The tax year is ending – some planning steps to take before December 31

For individual Canadian taxpayers, the tax year ends at the same time as the calendar year. What that means for individual Canadians is that any steps taken to reduce their tax payable for 2021 must be completed by December 31, 2021. (For individual taxpayers, the only significant exception to that rule is registered retirement savings plan contributions; with some exceptions, such contributions can be made any time up to and including March 1, 2022, and claimed on the return for 2021.)

While the remaining time frame in which tax planning strategies for 2021 can be implemented is only a few weeks, the good news is that the most readily available of those strategies don’t involve a lot of planning or complicated financial structures — in many cases, it’s just a question of considering the timing of steps which would have been taken in any event. What follows is a listing of some of the steps which should be considered by most Canadian taxpayers as the year end approaches.

Charitable donations

The federal government and all of the provincial and territorial governments provide a tax credit for donations made to registered charities during the year. In all cases, to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year — there are no exceptions.

There is, however, another reason to ensure donations are made by December 31. The credit provided by each of the federal, provincial, and territorial governments is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. For the minority of taxpayers who have taxable income (for 2021) over $216,511, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2021 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2021 and January 2022, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2022 donation can’t be claimed until the 2022 return is filed in April 2023. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to 5 years, donations which were made in a particular tax year. So, if donations made in 2021 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2016, 2017, 2018, 2019, or 2020 tax years can be carried forward and added to the total donations made in 2021, and the aggregate then claimed on the 2021 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax — currently, Ontario and Prince Edward Island — it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Claiming home office expenses

As pandemic restrictions have eased and lockdowns ended, some employees have begun to return to the office on at least a part-time basis. However, there’s no question that millions of employees have spent at least a part of the 2021 tax year working from home. There are a lot of benefits to a work from home arrangement, and one of them is the ability to claim a tax deduction on the 2021 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, home maintenance, and home internet access (but not internet connection) fees.

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, home maintenance, and home internet access fees, 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 (CRA) 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 2021, 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.

It should be noted that, for the 2020 tax year, the CRA permitted employees working from home to claim a home office deduction without the need to obtain a T2200 from the employer, or to calculate and document specific expenses as outlined above. However, when that administrative concession was announced, the CRA indicated that it was to be made available for the 2020 taxation year only. There has been no indication to date that such concession will be provided for 2021; consequently, employees should assume that, in order to claim a deduction for home office expenses for 2021, it will be necessary to follow the detailed steps outlined above.

Reviewing tax instalments for 2021

Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) 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 Wednesday December 15, 2021. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2021 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 before March 1, 2022. While the tax return forms to be used for the 2021 year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2020 form. Increases in tax credit amounts and tax brackets from 2020 to 2021 will mean that using the 2020 form will likely result in a slight overestimate of tax liability for 2021.

Once one’s tax bill for 2021 has been calculated, that figure should be compared to the total of tax instalments already made during 2021 (that figure can be obtained by checking one’s online tax account on the CRA website, or 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 additional funds for the inevitable holiday spending!