Get ready for a complex tax season. Aside from the challenge of filing taxes during a pandemic, Canadians face a basic T1 Income Tax and Benefit Return form with various Schedules totalling more than 40 pages for the 2020 taxation year. Although that makes the task more arduous for financial professionals, it can lead to new opportunities.
Against the backdrop of the most significant public health crisis in a century, astute financial advisors can help their clients uncover gaps in their tax and investment strategies as well as engage the whole family in financial planning.
More specifically, advisors can make a notable difference with providing support to three types of clients, in particular, this tax season:
1. Pandemic support recipients
More families will need to file an increasing number of tax returns this year. That’s because children as young as 15 years of age were able to apply for the taxable Canada Emergency Response Benefit (CERB). Some of them could have received up to $14,000 in benefits, which can result in a balance due to the Canada Revenue Agency. Parents may have to cover this payment, in some cases.
Alternatively, students may have received the taxable Canada Emergency Student Benefit (CESB). Depending on income, it may reduce or eliminate the transfer of tuition amounts from post-secondary students to their parents, making the cost of their education more expensive.
Furthermore, anyone who received the CERB or CESB in error must repay those benefits. If the repayment occurred in 2020, there is no need to report the income. However, if the repayment takes place in 2021, the benefits that were received need to be reported as income on the 2020 T1. An offsetting deduction will then be claimed in 2021. That’s a long wait for the resulting refund. Worse, other available tax credits and benefits may be reduced.
Those who received the Canada Recovery Benefit (CRB) after CERB payments ended may be subject to an expensive clawback. For every dollar of net income above $38,000, excluding any amounts received from the CRB itself, 50 cents must be repaid. CRB repayments will be subtracted from income and repaid in a manner similar to Old Age Security (OAS) clawbacks.
Finally, a few tips for seniors who received COVID-19 benefits: the $300 lump-sum payment made to OAS recipients is not taxable – nor is the $500 payment to Guaranteed Income Supplement recipients or the $600 paid to disabled Canadians. Also, U.S. citizens living in Canada who received the U.S. COVID-19 relief payments will not be required to report these as income. Many provinces also made non-taxable payments to their residents.
2. Employees or proprietors claiming child care expenses
Child care expenses reduce net income, which is used to determine the size of the Canada Child Benefit and other credits on the tax return. The lower-income earner in a household usually claims these expenses. The child care claim is the lesser of the amounts actually paid, maximums of $5,000 for each child aged 7 to 16 or $8,000 for children aged 6 or younger, or two-thirds of the taxpayer’s earned income.
Under usual circumstances, that earned income includes most sources except for Employment Insurance (EI) benefits. However, for the 2020 and 2021 taxation years only, earned income will include both EI and any taxable pandemic benefits. In addition, child care expenses can be claimed for a period in which one or both parents are receiving EI or other taxable pandemic benefits.
Some families will receive another bonus in 2021 under the Canada Child Benefit, which is above the usual benefit: an additional, tax-free, $300 per child under age 6 when family net income is less than $120,000, or $150 per child when family net income exceeds that threshold. Smart financial planners should encourage these families to use the extra money to fund registered education savings plans for their children, which would then qualify for the Canada Education Savings Grant.
3. Employees who work from home
The federal government has come up with some temporary tax relief for employees required to work from home in 2020. Here are the options:
First, a temporary flat rate of $2 a day to a maximum of $400 is available to employees who worked more than 50 per cent of the time from home for at least four consecutive weeks. No employer-signed form, home workspace details, or supporting documents are required. However, the return is small: at a 30 per cent marginal tax rate, a real dollar return of 60 cents a day, or $120 if the full $400 is claimed. To make the claim, employees must file form T777S Statement of Employment Expenses for Working at Home Due to COVID-19.
Then, there’s a detailed method. Employees who want to claim more can use the same form T777S to claim a portion of expenses such as rent, utilities, condominium fees, maintenance and minor repairs, cleaning supplies, light bulbs, paint, office supplies, internet access fees, use of a basic cell phone plan, and long-distance charges. Documentation is required, including an employer-signed Form T2200S, Declaration of Conditions of Employment for Working at Home Due to COVID-19.
Note that home workspace expenses cannot exceed income from employment minus Registered Pension Plan contributions and union dues. Otherwise, they must be carried forward.
A dedicated workspace is not required, but if the workspace is shared, the expenses must be prorated according to the number of hours that space is used for work each week. Again, the resulting tax savings may be quite small, but the audit risk is high.
Furthermore, employees who earn commissions may also claim property taxes and home insurance, as well as lease costs for equipment, aside from the expenses described above. A signed Form T2200 Declaration of Conditions of Employment is required from the employer and Form T777 Statement of Employment Expenses is used to make the claim.
Evelyn Jacks is founder and president of Knowledge Bureau Inc. She has written 55 books on tax and family wealth management.