With December upon us, here are a number of tax considerations and deadlines to remember for the 2020 tax year. Please note that December 31 is a Thursday this year.
Payments, Expenses and Other Transactions
1. Tax-Loss Selling
Tax-loss selling entails selling investments with unrealized capital losses before year-end to offset capital gains realized during the year. Any remaining unused capital losses can be carried over to offset capital gains from the three preceding years or in any future year. While this strategy may be advantageous from a tax perspective, ensure that tax-loss selling makes sense from an investment perspective as well.
To ensure that your capital losses can be reported in the 2020 tax year, trades on Canadian securities exchanges must be placed no later than December 29, 2020, as trades typically take two business days to settle. Different dates may apply to foreign exchanges.
Beware of ”superficial loss” rules. The capital loss on an investment will be denied if you buy an identical investment during the period that begins 30 days before and ends 30 days after the sale settlement date and you still own that investment at the end of the period. These rules also apply if the identical investment is purchased by or transferred to your RRSP, RRIF, TFSA, spouse or a company controlled by you or your spouse.
If you are caught by the superficial loss rules, the denied loss amount is generally added to the adjusted cost base of the identical investment purchased, in essence deferring the loss until the ultimate year of disposition.
2. Charitable Donations
The first $200 of annual donations are eligible for a 15% federal tax credit, plus applicable provincial credit (5.06% in BC). The federal donation tax credit increases to 33% to the extent that the individual has taxable income in the highest tax bracket (in excess of $214,368 for 2020). When combined with the applicable provincial tax credit, this portion of the donation could be worth between 47.5% and 54.0%. Otherwise, donations in excess of $200 are eligible for a 29% federal tax credit which, when combined with the applicable provincial tax credit, could be worth between 43.5% and 50.0%.
3. Carrying Charges
Investment-related expenses, such as fees to manage non-registered accounts and charges and interest paid on money borrowed for most investment purposes (other than in registered accounts) must be paid by December 31 to be deductible in 2020.
4. Income Splitting
The deadline to pay 2020 interest on spousal loans is January 30, 2021. This should not be confused with pension income splitting rules which allow recipients of eligible pension income to allocate up to 50% of such income to a spouse or common-law partner, for tax purposes. Eligible pension income includes payments from a registered retirement income fund (RRIF) and life income fund (LIF) where the account holder is 65 years of age or older at the end of the year. It also includes life annuity payments from a registered pension plan at any age.
5. Repayments of Canada Emergency Response Benefit (CERB)
If you received CERB payments that exceeded your entitlement – for example, due to your income while claiming benefits exceeding the limit set per claim period, or due to claiming CERB through both Service Canada and the Canada Revenue Agency (CRA) for the same period – you can repay excess amounts by December 31 to reduce your 2020 T4A slip income amounts and simplify your 2020 income tax filing.
Contributions to Registered Plans
6. Registered Retirement Savings Plans (RRSPs)
The maximum RRSP contribution limit for 2020 is $27,230. If you contribute to a spousal RRSP, making a 2020 contribution by December 31 reduces the income attribution period for that contribution by one calendar year, versus waiting until 2021. If you have a considerable amount of contribution room or if you expect to be in a higher tax bracket in the near future, consider making the maximum contribution this year, but deduct the contribution over multiple years, depending on your expected taxable income and credits.
7. RRSP Contributions After Age 71
Although you can no longer contribute to your own RRSP after December 31 of the year in which you turn 71, you can contribute to a spousal RRSP if you still have contribution room and your spouse or common-law partner is not older than 71 in the year of contribution.
8. Tax-Free Savings Accounts (TFSAs)
There is no deadline for TFSA contributions. You must reach the age of majority (19 in BC) to open an account; however, the accumulation of contribution room starts at age 18. Unused contribution room is carried forward to future years.
If you were eligible for a TFSA in every year since 2009 but have never contributed to one, you may have up to $69,500 in TFSA contribution room available for 2020.
If you plan to withdraw from TFSAs in the near future, consider making the withdrawal in December 2020, rather than in 2021. Since TFSA withdrawals increase your contribution room the following calendar year, this will enable an early re-contribution, as early as January 1, 2021, rather than having to wait until 2022.
9. Registered Education Savings Plans (RESPs)
The federal government provides a 20% Canada Education Savings Grant (CESG) of up to $500 annually ($1,000 annually, if catching-up past unused CESG room) for beneficiaries age 17 or younger at the end of the calendar year, up to a lifetime limit of $7,200 per beneficiary.
If your child turned 15 in 2020 and you have not contributed a minimum of $2,000 or at least $100 per year in any four years to the RESP, then December 31, 2020, is your last chance to contribute enough funds to maintain CESG eligibility on future contributions in 2021 and 2022 (ages 16-17).
The enhanced CESG (eCESG) is available to moderate-income families on the first $500 of annual contributions. Since eCESGs cannot be carried forward, contribute by December 31, if eligible.
10. Registered Disability Savings Plans (RDSPs)
RDSPs are tax-deferred savings plans that you can use to help provide long-term savings for an individual who is eligible for the disability tax credit. Lifetime contributions of up to $200,000 can be made by anyone until the beneficiary turns 59, but the contributions are not tax deductible.
The federal government provides assistance in the form of Canada Disability Savings Grants (CDSGs) and Bonds (CDSBs) until December 31 of the year in which the beneficiary turns 49:
- CDSGs up to $70,000 are provided on a matching basis, based on the contribution amount and the beneficiary’s family income, subject to annual limits.
- CDSBs up to a lifetime limit of $20,000 are provided to low-income beneficiaries. No contributions are required to receive the bond, subject to annual limits.
Interested persons should consider opening/contributing to an RDSP by December 31 in order to receive government assistance for the current year and up to 10 previous calendar years, particularly if the beneficiary is age 49 by December 31, 2020.
Odlum Brown Financial Services Limited is a wholly owned subsidiary of Odlum Brown Limited, offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.
The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. Many factors unknown to Odlum Brown Financial Services Limited may affect the applicability of any matter discussed herein to your particular circumstances. You should consult directly with your financial advisor before acting on any matter discussed herein. Individual situations may vary.