Year-End Tax Planning for an Unprecedented Year

With the 2020 year-end fast approaching, now it is a good time for you to review your tax situations and discuss year-end tax planning strategies with your Welch tax advisor. 2020 has been an unprecedented year for all of us around the world. If your business or investment has experienced a loss or a decline, there may be tax issues for you to consider. If you have received COVID-19 emergency measures from the government, the tax implications should be considered. Depending on your situation, the following are some year-end tax tips that may help you and/or your business.

Personal taxes

  • Prescribed rate loan planning – consider locking into an income splitting loan arrangement with your family members or family trust at the CRA current low prescribed interest rate of 1%. This is one of the few remaining income splitting/tax savings strategies left. Attribution rules will not apply as long as the interest on the loan is paid by the trust by January 30th of the following year.
  • Capital losses – consider disposing investments with accrued capital losses before the year-end. Note that the sale needs to happen before December 29th in order for the transaction to be effective this year due to the settlement date being two business days after the trade date. The realized capital losses can be offset against the current year’s capital gains. The unused capital losses can be carried back to reduce capital gains realized in the past 3 years which can recover taxes paid in prior years.
  • Allowable Business Investment Loss (ABIL) – you may be able to claim an ABIL to offset against all sources of your income if you dispose shares or debt of a small business corporation at a loss. Discuss that with your Welch tax advisor to identify whether you would be qualified to claim an ABIL.
  • Employee home office expenses – the federal government proposed in its fall economic statement that employees working from home during the COVID-19 pandemic can claim “modest” home office expenses of up to $400 without tracking any expenses or keeping any receipts.  Employees working from home can still claim the actual home office expenses under the existing rules if they choose to do so. Under the current rules, eligible home office expenses include utilities, minor repairs and office supplies for the work space. However, any costs capital in nature such as computer equipment or office furniture are not eligible for claim. Whether T2200 form is required for claiming the employment home office expenses due to COVID-19 will be clarified by the CRA in the coming weeks.
  • Charitable donations – consider making charitable donations by December 31st to receive donation tax credits. Gifting of publicly traded shares and stocks other than cash may increase the tax benefits of making the donation.
  • RRSP contribution – consider contributing to your RRSP or your spousal RRSP now or within the first 60 days of 2012. If you are turning or have turned 71 years old in 2020, you must convert to a RRIF but, before you do, you have until the end of year to make an RRSP contribution. 

Business Owners

  • Year-end accrued bonus – consider accruing a year-end bonus to reduce your corporate income taxes for the current year, and the bonus will only be included on your T4 in the following year. You must ensure that the bonus is paid out within 179 days of the following year and the related payroll source withholdings are remitted to CRA.
  • Paying a salary to a family member – you may consider paying a reasonable salary to a family member if the person has provided his/her services to your business. The key is that the salary amount should be reasonable, which means that it should be similar to a comparable market rate.
  • Paying a dividend to a family member/shareholder – before you pay a dividend to a family member, consult with your Welch tax advisor because the dividend might be subject to “TOSI” (a special tax that applies to certain dividends), with the result that your family member may be taxed at the top personal marginal tax rate on that amount.
  • Purchase of new assets – If you are planning to purchase capital assets, consider purchasing them before your year-end to take advantage of the accelerated CCA tax deduction.
  • Zero-emission vehicle – if you are planning to purchase a vehicle, consider purchasing a zero-emission vehicle including electric, hydrogen and hybrid vehicles because you may be able to deduct capital cost allowance up to $55,000 due to the enhanced first-year CCA rate of 100%.  Not only good for taxes, also good for the environment.
  • Delay the sale of depreciable assets – If you are planning to sell depreciable assets, consider selling them after your year-end to take advantage of an extra year of CCA claim.  
  • Inter-corporate dividends and capital gains – an inter-corporate dividend is tax-free to the recipient corporation (Holdco) when there is sufficient “safe income” (generally retained earnings on a tax basis) on hand. A safe income computation is recommended to be completed prior to paying an inter-corporate dividend. However, when the Holdco does not have safe income on its Opco shares, the inter-corporate dividend is converted to a capital gain which will result in tax being paid by Holdco. While this means tax is paid sooner than otherwise, it can result in an overall tax savings. The effective tax rate by virtue of capital gains treatment is 28.83% as opposed to the top tax rate on eligible/non-eligible dividends of 39.3%/47.4%. This is complicated stuff – speak with your Welch tax advisor…..
  • Estate freeze or re-freeze – If your business is experiencing a temporary decline in value as of result of the COVID-19 pandemic, an estate freeze or re-freeze of your ownership of the business may make sense since it caps the fair market value in your business at a lower value, which helps to limit your future income tax liabilities.

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