1. Contributing into RRSP to Reduce Tax Liability

RRSP contributions are tax deductible - they can be claimed as a deduction from income in the same year or may be carried forward and claimed as a deduction in a future year, depending on your expected income level. In the example noted above, if RRSP contribution of $5,000 is made by March 1, 2021, it can result in tax savings of $2,000 for 2020. For effective tax planning, you must consider not only your income level but also the income sources during the year to calculate the optimal amount of RRSP contribution for that year.

2. Income Splitting through Spousal RRSP

Splitting income with the low-income spouse can reduce taxable income and marginal tax rate of the high-income spouse. Spousal RRSP lets you contribute into your spouse’s RRSP, so that income, upon retirement, is split between the spouses and your combined taxes are lower than what you alone would have paid if the entire amount were received by you.

You must consider the following with a spousal RRSP:

• If you contribute into your spouse’s RRSP, you are the one who will claim this contribution as a reduction of your income in the same year or in a future year. This works out well if you were the high-income spouse.
• Your RRSP deduction limit is reduced by your contribution into spousal RRSP. For example, if your RRSP deduction limit for 2020 is $15K and you put $6K into spousal RRSP, you have the balance of $9K to contribute into your RRSP or leave unused.
• Your contribution into spousal RRSP must not be withdrawn for at least 3 years. If a withdrawal is made by the spouse within 3 years, it is added to your taxable income and not your spouse’s.
• You cannot contribute into your RRSP after the end of the year in which you turn 71. But you can still use your RRSP deduction limit to contribute into spousal RRSP until your spouse turns 71. This is particularly useful in reducing overall taxes if you are over 71 and still earning and your spouse is in a lower income tax bracket.

3. Using RRSP as a First-Time Home Buyer

Withdrawals from RRSP are taxable in all cases except two. One of these exceptions is the Home Buyers' Plan (HBP) that allows you to withdraw tax-free funds of up to $35,000 from RRSP to buy a home for yourself or for a related person with a disability. This opens up an effective tax planning opportunity, whereby you reduce taxes in each of the years that you contribute into RRSP and then access the accumulated funds ahead of your retirement and without any immediate tax implication. You have up to 15 years to repay the amounts that you have withdrawn from your RRSP under the HBP.

Unless you are a person with a disability or you are helping a related person with a disability buy a home, you must be a first-time home buyer to withdraw funds under the HBP. A first-time home buyer does not mean that it is the first ever home that you are buying as a principal residence. Instead, you qualify if, at any time in the previous four years, you did not live in a home that you owned or that your current spouse or common-law partner owned.

4. Using RRSP for Post-Secondary Education

Another way to withdraw tax-free funds from RRSP is through the Lifelong Learning Plan (LLP) whereby you can take out up to $10,000 in a year, and up to $20,000 in total, for your or your spouse’s full-time technical or vocational training or post-secondary education. LLP can be used toward part-time education if the student has a disability. Repayments to RRSP under the LLP is done over a 10-year period.

Contributing into RRSP for subsequently withdrawing those funds under LLP can be an effective tax planning tool for individuals who are currently in a low-income bracket and are pursuing further studies. For example, if you are a college student with a part time job, you can contribute into RRSP but can decide to forego deduction from your taxable income in the current year since your marginal tax rate is already low. You can carry forward the un-deducted contribution and use it in a later year when your income level has gone up, while in the meantime having used the LLP to partially fund your education.

5. Final RRSP Contribution

The final RRSP contribution must be made up to December 31 of the year in which you turn 71, by which time RRSP must be either withdrawn or transferred into RRIF or an annuity. If you are working during the year when you are 71, you will have RRSP deduction limit for next year, but you will not be allowed to contribute into your RRSP at that time. A tax planning opportunity arises here - you can estimate your RRSP deduction limit for next year and make a final contribution into RRSP in December of the year in which you turn 71 before it is converted into RRIF or annuity. CRA will charge 1% penalty on the over-contribution for one month only, but you will potentially have a larger tax saving by deducting RRSP contribution from your income for next year.

Choose Wisely

Tax planning cannot follow a ‘one size fit all approach’. You need to be careful in deciding which tax planning strategy works best for you and choose the optimal combination that can help reduce taxes. The options that have been discussed here are meant for general information only, and you must obtain professional advice in deciding which tax planning strategy would work in your particular situation. 

1. Contribute into a Registered Retirement Savings Plan (RRSP)

Putting money into RRSP gets you a deduction from the total income that lowers the amount of tax payable for the year. Income received within RRSP remains tax-free, but tax is applied when you withdraw funds from RRSP. Essentially, RRSP is a retirement savings vehicle since it allows you to defer taxes on contributions into RRSP and on your earnings until retirement, at which time you pay tax based on the applicable marginal rate. Most people are usually in a lower tax bracket after retirement; hence, the tax rate is likely to be lower than what it would be now. You can also use spousal RRSP for tax planning when the spouses are in different tax brackets.

2. Invest into a Tax-Free Savings Account (TFSA)

TFSA provides a tax-free option to earn investment income, such as interest, dividends, and capital gains. Money deposited into a TFSA can grow on a tax-free basis, and no tax is payable when you withdraw that money or your earnings. TFSA provides an effective tax planning tool for low- and modest-income earners since they can earn investment income within TFSA without reducing or becoming disqualified for government benefits and credits that are linked to their income level. Another way TFSA can be used in tax planning for individuals is for a high-income spouse to gift money to a low-income spouse to contribute into the spouse’s TFSA or for a parent to gift money to a child who is at least 18 years old for contributing into the kid’s TFSA.

3. Give Charitable Donations

Giving is a joy in itself! You can double the joy by claiming charitable donation tax credit to reduce your tax liability. The federal tax credit is 15% on the first $200 of donations to registered charities and then at a much generous level of 29% on additional donations in a year. The tax credit can reach 33% if you are in the highest tax bracket. In tax planning for individuals, unused charitable donations may be carried forward for up to five years so that the tax credit can be claimed in a later year when taxable income is higher than usual. You can also share charitable donations with your spouse to enable the higher-income spouse to reduce the tax bill.

4. Income Splitting

Splitting income with the low-income spouse can reduce taxable income and marginal tax rate of the high-income spouse. Income splitting needs to be approached with caution to ensure that tax reduction arrangements are not subject to tax on split income (TOSI) rules, attribution rules or otherwise inconsistent with the intent of law. Despite the scrutiny, certain income splitting opportunities remain available for the benefit of taxpayers. These include the spousal RRSP and TFSA arrangements noted above as well as the opportunity to transfer dividend income to a spouse, lending money to spouse for investment, and pension income splitting. Each arrangement comes with its set of rules and caveats that must be considered for effective tax planning.

Choose Wisely

The above-mentioned ways are just a few of the many different techniques one can use for effective tax planning. Tax planning cannot follow a ‘one size fit all approach’. You need to be careful in deciding which tax planning strategy works best for you and choose the optimal combination that can help reduce taxes. Depending on your circumstances, it may be useful to obtain professional advice for tax planning that caters to your specific situation.

The Government has introduced a temporary wage subsidy for eligible employers to reduce their payroll cost over a three-month period during the ongoing economic downturn induced by COVID-19. Let’s call it the 10% wage subsidy (to distinguish it from the 75% wage subsidy also announced by the Government).

This is how the 10% wage subsidy will work.

1. Who is an eligible employer?

Only the following employers having an existing business number and payroll program account with CRA as on March 18, 2020 are eligible to claim the 10% wage subsidy:

• a non-profit organization,
• a registered charity,
• a sole proprietor;
• a partnership; or
  
• a corporation that has a business limit greater than nil (and determined without reference to passive income business limit reduction) for small business deduction for its last taxation year that ended before March 18, 2020.
  

Partnerships are only eligible for the subsidy if their members consist entirely of individuals (excluding trusts), registered charities, other partnerships eligible for the wage subsidy, or CCPCs eligible for small business deduction.

2. Which payments qualify for 10% wage subsidy?

These would be salary, wages, bonuses, or other remuneration paid by an eligible employer to an eligible employee (i.e. an individual employed in Canada) between March 18, 2020 and June 19, 2020.

If no remuneration has been paid between March 18, 2020, and June 19, 2020 – for example, if employees have been dismissed or they are on unpaid leave over this period – there is no entitlement to wage subsidy, even if the employer otherwise qualifies as an eligible employer.

3. How much subsidy can be claimed by an eligible employer?

The subsidy is equal to 10% of remuneration paid by an employer over a three-month period starting March 18, 2020, up to $1,375 per eligible employee and with an overall cap of $25,000 per employer. The calculation is based on the total number of eligible employees employed at any time during the three-month period.

Eligible employers that are associated CCPCs do not share the maximum limit of $25,000. In other words, each employer is entitled to a maximum of $25,000 in wage subsidy regardless of whether or not it is an associated CCPC.

4. How can an employer receive the 10% wage subsidy?

To claim the subsidy, eligible employers will reduce the amount of payroll deductions required to be remitted to CRA by the amount of subsidy they have calculated. Only the income tax portion of payroll tax remittance can be reduced, but not the CPP contributions or the EI premiums.

The 10% wage subsidy can only be claimed against payroll tax remittances to CRA, and not against those made to Revenu Québec by QC-based employers.

5. When can the 10% wage subsidy be claimed?

Eligible employers can reduce payroll tax remittance by the amount of subsidy in the first remittance period for salary paid between March 18, 2020, and June 19, 2020. For example, a regular remitter can claim subsidy against payroll tax remittance due to CRA by April 15, 2020.

Alternatively, an eligible employer that does not reduce its payroll tax remittance to CRA in 2020 may ask CRA that 10% wage subsidy on remuneration paid between March 18, 2020, and June 19, 2020 be paid to the employer at the year-end or transferred to its payroll account for 2021. CRA will require eligible employers to fill out a self-identification form, that will be published in the coming months, to credit their payroll program account by the amount of the subsidy.

6. Can an eligible employer reduce payroll tax remittance to CRA for salary paid after June 19, 2020?

Yes, this is possible if the income tax remittance for salary paid between March 18, 2020, and June 19, 2020 is not adequate to cover the amount of 10% wage subsidy which the employer is entitled to claim. For example, if you have calculated a subsidy of $5,000 on remuneration paid between March 18, 2020, and June 19, 2020, but have only deducted income tax of $3,250 from salaries paid to employees, you can reduce future income tax remittance by $1,750 even though such remittance is in respect of salary paid after June 19, 2020.

7. Does 10% wage subsidy affect net salary calculation for employees?

No, it doesn’t. An eligible employer will continue to deduct income tax, CPP contributions, and EI premiums from gross salary earned by employees in the same manner as before. It’s only when these deductions are to be remitted to CRA that the employer may reduce the income tax portion by the amount of subsidy and remit the balance to CRA.

8. Can an employer paying tax-exempt remuneration claim the 10% wage subsidy?

Yes, wage subsidy is available for remuneration paid from March 18, 2020 to June 19, 2020, even if all or part of this remuneration is tax-exempt. The eligible employer will, in this case, ask CRA to pay the amount of subsidy at the end of 2020.

9. How does the 10% wage subsidy affect an employer’s claim for the 75% Canada Emergency Wage Subsidy (CEWS)?

Employers who qualify for both subsidies will reduce the amount available to be claimed under CEWS by the amount of 10% temporary wage subsidy that they are eligible to claim, whether or not they have taken advantage of the 10% wage subsidy. CEWS and the 10% wage subsidy are intended to provide total support of up to 75%, not 75% + 10%. This means that the maximum benefit for an eligible employer cannot exceed its entitlement under CEWS.

10. Is the 10% wage subsidy considered taxable income?

Yes, an eligible employer will report the subsidy as income in the year in which it has been received.

11. What recordkeeping should eligible employers maintain?

Employers will need to keep information to support subsidy calculation. This includes:

•  the total remuneration paid from March 18, 2020 to June 19, 2020;
• the income tax that was deducted from that remuneration; and
• the number of eligible employees employed in that period.

CRA is currently updating reporting requirements and will provide more information on how to report this subsidy.

J-MAK CPA team

1. You are thinking about incorporating your business

This is a good starting point for a conversation with a small business accounting firm. Incorporation may not make sense in every situation and it’s a good idea to obtain professional advice before you decide to incorporate your business. A business accountant can guide you on the legal structure that you may adopt and tax planning opportunities that may be available to you.

2. You have hired employees

As an employer, you are responsible for complying with the requirements of different government agencies, particularly the CRA and the provincial Workers’ Compensation Boards. A small business tax accountant can help you comply with these various requirements and keep you up to date if the requirements change.

3. You want to maximize deductions against business income

You are entitled to deduct certain expenses in calculating your taxable business income, but other expenses are only partly deductible while some are fully inadmissible. A business accounting firm can help identify which expenses to charge against business income to save taxes in a legal and optimal manner.

4. You are not familiar with sales tax regime

As a new business owner, you need to decide if and when you need to register for sales tax. The requirements for sales tax registration, collection and reporting vary across Canada. A small business tax accountant can help you manage the complexities of sales tax applicable in your specific situation.

5. You don’t know how to draw money from your corporation

There can be different avenues for you to draw money from the corporation, with each option having different tax implications for the corporation and you. With suitable professional advice from a small business tax accountant, you can draw an optimal amount from the corporation for your personal use with (hopefully) minimum tax burden.

6. You have personal income from different sources and are looking to save taxes

No one likes paying more taxes than they must. If you are already a high earner (maybe you have a salaried job and/or have investment portfolio), the addition of business income to your current income sources may push your taxes through the roof. You may benefit from tax planning strategies that a business accounting firm can help you implement.

Splitting income with spouse and other family members is subject to complex rules and requires careful tax planning. With the expertise of a small business tax accountant, you can create legitimate opportunities to split income and reduce taxes as a result.

8. You do not pay attention to bookkeeping

You may have a general aversion to numbers or you may not have enough time to devote to bookkeeping. Regardless, maintaining up to date books for your business is essential for timely compliance with tax filing requirements and, more importantly, is critical for you to evaluate the direction that your business is headed. A business accounting firm can guide you in setting up bookkeeping in Cloud, train you to do bookkeeping inhouse, or maintain it for you as an outsourced service.

9. You need a bank loan

A business accountant can be useful in putting together a bank loan application. Bankers often require business plan, including financial projections of your business for the next few years. While you may have a fair idea about business growth expectations over the following years, a business accountant can select objective assumptions, given the industry dynamics and your potential for growth, and explain to the lender how you meet the qualifying criteria.

If you find yourself in any of these situations and have not yet engaged an accounting firm, it may be time for you to start looking for one. Engaging the right accountant is critical to help you run and grow your business without stressing about your finances and taxes.