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2020 Year-End Tax Tips

2020 Tax Updates

CCPC (Canadian Controlled Private Corporation) tax rates:

  • CCPC small business tax rate: reduced to 12.2% in 2020 from 2019’s 12.5% (combined Federal and Ontario, for taxable active business income to $500,000, payable three months after the fiscal year-end). However, the personal tax rate for the non-eligible dividend was increased correspondingly, resulting in no real tax reduction at the individual level.

  • CCPC passive income tax rate: remained at 50.17% in 2020. The refundable portion remained at 30.67%. Note: Any CCPC passive income above $50,000 will grind down its small business limit at a five times rate (limited to federal tax only, not for Ontario small business limit).

  • Refundable Part IV tax rate and dividend refund rate: on taxable dividends paid by a corporation remained at 38.33% in 2020. Note: The dividend refund is now split into a complex eligible and non-eligible RDTOH concept. Contact us for more details.

Personal tax rates:

  • Personal top marginal tax rate: in Ontario remained at 53.5% in 2020.

  • CERB and CRB payments are taxable income for the claimants. The CRB is subject to clawback: to repay some or all of the benefit through their income tax return if their annual net income, excluding the CRB payment, is over $38,000, that is to repay $0.50 of the benefit for each dollar of their annual net income above $38,000 in the calendar year to a maximum of the amount of benefit they received.

  • Must report the sale of principal residence: in personal tax returns (including change of use or deemed dispositions) and designate principal residence for dispositions. Discuss with us for any sale or any change of use of real estate properties.

Ontario budget:

  • A $10,000 Seniors’ Home Safety Tax Credit (SHSTC) at 25% in 2021 and an Ontario staycation tax credit of up to 20% for eligible Ontario tourism expenses in 2021 (TBA).

Small Business Owners

Owner-manager remunerations:

  • Preferred salary/dividends mix: Determine the preferred mix of salary and dividends for you and your family members for 2020 with consideration for the TOSI rules. Discuss with us for optimal dividend for family members, if meeting the requirements for excluded business or excluded shares.

- Consider paying a reasonable salary instead, especially for a personal taxable income below $48,000, with proper support to justify the pay.

- Paying enough taxable dividend to receive all the RDTOH refund inside the company.

  • Bonus accruals at year-end must be paid within 179 days after the corporate year-end, including appropriate source deductions and payroll taxes to be remitted on time.

  • Tax-effective dividends: Make tax-effective dividends such as non-taxable capital dividend before a capital loss is triggered.

  • Preserve cash in the corporation in times of uncertainty.

Year-end tips:

  • COVID-19 Benefits: Business ensure to apply for CEBA, CEWS, CERS, and other government benefits if qualify. Consult our practical guides: https://www.impactcpas.ca/post/information-regarding-covid-19

  • Accelerate purchase of depreciable assets before the year-end. Take advantage of the Accelerated Investment Incentive, which allows an increased first-year capital cost allowance (CCA) deduction.

  • Claim a business reserve for the unpaid amount over a maximum of three years.

  • Claim a capital gains reserve – if you receive proceeds that include debt – over a maximum of four years (resulting in the capital gain being included in income over a maximum of five years).

  • Shareholder loans to your corporation – Determine whether your corporation would benefit from deductible interest on shareholder loans made to the corporation, rather than additional salary or bonus payments that may be subject to payroll taxes.

  • Repay shareholder loans from your corporation no later than the end of the tax year after the one in which the amount was borrowed.

  • Use of private health services plan (PHSP) premiums instead of the non-deductible medical expenses.

  • Buy company-owned life insurance policy to utilize corporate retained earnings and defer passive income.

  • Track motor vehicle used for business – maintain a logbook of mileage (including date, destinations, distance KMs, and purpose). Try to increase the business mileage to greater than 50% to reduce the standby charges of a company car.

  • Apply for SR&ED tax incentives: CCPC may have the ability to access the enhanced (and refundable) 35% SR&ED ITC. Ensure claims in respect of SR&ED expenditures or ITCs are filed by the deadline.

  • Create a company stock options plan: To potentially obtain a 50% income deduction (note the new restrictions to $200,000 is for public companies only, not impacting CCPC).

Corporate matters:

  • Income from property: may be eligible for the small business rate if CCPC has more than five full-time employees.

  • Mandatory e-filing of corporate income tax return – to avoid penalties – if corporate annual gross revenues exceed $1 million.

  • PSB Issue: Be mindful of the personal services business (PSB), the tax rate is at 44.5% in 2019. Discuss it with us.

  • CEWS audit: Ensure adequate documentation in preparation for a potential CRA audit.

Individuals


Year-end tips:

  • COVID-19 Benefits: Individual ensure to apply for CERB, CESB, CRB (and CRSB/ CRCB), and other government benefits if you qualify. Consult our practical guides: https://www.impactcpas.ca/post/information-regarding-covid-19

  • Make charitable donations and political contributions before year-end. Take advantage of higher tax credits and first-time donor’s super credit (25% on up to $1,000 donations)

  • Employee gifts and awards – Ask your employer to provide you with non-cash gifts/awards. These will not be taxable to you if you receive non-cash with a total value to you of $500 or less annually.

  • Job-related courses – Ask your employer to pay for job-related courses directly, rather than paying you additional remuneration.

  • Canada training credit – starting 2020, eligible individuals aged 25 to 65 who are enrolled at eligible educational institutions can claim this new federal refundable tax credit on tuition and fees for training (annual allowance of $250 per year; $5,000 maximum lifetime tax credit).

  • Home office expenses – If you work from home for more than six months in 2020, you may be eligible to deduct certain expenses related to your home office. Ask your employer to issue Form T2200. Also, track home office expenses and retain relevant utilities, supplies, and maintenance receipts.

  • Contribute $6,000 TFSA (tax-free savings account). If you are planning a withdrawal from your TFSA, consider doing so before the end of 2020 instead of early in 2021 – the amount withdrawn is not added to your TFSA contribution room until the beginning of the year after the withdrawal. Be mindful of an over-contribution penalty of 1% per month for both TFSA and RRSP.

  • Homebuyers’ incentives – If you are a first-time homebuyer, consider withdrawing tax-free up to $35,000 from your RRSP, under the Home Buyers’ Plan. Amounts withdrawn must be repaid to your RRSP over 15 years. And claim the first-time homebuyers’ tax credits.

  • Sell investments with accrued losses before year-end to offset capital gains realized in the year. Watch for superficial loss rules and consider your tax brackets.

  • Claim Allowable Business Investment Loss (ABIL) with an election under subsection 50(1).

  • Prescribed rate interest on intra-family loans outstanding in 2020 must be paid on or before January 30, 2021, to avoid attribution of income.

Tax-efficient investments:

  • Hold investments intended for capital growth outside your RRSP and hold interest-generating investments inside RRSP.

  • Contribute to RESP for your child or grandchild. Plan for the RESP to receive the maximum lifetime Canada education savings grant of $7,200. Discuss with us about RESP withdrawing rules.

  • Pay childcare expenses for 2020 by December 31, 2020, and get qualifying receipts.

  • Canada Child Benefit – If you receive this benefit, invest the funds in a separate account in trust for your children. Investment income on these funds will not be taxable to you.

  • For high earners, consider hold investments in a corporation. Discuss the merits with us before setting up an investment holding corporation.

  • Repay debt that has non-deductible interest before other debt that has interest qualifying for deduction (e.g. investment loan) or tax credit (student loan).

International information reporting:

  • T1135: Review your foreign holdings to determine if you have a reporting obligation with a total cost of specified foreign property exceeding $100,000 at any time in the year – required to file Form T1135.

  • T1134: for owning shares in non-resident corporations. Watch out for the foreign accrual property income (FAPI) complications. Discuss the implications with us.

  • T1142: for distributions received in 2019 from a non-resident trust that the taxpayer is a discretionary beneficiary including the relevant distribution information.


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