As we approach the end of the year, now is a good time to think about income tax planning whether you be a business owner, employee, or retired. Be sure to take note of the 2020 and 2021 deadlines that are approaching to make sure 2020 income taxes are minimized.
The following payments are due by Dec. 31, 2020, to claim on your 2020 income tax return:
– Interest on student loans
– Spousal support payments
– Medical expenses
– Charitable donations
– RRSP contributions if you turned 71 during 2020
By Jan. 31, 2021, be sure Interest owed on your prescribed rate loan plan has been paid. By March 1, 2021, be sure your RRSP contribution is finalized.
Organize receipts to deduct home office expenses
If you were asked to work from home in 2020, you may be able to claim home office expenses. As mentioned in my September article, the CRA has yet to clarify certain details of the claim. In the meantime, be sure to maintain full records of any work space expenses and receipts for any eligible home office supplies so that you can claim deductions for the 2020 tax year. We will continue to await eventual CRA updates.
Selling or buying equipment?
If you are thinking about selling an asset you claimed capital cost allowance on, and the calculation results in recaptured depreciation, consider deferring the disposition until January 2021. By doing so, you will defer any recapture arising from the sale until 2021. If your business requires purchasing assets, consider acquiring them before your December 31 year-end. As long as you can actually put the asset to use in your business this year, acquiring the asset just before the December 31st year-end will accelerate the timing of your tax deduction.
Dividend in 2020 or 2021?
Make sure to note the top personal marginal tax rate in Ontario on eligible and non-eligible dividends is higher than the 38.33 per cent dividend refund rate in both 2020 and 2021. This can result in no tax savings to paying dividends to recover refundable dividend tax on hand in either year.
Did you borrow money from your corporation you have yet to pay back?
If you borrow money from your corporation, you are considered to have received a taxable benefit from the corporation equal to 1 per cent (the CRA’s prescribed interest rate) less any interest you actually paid. You must repay this loan by a certain deadline or it becomes income on your individual return.
Unrealized capital losses
If you have realized capital gains in 2020 or in one or more of the last three years, consider selling assets with an accrued loss to offset these gains. In order for a disposition of marketable securities to be included in your 2020 tax year, you’ll have to sell them on or before the stock exchange’s last trading day for settlement in 2020.
Splitting income with low income family members
If you make a simple investment loan to family member or family trust, and charge interest on the loan at the prescribed interest rate, any income they earn on the funds (net of the interest expense) will be taxed in their hands and not yours. Consider a loan at the 1 per cnet rate on or before Dec. 31.
Scott Conner is a partner in BDO’s Huntsvile office, with over 20 years of experience providing corporate and personal tax planning strategies for family-owned businesses, entrepreneurs, and large corporations. He helps his clients with shareholder remuneration strategies, estate planning, as well as business structuring to minimize taxes.