The Thursday, April 30 tax filing deadline for individuals is coming up fast. Here’s a summary of new limits, new rates, tax changes and new services.
Tax filing season is upon us, and the first thing to note is the filing deadline: Thursday, April 30. For business owners and their spouses, the tax return due date is Monday, June 15. That said, any tax payments are due by the April 30 individual filing deadline.
Below, we list changes to limits, rates, tax credits and Canada Revenue Agency (CRA) services that may affect your clients and their tax returns.
Update as of March 18th:
The COVID-19 economic stimulus package announced on March 18, 2020 has resulted in the following changes to the above noted filing deadlines for 2020:
- Individual income tax returns are due June 1, 2020;
- Income tax returns for Trusts with a December 31st tax year are due May 1, 2020;
- Businesses will continue to have an income tax return filing deadline of June 15, 2020; and
- Taxes that become payable, including GST and installment payments, from March 18 to August 31 are deferred until September 1, 2020.
- Additionally, reducing the required RRIF minimum withdrawals by 25% for 2020. The move comes in response to the financial impact of volatile market conditions on seniors’ retirement savings.
New limits and rates
Tax-Free Savings Account (TFSA) limit
The TFSA contribution limit remains unchanged at $6,000 for 2020. Total cumulative annual TFSA contribution room allocated since 2009 is $69,500.
Registered Retirement Savings Plans (RRSPs)
The RRSP dollar limit is $27,230 for 2020. As a refresher, an individual’s 2020 RRSP contribution room is the lesser of 18% of his or her prior year’s earned income and the RRSP dollar limit for 2020 ($27,230). An individual’s RRSP deduction limit for 2019 appears on his or her 2018 Notice of Assessment and online through the CRA’s My Account.
Budget 2019 introduced measures to allow RRSP and RRIF annuitants to purchase a greater array of annuity products beginning in 2020. The goal is to give individuals additional flexibility in managing their retirement savings.
Canada Pension Plan (CPP) enhancement
Budget 2018 included significant changes to the CPP. Dubbed the “CPP enhancement,” the changes increase CPP contributions gradually over seven years, starting in 2019 and ending in 2025. In 2019, the CPP contribution rate increased from 4.95% to 5.10% for employees and employers and from 9.90% to 10.20% for self-employed individuals. In 2020, the CPP contribution rate increases from 5.10% to 5.25% for employees and employers and from 10.20% to 10.50% for self-employed individuals. By 2023, each employee will be contributing at a rate of 5.95%, with matching employer contributions, for total CPP contributions of 11.90% on actual pensionable earnings up to the Yearly Maximum Pensionable Earnings (YMPE) limit for the year. Another change will have a higher ceiling for earnings where contributions will be required. This higher ceiling will be called the Yearly Additional Maximum Pensionable Earnings (YAMPE) and will be phased-in over two years starting in 2024 and ending in 2025.
Tax changes and new services
Under the Home Buyers’ Plan (HBP), a first-time home buyer may withdraw up to $35,000
from an RRSP to purchase a qualifying home that he or she intends to occupy as a principal
residence. A couple who both qualify can withdraw up to $70,000. A “first-time home buyer” is a Canadian resident who has not occupied a home owned by himself/herself or his or her spouse/common-law partner as a principal place of residence during the past four full calendar years.
The repayment period for HBP participation starts the second year after the year of the HBP withdrawal. That means 2017 HBP participants must repay, or include as income, the minimum HBP amount in 2019. The first 60 days of 2020 may be used to facilitate the 2019 HBP repayment. Additionally, Budget 2019 enhanced flexibility for individuals seeking to participate in the HBP after a marriage breakdown.
Climate action incentive for residents in small and rural communities
This is a basic amount plus a 10% supplement for residents of small and rural communities. Eligibility is based on one claim per family and only applies to residents of Alberta, Saskatchewan, Manitoba and Ontario. The incentive reduces taxes payable or increases the income tax refund. Make the claim on Schedule 14 when filing the income tax and benefit return.
Though not new for 2019, recall that transacting in digital currencies results in tax implications that are reportable on the income tax and benefit return. The tax outcome of the transaction depends on the nature of the activity and the activity itself. Generally, however, an investor who trades digital currencies (or cryptocurrencies) can expect tax treatment similar to an investor who trades commodity-like securities.
CRA email changes
On February 11, 2019, the CRA launched an improved email notification service that allows taxpayers to receive email notifications about important changes to their accounts. Examples include address changes or changes in direct deposit information. Email notifications allow taxpayers to monitor their accounts and help keep their information secure.
Cannabis as a medical expense
The cost of medical marijuana and cannabis products for medical purposes may qualify as a medical expense if legally purchased after October 16, 2018 and if it otherwise meets the conditions for a claim. Eligibility is primarily based on having a medical document provided by a health care practitioner to support the use of cannabis for medical purposes and making the purchase through a licensed cannabis retailer.
Private corporation tax changes
Passive investment income and the small business deduction
Recall that active business income is taxed at favourable low rates, generally resulting in a private corporation’s after-tax income being greater than if that income were earned and taxed at the individual tax rates. This difference was the deferral advantage, as more after-tax proceeds are available to accumulate passive investments within the private corporation.
Initial reforms called for a limit ($50,000) to which a private corporation could earn passive investment income without running afoul of a set of punitive tax rules. A new measure targets the deferral advantage that private corporations enjoy on the first $500,000 (federally) of active business income and applies to taxation years starting after 2018.
The measure reduces the small business deduction available for private corporations having between $50,000 and $150,000 in passive investment income. Private corporations are only affected if their business income exceeds the calculated reduced business limit. Provided that the calculated reduced business limit remains above actual active business income, there will be no impact to the private corporation, and all active business income will be taxed at the small business tax rates.
The rules reduce the small business deduction by $5 for every $1 of investment income above $50,000, with a complete elimination of the small business deduction when passive investment income reaches $150,000.
A corollary measure introduces changes to the refund dividend tax on hand (RDTOH) account. Now two separate accounts are tracked: the eligible RDTOH and the ineligible RDTOH. The refundable corporate tax mechanism will also change based on the ordering rules and the type of passive investment income generated.
Tax on split income (TOSI)
The tax on split income (TOSI) rules are designed to limit the tax advantages that may otherwise be gained by income sprinkling through various family business operations to immediate family members. The rules are complex and impose a top tax rate to the recipient of the income (generally in the form of dividends) instead of the individual’s actual (presumably) lower tax rate. The TOSI rules have exceptions; however, careful analysis is needed to ensure one of the exemptions applies. TOSI rules apply to 2018 and subsequent tax years.
Upcoming changes in 2020
Future increase to the basic personal exemption amount
Although not a change for the 2019 income tax filing year, there will be an increase to the basic personal exemption amount (BPA) starting in 2020. When fully implemented by 2023, the BPA maximum claim will be $15,000. There will be an income test and clawback to ensure higher income earners cannot access the higher BPA amount. In essence, this will be a claimable amount in addition to the regular indexed BPA ($12,298 in 2020). The additional claimable amount will be clawed back when income is in excess of the bottom of the fourth tax bracket ($150,473 in 2020) and will be nil when income reaches the bottom of the fifth tax bracket ($214,368 in 2020).
Proposed changes affecting employee stock options
There are proposals to cap the deduction that is available on stock options, similar to rules in place in the United States. The proposals will place an annual limit of $200,000 on the deduction against the taxable stock option benefit (generally limited to 50% of the calculated stock option benefit) that may be taken from income; however, this limit is not intended to apply to start-ups, emerging and scale-up Canadian businesses. The deduction permits the stock option benefit (fully included as income) to receive treatment similar to capital gains. The proposals were scheduled to come into force in 2020, but have been postponed.