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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management in Toronto.
Each year, we sit down with clients to talk about year-end tax planning, and this year it’s a little bit different, given everything that’s been going on with Covid-19. I say that because individuals who are affected by Covid-19 may have received a number of specific benefits on which they may have to pay tax, and they may not have thought about it.
So, obviously, we start with the CERB, the Canada Emergency Response Benefit. That could be up to $14,000, depending on how people were eligible, and this $14,000 was not subject to tax at source. Which means that, depending on your tax bracket, you could actually owe a lot of money on that CERB at the end of the year.
Now, that tax rate could be zero if that was your only source of income and you’ve got the basic personal amount. That tax rate could be as high as 54% for someone in Nova Scotia who was at the top tax bracket, who earned a substantial amount of income before being laid off, and then started collecting the CERB.
So, these are issues to think about. You want to either work with your professional advisor, your accountant, in terms of calculating the tax on that CERB. You can certainly go online and use an online tax calculator, and get an estimate of how much you might owe.
Even the new benefits, the Canada Recovery Benefit, the Sickness Benefit and the Caregiving Benefit, although they are subject to a 10% withholding tax, that may not be enough, depending on your tax rate for 2020. So, my first tip for year-end is to think about your total liability on any Covid-19 related benefits you had received in 2020, and set aside that money so it’s not a surprise in the spring.
Then we get into the normal stuff that we talk about every year, with tax-loss selling, particularly this year. 2020 was a difficult year if you owned energy stocks, which are down as of early December by about 25% or so. So, again, if you’ve got some losers on the energy stocks, maybe you want to sell those before the end of the year, take that capital loss, apply it against other gains you had this year. Maybe carry it back three calendar years, or being able to carry it forward indefinitely.
Always be mindful of the superficial loss rules, which is that 30-day rule which says that if you buy it back within 30 days, either you or your spouse, your corporation — even an RRSP or a TFSA buys it back — that loss is superficial and therefore you cannot take advantage of it right away.
Other things that we always talk about towards the end of the year, of course, for people converting an RRSP to a RRIF, you’ve got to do it aged 71 by the end of the year. If you have any unused RRSP contribution room, you’ll want to make sure you use that before December 31st. You don’t have that normal 60 days.
There are some strategies out there in terms of making a deliberate overcontribution if you still have earned income this year that will create contribution room for next year. Delay making a deliberate overcontribution this month in the month of December, paying a bit of penalty tax for a month, and then being able to deduct that next year when you don’t have an overcontribution problem.
We have the normal stuff as well, in terms of things like making sure that we pay certain expenses by the end of the year. Students should pay interest on their student loans, make sure they do that by the end of the year. If it qualifies, you get a non-refundable tax credit. Individuals who have medical expenses, if they’re using a calendar year basis, you want to pay those by the end of the year. Similarly, charitable giving: you want to make sure you want to do that by December 31st to get your tax credit for 2020.
Finally, just something to keep in mind. There is a special one-time Covid-19 payment for individuals with a disability. It’s a $600 one-time, non-taxable payment. They have extended the deadline to apply for the disability tax credit to December 31st, 2020. So, an opportunity for anyone in the family that does have a severe disability that could qualify for the disability tax credit, to have that certificate filled out by a medical practitioner, have it certified, and get that $600 one-time, tax-free payment in early 2021.