Long-form claim for work expenses could be worth extra effort

Using the short form to claim work-from-home deductions might be easy, but using the long form could lead to more tax savings, says John Yanchus, a tax and estate planning consultant with Canada Life’s sales enablement team.

He said Canadians who started working from home due to the pandemic will likely save more if they detail all their expenses.

As of press time, the federal government had not yet confirmed the short-form T2200 will be an option for the 2021 taxation year. Last year, Form T2200S allowed for a claim of $2 for every day employees were required to work remotely (due to Covid-19 or other reasons), to a maximum of $400. Yanchus said if the T2200S is available for the 2021 tax year, it will definitely be the simpler option, but not necessarily more lucrative.

“If you use the long form and receive a T2200 form from your employer, you may be allowed to claim more deductions,” he said, “but it does come with a bit of onus in keeping better records, keeping receipts, and more complex reporting.”

In 2020, the CRA expanded the list of eligible expenses that can be claimed under the detailed method to include home internet access fees. The CRA has a comprehensive list of all eligible expenses on its website.

Yanchus offered year-end tax tips in a wide-ranging conversation with Investment Executive’s Soundbites podcast. Among his recommendations was a caution against selling troubled assets merely to take advantage of tax-loss selling.

He said long-term thinking should apply, especially when considering big market moves in an attempt to capture short-term value.

“One invests to generate income in the future. If we take advantage of selling an asset for tax purposes while that investment is decreased in value, the investment side of that equation seems to be neglected or ignored,” he said. “The age-old adage of buying low and selling high should be adhered to here.”

He said where an investment has dropped in value on a permanent basis, or that investment has been fully impaired, there could be reason to sell the stock and take the capital loss, which can be carried back three years or carried forward indefinitely. But if the impairment is not permanent, there may be strong reasons to hold onto it.

“The decision of whether to sell should be taken on the merits of the investment prior to the tax benefit,” he said.

Charitable donations

Yanchus also offered some thoughts on making the most of charitable giving, especially when donating an asset that has increased in value.

“From the tax perspective, an in-kind donation may make more sense [than a cash donation],” he said. “With an in-kind donation, you have the ability to take advantage of a zero-capital-gain inclusion rate.”

The client will not owe taxes on the donated asset’s capital gain, but they will still get a donation receipt for the full fair market value of the asset.

Yanchus also suggested that couples pool their charitable donations. “You can combine charitable donations made by spouses on your tax returns,” he said. “So, if one spouse claims a donation, the tax credit will be that much higher.”

A matter of perspective

People can be short-sighted when it comes to tax planning, looking for benefits in the current year but ignoring long-term benefits, Yanchus said.

He said even tax experts can be too focused on short-term gain, “looking at a tax deduction for this year but not considering what would be the alternative if nothing was done in this year and it was done in a following year.”

According to Yanchus, the advice of a financial planner can sometimes conflict with the advice of an accountant because they are considering the situation from different perspectives.

“From an accounting perspective, I’m looking at this year and maybe into next year. But as a financial professional, a planning professional, I’m not only looking at this year but I’m looking five, 10, 20 years down the road.”

A clear grasp

A good understanding of income types and tax brackets is critical to maximizing tax returns, Yanchus said, suggesting that a solid grasp of income sources and their implications on a client’s tax bracket makes tax decisions easier.

“Understanding that, you know the tax rate that will be applicable to your income, and you can make the appropriate decision of whether to access more cash flow from a taxable source or a non-taxable source.”

He also suggested a tax strategy would be very different for someone with high living expenses who needs to minimize taxable income, as opposed to someone who has excess cash that could increase tax flexibility in future years.

Either way, Yanchus said, “the main thing to keep in mind is that everything has to be concluded by the end of the year in order to be reported in that year.”

Among his other recommendations:

• One-time over-contribution to an RRSP. In the year a client turns 71, it could be advantageous to make a one-time overcontribution to their RRSP. That contribution will be subject to a penalty but the upside could be considerable. “That penalty is 1% per month, but if we do it in December of that year, then you would only be subject to the one month of penalty. But what you would exchange for that would be the full amount of the RRSP contribution of the earned income you made in that prior year.”

• Best timing for TFSA withdrawals. TFSA withdrawals that will be put back into the TFSA in the near future should be made prior to year end. That room — the full withdrawal amount, new contribution room, plus growth — becomes available January 1st of the year following. “This is one thing that most people aren’t aware of.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

Read John Yanchus’ Year-End Tax Tips article for Canada Life.

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