Insights

Tax Tips for the year 2021

Some Tax Planning strategies for the year 2021

Canada Pension plan

The maximum pensionable earnings and contribution rate for 2021 have now been released and are a surprise to many; the cost of CPP is significantly increasing.

For example, a self-employed person earning $61,600 or more will pay $537 more this year (as compared to last year’s increase of $298), for a total of $6,333. Or, looked at another way, an employer with ten employees earning $61,600 or more will pay a total of $31,660 of CPP premiums in 2021 (an increase of $2,680 from 2020 contributions).

Dividend income:  
Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby potentially providing greater access to the capital gain exemption.

Consider paying taxable dividends to obtain a refund from the “Refundable Dividend Tax on Hand” account in the corporation. The amount of refund may be restricted if “eligible” dividends are paid. Eligible dividends are subject to lower personal tax rates.

Non-Taxable Employee Benefits

Where benefits are a part of your compensation, you should seek non-taxable benefits over taxable ones. Non-taxable employee benefits include the employer contributing to a registered pension plan, as the employee pays income tax on the pension plan when it is paid out (similar to CPP benefits), as well as health insurance plans which reimburse for expenses not covered by public health insurance (primarily dental care, vision, hospital fees, and paramedical).

Reduction of Tax Withheld at Source

In anticipation of a large tax refund at the time of filing the T1 return, possibly as the result of substantial RRSP contributions, business losses, or spousal support payments, among others, then you can apply in advance to the CRA with form T1213 (Request to Reduce Tax Deductions at Source) for a reduction of the income tax portion of your payroll withholdings.

Employee Loans

Although normally a taxable benefit if the interest rate is below the market rate, there are specific circumstances where the reduced-interest loan is not taxable.

If the loan is provided to the employee or their spouse or common-law partner for the purposes of purchasing a dwelling in which they plan to live;

If the loan is provided to the employee in order to purchase shares from the corporation;

Or if the loan is provided to the employee in order to purchase an automobile that is used in the course of performing the duties of their employment.

Otherwise, the difference between the CRA prescribed interest rate and the loan interest rate – if the latter is lower than the former – is considered a taxable benefit. This benefit last for as long as the loan is outstanding. Any interest paid to the employer is not considered a deductible expense unless the loan is specifically used for the purposes of generating business or property income, and not for personal reasons.

Registered Education Savings Plan (RESP)

If you have children or grandchildren, consider investing into an RESP. Although, unlike an RRSP, these are not deductible for tax purposes, capital withdrawals are also not taxable. The income earned on the capital investment is taxed, but because the objective is for this funding to be withdrawn by a student in post-secondary education who likely has little or no other income, this tax will be paid at a low rate – if indeed it manages to clear the personal tax exemption threshold.

There is no annual contribution limit to the RESP, however the lifetime contribution limit is taxed at $50,000 per beneficiary. As noted, the money contributed (the capital) may be withdrawn from the plan without being taxed.

Childcare Expense Deduction

Childcare expenses (typically daycare) may be claimed for up to $11,000 for a disabled child. Otherwise, the maximum is $8,000 for a child from the ages of birth to seven years old, and $5,000 for a child from the ages of seven to sixteen. Remember that the spouse with the lower net income must claim the childcare expense on their income tax return.

The Canada Child Benefit (CCB)

The Canada Child Benefit is a tax-free payment from the government which is based on family income. Up to $563.75 per month can be claimed for children aged from birth to five years old, and up to $475.67 per month can be claimed for children aged from six to seventeen years old. The maximum can be claimed by any family with a total income of $30,000 or less, and is gradually clawed back to a maximum income of $200,000, where the amount is zero.

The Registered Disability Savings Plan (RDSP)

A person who is eligible for the disability tax credit can be named as the beneficiary of the RDSP, which allows for contributions to be made until the beneficiary reaches the age of 59. Unlike RRSPs, RDSPs do not allow for tax deductible contributions, but this means that capital contributions are also not taxed upon withdrawal.

The government provides annual matching grants of up to $3,500 – and allows unused grant entitlements to be carried forward for up to ten years.

There is no annual limit on RDSP contributions but the lifetime contributions cannot exceed $200,000.

Contributions that are withdrawn by the beneficiary are not included in their taxable income though the contributions are counted as income for the purposes of other disability fund calculations, such as the Canada Disability Savings Bond and the Canada Disability Savings Grant.

One special advantage of the RDSP is that it allows for the RRSP or RRIF of a deceased parent or grandparent to be transferred into the RRSP.

Home Accessibility Tax Credit

This credit is available if expenses were incurred in making the homes of individuals who are 65 years of age or older more accessible to those with disabilities or infirmities. Either the individual who incurred the expenses or the individual for whom the expenses were incurred can claim the credit. The individual who incurred the expenses is only eligible if these expenses were incurred on behalf of a spouse or common-law partner, or infirm or disabled dependent.

Up to $10,000 in eligible expenses can be incurred, at the rate of 15% (for a $1,500 credit). The expenses must be permanent and non-routing renovations, and it must allow greater mobility or reduction of potential hazards on the part of the individual for whom the expenses were incurred.

Canada Caregiver Credit

This is a credit of 15% on a prescribed amount – currently $7,140 – which can be claimed for the care of an infirm or dependent relative. The credit is only valid if the net income of the dependent is below $23,906.

Ontario Childcare Access and Relief from Expenses Credit

The Ontario Childcare Access and Relief from Expenses, or CARE, credit, is a refundable tax credit available to families with a household income below $150,000. This is a supplement of the Child Care Expense Deduction. The credit is up to $6,000 for a child from the ages of birth to six, up to $3,750 for a child from seven to sixteen, and up to $8,250 for a disabled child.

Canada Workers Benefit

The amount of the Canada Workers Benefit (CWB) is 26% of earned income over $3,000, to a maximum of $1,381 for singletons, and $2,379 for families with children. The maximum is reduced by 12% of net income of $13,064 for singletons and $17,348 for families. Note that for the purposes of the CWB, kinship care providers are considered the parents of a child in their care, and therefore are eligible for the family CWB amount.