It's not too late!
As we approach the end of the year, it’s a good idea to think about personal income tax planning now so that you can maximize tax savings in 2021 and be prepared when final tax payments are due.
Below are some strategies to help you manage your tax costs. Keep in mind that while not all of these strategies may apply to your particular situation, An OpenGate CPA can assist you with your tax planning needs.
1. Understand tax implications of government COVID-19 benefits
The federal government has offered many financial relief programs during the Covid Pandemic. If you received the Canada Recovery Benefit, Canada Recovery Sickness Benefit, or Canada Recovery Caregiving Benefit in 2021, the payments are taxable. Even though taxes were withheld at 10% of the benefits under these programs, depending on your 2021 marginal tax rates, the amount of taxes withheld may not be sufficient to cover your tax liability on these payments and you may need to pay additional tax in the spring. You should consider estimating the amount of taxes that will be due and setting aside the funds now.
The government will issue a T4A slip showing the total amount of taxable COVID-19 benefits each individual received in 2021, as well as repayments made in the year. It’s important to remember that if you’ve already taken a deduction for a repaid amount last year, you cannot claim a deduction for the same repayment on this year’s return. You should keep good records to support eligibility for these government programs, amounts received and repayments made by year, and compare them to your T4A slip. This information is also useful to have on hand in case the Canada Revenue Agency (CRA) asks for them.
2. Consider selling investments with accrued losses
If you've realized capital gains in 2021 or in one or more of the last three years, consider selling assets with an accrued loss to offset these gains. To include a disposition of marketable securities in your 2021 tax year, you need to sell them on or before the stock exchange's last trading day for settlement in 2021. The last trading day for settlement in 2021 will generally be Dec. 29 for Canadian exchanges. For other transactions, legal ownership must be transferred before the end of the year.
If you do decide to undertake a tax-loss selling strategy, you should be aware that rules (known as the superficial loss rules) may apply to deny losses on certain dispositions of property. In particular, the loss will be denied if you (or your spouse/common-law partner or a company you or your spouse/common-law partner control) repurchase the asset you disposed of for a loss within 30 days of the disposition.
3. Pay and manage amounts eligible for deduction or credit
Many items that are creditable or deductible for tax purposes must be paid by the end of the year. These amounts include alimony and maintenance, childcare expenses, investment counsel fees, professional dues, charitable donations, medical expenses, and political contributions. To ensure that you will benefit from the tax deduction or credit in 2021, be sure that you pay these amounts by Dec. 31.
Consider donating securities
If you plan to donate money to a registered charity, you should consider donating publicly listed securities you own instead of cash. If there is an accrued gain on your securities, by donating the shares directly to the charity, you can save on capital gains tax that you would otherwise incur.
Manage your medical expenses
In the case of medical expenses, only amounts in excess of $2,421 (limit may vary by province or territory) or 3% of net income (whichever is less) are eligible for a credit. In Quebec, eligible medical expenses must be reduced by 3% of family income.
If your medical expenses for the current year are already in excess of the threshold and you anticipate that you won't have medical expenses in excess of the threshold next year, consider paying now for additional expenses that will arise in the near future.
Although most medical expenses are only paid as the medical services or supplies are required, some can be paid in advance. Glasses and contact lenses are two common examples. If you're paying for a major expense such as braces on an instalment basis, consider paying the balance owing early to maximize your medical credit claim.
4. Consider purchasing luxury goods before
The government has promised to move ahead with implementing a new 10% luxury tax on the purchase of cars and personal aircraft that retail for more than $100,000, as well as boats for personal use that retail for more than $250,000, beginning Jan. 1, 2022.
5. Contribute to your RRSP
In order to be deductible for 2021, your registered retirement savings plan (RRSP) contribution must be made on or before March 1, 2022. If you want to know how much you can contribute for 2021, check your RRSP contribution limit on your 2020 notice of assessment, online using the CRA's My Account service, or the MyCRA mobile app.
Your contribution limit for 2021 is 18% of your 2020 earned income (to a maximum of $27,830) less your 2020 pension adjustment, if any, plus any RRSP room carried forward from prior years.
6. Sell non-qualified investments in your RRSP
There are specific rules as to the types of assets your RRSP can hold. If you have a self-directed RRSP, you may have purchased assets that don't qualify, referred to as non-qualifying investments. Qualified investments generally include money, guaranteed investment certificates, bonds, mutual funds, and securities listed on a designated stock exchange.
If non-qualifying investments are acquired or existing investments become non-qualified, a tax equal to 50% of the amount of such investments will apply to the RRSP holder. Where the non-qualifying investment is disposed of, the tax will be refunded if certain conditions are met. If the purchase and sale are in the same year, the tax and the refund will generally be offset. If you find that you have non-qualifying assets in your RRSP, it will be beneficial to dispose of the non-qualifying assets before Dec. 31.
7. Make your required Home Buyers’ Plan repayment
If you participated in the Home Buyers' Plan (HBP) prior to 2020, you may have a repayment due in the 2021 taxation year. Generally, you have up to 15 years to repay the HBP loan from your RRSP. The CRA issues an annual HBP statement of your account, and your required repayment amount will be shown on that statement. Your 2021 minimum repayment amount will be shown on the statement, which would have been received with your 2020 notice of assessment.
If the minimum repayment isn't made, you will be required to include the shortfall from the minimum payment in your income. To ensure the minimum annual HBP repayment isn't included in your taxable income for 2021, the required amount must be repaid to your RRSP on or before March 1, 2022.
8. Check your personal income tax instalments
If you're required to pay tax instalments, now is a good time to check to see if you're up to date on your 2021 payments. If you've paid the instalments on the notices sent to you by the CRA for 2021 and plan to make the required final payment by Dec. 15, 2021, then you are up to date.
If you paid less than the amount on the CRA notice because you thought that your income for 2021 would be less than 2020, you should check to see if you have paid enough.
Note that individuals whose main source of income is self-employment income from farming or fishing are only required to make one instalment payment, which is due by Dec. 31.
It's not too late to save on your 2021 taxes
Tax planning shouldn't be something that only happens when you file your tax return. By investing some time to review your personal tax situation during the year, and especially as you near the end of the year, you may find some easy ways to save on your annual tax bill.
OpenGate CPA offers a free one-hour consultation. Book a no-charge, risk-free consultation to talk about your unique situation and learn how OpenGate can provide value to you and your business.