As 2021 draws to a close, we turn our attention to end-of-year tax planning. Consider these year-end tax tips for investors, along with some information on the most recent promises made by the re-elected Liberal minority government.
- Tax tips related to COVID-19
- Tax tips for long-term investors
- Tax tips for families
- Tax tips for people with disabilities
- Tax tips for home buyers and sellers
- Tax tips for retirees and seniors
- Tax tips for TFSA holders
- Enhanced disclosure requirements
- Tax reporting reminders
- Liberals’ election platform: Potential future tax changes
Understand deductibility of home office expenses for full-time salaried employees
Firstly, the 2021 Liberal campaign election proposed to extend the home office expense deduction (described below) for an additional two years through to 2022 including an increase to the amount by $100 to $500 from $400 (under the simplified flat rate method).
For some background on the home office expense deduction, many non-essential employees had been forced to work from home on a full-time basis due to COVID-19. As a result, many employees have had to personally invest funds to create a suitable home office. To deduct initial and ongoing costs of working from home for tax purposes, specific conditions must be met, particularly for the 2020 and 2021 tax year:
- The employee must pay for their own supplies, office rent or salary to assistants as required by the contract of employment
- The employee must not have received or be entitled to a reimbursement of expenses
- The expenses must be reasonably regarded as applicable to earning employment income
- Supplies must be consumed directly in the performance of the employee’s employment duties
In addition, the home office workspace itself must fit within one of the following two conditions:
- The home office workspace is where the employee principally performs their duties
- The home office workspace is used exclusively for the purposes of earning the employee’s employment income on a regular and continuous basis as a means to meet customers or clients in the course of performing their office duties
To claim a deduction for home office expenses, the employee must submit Canada Revenue Agency Form T2200, Declaration of Conditions of Employment, with their tax return. Residents of Quebec must also submit Form TP-64.3-V, General Employment Conditions, completed by the employer, with their Quebec provincial tax return and Form TP-59-V, Employment Expenses of Salaried Employees and Employees Who Earn Commissions, or a detailed statement that identifies the expenses.
Note that any unused expenses cannot be carried forward and deducted in a future year. Eligible expenses include typical office supplies such as stationery items, toner, stamps and ink cartridges, as well as light bulbs and cleaning supplies. Additional deductions are permitted for homes that are rented in respect to the office space for the proportional expenses paid for maintenance, minor repairs, gas and electricity.
To be eligible for deduction, home office expenses must not be reimbursed by the employer. Keep in mind that if expenses are reimbursed, they are generally not considered taxable benefits if they are considered reasonable and necessary to perform the employee’s duties.
In making this determination, if the benefit of the expense is primarily for the employee, and it can be measurable or quantifiable, it will be a taxable benefit to the employee. If the benefit is primarily for the employer, it will not be considered a taxable benefit to the employee.
Additionally, when expenses have both a personal and business component, there must be a reasonable allocation to those expenses attributable for employment use and, therefore, eligible for deduction as long as they meet the above eligibility conditions. When home office costs have been reimbursed but relate to a reimbursement of costs that is traceable for personal use, that part of the reimbursement is considered a taxable benefit.
Note: the CRA implemented a simpler method to claim home office expenses due to COVID-19, known as the “temporary flat rate method” in 2020. Although the deductions would have been claimed for home office expenses incurred in 2020, a similar provision may apply towards expenses incurred in 2021 and 2022 based on the Liberals proposal. For more information, including eligibility conditions, please refer to the Invesco Tax & Estate InfoService blog, titled “Canada Revenue Agency makes it simpler to claim home office expenses due to COVID-19.”
Tax tips for long-term investors
Weigh the pros and cons of capital gain/loss selling
Investors with realized capital gains this year or in any of the preceding three years (back to 2018) can apply net capital losses realized this year against those gains. To realize capital gains and losses in 2021, trades must be executed by Wednesday, December 29, to ensure settlement by Friday, December 31, the last business day of 2021.
Remember, the year a disposition occurs for tax purposes is based on the settlement date and not the trade date. Give special attention to trades executed within the calendar year but settled in the following calendar year. These trades may appear on the relevant tax slips (e.g., T5008) and statements, but are technically reportable in the year of settlement.
Historically, the capital gains inclusion rate was 66 2/3% from January 1988 to the end of calendar year 1989. It was last seen at 75% between January 1990 and February 27, 2000. It decreased to 66 2/3% on February 28, 2000, and set to the current 50% inclusion rate after October 17, 2000. Before January 1972, capital gains were not subject to tax. Individuals should consult with a qualified tax professional who can help them implement any planning strategies.
Pay investment expenses and make charitable donations before year-end
Eligible expenses incurred to earn investment income must be paid by Friday, December 31, 2021, to be deductible for 2021. Eligible expenses may include interest and investment advisory fees. To give clients an opportunity to deduct investment advisory fees for services rendered this year, advisors should send invoices with enough time to allow clients to make payments before the end of the year.
Individuals considering making a charitable donation through cash or donating securities in kind should do so by Friday, December 31, 2021 if they wish to claim the donation tax credit in the 2021 tax year.
From a federal income tax perspective, the first $200 of donations for the year allows an individual to claim a 15% non-refundable tax credit. Donation amounts in excess of $200 enable an individual to apply a federal tax credit towards taxes payable: 29% if income is below $216,511 (for 2021) and 33% if income exceeds $216,511.
That said, charitable donations can be carried forward to any of the next five years, or to any of the next 10 years for a gift of ecologically sensitive land made after February 10, 2014. Therefore, individuals do not have to claim the donation tax credit on their income tax return for the current year. For more information, please refer to our Tax & Estate InfoPage, Planned charitable giving.
Track the adjusted cost base (ACB) on investments and note transactions that nullify losses
Investors are responsible for keeping track of their own ACB. Be aware that certain transactions can affect the ACB without necessarily being tracked by the financial institutions that hold the investments.
Return of capital (ROC) distributions, which represent principal paid back to investors, are not taxable but instead reduce the ACB of the investment by the amount of the distribution. After ROC distributions reduce the ACB to nil, additional ROC distributions are taxable as capital gains in the year they are received.
“Phantom distributions” (sometimes referred to as “notional distributions”), which are distributions from exchange-traded funds (ETFs) that do not result in the issuance of more units or a change in the net asset value (NAV) of the units, may increase the ACB.
Phantom distributions do not give the investor any tangible cash payments but are taxed in the year they are received just like regular distributions. If investors do not correctly account for this by increasing the ACB by the amount of the distribution, they risk being taxed twice on the same amount when they redeem.
Certain capital losses may be “deemed to be nil” and cannot be claimed. An in-kind transfer from a non-registered plan to a registered plan – for example, a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) – results in a disposition for tax purposes. Any capital gains are taxable and any capital losses are denied.
As a reminder, this provision that denies the loss is separate and distinguishable from the superficial loss rules discussed below. Keep this in mind if funding RRSP or TFSA contributions by way of an in-kind transfer of securities from a non-registered account.
In addition, beware of the superficial loss rules. A capital loss realized on a property that is disposed of and repurchased (by the same investor or an affiliated person) within 30 days before or after the disposition is considered a superficial loss if that same or identical property continues to be held after this period. The amount of the loss is added to the property’s ACB.
The same rule applies to a property acquired by a company controlled by the investor or an affiliated person or a trust for which the investor or the investor’s spouse/common-law partner is a majority interest beneficiary. It is possible to avoid a superficial loss by not acquiring an “identical” property. Two properties are generally considered identical if they are the same in all material respects and an individual would be indifferent to owning one property over the other. For more information, including a discussion of planning strategies, please refer to our Tax & Estate InfoPage, Capital loss planning.
Consider prescribed rate spousal loans
The current prescribed rate on spousal loans is 1%, and this remains in effect for the duration of the term of the loan. The 1% prescribed rate loan was effective starting July 1, 2020.
Spousal loan arrangements permit individuals who have a higher tax rate to split income with individuals who have a lower tax rate. If set up properly, the prescribed rate in effect at the time of entering spousal loan arrangement will endure throughout the arrangement despite any changes to the prescribed rate. Payment of the accrued interest expense is due by January 30 of the following year to preserve eligibility for deductibility (for the paying spouse) and to avoid the spousal attribution rules. Also remember that the interest must be included as income for the lending spouse.
Tax tips for families
Maximize grants on Registered Education Savings Plan (RESP) contributions
Government grants on RESP contributions depend on the age of the beneficiary. The maximum amount of the basic Canada Education Savings Grant (CESG) that can be received on RESP contributions made in a beneficiary’s name in a given year is $1,000. The maximum CESG that can be received in a child’s lifetime is $7,200. To ensure the maximum CESG amount is received, contributions in a child’s name must begin no later than age 11. In addition, a minimum amount of contributions must be made before a child reaches age 16; otherwise, contributions made while the child is 16 or 17 will not be eligible for the CESG.
For more information, please refer to our Tax & Estate InfoPage, Registered Education Savings Plans.
New Canada Learning Bond (CLB) application rules
For children born on or after January 1, 2004, the CLB provides lower income families with the support needed in order to help start saving for their child’s post-secondary education. Eligibility is linked to the Canada Child Benefit (CCB), which is subject to adjusted net family income and the number of children the primary caregiver has. No contribution is required to receive the CLB. Families of up to three children may be eligible for the CLB if their adjusted net family income is less than or equal to the lowest income tax threshold ($49,020 in 2021). Families with more than three children may be eligible for the CLB if the adjusted net family income is less than the amount determined by a formula. The CLB amount is paid into an RESP with the authorization of the primary caregiver, and does not affect RESP contribution limits.
Children are eligible to receive the CLB from birth, so it is generally advantageous for parents to apply right away. In situations where parents delay their applications, the government accrues the CLB payments without interest until an application is made, providing an opportunity for the recovery of outstanding payments.
As of January 2018, the primary caregiver, or their cohabiting spouse or common- law partner, may request the additional CESG and/or the CLB. The primary caregiver or their spouse or common-law-partner’s SIN and written consent must be provided in the government application for beneficiaries under 18.
An application for outstanding CLB amounts can be made up to the beneficiary’s 21st birthday. However, if a successful application has not been made before the beneficiary’s 18th birthday, the CESG and CLB application form (ESDC 0093) is no longer applicable. The beneficiary, from age 18 to 20, must apply for the CLB for their own Individual RESP or provide their consent to the subscriber of an existing eligible RESP.
Effective January 1, 2022, a new CLB application form (ESDC SDE 0107) must be used by an adult beneficiary who is between 18 and 20 to apply for any outstanding CLB. When the adult beneficiary is not the RESP subscriber, subscriber authorization to request the CLB is required. Please reach out to an Invesco Client Relations representative for more information on this prior to pursuing this option.
Tax tips for people with disabilities
Take advantage of Registered Disability Savings Plans (RDSPs) and the medical expense tax credit
People who claim the disability tax credit (DTC) may also make use of RDSPs. These plans offer strong incentives for saving, including the opportunity to shelter investment income and growth from tax and the potential to attract free government bonds and matching government grants.
Those bonds and grants are available only until the end of the year in which the beneficiary turns 49, but personal contributions may be made until the end of the year in which the beneficiary turns 59. The maximum lifetime contribution limit is $200,000. There are no annual limits on contributions.
The 2018 federal budget extended to the end of 2023 the temporary measure that allows a family member (i.e., a parent, spouse or common-law partner) of the beneficiary to be a plan holder. Individuals can claim the medical expense tax credit on eligible expenses incurred for any 12-month period ending in the taxation year. For 2021, the amount individuals can claim federally is the total of all medical expenses exceeding the following two amounts: 3% of net income and $2,421. An equivalent provincial/territorial credit may also be available.
Home buyers and sellers
Make required Home Buyers’ Plan (HBP) repayments
Under the 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 themselves or their spouse/common-law partner as a principal place of residence during the past four full calendar years. For more information on the HBP, please refer to our Tax & Estate InfoPage, Home Buyers’ Plans (HBPs).
The repayment period for HBP participation starts the second year after the year of the HBP withdrawal. That means 2019 HBP participants must repay, or include as income, the minimum HBP amount in 2021. The first 60 days of 2022 may be used to facilitate the 2021 HBP repayment.
Additionally, the 2019 federal budget enhanced flexibility for individuals seeking to participate in the HBP after a marriage breakdown. For more information on this development, please see our Tax & Estate Matters article “Recent changes related to the Home Buyers’ Plan (HBP)” (please contact our Client Relations department to obtain a copy of this article if you are interested).
An individual who acquired a home during the calendar year and is considered a first-time home buyer may claim a non-refundable tax credit under the “Home buyers’ amount” of $5,000 (equivalent to a value of $750) on their income tax return for 2021.
Additional support for first-time homebuyers
In addition to the points above, the Liberal party of Canada also proposes to implement some tax changes that aim to ease the burden for first-time homebuyers to afford and purchase their first home. Some of these measures are explained below:
- Introducing a new Rent-to-Own Program, which aims to help renters get on the path towards home ownership while renting. The program will be based on three principles: (1) the landlord must commit to charging the renter a lower-than-market rate in order to allow the renter to build up savings for a down payment; (2) the landlord must commit to ownership in a five-year term or less; and (3) proper safeguards will be in place to protect the future homeowner.
- Introducing a tax-free First Home Savings Account (FHSA) that will allow Canadians under the age of 40 to save up to $40,000 towards their first home, and to withdraw it tax-free to put towards their first home purchase with no requirements to repay it (as with the HBP and LLP). This would effectively combine features of an RRSP and a TFSA.
- Providing more flexibility within the First-Time Home Buyers’ Incentive (FTHBI), which will allow the individual to choose between the current shared-equity approach or a loan that is repayable only at the time of sale. This would allow the individual to keep more of any increase in the value of their home, while still reducing their monthly mortgage costs.
- Doubling the First-Time Home Buyers Tax Credit. Currently, the credit allows an individual to claim $5,000 (resulting in a $750 direct tax bill reduction) if an individual (or the individual’s spouse/common-law partner) acquired a qualifying home, and the individual did not live in another home owned by the individual or their spouse/common-law partner in the year of acquisition or in any of the four preceding years (first-time home buyer). Doubling the First-Time Home Buyers Tax Credit would mean the individual could claim $10,000 (equivalent value of a $1,500 direct tax bill reduction), making the individual’s first home purchase a little easier.
- Introduce a targeted measure for home “flippers” by imposing an anti-flipping tax on residential properties where they have not been at least held for 12 months.
- Introduce a temporary ban on new foreign ownership in Canadian housing for the next two years. Recall also the Liberal government introduced a national tax on non-resident, non-Canadian owners of vacant, underused housing beginning January 1, 2022.
Use the principal residence exemption (PRE)
If you’ve recently sold a home, look into whether the principal residence exemption (PRE) applies. The PRE may reduce or eliminate a capital gain (for income tax purposes) on a disposition or deemed disposition (e.g., on death) of a house on land not exceeding 0.5 hectares. A few conditions must be met for an individual to claim the PRE:
- The individual must own the property in the year the property is claimed as a principal residence
- The individual must designate the property as their principal residence on their income tax return in the year of disposition
- No other property may have been designated by the taxpayer or a member of the taxpayer’s family unit (spouse/common-law partner or child under age 18)
For all dispositions after 2015, an individual must designate the property on Schedule 3 of the income tax return. In addition, the property must be “ordinarily inhabited” in the year by the taxpayer or by their current or former spouse/common-law partner or child(ren). Note that only one property may be designated by a family unit (generally includes the individual, their spouse/common-law partner, and children under 18) in any particular year.
If your your family has multiple properties, refer to our Tax & Estate InfoPage, Planning for a family cottage for a more detailed discussion.
Tax tips for retirees and seniors
Understand spousal RRSP contributions and withdrawals
Income attribution to an RRSP contributor spouse applies if the annuitant spouse makes a withdrawal before the end of the second calendar year following the spouse’s contribution. For example, a contribution made in January 2021, though deductible by a spousal contributor for the 2020 tax year, was made in the 2021 calendar year. As a result, a withdrawal from the spousal RRSP before 2024 will result in the application of the attribution rules. If that same contribution had been made in December 2020 instead, a withdrawal could be made in 2023 without triggering the attribution rules.
Make final RRSP contributions at age 71
Contributions to an RRSP can only be made up to December 31 of the year in which a person turns 71. For individuals who continue working into their early 70s, this age limit complicates the act of making a final RRSP contribution, as RRSP contribution room for a given year is not credited until the following year.
One approach is to make a final contribution in December of the year the RRSP annuitant turns 71, suffer the 1% overcontribution penalty for that month, and then be back onside in January when the room is credited to the annuitant. If the annuitant has a younger spouse, another option is to contribute to a spousal RRSP (provided the spouse is under 71) in the new year, after the contribution room is credited to the annuitant.
Make final RRSP contributions after death
The legal representative may make a final RRSP contribution into a spousal RRSP on behalf of the deceased individual. This option is only available if the deceased’s spouse/common-law partner is the annuitant.
For this final RRSP contribution to take place, the deceased’s spouse/common-law partner must meet the RRSP age requirement (i.e., not be over 71 years old). Moreover, it is our understanding that to claim a deduction on contributions made on behalf of a deceased individual, the final RRSP contribution must be made into the spousal plan either in the year of death or during the first 60 days after the end of the year of death.
So, if an individual passed away in 2021, RRSP contribution made on their behalf into their spouse’s/common-law partner’s RRSP may only be deductible (up to the individual’s 2021 RRSP deduction limit) if they were made in 2021 (the year of death) or within the first 60 days of 2022 (i.e., by March 1, 2022). If the contributions are made within that designated period and were not deducted from the deceased individual’s 2021 final tax return, an adjustment of the deceased’s terminal return may be allowed. The Income Tax Act does not provide for any deductibility of RRSP contributions paid (on behalf of a deceased individual) into a spouse’s/common-law partners’ RRSP after the first 60 days following the year of death.
Tax tips for TFSA holders
Know the TFSA annual dollar limit and withdrawal deadline
Withdrawals from a TFSA are added back to the TFSA holder’s contribution room in the following year. For contribution room to be re-credited to a TFSA holder for 2022, a withdrawal should be made no later than Friday, December 31, 2021. Assuming an individual was 18 years of age or older in 2009, total cumulative annual allotments of TFSA contribution room equal $75,500 per individual as of 2021.
Based on our internal calculations at the time of writing, the 2021 inflation rate stands at 2.40% (for the 12-month period ending in September 2021) which would not be enough to increase the TFSA annual allotted amount to $6,500 for 2022. We expect the annual TFSA contribution limit to remain at $6,000 for 2022.
Looking ahead, an annual inflation factor (ending in September 2022) of approximately 1.41% is needed to push the annual TFSA contribution limit to $6,500 in 2022. The average inflation rate since the birth of the TFSA in 2009 to 2021 is 1.62%, with the highest inflation rate in this period occurring in 2021 with an inflation rate of 2.40%. Based on these averages, though a purely an academic exercise, it is more probable that the inflation rate ending in September 2022 will be high enough (at least 1.41%) to increase the TFSA annual allocated amount for 2023.
Recall that money gifted to a spouse or common-law partner to contribute to their own TFSA will not attract the income attribution rules on investment income generated while that gifted money remains inside the TFSA. However, if the amounts are subsequently withdrawn from the TFSA and reinvested outside of the plan, attribution rules will apply on any future income and capital gains earned from the gift.
Consider TFSA exempt contributions at death
On the death of a TFSA holder, the amount up to the fair market value (FMV) of the plan as of the date of death is received tax-free by the beneficiary of the TFSA or by the deceased’s estate if no beneficiary is named. Any growth from the date of death and date of payment is generally taxable to the beneficiary or estate.
In the context of TFSAs, a “survivor” is defined as an individual who was, immediately before the TFSA holder’s death, a spouse or common-law partner of the holder. When the survivor is designated as beneficiary directly on the TFSA or through the deceased’s will, it is possible to directly or indirectly transfer the proceeds to the survivor’s own TFSA and designate the contribution as an “exempt contribution.”
The exempt contribution must be made by December 31 of the calendar year following the year of death (known as the “rollover period”), and the survivor must file the prescribed Canada Revenue Agency Form RC240, Designation of an Exempt Contribution – Tax-Free Savings Account (TFSA), within 30 days after the day the contribution is made to designate the amount as an exempt contribution. The amount that may be designated as an exempt contribution is usually limited to the FMV at the date of death. The Canada Revenue Agency issued an income tax ruling that addresses various scenarios, including when:
- The estate is designated as the beneficiary of the TFSA
- The FMV of the property held by a TFSA decreased after the death of the TFSA holder
- The survivor is a beneficiary of the TFSA holder’s estate through the will
In these circumstances, the ruling indicates the amount that may be designated as an exempt contribution is limited to the lower of the amount paid from the TFSA to the deceased’s estate and the FMV on the date of death, provided the survivor receives at least that amount from the estate as an estate beneficiary.
For more information regarding the treatment of TFSAs following the holder’s death, please refer to the Invesco Tax & Estate InfoPage, Death and taxes.
Enhanced disclosure requirements
Learn about new upcoming trust reporting rules
Currently, a trust is only required to file a T3 Trust Income Tax and Information Return (“T3 return”) for a given year if it has tax payable or if it distributes all or part of its income or capital to the beneficiaries of the trust. In an effort to counter tax avoidance and assess tax liability for trusts, new tax return filing and information reporting requirements will be enforced for taxation years ending on or after December 31, 2021.
The new rules will apply to “express trusts” that are resident in Canada (or deemed to be resident in Canada) or non-resident trusts that are required to file a T3 return. They will require applicable trusts to report, on the relevant T3 return, the identity of the settlor(s), trustee(s), beneficiary(ies), and anyone who has the ability to influence the trustee’s decisions regarding the allocation of income or capital. In addition, they will require specific information – such as the name, address, date of birth, jurisdiction of residence and taxpayer identification number (TIN) – to be disclosed for each of these parties.
Exceptions to the new rules include, but are not limited to:
- Graduated rate estates (GREs)
- Qualified disability trusts (QDTs)
- Mutual fund trusts
- Segregated funds
- Master trusts
- Trusts governed by registered plans (e.g., RRSPs and TFSAs)
- Trusts that qualify as non-profit organizations or registered charities
- Trusts that have been in existence for less than three months or hold less than $50,000 in assets (limited to deposits, government debt obligations and listed securities) throughout the taxation year
Under the new measures, a trustee who makes a false statement or fails to file a T3 return, either knowingly or in incidents that result in gross negligence, will be subject to a penalty of $25 per day (with a minimum penalty of $100), up to a maximum penalty of $2,500. Further, gross negligence penalties may apply, up to 5% of the maximum FMV of the property of the trust, with a minimum penalty of $2,500.
Follow reporting requirements under the Foreign Account Tax Compliance Act and Common Reporting Standard (FATCA/CRS)
Consistent with updates to the FATCA/CRS guidance to the legislation, the Canada Revenue Agency has confirmed that, starting on January 1, 2021, penalties will begin to be assessed for missing taxpayer identification numbers on reportable accounts. The CRA is also looking to ensure that for all new accounts opened, there is verification that the client has completed a self-certification form. Failure to comply may lead to penalties of $2,500 under each regime (FATCA & CRS) for a total of $5,000 per account. As industry participants react to and prepare for this new reality, there is an expectation of increased compliance activities as policies and procedures are strengthened to more closely adhere to the rules.
U.S. estate and gift tax exemption threshold changes
A Canadian resident who holds U.S.-situs property at death may be subject to the U.S. estate tax. U.S.-situs property generally includes U.S. individual marketable securities, pooled securities such as U.S. ETFs, as well as real and tangible personal property located in the U.S. Generally, U.S. estate tax only applies to U.S.-situs property, and only if worldwide assets at death exceeds a certain threshold each year.
A Canadian resident may take advantage of the “unified credit,” which can offset their U.S. estate tax payable as long as the value of worldwide assets does not exceed the maximum exclusion amount (US$11.7 million for 2021). However, it should be noted that if a deceased individual held worldwide assets below the threshold but has U.S.-situs assets in excess of US$60,000, an executor may be obligated to file a U.S. estate tax return, even if no tax is due.
As part of President Biden’s Build Back Better spending plan, Congress is considering changes to the federal tax code to reduce the U.S. estate and gift tax exemptions. Effective January 1, 2022, the federal estate and gift tax exclusion will be cut in half to about $6 million USD (note that the exact amount is currently unknown), after adjusting for inflation.
In lieu of the upcoming reduction in U.S. estate tax exemptions, the following strategies may be undertaken by a Canadian resident holding U.S.-situs property to reduce U.S. estate tax. However, note that the following strategies should only be undertaken with the help of competent professionals knowledgeable in cross-border tax and estate planning matters.
- Sell U.S. securities that are held directly
Any accrued gains are calculated as the difference between the fair market value of the proceeds of disposition, minus the adjusted cost base and any outlays and expenses. Therefore, it is important to weigh the tax savings from selling U.S. securities before passing away and the disadvantage of accelerated capital gains taxes in Canada on any accrued gains. If the gains on the disposition of U.S. securities are substantial, it may be preferable to defer the recognition of Canadian taxes until death. The estate could potentially pay the U.S. estate tax and use foreign tax credits under the Treaty to create some level of relief through the matching of foreign tax credits.
- Gift U.S. property prior to death
Property that is gifted by a Canadian resident prior to death is not subject to U.S. estate tax. For individuals who are neither U.S. residents or U.S. citizens, the U.S. has a separate tax that is imposed on the gifting of tangible U.S.-situated assets such as real property. Intangible property (including assets such as U.S. shares or U.S. debts), are not subject to gift tax for non-residents or non-citizens of the U.S. under U.S. law.
The IRS provides an annual exemption from gift tax on gifts of tangible property made during one’s lifetime. For tax year 2021, the annual gift exemption amount is US$15,000. There is no limit to the number of recipients for which an individual may claim this annual exemption. The annual limit for gifts to a non-US citizen spouse is $159,000 USD (indexed annually) in 2021.
For individuals who are either U.S. citizens or U.S.-residents, the $15,000 USD annual gift exemption amount will generally apply on both tangible and intangible property.
- Make sure that overall U.S. worldwide estate is below $11,700,000 USD for 2021, or around $6,000,000 for 2022 depending on new changes
Reducing the individual’s worldwide estate to below the respective threshold ensures that any U.S. assets held personally will not be subject to U.S. estate taxes.
- If an individual wishes to invest in U.S. shares, he or she may consider using Canadian-listed mutual funds to hold any U.S. shares for investment purposes
Canadian mutual funds that hold U.S. shares are not considered U.S.-situated assets because of their domestic Canadian corporate or trust structures. Therefore, any U.S. shares acquired or held within a Canadian mutual fund are not subject to U.S. estate tax upon death of a Canadian resident.
Tax reporting reminders
The Canada Revenue Agency’s Form T1135, “Foreign Income Verification Statement,” should be completed and filed if, at any time in the year, the total cost amount of a taxpayer’s specified foreign property is more than $100,000 (CAD). Note that Canadian-domiciled ETFs, mutual fund trusts and corporations do not have to be reported on this form, as the taxpayer owns units or shares of the fund and not the securities directly.
Taxpayers should review their records to make any necessary adjustments to the ACB of their investments.
Tax return adjustments
Individuals can make changes to previously filed income tax returns dating back 10 years. They must request changes to their 2011 income tax return by December 31, 2021.
Enhanced basic personal tax credit
Individuals can claim the basic personal amount (BPA), which is a non-refundable tax credit that provides a full reduction from federal income tax to individuals with taxable income below the BPA threshold. On December 9, 2019, the federal government presented legislative proposals to provide a gradual yearly increase in the BPA, starting in 2020, increasing it to $15,000 in 2023. The maximum BPA for the 2021 tax year is $13,808 for individuals with a net income of $150,473 or less; the BPA is gradually reduced for individuals with net income between $151,978 and $216,511. If an individual’s net income is above $216,511, this change does not apply and their BPA is $12,421 for the 2021 tax year.
Liberal election platform: Potential future tax changes – ensuring everyone pays their share of taxes
In an effort to ensure more Canadians are paying their fair share of taxes, the Liberal party of Canada plans to implement a few changes that will invest more in combating aggressive tax planning and tax avoidance, while ensuring top earners are paying their share of taxes. Although the full details of some of these changes have not yet been disclosed, we have outlined some of these proposals below (not an exhaustive list):
- Creating a minimum tax rule, so that everyone who earns enough to qualify for the top bracket (i.e., those earning more than $216,511 in 2021) pays at least 15% each year (the same rate as those earning less than $49,000), removing their ability to artificially pay no tax through excess use of deductions and credits. The minimum tax is projected to raise approximately $1.7 billion over the course of five years.
- Implementing a tax on luxury cars, boats, and planes as outlined in Budget 2021. According to the changes, effective January 1, 2022, a tax will be introduced on the retail sale of new luxury cars and personal aircraft priced over $100,000 and boats priced over $250,000. For vehicles and aircraft, the tax amount would be lesser of 10 percent of the full value of the vehicle or aircraft or 20 percent of the value above $100,000. For boats, the tax amount would be the lesser of 10 percent of the full value or 20 percent of the value above $250,000. GST/HST would then be applied to the final sale price inclusive of the luxury tax.
- Raising corporate income tax rates for banks and insurance companies who earn more than $1 billion per year and introducing a temporary Canada Recovery Dividend that these financial institutions would pay in recognition that they have recovered faster than many other industry.
- Working with international partners to implement a global minimum tax, in order to prevent large companies around the world from escaping taxes they may owe in Canada.