As the reality surrounding the COVID-19 pandemic sets in, many Canadians are facing financial uncertainty like never before. Here are a few tax considerations that might help ease some of the pressure.
1. Know the withdrawal rules for RRSPs and other registered accounts
Under normal circumstances a person should not withdraw from their RRSP before retirement. When you withdraw from your RRSP, you’ll be charged what’s known as a withholding tax. The rate of withholding tax depends on how big the withdrawal. Please see CRA’s website for rates on RRSP withdrawals. If the withdrawal puts you in a higher tax bracket, you’ll have to pay more income tax. Not to mention you don’t get your contribution room back. That’s why withdrawing early from an RRSP should be a last resort. But we are not in normal circumstances and options might be limited. In a cash crunch you need to understand the net cash, costs and consequences of each.
2. Time Value of Money - Explore triggering capital losses during the market downturn.
The markets are taking historical blow after blow. This means some of your holdings’ value today could be less than what you paid for them. You and your advisor should consider triggering a capital loss in your taxable investment account (excludes RRSP, TFSA etc.).
When triggering capital losses, it is very important to be aware of the “superficial loss” rules. For example, you cannot sell a stock and immediately turn around and buy the same stock back. Speak to your accountant and advisor for details on these complex rules.
Why trigger a capital loss? If you have other capital gains this year or in the last three years, you could apply the capital losses triggered now against those capital gains and get a refund. You're trading a refund now for more taxes in the future. This gives you the advantage of cash in your hands sooner, Dry powder, if used for investing. Again, talk to your accountant and advisor.
3. WAIT! Clear your Capital Dividend Account. Those who hold their investments in a corporation are likely familiar with the mechanics of the Capital Dividend Account (CDA). It is a notational account that small businesses can use to pay out “tax free” income to its shareholders. The CDA is a continuously adjusting account so timing matters. If you have a positive CDA balance you should pay that out before triggering any losses which will reduce your available CDA balance. Talk to your accountant and advisor for professional guidance. 4. Stay up to date on government announcements for taxes – plan for the worse, hope for the best. Given everything that’s going on it is important to stay informed of any possible changes CRA may announce, but don’t assume changes will occur. Possible changes could include; extending filing deadlines, streamlining electronic signatures for forms that currently need physical signatures and the waiver of certain penalties. 5. Lastly, send your documents to your accountant electronically if you can. This will limit foot traffic at their office. I suggest, following up with a phone call to confirm all documents were received. 6. If you file your own taxes and are expecting a refund, consider filing early to get the cash sooner. This writing is for general information purposes only. It is not intended to provide legal, accounting, tax or financial advice. For complex matter you should always seek help from a professional.
Author:
Jared Burns CPA, CA is an estate and tax planning manager with Louisbourg Investments. Submit your comments tojared.burns@louisbourg.net.