The full economic impact of the Covid-19 pandemic remains to be measured, but it is safe to assume that personal and corporate financial repercussions will be felt by many for years, even decades to come. Moving forward, careful tax planning may play a more important role in both your short and long-term financial health. One of our Client Service Managers—Igor Fik, CPA, CA—has compiled a summary of some of the key Covid-related tax implications.
Home Office Considerations
If you are one of the millions of Canadians who suddenly found themselves working from home in March, you may be eligible to deduct a portion of your home office expenses from your income—similar to what applies to the self-employed.
If you’re self-employed (or a small business owner), you can deduct a portion of your utilities, maintenance, rent, home insurance, property taxes, mortgage interest and CCA if your home is your principal place of business—generally defined as where you work more than 50% of the time—or if you use a defined space located at your principal residence to solely earn business income and meet clients, customers, or patients on an ongoing basis.
Note: use caution and speak with your accountant before claiming the capital cost allowance (CCA) on your home, as this can produce a negative financial impact in the future.
Generally, if you are an employee and want to claim home office expenses (those not reimbursed by your employer) you must also meet an additional two conditions:
- your employment contract outlines the need to work from home and to pay your own expenses
- your employer has filled out and signed a T2200 (Declaration of Conditions of Employment) for you to submit when you file your taxes
Unlike self-employed individuals and business owners, commissioned salespeople cannot deduct mortgage interest or CCA, while salaried employees cannot deduct mortgage interest, CCA, home insurance or property taxes. In all cases, deductions must be prorated based on a reasonable calculation of the square footage of your home office (or other reasonable basis).
With a significant percentage of people across the country likely to continue working from home for many months to come (many perhaps indefinitely), there is some anticipation that the CRA may make an announcement in the fall to relax some of these rules for the 2020 tax year. So, keep your receipts. If you are indeed able to deduct some of your work-at-home expenses, you may be required to provide them to the CRA to support your claim.
Personal Tax Considerations
- Employment Insurance (EI), the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB) are all taxable benefits. EI is taxed at the source, so there is likely no extra tax due. But taxes are not withheld from CERB or CESB payments. If you collected either of these benefits, you will receive a T4A tax slip that you will need to include as taxable income on your 2020 return.
- The CRA knows we have all been driving a lot less in 2020, and so they will expect your motor vehicle expenses and mileage to have decreased accordingly. They will be looking for this pattern so ensure you are able to back up your mileage log.
- If you lost your business, or the investment you made in that business, you may be able to deduct 50% of that investment loss on your tax return as an Allowable Business Investment Loss if certain criteria are met.
Lastly, although filing and payment deadlines have been extended penalty-free to the end of September, ensure that you file your tax return as soon as possible in order to continue to receive benefit payments beyond September 2020. If your tax return isn’t assessed by early September, your benefit payments will cease in October 2020 and you may even need to repay amounts received since July 2020.
Employer Tax Considerations
- Employees required to work from home as a result of Covid-19 may ask you to provide them with a signed T2200 Declaration of Conditions of Employment as well as an amended employment contract to enable them to deduct unreimbursed home office expenses on their 2020 income tax return. The government may or may not loosen the existing eligibility requirement to claim these expenses. It is anticipated there may be an announcement on this in the fall.
- The CRA has introduced new T4 reporting requirements for the 2020 tax year. In addition to reporting employment income in Box 14 or Code 71, there are four new codes you will need to use to report employment income and retroactive payments in four defined periods that align with eligibility criteria for the CERB, CEWS, and CESB:
- Code 57: Employment income – March 15 to May 9
- Code 58: Employment income – May 10 to July 4
- Code 59: Employment income – July 5 to August 29
- Code 60: Employment income – August 30 to September 26
- The CRA has indicated that reimbursements to employees of up to $500 for computer equipment will not be considered a taxable benefit to the employee, provided the employee can produce a supporting receipt.
- If your business received any assistance from the Canada Emergency Wage Subsidy (CEWS), the Temporary Wage Subsidy (TWS) or Canada Emergency Commercial Rent Assistance (CECRA), please remember that these amounts are taxable in the year received.
Lastly, if you have experienced decreased revenues, your company valuation may be lower. This might be a good time to do some business succession or estate planning.
Future Considerations
The national deficit is projected to hit $343 billion this year, with the total debt level exceeding $1 trillion for the first time ever. Although technically the debt is still considered manageable and Canada should be able to carry it for quite some time, it is reasonable to assume the government is considering options to eventually bring it down. Some of these options may include:
- An increase in income tax, particularly for the middle class and wealthier
- An increase in sales tax
- A wealth tax on an individual’s annual net assets
- A home equity tax on the equity or increase in equity of your principal residence
- An increase in the taxable portion of capital gains
The capital gains tax increase is one of the more likely scenarios, as there had already been speculation that the government might try to take a bigger piece of the realized gains from the skyrocketing corporate and real estate valuations witnessed pre-Covid.
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