It's Your Money  

Income tax during COVID

This year’s tax filings will likely prove move complicated for many due to pandemic-related benefits and work from home adaptations.

Although Canadians were given an extension to file their taxes last year, the deadline to file 2020 income tax returns remains April 30 (June 15 for the self-employed).

So what is different this year?

Reporting taxable COVID benefits

Millions of Canadians received pandemic related benefits in 2020 that must be reported on your tax return.

The CERB, CESB, CRB, CRCB and CRSB programs are all considered taxable income and should be reported on Line 13000 (Other income) on tax filings.

T4A and/or T4E slips have been issued by the government for these programs and although they should have all been sent in the mail, you can also view them on your “My Account” on the CRA website.

Understanding what is non-taxable

While the above-mentioned benefits are taxable, some other pandemic related relief is considered tax-free.

The government also delivered a number of other payments to some people including a GST/HST credit, OAS and GIS supplements and payments to people with disabilities which are not taxable and should not be reported on the 2020 return.

Certain provincial benefits such as the BC Recovery Benefit one-time payment are also not taxable.

Some will need to file for their first time

Children as young as 15 were able to apply for the CERB and some of them received as much as $14,000 in benefits, which are taxable. Many students may have also received the taxable CESB benefit as well.

Young people who received a government benefit of any type during 2020 need to confirm if they need to file their own tax return, even if they’ve never done so before.

Claim work from home expenses

The government announced two methods for claiming expenses related to working from home.

First, a flat rate of $2 per day to a maximum of $400 is available to employees who worked more than 50 per cent of the time from home for a period of four consecutive weeks or more.

No employer-signed form or supporting details are required, but the total amount you can claim using this method is quite small.

The second option is to use a more detailed method. Documentation of all eligible expenses is required as well as an employer-signed form T2200S.

Childcare expenses

For the 2020 and 2021 tax years only, the calculation of “earned income” will include both EI and any taxable pandemic benefits.

In addition, childcare expenses can be claimed for a period in which one or both parents are receiving EI or other taxable benefits.

This will inevitably be a challenging tax year for many Canadians to navigate but that does not mean you can put it off any longer. Missing the filing deadline is a bad idea, even if you don’t have the funds on hand to pay any taxes that are owing.

If needed, seek professional help in preparing your tax return, even if only for this year.

No-retirement plan blues

Are you into your 50s with no retirement savings to speak of yet?

If so, you are not alone.

I read somewhere recently that only 54% of “boomers” (currently those in the 55-75 age range) in the United States have any retirement savings at all. With Canadians unhealthy appetite for debt, many here at home are in a similar position.

While not an ideal situation, there are still plenty of things you can do. Sinking to despair and “giving up” because it is too late to start is not the answer. Instead, here are a few things you can consider doing to get back on track:

Get past the fear stage and reframe your thinking.

Instead of dwelling on past decisions or wishing you had started earlier, you need to think positive and take comfort in taking on action on the things you can control.

Any savings put away today is better than nothing and puts you farther ahead than you were the day before.

Look for ways to generate more income.

Do you have an opportunity to work a bit of overtime at your job? Maybe there is a way to attain a higher year end bonus or work towards a raise?

Maybe a side-business can generate some extra cash flow? And if you do earn some extra income, put 100% of it against debt or into your retirement savings instead of treating yourself for your extra hard work.

Reduce your expenses aggressively.

You need to take a hard look at your budget and where you spend money to see what can be trimmed. This includes both day to day spending as well as bigger ticket items.

Saving an extra $10 a day starting at age 50 translates to an extra $87,000 in your nest egg at age 65 (assuming six per cent rate of return). And don’t increase your debt load for any reason.

It is time to cut the kids off.

I know how much you love your children but if they are going to college or already grown adults, it is time for them to pay their own way.

If you are behind on your own retirement savings, this must take priority. As much as your heart is in the right place by trying to help them, the lessons they will learn now about managing money and taking on debt will help them for the rest of their lives and they will be less likely to have to support you in your later years.

Rethink your retirement plans.

This could mean working for a few extra years or even working part-time in retirement. Working for a few extra years has huge benefits.

Not only will you have some extra income to invest, you will delay dipping into what you do have saved and can also delay taking government pension programs for a few years increasing the amount you will receive.

If you find yourself behind on your retirement preparation, the single most important thing you can do is to create a comprehensive financial plan. I regularly hear people say that they “don’t have enough money saved to setup a financial plan,” but this makes no sense at all.

A proper plan will outline where you are today, what your future goals are and detail the steps you need to take to get there. No matter how dire your situation feels, the sooner you take action the better off you will be.

Rich also buy life insurance

Popular wisdom suggests that as people accumulate wealth their need for life insurance decreases.

However, permanent life insurance is a financial tool with unique tax benefits.

Many affluent families find significant value by using life insurance to protect and even enhance their wealth.

People buy life insurance either for temporary income protection or for long term wealth preservation. When you are young, life insurance is used to protect your family by providing money to replace your income.

However, as we approach retirement our need for income replacement lessens and the focus switches to wealth protection.

Wealth protection is a long-term concern, so it requires permanent solutions. Permanent life insurance is a tax efficient tool that many Canadians use for one of the three following concerns:

Estate preservation

Some Canadians have built up significant wealth in certain assets (such as RRSPs, second properties, businesses, etc.) that may trigger significant tax liabilities when those assets transfer to the next generation.

Where does the money come from to pay that tax bill?

Your beneficiaries could liquidate some of your assets or borrow the money. Or, prior to your death, you could try to save the additional funds required.

What if you funded that tax bill with insurance?

Insurance is typically the most efficient and effective solution as the money arrives tax free when needed most.

If you are concerned about a large tax bill when you pass away or that your beneficiaries may have to sell off estate assets to fund it, then you should consider an estate preservation strategy to preserve the value of your estate.

Estate equalization

Many Canadians have a strong desire to leave the value of their assets equally to their beneficiaries. But some have certain assets that are unique and destined for only one beneficiary (or a group of beneficiaries) such as a business or vacation property.

Blended families also often require estate equalization strategies to ensure each family line is protected and treated fairly. Even if estate preservation has been addressed, the nature of some assets can make it difficult to divide equally among your heirs.

Leaving certain assets to specific heirs is also likely to create inequality and friction.

To address these complexities, most affluent families find that life insurance is a cost-effective way to provide the liquidity needed to make estate values more equitable.

This solution is even more effective where a private corporation is involved. With an estate equalization strategy, the tax-free life insurance death benefit proceeds provide liquidity which helps balance out estate values while still achieving your asset distribution goals in a cost-effective way.

Estate maximization

Some Canadians have more income and/or assets than they will need for retirement and have a strong desire to leave a legacy.

Most people assume that investments are always the best way to increase the value of their estate. Others believe real estate or business ownership are the solution.

While all of these are useful, they do come with tax implications.

What if you were to move some of that excess money that may be attracting annual taxation into a life insurance contract?

An exempt permanent life insurance policy provides tax-deferred policy growth while you are alive and pays out tax-free on death to your named beneficiaries (or estate).

If maximizing the size of your estate is important, then you should consider an estate equalization strategy”.

With this strategy, you increase the size of your total final estate by moving surplus funds, which may be currently exposed to tax, into an exempt permanent life insurance policy.

You can potentially reduce the amount of taxes payable during your lifetime, avoid associated probate fees on the death benefit amount and create a larger pool of tax-free money at death, thereby maximizing your estate values.

As you can see, life insurance is an important financial tool, with unique tax benefits, used by many affluent Canadians, particularly when looking to optimize their overall estate plan.

Passing the family cottage

The family cottage can be the most coveted, yet challenging part of many people’s estate plans.

Many family members will have countless memories at the cottage built up over many years, if not decades, and can’t imagine the idea of losing it when the primary owner passes away.

At the same time, the tax consequences of passing the cottage on at the time of death can be substantial. And if these taxes are not properly planned for, the surviving family members may not have a choice.

While each situation is different and a proper estate plan should be tailored accordingly, here are a few of the key items to consider:

Tax liability

Many people do not realize that the increase in value of their vacation property from the time of purchase may be taxable to their estate when they pass. At the time of death, there is a “deemed disposition” of all of a person’s assets, unless they are transferred to their spouse or common-law partner.

A deemed disposition means that your assets are deemed to be sold for fair market value. So, if you purchased the family cottage 25 years ago for $150,000 and its fair market value today is $750,000, your death would trigger a $600,000 capital gain.

Principal residence exemption

One possible way to reduce or eliminate the tax liability on your cottage is to designate it as your principal residence for tax purposes.

If you do this for the entire time you own the cottage, the increase in value would not be taxable.

There is a catch however — you can only claim this on one property, so if you do this for your cottage, it means the gains on your primary home would end up being taxable.

And before you ask, no you can’t claim your cottage and have your spouse claim your other house in the same year(s).

Adjusting the cost base

Another way to reduce the tax bill owing is to adjust the cost base (purchase price) with any additional money you put into the property.

While you cannot claim “sweat equity” for work you perform, you can increase the cost base by any out-of-pocket expenditures.

You would want to make sure this was money actually put into the improvement of the property and be sure to keep all receipts!

Planning for the taxes

There are a number of ways to prepare for this tax bill so that you can ensure the property won’t need to be sold upon your death to cover them. Some estates will have sufficient cash flow to do so and others may plan to cover the bill with an insurance policy.

In some cases, the children who will inherit the cottage choose to pay for the insurance premiums to ensure they are able to keep it.

Confirming the interest

Often, one or more of your children may not be as interested in carrying on with the property as their siblings. This is important to discover early, so that you can build this into your estate plan.

You can easily accommodate this by “equalizing the estate” if you plan for it. For example, one child may receive the cottage and the other is the sole beneficiary of an insurance policy worth a similar amount.

Giving while you are alive

One mistake that some property owners make is to try to escape paying tax by transferring the property to their children while they’re still alive.

This strategy contains many pitfalls and needs to be approached carefully. Not only will this “gift” trigger a disposition and taxes owing at the time, it also opens the property up to your child’s partners and creditors too.

Planning for multiple owners

If the cottage is currently owned by you and your spouse and the plan is to leave it to multiple children (with spouses of their own), you need to consider a co-ownership agreement. Something that stipulates how the property will be used, who will pay for it, how time is divided and how it will be kept.

The very last thing you would want to see is the gift you leave behind driving a wedge between family members.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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