Tax Tips for an Extraordinary Year

Tax specialist John Waters Vice President, Director of Tax Consulting Services, BMO Wealth Planning & Advisory Services, offers key talking points to help you structure necessary planning conversations with your clients – potentially helping to reduce their tax bill after one of the most financially trying years in more than a decade.

Since 2020 was anything but ordinary, many clients may be feeling extra anxious when it comes to tax season this year – whether it’s questions on new relief measures, knowing what home office expenses to claim, or even missing out on a specific savings strategy. This creates an enormous opportunity for Advisors to add value for their clients by helping them navigate the sea of complexities.

As an Advisor, knowing what relevant tax changes to consider, and having planning conversations with your clients AHEAD of time, will help bring peace of mind – and deepen relationships. It doesn’t have to be a technical discussion, but it should be a helpful starting point to allow them to take stock of what happened last year, and understand the potential tax issues at hand. The knowledge could also benefit your own practice, particularly since many of the new programs introduced apply to a wide range of Canadians.

Understanding COVID relief measures

First off, it’s wise to review the potential tax implications of some of the new relief programs announced in 2020 that many Canadians took advantage of last year.

For example, the Canada Emergency Response Benefit, also known as CERB, and the Canada Emergency Student Benefit (CESB) are taxable, and therefore will be reported as income when filing a return (T4A slips should be received by March 10, 2021). However, no income tax was withheld on the payment of these benefits, so it will be important to set aside adequate funds for any future tax liabilities. Even some of the newer measures that became effective last September – including the Canada Recovery Benefit (CRB) – have only 10% withholdings, so this needs to be taken into account.

In addition, unlike CERB, the CRB – which was introduced in lieu of CERB and for those who couldn’t qualify for Employment Insurance (EI) – has the added income threshold of $38,000 per calendar year. Recipients have to reimburse $0.50 of the CRB for every dollar of net income earned above $38,000 (excluding the CRB), which is repayable on their income tax return (for 2020 or 2021).

For business owner clients, it’s also important to make them aware of some changes announced in the Fall Economic Statement released in late November, to help support companies during these challenging times, including:

• Increasing the maximum Canada Emergency Wage Subsidy (CEWS) rate to 75% for the period beginning December 20, 2020 until March 13, 2021
• Extending the current subsidy rates of the Canada Emergency Rent Subsidy (CERS) to March 13, 2021, to provide greater certainty to businesses
• Lengthening the deadline to apply for a Canada Emergency Business Account (CEBA) loan to March 31, 2021 – and increasing the loan amount as of December 4, 2020
• Creating the Highly Affected Sectors Credit Availability Program (HASCAP) to offer low-interest loans for the hardest hit businesses in sectors like tourism and hospitality, hotels, arts and entertainment

New Ikea desk purchase? Check.

Another filing issue to flag this tax season will be the home office deduction, particularly with an influx of the population working remotely who are now able to qualify for this benefit. At a high level, for 2020 there are two claim methods to understand, the temporary flat rate option, and the detailed process (which has always existed, albeit tweaked slightly now to make it easier to qualify).

With the former option, clients with modest expenses can claim $2 for each day worked from home in 2020 as a result of the pandemic, up to a maximum of $400, while the latter allows for total actual amounts paid, supported by documentation and a signed form by the employer.

At the end of day, the best option will be dependent on your clients’ personal situation. While many will likely opt for the temporary method even though it’s not a significant amount, it offers simplicity in that it doesn’t require employer-signed forms or supporting documentation. Meanwhile, it will be more advantageous for those with larger expenses – including renters – to take the detailed route, which obviously requires more planning and work when it comes down to tracking receipts.

Here’s a helpful comparison of the two options from the CRA website to give you more insight, which could also be useful for your own business:

Temporary flat rate method

Detailed method

Source: Canada Revenue Agency.

To be eligible for the temporary method, Canadians must have worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020, and employers could not have reimbursed them for all of their home office expenses.

Tax Changes to Keep on Your Radar

Aside from keeping your ears to the ground for the upcoming 2021 Federal Budget (especially since the 2020 Budget was absent in light of the pandemic), there are also some noteworthy tax reforms effective this year, which could impact future plans:

1. Employee Stock Option Limit – Draft legislation introduced in 2019 proposed to apply a $200,000 annual limit (per vesting year) on certain employee stock option grants that can access the preferential 50% tax rate. These changes were delayed, and are now due to take effect for options that are granted on or after July 1, 2021. However, a number of exclusions still exist, including for Canadian-controlled private corporations (CCPCs), as well as non-private companies that meet specific conditions, including start-ups and emerging businesses.
2. Canada Training Credit – Also introduced in 2019, under this new program, eligible individuals will be able to accumulate $250 of refundable credits each year, up to a maximum of $5,000 in a lifetime for tuition and fees associated with eligible professional development courses taken in 2020 onward. To qualify, clients must be between the ages of 25-65, earning more than $10,000 and less than roughly $150,000 (the top of the third tax bracket) of income annually. Even if clients didn’t know about this opportunity last year, it could influence them to take a forward step towards career development, particularly given the added work-from-home flexibility now.
3. New Trust Reporting Requirements – Due to come into effect for taxation years ending on or after December 31, 2021, most trusts will now have to report the identity of all its trustees, beneficiaries and settlors as well as the identity of each person who has the ability to exert control over major trustee decisions. The rules will also mandate an annual T3 filing obligation for many trusts that did not have to file previously, including those that did not have activity during the year, or no income tax payable, such as those created on an estate freeze, or holding a vacation property. PRO-TIP: if setting up a trust, the new requirements could be onerous and require planning ahead.

The 2020 Fall Economic Statement also noted several tax proposals to keep tabs on in the next few months, including targeting the unproductive use of domestic housing that is owned by non-residents through a national, tax-based measure. It also announced allocating additional resources to fund new initiatives targeting international tax evasion, and aggressive tax avoidance.

In addition, the Canadian government announced plans to implement a new tax on certain corporations providing digital services in Canada, effective January 1, 2022, with more details anticipated in the upcoming Federal Budget.

A Year-Round Discussion

With so many moving parts, tax planning is clearly not a one-time, value-add discussion. It’s a year-round process that requires consistent record keeping, while keeping track of any tax law changes that may open up new avenues for your clients.

From pension income splitting and deciding how much to contribute to RRSPs to the finer points of tax-loss harvesting, there are always conversations to be had and flexible options to consider. More often than not, there are savings strategies that clients may have missed, and alerting them could create valuable opportunities to reduce their tax bill going forward – strengthening your relationship in the process. The main question to ask is: What can your clients plan to do now to access [insert tax measure here] next year?

Taking Action:

• BMO 2021 Personal Tax Calendar: ensure no important dates are missed and that key deductions and credits are at your fingertips, including overall wealth planning tips
• Update on Canada’s COVID-19 Economic Response Plan: access in-depth knowledge about the latest pandemic relief measures in our comprehensive report
• Contact your BMO Global Asset Management Regional Sales Representative to discuss investment solutions that offer greater tax-efficiency

As with all tax-related investment decisions, your clients should consult with a professional tax advisor to determine which unique strategies make sense for them.