Tax Tips and Myth-Busting for 2022 and Beyond
With tax top-of-mind for your clients, BMO tax expert John Waters suggests there’s no better time for in-depth conversations – and shares talking points, year-round pro tips, and a new challenge for a burgeoning segment in your books.
With inflation high, interest rates on the rise and pandemic restrictions being lifted, financial planning conversations have never been more important – and many of those focus on tax. Once the April 30th tax return filing date is behind us, what should Advisors be discussing with their clients starting May 1? John Waters, Vice President, Director of Tax Consulting Services, BMO Private Wealth, provides timely tips and busts four common tax-related myths.
Year-Round Tax Tips
For well-prepared Advisors and clients, tax season largely boils down to record-keeping. But with the subject already top-of-mind, it’s also a great time for Advisors to sit down with their clients to focus on the year ahead. From RRSP rules to considerations for high-net-worth individuals, it’s ALWAYS better to be prepared with these client-facing talking points:
#1: Make the most of your RRSP and TSFA (May): Making a contribution early rather than at the March 2023 deadline will allow for extra tax-deferred growth. And if you receive an income tax refund for 2021, you may want to put it towards your 2022 RRSP/TFSA contribution.
#2: Evaluate your RRSP maturity options (October): If you are turning 71 in 2022, you must wind-up your RRSP by the end of the year, so consider making a final RRSP contribution (to the extent you have any unused RRSP contribution room) by December 31, 2022 before you convert your RRSP into a RRIF (Registered Retirement Income Fund).
#3: Consider tax-loss selling (December): Selling securities with accrued losses before December 31 can help to offset capital gains realized during the year—or the three previous taxation years (if a net capital loss is created in the current year).
#4: Make charitable donations by year-end (December). The deadline to make charitable donations that can be claimed for the 2022 tax year is December 31. Be sure to keep track of all of your receipts for donations made throughout the year so that you’ll have them handy at tax time.
#5: Keep an eye out for tax law changes (Year-round): Tax policies can change at any time. This year’s federal budget was unveiled on April 7, and as always, there were a number of important tax measures proposed as well as items from the Liberals’ election platform that moved forward. For complete details and analysis, see BMO’s 2022 Federal Budget Review.
Political and policy developments worth monitoring include:
- Tax-Free First Home Savings Account (FHSA)
- Proposed in the 2022 budget
- Combines elements of RRSPs and TFSAs
- Would provide first-time home buyers with the ability to save up to $40,000 towards the purchase of a first home
- Contributions made into the FHSA would be tax-deductible and income earned in an FHSA would not be subject to tax
- National 1% tax on non-resident, non-Canadian owners of vacant, underused housing
- Expected to be effective for the 2022 calendar year
- A proposed expansion would include foreign-owned vacant land within large urban areas
- Luxury tax on cars, boats, and planes
- To be calculated as the lesser of 20% of the value above the threshold ($100,000 for luxury cars and private aircraft, and $250,000 for boats) or 10% of the full value of the luxury car, boat, or private aircraft
- Currently in the draft legislation stage, with a proposed effective date of September 1, 2022
- Recent Liberal-NDP “confidence and supply” agreement
- While this agreement seemingly formalizes an arrangement that already largely existed – given the NDP’s support for previous Liberal budgets – we await further detail on the longer-term ramifications for tax law
For a deeper dive into how the 2022 federal budget may affect tax measures and the economy, view my virtual conversation with BMO Chief Economist Douglas Porter (Password: 2022).
From RRSP rules to considerations for high-net-worth clients, it’s ALWAYS better to be prepared.
Busting 4 Persistent Tax Myths
When speaking with Advisors about tax-related concerns, certain themes and misperceptions tend to weave their way into the conversation. Here are four persistent myths that may help you help your clients:
RRSP overcontributions aren’t a big deal.
Accidentally overcontributing to an RRSP can lead to stiff penalties, and the rules are a common source of confusion. First off, it’s important to know that it is your RRSP contribution limit that determines how much you can contribute to your spouse’s RRSP (and/or your own RRSP), not your spouse’s RRSP contribution limit. Clients will also want to stay on top of other factors, such as employer/workplace contributions and any pension adjustments. Should an overcontribution happen, there are a few strategies. For one, they can look ahead to see if they’re likely to generate the necessary contribution room in the near future. If they instead choose to withdraw the overcontribution, there’s the “rip the band-aid off” approach, which will be subject to (potentially recoverable) withholding tax but will stop the proverbial bleeding – or they can approach the CRA to seek approval to avoid withholding on a qualifying withdrawal, but this approach will take longer, potentially resulting in higher over-contribution penalties.
TFSAs are just like regular bank accounts.
Though TFSAs have become better understood, this myth continues, as individuals take money out and then, over the next few months, put it back. In reality, contributors have to wait until the end of the year to recontribute funds withdrawn. The same issue arises when investors try to switch a TFSA from one financial institution to another. Rather than going through firms’ proper transfer protocol, they simply take money out of one TFSA and put it into another, not realizing that they won’t have the contribution room until after year-end.
For HNW clients donating to charities, “cash is king.”
Many affluent individuals don’t realize that they can donate appreciated publicly-traded securities to a charitable organization and receive a zero capital gains treatment in addition to the donation receipt equal to the value of the securities donated. It’s a great alternative to simply writing a big cheque each year.
Clients with foreign income/property don’t need to report it.
Foreign income reporting is another common area of confusion. It’s important to remember that Canadians must pay tax on their worldwide income, and if the aggregate cost of a client’s foreign assets exceeded CDN $100,000 at any time during the year, they ARE required to file form T1135, the Foreign Income Verification Statement annually with the CRA – even if they don’t need to file an income tax return.
Tax and the Gig Economy: Conversations Starters
Now more than ever, young people—and even some of an older vintage—are earning all or part of their living from freelance work and side gigs. From writers and artists to tech experts and Uber and Lyft drivers, the gig workers in your book have opted for greater choice in the projects they take on and flexibility in their schedules. But when it comes to taxation, it can get complicated.
The first question is whether your client is an employee or a self-employed contractor:
- Employment status affects eligibility for employment insurance (EI)
- In an employer-employee relationship, it’s the employer’s responsibility to deduct Canada Pension Plan (CPP) contributions, EI premiums, and income tax at source
For self-employed individuals, there’s more to consider that you can “coach” them through:
- Gig workers are not likely to have had tax or contributions withheld at source, so they’ll need to budget appropriately and set aside that money themselves
- They may also have to factor in collecting and remitting GST or HST to the Canada Revenue Agency
Organization is key, and Advisors and clients alike benefit from financial planning conversations to make sure all the bases are covered. Encouraging clients to keep track of invoices, assemble receipts and tax records, and identify deductible business expenses on a year-round basis will make next tax season go much more smoothly.
Even more important are the broader life goal conversations that Advisors will want to have with self-employed clients, covering topics including:
- Tax-efficient investing
- Setting aside emergency funds due to the unpredictable nature of freelance work
- Life, disability and critical illness insurance
- A health plan
- Establishing a will
- Retirement planning
Note: Self-employed workers can file their taxes as late as June 15. But a common misconception you can alert your clients to is that despite this deadline, any tax owed is still due by April 30.
Gig workers have opted for greater choice in the projects they take on and flexibility in their schedules. But when it comes to taxation, it can get complicated.
Changes for 2021 Returns You Need to Know
Even when there are no major changes to personal income tax, there are inevitably smaller tweaks you can alert your clients to every year, in advance of filing. For 2021, those include:
- Work-from-Home Expenses: The temporary simplified (“flat-rate”) deduction has been extended for an additional two years (through the 2022 tax year) and the maximum amount has been increased to $500 (from $400). Alternatively, employees with larger claims for home office expenses can still choose to use the (modified) Detailed Method to calculate their home office expenses deduction.
- Climate Action Incentive: Of relevance for residents of Alberta, Manitoba, Ontario and Saskatchewan, the “CAIP” will now be automatically delivered to eligible recipients (determined by the CRA, based on a filed income tax and benefit return) on a quarterly basis starting in July 2022.
- Educator School Supply Tax Credit – To support teachers and early childhood educators in Canada, the government proposed to expand and enrich the Eligible Educator School Supply Tax Credit to allow them to claim a 25 per cent refundable tax credit for purchases up to $1,000 on eligible teaching supplies bought during the tax year.
! Pro tip Every year, the CRA publishes complete details on changes that you can brush up on. (For 2021, see the Canada Revenue Agency’s “What’s new?” page or consult the Federal Income Tax and Benefit Guide available as part of the T1 income tax package.)
As with all tax-related investment decisions, your clients should consult with a professional tax advisor for specific advice and direction as to which unique strategies make sense for them.
To discuss investment solutions that offer greater tax efficiency, contact your BMO Global Asset Management Regional Sales Representative, and access the resources below.
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