Only weeks remain till we escape 2020 and its challenges – and good riddance! However, one chore remains before the calendar turns over: reviewing your taxation situation while there is still time to make any transactions that will reduce your income-tax bill for the year.
Your income may be lower than last year due to COVID-19’s impact on your job or business. You also may have received pandemic-relief benefits from the federal government, which are taxable -- and in some cases may have to be repaid. While this adds a layer of complexity to the year-end task, the good news is the process will end up being familiar, as the usual tax-saving tactics come into play. The difference is it may be more urgent than ever to make the most of them –to realize additional income for 2020 or, if possible, delay receiving it until 2021, depending on your situation.
COVID Benefits Are All Taxable
The Canada Emergency Response Benefit (CERB) provided relief until Oct. 3, 2020. No tax was withheld at source by the CRA. “The full amount of the CERB is taxable and should be reported as income upon filing your personal income tax for the 2020 tax year," says Barry Travers, KPMG’s National Leader, Public Sector Tax. For post-secondary-school students, the Canada Emergency Student Benefit (CESB) was available until Aug. 29, and also is fully taxable. There was no tax withheld at the source for either of these benefits., and recipients are to receive T4A tax-information slips in early 2021.
Travers notes that, while the CESB was closed for application on Sept. 30, 2020, due to application-system technical issues, the CRA will still consider applications for this benefit that were unsuccessfully attempted during Sept. 28 through 30. If this was the case for you, telephone the CRA at 1-800-959-8281; you will need to prove you tried to apply during those three days.
The Canada Recovery Benefit (CRB) (replaced the CERB in late September, with somewhat different conditions. It pays $1,000 for each two-week period for which the individual is eligible. “Unlike the CERB and CESB, the CRB is subject to 10% withholding tax at source,” says Travers. “The full amount of the CRB must be reported as income for 2020.”
Two other new programs were added this fall: the Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregivers’ Benefit (CRCB). Both also are fully taxable to the recipient and have a 10% tax withholding.
“The 10% tax on the income withheld at source may not be all the tax you need to pay on this income,” Travers says. “Upon filing your tax return, you may need to pay more (or less), depending on how much income you earned for the 2020 tax year.”
Beware the CRB Income Limit
Moreover, for the CRB only, there is an income threshold of $38,000 for the total amount received during 2020. You will have to repay 50 cents of the CRB for every dollar of net income in excess of $38,000. Net income includes any CERB, CRSB and CRCB payments you received, but it does not include the CRB and CESB.
Net income is a specific amount calculated on your tax return and is equal to your total income, less deductions for various contributions, payments and expenses, such as those related to:
- Registered pension plan (RPP) contributions
- RRSP contributions
- Union or professional dues
- Child-care expenses
- Alimony and maintenance
- Moving expenses
- Business investment loss
- Employment expenses
If your 2020 net income will exceed $38,000, you must do all you can to reduce this number by claiming any of the above deductions that apply to you.
Ways to Reduce Your 2020 Taxable Income
Regardless of the CRB income threshold, if you owe tax on any COVID relief benefits, it is particularly important to find ways to reduce tax payable. Among these are:
- Reduce your required annual RRIF withdrawal. The annual minimum withdrawal in 2020 has been reduced by 25% of the percentage amount for your age. For example, someone aged 75 at the beginning of 2020 now must take out at least 4.37% from his or her fund, rather than the 5.82% that would have applied without the 25% reduction. The minimum amount on a $200,000 portfolio thus falls to $8,730 from $11,640. A 90-year-old’s minimum withdrawal is now 5.12%, instead of 6.82%, resulting in a minimum withdrawal for 2020 of $10,230, as opposed to $13,640.
- Make your maximum RRSP contribution by March 1, 2021. This would be the combination of your 2020 limit (the lesser of $27,230 or 18% of net income) and any unused contribution room accumulated from past years.
- Sell investments with unrealized capital losses, which can be used to reduce any capital gains already realized in 2020. (Losses can also be applied retroactively to gains realized during three previous years.)
- It also may be to your advantage to realize capital gains before the year end if your income in 2020 is likely to be much lower than what you expect it to be in 2021.
- Another reason to potentially realize capital gains or losses is if you are concerned the government may increase the capital-gains inclusion rate in the coming year to raise revenue to help reduce the massive new deficit brought on by COVID -related spending.
- Charitable donations made before the year-end can be claimed as a tax credit.
- All fees paid by you related to investment advice.
- Tuition fees and interest on student loans.
- Medical expenses (including those for your spouse and dependent family members).
- Use any carry-forward amounts. Review your online CRA account, or check your 2019 Notice of Assessment, to see what unused deductions and credits from an earlier year may be available to you. These include items like tuition/education amounts, moving expenses, charitable donations and student loan interest. Where available, these amounts can be used to reduce the current year’s taxes.
Payments to Consider Before Year-End
KPMG’s Travers recommends calculating any amounts owing to the tax authorities and paying this prior to the end of the year. “Estimate the amount of tax payable based on the annual income level and make an additional tax instalment payment to the CRA (and Revenue Quebec, if applicable) before December 31, 2020,” he says. “The mandatory instalment-payments requirement would be triggered if, upon filing your tax return, the amount of federal tax payable is more than $3,000 ($1,800 for Quebec residents) in two of the three taxation years from 2018 to 2020.”
If after making use of all tax deductions and credits, you still expect to have to repay any CRB benefits due to the $38,000 threshold – or if you expect to owe tax on any COVID relief benefits – you should make a payment to the tax department(s) prior to Dec. 31, Travers says.
Contribute to TFSA for Future Tax Savings:
Make the maximum tax-free savings account (TFSA) contribution, which is this year’s limit of $6,000, plus any amounts from previous years. Note that if you made or plan to make a withdrawal from your TFSA this year and wish to replace that amount, you can only do so to the extent of your total limit. Replacement contributions are not admissible until the new year (Jan. 1, 2021, onward).
