Tag:

Taxes

Jamie Golombek: Here’s how making an RRSP contribution could save you big bucks for 2020 and beyond

Postmedia may earn an affiliate commission from purchases made through our links on this page.

Article content

The March 1 deadline for registered retirement savings plan (RRSP) contributions for the 2020 tax year is less than 10 days away, and, even if you’ve never contributed before, this is the year you may want to consider making one to claim a deduction on your tax return and save some tax on any COVID-19-related benefits.

Let’s review the basic rules and then look at a couple of examples of how making an RRSP contribution could save you big bucks for 2020 and beyond.

To claim a deduction on your 2020 return, you need to contribute by March 1, 2021, and the maximum amount you can contribute can be found at the very bottom of your “RRSP deduction limit statement” on your 2019 Notice of Assessment. It can also be looked up online using the Canada Revenue Agency’s My Account portal.

Your deduction limit for 2020 was based on 18 per cent of your 2019 earned income (up to a dollar limit of $27,230), less any pension adjustment from your employer, plus any unused deduction limit from previous years. Earned income includes employment, self-employment and rental income (as well as a few other things.)

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

It’s important to note, however, that an RRSP contribution can be deducted against any source of income, not just earned income. In other words, contributing to an RRSP can help you save tax on your employment income as well as your investment income, taxable capital gains and even government COVID-19 related benefits that are taxable.

If you’re one of the millions of Canadians who received COVID-19-related government benefits in 2020, you need to report most of these amounts on your 2020 return. Reportable amounts include: the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB), all of which are considered taxable income and should be reported on Line 13000 – Other income.

Depending on your total 2020 income, you may owe some tax on your COVID-19 benefits. This is particularly true if you received CERB or CESB payments, since no tax was withheld when they were issued, so there may be a balance owing when you file. If you received CRB, CRSB or CRCB payments, 10-per-cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

In addition, if your 2020 net income was more than $38,000, you may have to repay 50 per cent of your CRB payments for every dollar in net income you earned above $38,000, to a maximum of CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not CRB).

By making an RRSP contribution by the deadline, you may be able to reduce or eliminate tax owing on any COVID-19 benefits as well as possibly keep more of the income-tested CRB.

Let’s walk through two examples to illustrate how two taxpayers could benefit from making an RRSP contribution and claiming a deduction on their 2020 returns. (For simplicity, CPP/QPP and EI contributions and credits/deductions have been ignored to focus on the income taxes owing.)

Example 1

Tom, an Ontario resident, earned $60,000 annually prior to COVID-19, but lost his job on March 15, 2020. Prior to this, he earned $12,500 in employment income for the first three months of 2020, for which his employer withheld $2,600 in federal and provincial tax. He applied for CERB, and received the full $14,000 in benefits with no taxes withheld. He subsequently applied for CRB, which replaced CERB, and received a total of $6,000 for the last three months of 2020, on which 10 per cent, or $600, was withheld.

Tom’s total income for 2020 was $32,500. His tax liability, after taking into account the enhanced basic personal amount, Canada employment amount and Climate Action Incentive, is $3,419. Since the taxes withheld at source via his employer and the government were only $3,200, Tom would need to pay additional tax of $219.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

If Tom contributes about $730 to his RRSP, he could reduce his tax bill for 2020 to the $3,200 that was withheld so he wouldn’t need to pay any further tax. Of course, whether it makes sense to do so will depend on the rate of return he can achieve on his tax-deferred savings, his anticipated tax rate on withdrawal, and how many years he can leave it in there before withdrawing it in retirement.

Example 2

Jerry, an Alberta resident, was self-employed for much of 2020, earning $50,000 before shutting down his business in the fall and collecting $6,000 in CRB (less 10-per-cent withholding). If he doesn’t make an RRSP contribution, he will be forced to repay the entire $6,000 in CRB since his net income (excluding CRB) for 2020 was $50,000 and he must repay 50 cents of CRB for each dollar of income above $38,000, for a repayment of $6,000 (i.e., ($50,000 – $38,000) x 50 per cent).

Jerry’s taxable income would be $50,000, since he’s not taxed on amounts he didn’t get to keep, and the net federal and Alberta tax liability (assuming just the basic personal amount and Climate Action Incentive) is $8,170. After taking into account the $600 withheld on CRB, Jerry would need to pay additional tax of $7,570, as well as repay $6,000 in CRB received for a total amount owing of $13,570. (For simplicity, we have ignored any tax instalment payments made in 2020, which affect cash flow and not the tax ultimately owing.)

But if Jerry can reduce his income to $38,000 by making a tax-deductible RRSP contribution of $12,000, perhaps by borrowing the funds via an RRSP loan, he would cut his tax owning and get to keep his full $6,000 in CRB (less the associated tax). His tax liability would drop by $1,581, for an effective marginal effective tax rate savings of 63 per cent ($7,581/$12,000).

Even if Jerry withdraws funds from his RRSP well before retirement, provided his marginal effective tax rate in the year of withdrawal was lower than 63 per cent, contributing to an RRSP will have been a smart tax decision. And, to the extent the funds can be left inside the RRSP, Jerry may also be able to enjoy decades of effectively tax-free investment growth to fund his retirement.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

Comments

Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

0 comment
0 FacebookTwitterPinterestEmail

If you have already repaid, the government will be sending it back to you

Postmedia may earn an affiliate commission from purchases made through our links on this page.

Article content

Sometimes, one word can make all the difference.

This week, the federal government officially backtracked on its previous position when it announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their “gross” income but not their “net” income will not be required to repay the benefit, provided they also met the other eligibility requirements.

No need to repay CERB

Readers will recall that back in December 2020, the Canada Revenue Agency sent out 441,000 “educational letters” warning individuals that they may not be eligible for the CERB. The letters were sent out to individuals for whom the CRA said it was “unable to confirm … employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application.”

The issue of whether the $5,000 income threshold for the self-employed means “gross” income (i.e. revenues) or “net” income (i.e. net of expenses) has been discussed extensively. It has always been the CRA’s view that the $5,000 refers to net income and thus if you had gross income of $5,000 in the required time period, but netted under $5,000 after deducting business expenses, then you didn’t qualify for the CERB and, until now, the CRA’s position was that you needed to return it.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

This week, the government reversed that position and said that self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay it, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria. The same approach will apply whether the individual applied through the CRA or Service Canada.

What if you already voluntarily repaid the CERB based on the government’s previous instructions to do so? Well, you’re in luck as the government will be sending you back any amounts you repaid, with additional details on how, and when, to be announced in the coming weeks.

But, the question on many other self-employed Canadians’ minds this week is: what about those individuals who didn’t apply for the CERB because their “net” self-employment income was under $5,000? It appears that they’re out of luck.

Interest relief

For some Canadians, the 2020 tax year may be the first time in their lives that they won’t be getting a tax refund and may actually end up owing some tax. That’s because, just like Employment Insurance (EI) benefits, the COVID-19 emergency and recovery benefits, including similar provincial benefits, are taxable. And, although tax was withheld at source at a rate of 10 per cent of the benefit amount for the three Canada Recovery Benefits (the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit), no taxes at all were withheld from the CERB or the Canada Emergency Student Benefit. In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of the CRB payments for every dollar in net income you earned above $38,000 (to a maximum of the CRB received in the year.) Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

To illustrate, assume Mike, an Ontario resident, was furloughed from his company in mid-2020. His pre-COVID income was $18,000 from which his employer withheld $2,200 in federal and provincial tax. He applied and received $14,000 of CERB, for which no tax was withheld. The result is that Mike would owe about $850 in taxes when he files his 2020 return, after taking into account non-refundable credits for the basic personal amount (federally $13,229), the Canada employment amount ($1,245) and the Climate Action Incentive ($300). (CPP and EI have been ignored for this example).

Now take Heather, whose 2020 income was $44,000 prior to losing her job due to COVID layoffs. She applied and received six periods of CRB for the final three months of 2020, for a total of $6,000 (with $600 withheld.) But, when she files her return, she will be forced to repay $3,000 of the CRB since her total income for 2020 was over $38,000, and the CRB is reduced by 50 per cent for each dollar of income above this amount (i.e. ($44,000 – $38,000) X 50 per cent).

But, what if Mike and Heather don’t have the funds to repay the government by the April 30, 2021 payment deadline?

To help taxpayers like Heather and Mike, the government also announced this week that it will be providing targeted interest relief to Canadians who received COVID-related income support benefits. Once you’ve filed your 2020 income tax return, if you qualify, you won’t be charged interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022, giving you more time and flexibility to pay if you have an amount owing.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

To qualify for this targeted interest relief, you must have had a total taxable income of $75,000 or less in 2020 and have received income support in 2020 through one or more of the COVID-19 measures: the CERB, CESB, CRB, CRCB, CRSB, Employment Insurance benefits or similar provincial emergency benefits.

If you fall into this category, you don’t need to do a thing other than file your return, as the CRA will automatically apply the interest relief measure for taxpayers who meet these criteria. In addition, the government announced that any CRA-administered credits and benefits normally paid monthly or quarterly, such as the Canada Child Benefit and the goods and services tax/harmonized sales tax credit, will not be applied to reduce any taxes owing for the 2020 tax year.

The government estimated that the interest relief measure will provide relief to approximately 4.5 million low- and middle-income Canadians.

No change to filing deadline

Finally, the government confirmed this week that it has not extended the tax filing deadline, meaning that you should file your 2020 return by the normal April 30, 2021 deadline or risk a five per cent late-filing penalty on any amount owing. Self-employed Canadians (and their spouse or partner) should file by June 15, 2021.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

Comments

Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Depending on your total 2020 income, you may owe some tax on your COVID benefits. This is particularly true if you received the CERB or CESB, since no tax was withheld when payments were issued, so there may be a balance owing when you file.

If you received the CRB, CRSB, or CRCB, 10 per cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020. You can find the income tax deducted at source in Box 022 of your T4A slip, which should be included on line 43700 – Total income tax deducted.

In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of CRB payments for every dollar in net income you earned above $38,000, to a maximum of the CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

Jennifer Gorman, Social Care Manager for TurboTax Canada, says that if this is your first year facing a balance owing, you want to make sure you file by the deadline, even if you don’t have the cash to pay. “There are two separate penalties. You have interest that accrues if you don’t pay your balance, but there’s also a late-filing penalty,” explains Gorman. The late-filing penalty is five per cent of your balance owing, plus one per cent of the balance owing for each full month your return is late, to a maximum of 12 months.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

This simple example may, at first glance, seem counter-intuitive. After all, with the RRSP Shira is paying tax on the dividend income at her full, ordinary Alberta tax rate of 30 per cent and if she went the non-registered route, her dividend income is only taxed at a 10 per cent marginal rate on eligible dividends. But, of course, her “net” investment in a non-registered investment is lower, and thus her dividend income is lower, because she had to pay 30 per cent tax on her employment income before she could invest.

Another way to look at is that by contributing to an RRSP, you are effectively getting a 100 per cent tax-free rate of return on your net after-tax RRSP contribution. In this case, Shira’s net (after-tax) RRSP contribution was $2,100 (i.e. $3,000 X (1 – .30)), which at a five per cent return, yields $105 of effectively tax-free dividends.

Finally, I would argue that even if your tax rate is higher in the year of withdrawal (or ultimately, in the year of death) than it was in the year of contribution, you could still be better off with an RRSP than non-registered investments because the benefits of effectively tax-free compounding might actually outweigh the additional tax cost of a higher withdrawal tax rate. This, of course, will depend on your expected rate of return, the number of years of compounding available, as well as the types of investment income you might otherwise earn by saving an equivalent amount in a non-registered account.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

What is still unclear from this research, however, is whether by excluding capital gains from income, we are excluding individuals whose primary source of income annually is significant capital gains, who arguably are the so-called “rich,” as opposed to the small business owner (or real estate owner) who sold their business (property) and reported a one-time, significant capital gain that moved them into a higher tax bracket for that single year alone.

Canada vs. the world

The Fraser Institute report also compared Canada’s capital gains tax rate to that of other countries and found that Canada’s top capital gains tax rate (27 per cent) is currently above the average for countries in the Organization of Economic Co-operation and Development (OECD), and substantially above the rate in Britain (20 per cent) and the United States (20 per cent).

That being said, with the inauguration of U.S. President Joe Biden this week, and Democratic control of both the House and Senate now established, it’s quite possible that Biden’s pre-election platform to effectively increase the tax on capital gains by treating them as ordinary income for taxpayers earning more than US$1 million could actually be passed. Combined with his plan to raise the top rate on ordinary income back up to 39.6 per cent (from 37 per cent), it would nearly double the current long-term capital gains tax rate.

As for Canada, “raising the capital gains tax rate would weaken Canada’s ability to attract investment and adversely affect our economic recovery,” concluded Clemens. “Canadians across the income spectrum — and the economy as a whole — would benefit from a lower, not higher, capital gains tax rate.”

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

At this point, the taxpayer retained a tax lawyer to deal with the CRA, who in February 2016 requested that the CRA reconsider its decision to refuse administrative relief. The CRA again denied his request but suggested that the taxpayer apply for a remission order. So, in January 2017, the taxpayer’s lawyer did just that, requesting relief of taxes, interest and penalties related to the 2005 and 2006 tax years.

In his request, the taxpayer argued that the reassessments were inaccurate because, due to circumstances beyond his control, the taxpayer had not been able to respond effectively to the concerns raised by the CRA’s auditor or to contest the reassessed amounts. Specifically, the taxpayer had relied on tax professionals to deal with the matter for him because he was unable to do so at the time, but the first accountant was unable to respond to the audit and the second accountant inexplicably failed to pursue the matter. As he explained, “If he had been able to respond effectively, he would have been able to show that the income and expenses he reported were as filed. He remains able to show that the income and expenses he reported were as filed and that the Reassessments were incorrect.”

In 2019, after reviewing the background to the matter and examining the merits of the request, the CRA concluded that remission was “not recommended as none of the criteria apply and there are no other circumstances which would support relief.” The taxpayer appealed the CRA’s decision to the federal court which heard the case by videoconference in August 2020, with the judge in Ottawa and the taxpayer in Toronto.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Her initial request was denied and her “reward” for coming forward was a CRA assessment totalling $27,641 in tax, penalties and interest for her excess and non-resident TFSA contributions, effectively wiping out her retirement savings. The taxpayer then requested a second, independent review by the CRA of her request for a waiver, which was also denied on the basis that she “continued to make excess and non-resident contributions to her TFSA after she was notified that she had over-contributed in 2009.”

As the harshly worded CRA letter stated, “(T)here are no circumstances that would support the cancellation of the tax on excess and non-resident TFSA contributions. It is the individual’s responsibility to educate themselves about the TFSA rules after being notified.”

The taxpayer appealed the CRA’s second-level decision to the Federal Court and the case was heard in August, via teleconference, by a judge sitting in Toronto, and the taxpayer being represented by Dentons Canada LLP in Edmonton, where she used to live.

In court, the taxpayer argued that the CRA’s decision was “unreasonable” because she was a Canadian resident in 2009, and she, therefore, did not “repeat the same mistake” when she contributed to her TFSA as a non-resident after 2009. Therefore, she believed that the CRA’s decision was not justified by its reasons.

Fortunately for the taxpayer, the judge agreed. Discretionary decisions by the CRA refusing to waive taxes and penalties are reviewed on the “reasonableness standard.” In addition, a reviewing court must determine whether the decision bears the “hallmarks of reasonableness: justification, transparency and intelligibility.”

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

The original CEBA loan was for up to $40,000 but, as of Dec. 4, 2020, an additional $20,000 CEBA loan is available to qualified applicants, for a total of up to $60,000. Those who previously received a $40,000 loan may apply for an additional $20,000. New applicants may apply for a $60,000 loan and the application deadline for new (or additional) CEBA loans is March 31, 2021. Up to $20,000 of a $60,000 loan can be forgiven if the balance is repaid by Dec. 31, 2022. For original loans of $40,000, 25 per cent of the amount (up to $10,000) may be forgiven.

More On This Topic

In a recently published technical interpretation, the CRA has confirmed the amount that is forgivable is taxable in the year that the loan is received. For instance, if a business receives a $40,000 CEBA loan in 2020, $10,000 must be included in income in 2020. Alternatively, a business could elect to not include the $10,000 in income, and instead to reduce $10,000 of non-deferable operational expenses in respect of which the CEBA loan was received. If a CEBA loan balance is not repaid by Dec. 31, 2022, so that the forgivable portion is not forgiven, an offsetting deduction is available in the tax year in which the amount is repaid.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

In addition to home office expenses, the CRA has provided a list of 59 common home office supplies, detailing which expenses are deductible (e.g. envelopes, folders, paper clips, highlighters, ink cartridges, etc.) and which expenses are not deductible (e.g. printers, webcams or houseplants).

Which method should I choose?

While at first glance, $2 per day may seem like a pretty small amount to claim as a home office expense, for employees who own their home rather than rent, it’s likely quite generous (and simpler!) than using actual pro-rated, expenses.

For example, say Sacha is a homeowner who has been working from home since March 16, 2020. He works at his kitchen table, which accounts for 20 per cent of the total square footage of his house. Since his kitchen is not used only for work, he must also consider the percentage of the employment use of the space. As he works 42 hours per week, out of a total 168 hours in the week or 25 per cent of the time, his percentage of the home that is considered to be used as a work space is 5 per cent. If he paid $500 monthly for utilities (home internet, electricity, heat and water) for 9.5 months in 2020, his employment portion would be $238 (i.e. $500 X 9.5 X 5 per cent). Sacha would be better off claiming $2/day for 200 days or $400, with no need to track receipts or having to obtain a signed T2200 from his employer.

Contrast that to Britt, who has also been working from home since March 16, 2020 and is a renter. She pays $2,850 monthly for a two-bedroom condo in Toronto, and spends an additional $150 on home internet and electricity. She works in her second bedroom, which occupies 25 per cent of her condo’s total square footage. As this room is used exclusively for working from home, her claim is not altered by the time the room is used personally. Her deduction for 2020 would be $7,125 (i.e. $3,000 X 9.5 months X 25 per cent) under the detailed method and she would require a signed T2200S from her employer.

The CRA has created an online calculator to help calculate your 2020 home office expense deduction.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

For the 2016 taxation year, the taxpayer’s TFSA contribution limit was only $11,500. On Aug. 12, 2016, he contributed $12,000 to his TSFA, and he made an additional $25,000 contribution to his TFSA on Nov. 10, 2016 to make up for the loss, for a total overcontribution of $25,500.

In June 2017, the CRA sent the taxpayer “an educational letter,” advising him that he had made excess contributions of $25,500 to his TFSA. The letter told him about the excess contribution tax and the steps available to correct his situation, which included withdrawing the excess amounts “right away,” i.e. “immediately.” The taxpayer didn’t withdraw the $25,500 excess contributions at that time. Eventually, however, the excess contributions were reduced by the annual increase in the contribution limits allowed in 2018, and smaller withdrawals made by the taxpayer in 2018.

The Canada Revenue Agency's offices in Toronto.
The Canada Revenue Agency’s offices in Toronto. Photo by Peter J. Thompson/National Post files

The taxpayer claimed he didn’t receive the educational letter, despite evidence that it was sent to the correct address. In July 2018, the CRA issued a Notice of Assessment (which, incidentally, was sent to the same address as the non-received educational letter) regarding excess contributions for the 2017 tax year. The CRA sent the Notice because the taxpayer failed to reduce the excess amount in his TFSA, as specified in the June 2017 educational letter. Shortly after receiving the Notice, however, the taxpayer withdrew excess amounts from his TFSA.

The taxpayer then wrote to the CRA to request a waiver of the tax imposed “because the excess contributions were made in error … because of the Bank’s advice that he was allowed ‘to replace (deposit) 20,000.00 (sic) that (he) lost earlier from (his) account without tax.’”

0 comment
0 FacebookTwitterPinterestEmail
Newer Posts