There is nothing certain in life except death, taxes, and a Leafs playoff defeat. But at least when it comes to filing your yearly CRA return, investors can claim a modicum of control.
Everyone is taxed, of course, regardless of whether you are low income or high-net worth. However, taking advantage of new and established tax benefits is invaluable. So, as the April 30 personal tax deadline looms, here’s a look at what’s new for 2021 as well as some strategies that could keep more of your hard-earned cash in your pocket. Discuss further with an independent financial advisor to understand fully what’s right for your situation.
1) What’s new for 2021?
- For those who have received COVID-19 benefits from the CRA in 2021 - for example, the Canada Recovery Benefit (CRB) - you will receive a T4A slip. Be aware, however, that if you received the CRB and your net income after certain adjustments is more than $38,000, you may have to repay all, or part of, what you received last year.
- There is good news for remote workers – you can claim up to $500 for work-from-home expenses, an increase from 2020’s $400.
- In more good news, the Basic Personal Amount (BPA), a non-refundable tax credit, has been increased to $13,808, meaning we all get a small boost to our return.
- Inflation means the federal tax brackets have been shifted to $0 to $49,020 of income (15%); more than $49,021 to $98,040 (20.5%); more than $98,041 to $151,978 (26%); more than $151,978 to $216,511 (29%); $216,512 and higher (33%). Check out your province for additional rates.
- The TFSA limit remained unchanged at $6,000, while the RRSP dollar limit for 2021 was $27,830 or 18% of your earned income from the previous year – whichever is less. For 2022, the RRSP dollar limit has been increased to $29,210.
- New OAS limit amounts were also announced for 2021. If your taxable income was more than $79,845, you will need to repay some of your OAS, while if it was over $129,757, you would have not received any OAS payments.
- The Federal government also expanded or changed a raft of tax credits. Among them was a widening of the eligibility requirements for the Disability Tax Credit to include: an updated list of mental functions; a longer list of activities in determining time spent on life-sustaining therapy; and reducing the minimum required frequency for therapy. Another change of note was the Small Business Air Quality Improvement Tax Credit, of particular significance given current health concerns. This is a refundable tax credit of up to 25% on eligible air quality improvement expenses like ventilation, air conditioning or air filtration devices.
Being alive to these changes will help your return statement but there are also longer-term strategies and credits that investors can capitalize on.
2) Canadian Dividend Tax Credit
What’s worse than taxation? Double taxation, which is why this credit was brought in. As a shareholder in a Canadian company, clients will receive dividends, but these corporations have already paid Canadian tax. Note, this only applies to dividends received from Canadian companies.
An important concept to understand is the gross-up, an increase to reported income that accounts for taxes already paid by a corporation before it pays a dividend, which is dished out from after-tax profits.
The idea of the credit is to balance things out. By paying a gross-up to turn your income back into pre-tax income, you then receive a tax credit that makes it fair for everyone. Neither you or the corporation are being double-taxed and the CRA subsidizes you for the tax the corporation has already paid on your dividends.
Currently, the gross-up rate is 38% for eligible dividends (usually from public corporations that don’t receive small business deductions or private companies with high earnings) and 15% for the other than eligible dividends (typically from small business corporations that earn less than $500,000).
3) Get your investment mix right
Structuring your income and investments is crucial to ensuring tax efficiency. For higher-income seniors, your Old Age Security (OAS) is clawed back at 15% from $75,000-$121,000. Planning to have a lower taxable income, with the right RRSP, TFSA, and non-registered investment mix, keeps you out of the clawback ranges.
It might be beneficial to cash in some or all your RRSPs before you turn 65 to avoid clawbacks although, of course, this works only if you can withdraw at a low tax rate.
In some cases, it makes sense to delay OAS payments, which you can do for five years until you turn 70. For example, if you work beyond 65, you might not need the income and, in some cases, the extra income from OAS would be clawed back anyway, partially, or entirely. In this instance, deferring, until you are in a lower tax bracket makes sense.
Getting your investment mix right is crucial. Most investors will know the basics – that you are fully taxed on pensions, RRIF withdrawals (what an RRSP turns into when you start taking money out) and interest, partially taxed on tax-efficient non-registered investments and not at all from TFSA withdrawals. However, knowing when to use these and how much to withdraw requires planning.
There are different ways to slice and dice this strategy but maximizing your TFSA and non-registered assets is a must to keep RRIF withdrawals as low as possible. One way to maximise growth is to convert the RRSP to a RRIF by the end of the year you turn 69 but don’t make the first RRIF withdrawal until the end of the year you turn 70. In a similar vein, continue to withdraw the annual required minimum from the RRIF as a lump sum at the end of each year.
Bear in mind, too that depending on your situation, keeping your income low could qualify you for the tax-free Guaranteed Income Supplement (GIS).
4) Keeping it in the family and spousal RRSPs
If there is significant difference between spouses’ incomes, the lower-income partner is taxed at a lower rate than the higher-income spouse.
A common tactic is for the likes of mortgage payments and other household bills to be paid by the bigger earner, allowing new investments to be made by the lower-income spouse, who will subsequently pay less tax on income and capital gains. Additionally, family businesses can pay salaries to a spouse and children, as long as they work, and the sums aren’t outrageously high.
Beware, however, that if a client transfers existing investments to a spouse, income or capital gains will be attributed back to you and taxed in your hands.
Another strategy to contemplate is the underused spousal RRSP. The way the tax rates are structured means that, for example, a couple with retirement incomes of $50,000 each pay about $6,000 to $9,000 less tax per year than a couple where only one spouse earns $100,000. In order to equalize this, a spousal RRSP allows one spouse to contribute while the other is the annuitant and legal owner.
Importantly, the contributing spouse can be any age, but the annuitant spouse must be turning age 69 or less in the year of contribution.
5) Effective use of surplus assets
For some of you, particularly those with ample savings or high-net income, you might be in the position where you have surplus non-registered assets, even under a very conservative financial plan.
If that is the case, you might want to consider directing those resources in more efficient directions. The first option is to purchase a tax-exempt life insurance policy, which is particularly relevant if you know that some of your assets will be passed on to your heirs and you won’t need them during your lifetime. This way, the money can grow on a tax-free basis rather than being exposed to the CRA.
The second option is to gift some of your surplus to low-income members of the family. This could help children or grandchildren buy a home, help with their education, or even pay for their wedding. Again, this is better than exposing the assets to a higher marginal tax rate. This transfer can be done directly or through a trust if you do not want your children to have control. There will be no attribution on any investment income earned on the gifted funds if the child is age 18 or older.
Beware, however, that the trend of escalating health care and long-term care costs mean it’s vital to be prepared for these eventualities before giving up what you think are surplus assets.