2021 year-end tax planning checklist

Consider these time-sensitive items & plan ahead for 2022
 

Effective wealth planning takes place throughout the year. However, you can take some key steps before the end of the year and early in the new year from a tax planning perspective that can make a positive impact on your overall finances.

While the following list is not exhaustive, here are some time-sensitive items to look at now for your 2021 tax return as well as proactive items for 2022.

 

Before December 15, 2021

Pay quarterly tax instalments for 2021, if required.

If your 2020 personal tax return showed net taxes owing of over $3,000, you may have received a notification from the Canada Revenue Agency (CRA) requiring you to pay quarterly tax instalments for 2021. If you have not made these instalments and expect to owe tax after your withholding taxes on salary are accounted for, you should make a payment by this date. This will reduce or avoid instalment interest and penalties being charged.

Before December 29, 2021

☐ Put tax-loss selling strategies to work:
  1. Calculate the capital gains you have realized for 2021.
  2. Identify and sell investments that are in a loss positions. Trades must be entered on or before December 29, 2021 to be settled by December 31, 2021.
  3. Net your capital losses against capital gains on your 2021 tax return.

Note: Be sure to factor in the impact of foreign exchange if investments in loss positions are not denominated in Canadian dollars.

In addition, any tax-loss selling strategies you use should account for the “superficial loss” rules, which will deny any capital losses if the investments are repurchased in a specified time period. Please refer to our “Tax-Loss Selling” and “Advanced Tax-Loss Selling” education articles for more details.
 

Before December 31, 2021

☐ Tax-Free Savings Account (TFSA):
  • Contribute to your TFSA. The TFSA limit for 2021 is $6,000. Keep in mind that TFSA contribution room accumulates if not used, so you may be able to top up your TFSA if prior contributions were missed. Check with the CRA to verify your unused contribution room.
  • If you plan to withdraw from your TFSA soon, consider making the withdrawal by year-end rather than waiting until early 2022. This is because a withdrawal in 2021 will be added back to your TFSA contribution room at the beginning of 2022.
☐ Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF):
  • Consider withdrawing funds from your RRSP or RRIF by year-end if you are in a low tax bracket for the 2021 tax year, or to take advantage of the $2,000 pension tax credit for RRIF withdrawals made by individuals that are at least age 65.
    • Note: If you are the owner of a spousal RRSP, you should be mindful of “income attribution” rules that may apply to withdrawals you make from the account, if your spouse had made contributions to the account during the year or the two prior calendar years.
  • If you plan to withdraw from your RRSP under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP), consider making the withdrawal early in 2022 rather than by year-end to maximize the repayment period.
  • If you are age 71 this year, you must convert your RRSP to a RRIF by December 31 and begin taking minimum withdrawals next year. Consider the following:
    • Using your younger spouse’s age for minimum payment calculations.
    • Making a final RRSP contribution by year-end, if you have earned income in 2021 and do not have a younger spouse that you can make RRSP contributions for in the future. A final contribution can be made to account for new RRSP room that will accrue on January 1, 2022 but will not be available to you as you can no longer own RRSPs. However, note that if the final contribution exceeds your 2021 RRSP contribution limit, there will be a 1% penalty tax payable on the overcontribution for the month of December, before new room accrues on January 1, 2022.
☐ Make charitable donations
  • Donating certain capital property, such as publicly traded securities, directly to charities in-kind, can increase your tax savings.
  • Note: Some charities may require additional time to accept and process donations, particularly in-kind, during this time. You should plan accordingly.
☐ Contribute to a Registered Education Savings Plan (RESP) or Registered Disability Savings Plan (RDSP) for the benefit of your family members.
  • The federal government can provide grants to RESPs and RDSPs which are tied to contributions made.
☐ Pay all tax-deductible expenses.
  • These include but are not limited to: investment management fees, interest paid on borrowings used for investing, child care expenses, medical expenses, home office expenses, etc.
☐ Consider whether to intentionally recognize or delay taxable income in 2021 if your marginal tax rate is expected to increase or decrease in 2022, respectively.
  • If you expect your marginal tax rate will be significantly different between this year and next year, you may wish to intentionally recognize or delay items of taxable income and deductions to take advantage of the anticipated tax rate differences.
  • Note: For example, if your marginal tax rate in 2022 is expected to be higher than in 2021, either because of your anticipated income levels or because you believe tax rates and/or the capital gains inclusion rate will increase, you may wish to trigger additional capital gains this year by selling investments. Remember, trades must be entered on or before December 29 in order to settle by December 31. This is commonly referred to as “tax-gain harvesting.”
☐ Consider whether you wish to enter into an income- splitting loan.
  • Income-splitting loans generally carry interest equal to the CRA’s “prescribed rate” to avoid the application of income attribution rules. The CRA’s prescribed rate is updated quarterly and is 1% until at least December 31, 2021. Please refer to our “Spousal Loans” education article for more details.

Before January 30, 2022

☐ Remember to pay the accrued interest on any income-splitting loans outstanding in 2021.
  • Interest on such loans must be paid on or before this date to avoid the application of income attribution rules.
  • Note: If your income-splitting loan was entered into during 2021, accrued interest must be paid on or before this date, even if the loan has not been outstanding for a full 12 months.

Before March 1, 2022

☐ Make RRSP and/or spousal RRSP contributions.
  • A RRSP or a spousal RRSP contribution made on or before this date will be deductible on your 2021 tax return, subject to your RRSP contribution limit. The RRSP dollar limit for 2021 is $27,830.
  • Note: If you turned age 71 in 2021, you only have until December 31, 2021 to make a final contribution to your RRSP.
☐ Pay the minimum repayment amount on the outstanding balance of your HBP or LLP.
  • If the minimum repayment amount is not made on or before this date, it will be taxable on your 2021 personal tax return.

Before April 30, 2022

Ensure that you have budgeted for income taxes payable on any COVID-19 financial benefits you received during 2021. These benefits may include the following:

  • Canada Recovery Benefit (CRB). The government withholds only 10% in taxes at source on CRB payments. The CRB for 2021 will also be clawed back if your total income from other sources during 2021 exceeds $38,000.
  • Canada Recovery Sickness Benefit (CRSB). The government withholds only 10% in taxes at source on CRSB payments.
  • Canada Recovery Caregiving Benefit (CRCB). The government withholds only 10% in taxes at source on CRCB payments.

The COVID-19 benefits you received in 2021 will be taxed at your 2021 marginal tax rate, which may exceed the amount of tax withholdings made at source by the government. Therefore, you should estimate your tax liability on these benefits (including any claw-backs of the CRB) to ensure you have sufficient funds to pay the tax by the deadline of your 2021 tax return.

Additional considerations for business owners

We recommend that you work with your tax advisors to ensure all income, deductions, and credits are accounted for and compliance requirements are fulfilled prior to the filing deadlines for your 2021 personal and corporate tax returns.

If you are an incorporated business owner, items to consider include but are not limited to:

  • Salary and dividend mix for the year to yourself and family members. Salaries paid must be reasonable in the circumstances. Note that dividends paid to related persons from a private corporation may be caught under the “tax on split income” rules. Please refer to our “Tax on Split Income” education article for more details.
  • Planning for investments held within your corporation, particularly if it or any other associated corporations benefit from the “small business deduction” on active business income. Tax rules phase out the small business deduction limit of an associated corporate group once its passive investment income from the prior year exceeds $50,000.
  • Repaying shareholder loans to your corporation to avoid potential inclusion of a taxable benefit.
  • Declaration of “capital dividends” from your corporation’s “capital dividend account.” Capital dividends are favourable because they are tax-free distributions to Canadian-resident shareholders.
  • Note: If it makes sense to implement tax-loss selling in your corporate investment portfolio, you may want to review whether there is a positive balance in the capital dividend account and whether to declare a capital dividend prior to selling investments. This is because capital losses realized will immediately decrease the capital dividend account balance.
  • If your corporation has applied for COVID-19 financial assistance, such as the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy and Lockdown Support, and/or the Canada Recovery Hiring Program, ensure you manage ongoing administration and record-keeping in case of CRA audits.

Additional considerations for trustees of trusts

  • If you are a trustee of a trust that has taxable income during the year, we recommend that you work with your tax and legal advisors to determine whether this income will be retained in the trust or will be distributed to beneficiaries and the associated tax implications. Note that trustee decisions to distribute income to beneficiaries generally have to be made by year-end for this income to be taxed in the beneficiaries’ 2021 tax returns.
  • If you are a trustee of a trust that has previously not been required to file trust income tax and information returns with the CRA, note that starting in 2021 such filings may be required on an annual basis. Trusts that may not have been required to file tax returns include those that only hold personal-use real estate or shares of private companies that have not made distributions. You should seek tax and legal advice on this matter. Note that the filing due date of the tax return for a trust with a December 31, 2021 year-end is March 31, 2022. Please refer to our “New Trust Reporting Rules” education article for more details.

Conclusion

We recommend you discuss these strategies with your professional investment, tax, and legal advisors before implementation to make sure they fit within your overall wealth plan.

Please reach out to Friesen Capital Management with any questions.