Page 9 - Newcom

tax & estate
Tax planning in a unique year
CERB, combined with lower deductions, is a recipe for potential tax owing
Many Canadians experienced income changes
this year, so tax return figures may look very
different than in previous years. In some cases, clients who typically receive refunds may owe tax.
On the surface, it may not seem like a big tax issue when someone’s income declines. Logically, taxes should decline, too. However, the situation may be more complicated.
For those who received Canada Emergency Response Benefit (CERB) payments, no income tax was withheld at source. In addition, tax deductions such as those for retire- ment savings contributions (especially payroll deductions to employer-sponsored plans) may be less than in previous years. With childcare facilities closed, work travel halted and medical services like dentistry on hold, the corres- ponding tax deductions or credits may be lower. This com- bination could be the perfect storm for a higher tax bill.
Adjusting for 16 weeks of CERB
Consider Hannah, a fictitious sales representative in Sas- katchewan. She’s a self-directed investor (with almost $300,000 in investment assets) but she wants to partner with an advisor because she’s worried about her 2020 tax return. When her employment was affected by Covid-19, she received CERB for 16 weeks in the middle of the year. Since her return to work this fall, all sales calls are virtual, so Hannah no longer travels. Without Covid-19, her 2020 tax situation would have looked like this:
Employment income
Taxable investment income1
RRSP contribution (payroll deduction)
Car expenses
Deduction for enhanced CPP contribution
Taxable income
1 Includes $250 of taxable capital gains, $2,070 of grossed-up eligible dividends and $1,000 of interest income
2 Difference between income tax withheld by her employer and taxes payable ($15,359 − $13,860)
Normally, Hannah would be in a refund position. Let’s pro-
ject what her situation may look like because of Covid-19:
Employment income
Taxable investment income1
CERB
RRSP contribution (payroll deduction)
Car expenses
Deduction for enhanced CPP contribution
Taxable income
byCurtis Davis, FCSI, RRC, CFP,
senior consultant for tax, retirement and estate planning services, retail markets
at Manulife Investment Management
$80,000
$3,320
($8,000)
($5,000)
($166)
Despite her taxable income being lower than normal, the combination of lower deductions and no tax withheld on CERB has Hannah in a potential balance owing situa- tion. What can you do?
First you review her tax information — including her notice of assessment — for any amounts carried for-
ward from previous years that could reduce taxes this year, and you find RRSP carry-forward room of $35,000. Hannah also mentions that she realized a $4,000 capital gain in 2019 on her non-registered account. Finally, when reviewing her investment statements, you notice two investments in her non-registered portfolio have combined unrealized capital losses of $3,000.
While there may be multiple solutions for Hannah, let’s explore one. An additional RRSP contribution of $6,462 would reduce Hannah’s taxes payable to $0. Since the current market value of the investments in the loss pos- ition is $10,000, you suggest using that amount to fund the RRSP contribution. To do this, Hannah must realize the losses in her taxable portfolio. You also suggest she
$70,154 carry the net capital loss back to 2019 to reduce her tax- able capital gain. This results in the following:
$55,385
› a total RRSP contribution of $15,538 and no taxable cap- ital gain, resulting in a projected refund of $1,250 for 2020
› additional tax savings of $413 from the capital loss carryback
Hannah’s projected combined tax refund of $1,663 is greater than the $1,499 she would have received in a
$3,320 normal year, and it’s much better than owing $2,132. You
have a happy new client.
For next year, remember that Hannah’s earned income
was lower than expected in 2020, decreasing her new
2021 RRSP contribution room relative to the previous ($156) year. This may require a review of her contributions from
$8,000
($5,538)
$59,011
others are subject to 10% tax at source. AE
ADVISOR.CA 9
($2,000)
1 Includes $250 of taxable capital gains, $2,070 of grossed-up eligible dividends and $1,000 of interest income
2 Difference between income tax withheld by her employer and taxes payable ($8,093 − $10,225)
her payroll to ensure the amounts are still suitable.
For other clients continuing to receive pandemic bene- fits, remember that the new Canada Recovery Benefit and
Tax-saving strategies
While no two client scenarios are the same, here are some ideas for tax savings in 2020:
Carry-forward amounts — Review CRA’s My Account and the notice
of assessment, where carry-forward amounts are tracked. These include items like tuition/education amounts, moving expenses, charitable dona- tions and student loan interest. Where
available, these amounts can be used to reduce the current year’s taxes. RRSP contributions — Using cur- rent year or carry-forward RRSP amounts could be a simple way to create a deduction, lowering 2020 income and taxes payable. Charitable donations — A charitable donation could provide additional tax savings and directly lower taxes. Capital losses — These can reduce net capital gains, saving tax.
Refund (including climate action incentive)2
$1,499
Projected taxes owing (net of climate action incentive)2
($2,132)