Useful advice to help Canadians reduce their tax bills.
Many Canadians’ 2020 tax return was unlike any other, depending on whether it was due to a change in employment status, business revenues, eligible tax deductions and credits, COVID-19 related benefits, or any combination of the above. Let’s look at some of the changes, their impact and potential planning points, going forward.
As of April 29th, 2021, the Canada Revenue Agency (CRA) website noted that approximately 20.7 million Canadians had filed their tax return. Of those who have filed:
- 65 per cent will receive a refund, the average amount of which is $1,834,
- 24 per cent have a balance owing with the average amount due being $4,431,
- approximately 11 per cent had a nil balance.
How does this compare to last year? Of those who filed a 2019 tax return, approximately 70 per cent received a refund, the average amount of which was $1,832, and 18 per cent had a balance owing, on average, of $4,660. The remaining 12 per cent had a nil balance.
|Percentage of returns with a refund||65%||70%|
|Percentage of returns with a balance owing||24%||18%|
It appears that for the 2020 tax year, a higher percentage of people owe taxes to the government. This might seem counter-intuitive at first, when one considers the negative financial impact the pandemic had on many Canadians last year. However, the reality is that some individuals who earned less income in 2020 must pay more in taxes. How can that be? Well, remember that many of the COVID-19 federal benefits had no tax withheld, and those that did only applied withholding tax at a rate of 10 per cent, which may not be sufficient to cover the tax owed. Combine that with the fact that several deductions, such as child care expenses, travel related work expenses and payroll contributions to employer sponsored plans were significantly reduced for many.
So, what can people do to help manage their taxes? While there are many potential planning strategies, what follows are a few that are particularly affected by these unusual times.
Flexibility in deducting the repayment of COVID-19 benefits
Many of the COVID-19 benefits are taxable as ordinary income at the recipient’s marginal tax rate, and any subsequent repayments can be claimed as a deduction. Prior to the 2021 federal budget, the repayment could only be deducted from income in the year the repayment is made. Where individuals received a benefit in 2020 and made a repayment in 2021, the benefit is included on their 2020 tax return. However, the deduction could only be claimed on the 2021 tax return. For some, this may only be a timing difference, but for others, this could be punitive if the value of the deduction is less in 2021 than 2020 - for example, if they have less income and are in a lower tax bracket in 2021. In an extreme situation, the deduction may be worthless and individuals could end up paying tax on the COVID-19 benefits they returned.
Fortunately, the recent federal budget proposes to allow individuals the option to claim a deduction for repaid COVID-19 benefits in computing their income for the year in which the benefit amount was received rather than the year in which the repayment was made. This option would be available for benefits repaid at any time before 2023. For these purposes, benefits would include the:
- Canada Emergency Response Benefit/Employment Insurance Emergency Response Benefit
- Canada Emergency Student Benefits
- Canada Recovery Benefits
- Canada Recovery Sickness Benefits and
- Canada Recovery Caregiving Benefits
Individuals may only deduct benefit amounts once they’ve been repaid. If someone makes a repayment but has already filed their income tax return for the year in which the benefit was received, they can request an adjustment to their income tax return for that year. Individuals in this situation should do an analysis to determine the year in which to claim the deduction and maximize their tax savings. Don’t forget to also consider income-tested benefits, such as Old Age Security and the Age amount tax credit.
Clawback of the Canada Recovery Benefit (CRB)
The CRB is subject to a clawback of $0.50 for every dollar of net income above $38,000 for the 2020 and 2021 tax years. For purposes of this clawback, net income means the amount reported on line 23400 which includes the COVID-19 benefits listed above, except for CRB payments. Any planning that can be done to avoid this clawback will provide a very significant return.
Tax owing and interest relief
If someone has yet to file their 2020 tax return, there may be another reason why they should. Those who have a balance owing will be eligible for interest relief on that amount if they:
- Had a total 2020 taxable income of $75,000 or less,
- Received at least one of the COVID-19 benefits listed above,
- Filed a 2020 income tax return.
Individuals who meet each of these requirements won’t have to pay interest on any amount owing from their 2020 taxes until April 30, 2022. This interest relief only applies to their 2020 taxes owing and not other debts with the CRA.
Note that the interest relief outlined here won’t apply to late-filing penalties, which amount to five per cent of taxes owing plus one per cent per month while it remains outstanding, to a maximum of 12 months. This is yet another reason to file as soon as possible, if one hasn’t and will owe taxes.
Other tax planning strategies
Traditional tax planning and tax filing strategies still apply. Consider the following:
Carefully review non-registered investment income
- Review non-registered investments and consider trying to structure them in a way that takes advantage of the tax efficiency of capital gains, Canadian dividends and return of capital, where it makes sense.
Registered Retirement Savings Plan (RRSP) contributions
- Current year and carry-forward RRSP amounts can be used to create a deduction and lower net income and taxes payable. However, individuals need to be careful, as they may have less earned income in 2020, and therefore will have generated less RRSP contribution room in 2021 than normal.
Realize capital losses
- Where it makes sense, consider realizing capital losses to offset capital gains and reduce taxes payable. Capital losses must first be used against capital gains in the same year, wherein any excess can be carried back up to 3 years or carried forward indefinitely to reduce capital gains reported at that time.
Review carry-forward amounts
- Review CRA’s My Account and the notice of assessment where carry-forward amounts are tracked. These include items such as tuition and education amounts, moving expenses, charitable donations and student loan interest. Where available, these amounts can be used to reduce the current year’s taxes.
The home office expense deduction
- Many more individuals have been working from home during the pandemic and qualify for the home office expense deduction. The government simplified the procedure for claiming the home office deduction for the 2020 tax year (see Working from home? Don’t miss out on valuable tax savings). Given that many Canadians are still working from home, it seems reasonable to assume that this deduction will apply again for the 2021 tax year, but we’ll await confirmation from the federal government.
Don’t celebrate a large tax refund – eliminate it and maximize cash flow
- If an individual normally receives a tax refund or expects a tax refund, for example, because they make non-payroll RRSP contributions or have deductible childcare, support payments or interest expenses, consider filing a T1213 (and a TP-1016 for Quebec residents). This could reduce withholding tax on their employment income and increase their take home pay. Then put the extra cash flow to good use by paying down debt or investing, e.g., contributing to their RRSP or Tax Free Savings Account. Click on the following link for more information: Don't celebrate a large tax refund - Eliminate it!
For more tax saving ideas check out our Tax planning tips.
We are living in unprecedented times and while much has changed, the value that tax planning provides remains. In fact, for some, the need is even greater. Hopefully, the strategies highlighted here can help.