The annual tax-filing ritual is always an important financial exercise for Canadians – and it’s essential during this year’s COVID-19 pandemic. That’s because it’s the quickest way to take advantage of enhanced tax credits and to receive a much-needed tax refund.
There were substantial changes to this year’s tax forms that financial advisors need to be mindful of when helping clients work through these documents. Here are some key items to consider:
The revamped T1 General Form
At eight pages, the 2019 tax return is the longest in history, featuring new five-digit field codes. The form now incorporates the old “‘Schedule 1,’” which contains lucrative tax credits that reduce taxes payable. Advisors should take the time to point to top-of-mind provisions found in this part of the document, like medical expenses, caregiver and disability amounts.
The new tax-filing deadlines
The April 30 individual T1 deadline was extended to June 1 this year, which is also the deadline to file Form T1135: Foreign Income Verification Statement and to optimize pension income-splitting for prior years. The tax-filing deadline for the self-employed (unincorporated proprietors) is still June 15. Filing dates for certain trusts and corporations have also been extended.
Advisors should advise clients not to delay filing their tax returns. With electronic filing and direct deposits, the Canada Revenue Agency (CRA) turns refunds around quickly. Clients should then put these refunds to good use by reducing non-deductible debt or by topping up their tax-free savings accounts or registered retirement savings plans.
Defer taxes owing to Sept. 1
This extension applies to individuals and proprietors for both taxes due and the June 15 instalment. There will be no penalties or interest. But the Sept. 15 quarterly remittance is due two weeks later. This can spell cash flow trouble at that time. Advisors can provide sound advice here. If clients’ income has dropped dramatically in 2020, another instalment payment may not be necessary. Estimate income to the end of the year and adjust the remittance requirements. Then, clients should advised to invest the savings appropriately.
Canada Pension Plan (CPP) reporting changes
CPP premiums rose to 5.1 per cent in 2019 on that year’s maximum pensionable earnings (YMPE) of $57,400 from 4.95 per cent on the YMPE of $55,900 in 2018. This increase resulted in a broad-based tax-filing change. Everyone who paid into the CPP will have at least two entries on the T1 starting with the familiar non-refundable tax credit for the base premium paid at 4.95 per cent. However, a deduction is claimed for the “enhanced” premium (0.15 per cent) for a total of 5.1 per cent. The self-employed must pay premiums of 10.2 per cent, which can be a particular hardship given many may now have lost their source of revenue. Still, their income taxes and both the employer/employee portions of the CPP premiums for 2019 must be paid by Sept. 1.
Look for investment gaps
For advisors, having familiarity with complex, new T1 calculations can be an important tool – especially when helping new clients – to discover their financial needs. Try to identify gaps in a client family’s investment framework. Do all members have emergency funds set aside? Have they already taken actions in 2020 that may have a positive retroactive impact on their 2019 tax-filing results? For example, have they crystallized capital losses that can be carried back to offset taxable gains reported in 2019, 2018 or 2017; thereby generating a tax refund?
Beware passive investment income rules
Retained earnings invested in a private corporation may be very helpful in a pandemic. However, new taxes on small-business corporations that have passive earnings exceeding $50,000 were imposed in the 2019 taxation year. Some taxpayers drew a taxable bonus or increased dividends to preserve their lower corporate tax rate. They may now face higher personal taxes on the 2019 T1 and an increased quarterly tax instalment liability on Sept. 15. These additional taxes add to the sudden fragile financial reality for many owner-managers, and advisors should help them address this situation along with any required changes in the investment strategy for the remaining retained earnings.
Review dividend-sprinkling activity
Dividends from private corporations received by non-active family members are reported on Form T1206 Tax on Split Income, a complex 10-page form. This income is taxed at the highest marginal tax rate. But there’s an exception: dividends can be received by a non-active spouse from an active spouse who is 65 or older. Advisors should initiate retirement income planning conversations to optimize this opportunity.
Address tax-debt problems
Although the CRA has the power to garnishee wages and seize assets, collections on new tax debt have been suspended and flexible payment arrangements are available on old tax debt. This provides much needed time for advisors to recommend the most tax-efficient withdrawal options to repay tax debt while navigating through market volatility. Point out that in difficult situations caused by the COVID-19 pandemic, the taxpayer relief provisions are available to waive penalties and interest.
Help manage audit risk
Together with the net worth statement and the financial plan, the tax return is one of three financial documents forming the cornerstone of all wealth-planning activities. The big differentiator is the audit risk clients take on. Advisors can help clients manage their burden of proof by providing critical information for adjusted cost base calculations, tracking eligible interest costs and investment management fees to claim a deduction for carrying charges and evaluating future investment decisions based on the availability of capital loss balances. This is an important way to manage future wealth erosion due to audit risk.
Evelyn Jacks is founder and president of Knowledge Bureau Inc. Her most recent book is the fifth edition of Make Sure It’s Deductible.