, on the amount of benefit received, but also on the taxpayer’s total income for 2020 and on the province or territory in which the taxpayer resides.

Taxpayers can arrive at a rough estimate the amount of federal tax payable on their CERB benefits as follows:

• For taxpayers having income for 2020 from all sources of less than $50,000, the percentage of tax payable on CERB received will be 15%.
• For taxpayers having income for 2020 from all sources of between $50,000 and $100,000, the percentage of tax payable on CERB received will be 20.5%.
• For taxpayers having income for 2020 from all sources of between $100,000 and $150,000, the percentage of tax payable on CERB received will be 26%.
• For taxpayers having income for 2020 from all sources of between $150,000 and $214,400, the percentage of tax payable on CERB received will be 29%.
• For taxpayers having income for 2020 from all sources of more than $214,400, the percentage of tax payable on CERB received will be 33%.

Of course, in each case, provincial or territorial tax must be added to arrive at the total tax payable on CERB amounts received. The provincial and territorial tax rates which apply for 2020 at different income levels can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#provincial.

Home office expenses

One of the hallmarks of 2020 has been the number of Canadians working from home. A  work-from-home arrangement has many benefits, and one of the less known of those benefits is the ability to claim a tax deduction on the 2020 tax return for household costs that would have been incurred in any event.

In order to claim a deduction for costs related to a work from home space, employees must meet at least one of the following conditions.

• The home work space is where the individual mainly (more than 50% of the time) does their work; or
• the individual uses the workspace only to earn his or her employment income. He or she must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of his or her employment duties.

To establish that the required circumstances exist, and that the employee is not receiving an allowance or a reimbursement for home office expenses from the employer it’s necessary to have a particular form completed and signed by that employer. That form, the T2200, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2200.html.

Once the requisite criteria are met, and certified by the employer on the T2200, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to his or her work space, such as the cost of electricity, heating and home maintenance.

Where an individual who qualifies under either of the criteria outlined above is a commission employee, an even broader range of costs become deductible. In addition to costs for electricity, heating and home maintenance, a commission employee can also deduct a proportionate share of costs incurred for property taxes and home insurance.

There is no specific formula provided for determining the proportion of eligible costs which can be deducted for qualifying home office expenses. The employee can determine that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home, or he or she can make that calculation based on the number of rooms in the house or apartment relative to the number of rooms used for work-related purposes. Whichever method is chosen, the most important consideration is that the approach taken (and the expenses claimed) be reasonable. In all cases, the Canada Revenue Agency can ask the taxpayer to provide documentation and support for claims made.

In order to determine the amount of any deduction for eligible home office expenses which can be claimed on the return for 2020, it’s necessary to gather together bills and receipts for the various expense categories (utilities bills, property tax notices etc.). It’s a tedious and sometimes time-consuming task, but necessary both in order to determine the amount of any available deduction and to have the required documentation for that deduction available should the CRA ask to see it. The T2200 signed by the employer does not have to be filed with the return, but should also be kept as part of that documentation.

RRSP contributions to be made by the calendar year-end

Most Canadians, even those who aren’t particularly familiar with our tax system, know that contributions to one’s registered retirement savings plan (RRSP) must be made by the end of February to be claimed as a deduction on the return for the previous calendar year.

There are, however, two instances in which making an RRSP contribution before the end of the calendar year is either necessary or advisable.

The first such instance affects Canadians who turn 71 years of age during 2020. Each of those individuals must collapse their RRSP by the end of 2020 – usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31^st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31^st of that year.

The other instance in which it is advisable to make the contribution before December 31 relates to spousal RRSP contributions. Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plans (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2020, the contributor can claim a deduction for that contribution on his or her return for 2020. The spouse can then withdraw that amount as early as January 1, 2023 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2021, the contributor can still claim a deduction for it on the 2020 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2024. It’s an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively new future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should the need for an unplanned withdrawal arise.

Adjusting the final individual income tax instalment

It’s also possible for some taxpayers to adjust the amount of remaining tax they will pay for 2020. The majority of Canadians pay their taxes by having those taxes deducted by their employer from their regular paycheque and submitted to the Canada Revenue Agency on their behalf. However, there are millions of taxpayers who pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.

The final quarterly instalment for this year will be due on Tuesday December 15, 2020. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2020 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions which will be made on or before March 1, 2021. While the tax return forms to be used for the 2020 year haven’t yet been released by the Canada Revenue Agency, it’s possible to arrive at an estimate by using the 2019 form. Increases in tax credit amounts and tax brackets from 2019 to 2020 will mean that using the 2019 form will likely result in a slight over-estimate of tax liability for 2020.

Once an estimate of one’s tax bill for 2020 has been calculated, that figure should be compared to the total of tax instalments already made during this calendar year (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281). Depending on the result, it may then be possible to reduce the amount of the tax instalment to be paid on December 15 – and thereby free up some funds for the inevitable holiday spending!