Holmlund Financial's 2020 Year End Financial Tips
1. Maximizing TFSA Contributions and Withdrawals
The TFSA dollar limit for 2020 is $6,000 but there is no deadline for making a TFSA contribution. If you have been at least 18 years old and resident in Canada since 2009, you can contribute up to $69,500 in 2020 if you haven’t previously contributed to a TFSA.
If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following calendar year, assuming the withdrawal was not made to correct an over-contribution.
Be careful, however, because if you withdraw funds from a TFSA and then re-contribute in the same year without having the necessary contribution room, over-contribution penalties can result. If you wish to transfer funds or securities from one TFSA to another, you should do so by way of a direct transfer, rather than a withdrawal and re-contribution, to avoid an over-contribution problem.
If you are planning a TFSA withdrawal in early 2021, consider withdrawing the funds by December 31, 2020, so you would not have to wait until2022 tore-contribute that amount.
Your advisor can help you make these choices.
2. Support for Learners Program
Ontario launches new Support for Learners program!
Whether your children are at home or at school, they're providing parents with financial support to help with learning expenses.
$200/child ages 0-12
$250/child or youth ages 0-21 with special needs
Learn more: https://news.ontario.ca/.../ontario-providing-additional...
3. Deferring Realization of a Capital Gain
Another common year-end tax strategy is to defer realized gains until the next calendar year. For instance, by deferring the sale of a security with an unrealized gain until January 1, 2021, the tax bill associated with the gain is not due until April 30, 2022. By taking advantage of lower graduated tax rates in separate calendar tax years, you can reduce the overall tax obligation. Other factors come into play as well. For instance, if the taxpayer is on maternity/paternity leave this year, they will likely be in a much lower tax bracket, so it would be optimal to realize a disposition in 2020. Also, be cognizant of changing tax rates from year to year. Your advisor can help you understand if this strategy can work for you.
4. RRSP Contributions – especially if you turn 71 this year
While you have until March 1, 2021 to make an RRSP/spousal RRSP contribution, you may want consider contributing earlier to optimize tax-deferred growth. Your RRSP matures by end of the year in which you turn 71, with no additional contributions permitted thereafter. Typically, people choose to roll the funds into a RRIF by the end of that year.
If you do turn 71 in 2020 and you have earned income, it may be worth your time to make an over-contribution in December of 2020. There will be penalties associated with the contribution above the $2,000 over-contribution buffer, however once the calendar flips to January 1, 2021 your contribution room will increase based on your 2020 earned income. It will be critical for your advisor to assess your 2020 earned income figure so the over-contribution penalty tax only applies for December of 2020. The penalty tax is calculated based on 1% of the excess contribution per month. The additional tax savings from the RRSP deduction for 2021 will likely materially exceed the assessed penalty. If this over-contribution strategy is not used, the contribution room created via 2020 income will be lost. The contribution would need to take place prior to the RRIF conversion.
Note that spousal RRSP contributions are still available as long as the recipient spouse doesn’t turn 72 until 2021, assuming contribution room exists, regardless of the age of the contributing spouse.
5. RESP Contributions & Withdrawals
Make RESP contributions for students
RESPs allow for tax-efficient savings for children’s post-secondary education. The federal government will pay into an RESP a Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 of annual RESP contributions per child or $500 annually. While unused CESG room is carried forward to the year the beneficiary turns 17, there are a couple of situations in which it may be beneficial to make an RESP contribution by December 31.
Each beneficiary who has unused CESG carry-forward room can have up to $1,000 of CESGs paid into an RESP annually, with a $7,200 lifetime limit, up to and including the year in which the beneficiary turns 17. If enhanced catch-up contributions of $5,000 (i.e.$2,500 x 2) are made for just over seven years, the maximum total CESGs of $7,200 will be obtained. If you have less than seven years before your (grand)child turns 17 and haven’t maximized RESP contributions, consider making a contribution by December 31.
Also, if your (grand)child turned 15 this year and has never been a beneficiary of an RESP, no CESG can be claimed in future years unless at least $2,000 is contributed to an RESP by the end of the year. Consider making your contribution by December 31 to receive the current year’s CESG and create CESG eligibility for 2021 and 2022.
Take RESP withdrawals for students
If your (grand)child is an RESP beneficiary and attended a post-secondary educational institution in 2020, consider having Educational Assistance Payments (EAPs) made from the RESPs before the end of the year. Although the amount of the EAP will be included in the income of the student, if the student has sufficient personal tax credits, the EAP income will be effectively tax-free.
6. Charitable Contributions
You can contribute to a registered charity by December 31, 2020 and receive a donation credit for your 2020 tax year. Be sure to obtain a tax receipt from the qualifying charity. Any eligible amounts given above $200 qualifies you for a higher federal credit rate of 29% (up to 33% for high income earners) versus 15%, so keep that threshold in mind. The provincial credit rates vary but generally increase at that threshold as well.
To increase your tax savings you can accumulate donation receipts and in any one year, you may claim:
- donations made by December 31 of the applicable tax year
- any unclaimed donations made in the previous five years
- any unclaimed donations made by your spouse or common law partner in the year or in the previous five years
A popular alternative is to donate securities with an unrealized capital gain in-kind to a charity. If choosing between donating cash and such an investment, the security may be the more efficient option, as an in-kind disposition of this nature is tax exempt. You also receive a tax receipt for the fair market value of the security at the time of donation. Talk to your advisor to ensure that you account for the processing time to take advantage of such a strategy prior to year-end. And, check with them to ensure that the registered charity accepts donations of this nature. One option to enhance flexibility is to use an alternative vehicle known as a donor-advised fund. These widely available vehicles offer flexibility on the timing of the grants to the desired charity, but allow for an immediate tax credit.
7. People Affected by Covid
The government introduced a number of measures in 2020 to assist individuals who have been affected by COVID-19. Here are some year end considerations to take into mind if you’ve received any of these benefits in 2020.
Canada Emergency Response Benefit (CERB) – No Tax Deducted
The government will be issuing a T4A tax reporting slip for 2020 showing the total amount of CERB you received, and you must report this amount as income when filing your 2020 income tax return. No tax was deducted at source from your CERB payments, so you may need to pay tax on the CERB amounts you received when you file your 2020 income tax return. The amount of tax that you will owe on your CERB will depend on your 2020 marginal tax rate, taking into account all other income you may have earned in 2020.
Canada Recovery Benefit (CRB) – 10% Tax Withheld
While the government has indicated that, unlike the CERB, it will be withholding 10% in taxes on any CRB payments, this may be insufficient to cover your tax liability on the CRB, which will be taxable at your 2020 marginal tax rates. In addition, if your total income (excluding the CRB) was over $38,000 in 2020, you may be required to pay back the CRB at a rate of $0.50 for each dollar of CRB received for income over this amount.
Canada Recovery Sickness Benefit (CRSB) – 10% Tax Withheld
Like the CRB, the amount is taxable and is subject to 10% withholding tax, so you could end up owing some extra tax on the CRSB for 2020 come next spring.
Canada Recovery Caregiving Benefit (CRCB) – 10% Tax Withheld
As with the CRB and the CRSB, the CRCB is taxable and subject to the 10% withholding tax, which may be insufficient. Accordingly, if you receive the CRCB, you may want to set aside some funds at year end to cover any additional tax that could be owing next April.
Home Work Space Expenses Deduction
Canadians working from home due to the COVID-19 pandemic who are eligible can claim home office expenses through a new temporary flat rate method or through the detailed method by filing the CRA simplified forms (Form T2200S and Form T777S). Click Here
8. Person With Disabilities
One-time COVID-19 payment to persons with disabilities
This non-taxable, non-reportable, one-time payment provides up to $600 in recognition of the extraordinary expenses incurred by persons with disabilities during the COVID-19 pandemic.
This payment complements other emergency supports, such as the one-time special payment through the Goods and Services Tax Credit and the one-time payment to seniors.
Contribute to a Registered Disability Savings Plan (RDSP)
RDSPs are tax-deferred savings plans available for Canadian residents eligible for the Disability Tax Credit. Up to $200,000 can be contributed to the plan until the beneficiary turns 59, with no annual contribution limits. While RDSP contributions are not tax deductible, all earnings and growth accrue on a tax-deferred basis.
Federal government assistance in the form of Canada Disability Savings Grants (CDSGs), which are based on contributions, and Canada Disability Savings Bonds (CDSBs) may be deposited directly into the plan up until the year the beneficiary turns 49.The government may contribute up to a maximum of $3,500 CDSG and $1,000 CDSB per year of eligibility, depending on the net income of the beneficiary’s family. Eligible investors may wish to contribute to an RDSP before December 31 to get this year’s assistance. There is a 10-year carryforward of CDSG and CDSB entitlements.
RDSP holders with shortened life expectancy can withdraw up to $10,000 annually from their RDSPs without repaying grants and bonds. A special election must be filed with the Canada Revenue Agency (CRA) by December 31 to make a withdrawal in 2020.