2020 year-end tax planning checklist
Consider these time-sensitive items & plan ahead for 2021
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.
Importantly, there are some additional 2020 tax-planning issues you should consider if you were affected by the COVID-19 pandemic and received any government benefits this year.
While the following list is not exhaustive, here are some time-sensitive items to look at now for your 2020 tax return as well as proactive items for 2021.
Before December 15, 2020
If your 2019 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 2020. 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 December 15, 2020. This will reduce or avoid instalment interest and penalties being charged.
Note: Only for 2020, interest and penalties are waived for the June 15 and September 15, 2020 instalment payments, provided they were paid by September 30, 2020.
Before December 29, 2020
☐ Put tax-loss selling strategies to work
- Calculate the capital gains you have realized for 2020.
- Identify and sell investments that are in a loss position. Trades have to be entered on or before December 29, 2020 in order to be settled by December 31, 2020.
- Net your capital losses against capital gains on your 2020 tax return.
Note: It is important that any tax-loss selling strategies you use account for the “superficial loss” rules, which will deny any capital losses if the investments are repurchased in a specified time period. More advanced planning can be used where a spouse has unrealized capital losses.
Please refer to our “Tax-Loss Selling” and “Advanced Tax-Loss Selling” education articles for more details.
Before December 31, 2020
☐ Tax-Free Savings Account (TFSA):
- Contribute to your TFSA. The TFSA limit for 2020 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 contemplate needing to withdraw from your TFSA in the near future, consider making the withdrawal by year-end rather than waiting until 2021. This is because a withdrawal in 2020 will be added back to your TFSA contribution room at the beginning of 2021.
☐ Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF):
- Consider withdrawing funds from your RRSP by year-end if you are in a low tax bracket for the 2020 tax year, or to take advantage of the $2,000 pension tax credit for individuals that are at least age 65.
- If you are age 71 this year, you must convert your RRSP to a RRIF by December 31, 2020 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 2020 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, 2021 but will not be available to you as you can no longer own RRSPs. However, please be advised that if the final contribution exceeds your 2020 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, 2021.
- If you are required to take minimum withdrawals from your RRIF for 2020 and have not yet, note that the mandatory minimum withdrawals are reduced by 25%. This reduction is only available for 2020.
☐ Make charitable donations
- Donating certain capital property directly to charities, such as publicly traded securities, instead of cash can increase your tax savings.
Contribute to your child’s Registered Education Savings Plan (RESP) or Registered Disability Savings Plan (RDSP)
☐ Pay all tax-deductible expenses
- E.g., investment management fees, interest paid on borrowings used for investing, childcare expenses, medical expenses, etc.
Consider whether to intentionally recognize taxable income in 2020 if your marginal tax rate is expected to increase in 2021.
- In light of the COVID-19 pandemic, you may have suffered a reduction in your employment or business earnings, which may result in your 2020 marginal tax rate being lower relative to prior years. If you anticipate that your marginal tax rate may increase in 2021, you may wish to intentionally realize taxable income in 2020 to take advantage of your lower marginal tax rate now. For example, you could trigger capital gains by selling investments.
Consider whether you wish to enter into an income-splitting loan prior to this date in order to take advantage of the CRA’s 1% prescribed rate.
- The CRA’s prescribed rate is revised quarterly and will stay at 1% until at least December 31, 2020. Please refer to our “Spousal Loans” education article for more details.
Before January 30, 2021
Remember to pay the accrued interest on any prescribed rate loans outstanding in 2020 prior to January 30, 2021 to avoid the income attribution rules from applying. Note: If your prescribed rate loan arrangement was entered into during 2020, accrued interest must be paid by this date, even if the loan has not been outstanding for a full 12 months.
Before March 1, 2021
A RRSP or a spousal RRSP contribution made prior to this date will be deductible on your 2020 tax return, subject to your RRSP contribution limit. The RRSP dollar limit for 2020 is $27,230. Note: If you turned 71 in 2020, you will only have until December 31, 2020 to make a final contribution to your RRSP.
If you have an outstanding balance under the Home Buyers’ Plan or Lifelong Learning Plan, the minimum annual repayment has to be made by this date.
- Otherwise, it will be taxable on your 2020 personal tax return.
Before April 30, 2021
Ensure that you have budgeted for income taxes payable on any COVID-19 financial benefits you received during 2020. These benefits include the following:
- Canada Emergency Response Benefit (CERB). The government did not withhold tax at source on any CERB payments.
- Note: The CERB was available from March 15, 2020 to September 26, 2020. If you were eligible but did not apply for all of your CERB payments, the CRA continues to accept and process retroactive applications until December 2, 2020.
- Canada Recovery Benefit (CRB). The government will withhold only 10% in taxes at source on CRB payments. Furthermore, the CRB for 2020 will be clawed back if your total income from other sources in the calendar year exceeds $38,000.
- Canada Recovery Sickness Benefit (CRSB). The government will withhold only 10% in taxes at source on CRSB payments.
- Canada Recovery Caregiving Benefit (CRCB). The government will withhold only 10% in taxes at source on CRCB payments.
The COVID-19 benefits you received in 2020 will be taxed at your 2020 marginal tax rate, which may exceed the amount of tax withholdings at source made 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 2020 tax return.
We recommend that you work with a tax-planning professional to ensure all income, deductions, and credits are accounted for and filing requirements are fulfilled prior to the filing deadlines for your 2020 personal and corporate tax returns.
If you are an incorporated business owner, items to consider in addition to the above include but are not limited to:
- Reasonable salary and dividend mix for the year to yourself and family members. 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, due to tax rules phasing out the deduction limit once 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” prior to implementing tax-loss selling in the corporate investment portfolio. Capital dividends are favourable because they are tax-free distributions to Canadian-resident shareholders.
- If your corporation has applied for the Canada Emergency Wage Subsidy and/or Temporary Wage Subsidy programs, ensuring that your applications have been processed and that ongoing administration and record-keeping is managed in case of CRA audits.
Additional considerations for trustees of trusts
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 will likely 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.
The new rules require annual disclosure of identifying information pertaining to all settlors, trustees, beneficiaries, and other persons that can exert control over a trust.
There are only narrow exceptions to the new rules, so most trusts will be caught. Financial penalties for failure to comply can be significant.
If you are a trustee, any planning to avoid having trust information disclosed to the CRA has to be accomplished before January 1, 2021. Action items that you should consider with your tax and legal advisors prior to year-end include:
- Reviewing the deeds and wills governing any trusts you manage and determining whether you have the information needed to comply with the new rules.
- If privacy of trust information is of importance, evaluating whether changes to the trusts can be made and the tax and legal implications of doing so.
- Winding up existing trusts that are either dormant or no longer achieve their purposes, so that they are not subject to the new rules.
We recommend you discuss these strategies with your professional investment, tax and legal advisors prior to implementation to ensure they fit within your overall wealth plan.
Contact us for more information on these topics.