Simplified home office deductions can reduce your tax bill ( December 2021)

 This article will discuss the latest update in the home office deductions, which can reduce your tax bill.

The COVID-19 pandemic has dramatically increased the number of Canadians working from home. The Federal Government has recognized the need for simplified reporting of home office expenses and reduces the burden on employers completing Form T2200 in its traditional format. 

The CRA announced two methods for claiming home office expenses for 2020: the new "temporary flat-rate method" and the "detailed method." You must have worked more than 50% of the time from home for at least four consecutive weeks in 2020 due to Covid to claim home office expenses.

Suppose you are an employee who paid employment expenses — including expenses for a home office — for which your employer did not reimburse you. In that case, you may be able to claim home office deductions under two different methods. 

Under the flat-rate method, you can use Form T777S to claim $2 for each day you worked from home, up to a maximum of $400 ($2 per day for up to 200 working days). If you use the flat rate method, you don't have to track expenses, keep supporting documents or allocate costs between employment and personal use, and you don't need a signed Form T2200(S) from their employer.

If you are an employee with more significant claims for home office expenses, the good news is that you can still choose to use the existing detailed method to calculate their home office expenses deduction. Under the detailed method, you need a completed and signed Form T2200(S) from your employer. This method allows you to deduct various expenses, such as a portion of the cost of rent, electricity, heating, home internet access fees, water, maintenance, and minor repair costs. If you are a commissioned employee, you can also deduct the cost of home insurance, property taxes and leasing costs for specific equipment. But please remember that mortgage interest and capital expenses or depreciation are not deductible, including the cost of furniture or computer equipment. I did a whole video on how much % of home office expenses you should claim under this method, and you might want to click on the screen's top right to get more details.

Selecting the method to use

The decision to use one method or the other depends on your specific situation as an employee. The detailed method carries a much heavier burden (documenting expenses incurred, allocation of expenses based on usage, preparing forms, etc.) but can provide greater economic value. On the other hand, the flat-rate method is much simpler but can only provide a maximum deduction of $400. Talk to your CPA who can make the calculations to help you decide the best method for you. 

Despite being more complicated, it appears that the detailed method might be advantageous if, as an employee, you rent your place of living in areas such as Vancouver, where the rent per square footage is high. Rent being, by far, the most significant expense in such cases. On the other hand, if you are an employee who is also a homeowner or are living in the suburbs such as Burnaby or Surrey etc., you might prefer using the new flat-rate method.

Keep track of your expenses.

Please note that employees' flat rate method is a temporary measure that may or may not be extended for 2021. Be sure to keep track of any expenses that you incur while working remotely this year if the CRA wants to see them.

How to take advantage of the opportunity of saving taxes through Income Splitting (December 2021)

I hope that you and your family are safe during this difficult time.

During this pandemic, I have seen a number of couples, where one is now earning significantly less than before Covid-19, with the result that he or she is going to be in a lower tax bracket this year. It could make sense to shift income to a lower-income spouse who can make an investment and pay tax on the investment returns at their low level.
This article covers the topic of income splitting through spousal investment loans, you see, income splitting is an extremely useful tool when a spouse has different levels of income, for example, someone at the highest tax bracket is paying taxes at somewhere around the 50 percent mark whereas someone with no income is paying no tax.
Now if this is done incorrectly the attribution rules of the income tax act are going to kick in and deem that investment returns were earned at the higher income earning spouses' level and tax it in their hands so how do we get around this? We get around this by doing an investment loan, so the high income earning spouse takes their money- loans it to the lower-income earning spouse and charges interest at what is called the prescribed rate.
The higher-income earning spouse claims this interest as income and pays tax on it at their marginal rate
then the lower-income earning spouse will be able to claim be actual investment returns on their income tax return paying tax presumably at a lower rate. This is a really good strategy especially in the current pandemic environment as the prescribed rate will be at a historically low level of 1% from July 1 2020,so even modest returns are going to provide the family with a tax benefit overall.
For Example
A husband (who is in the top tax bracket) lends his wife (who has very little income) 1 million dollars that is currently earning a 6% return. The money is loaned at an interest rate of 1% i.e the interest is 10,000 dollars. The wife would report income of 60,000 dollars on her return with a deduction for the interest of 10,000 dollars leaving 50,000 dollars of taxable income. On the other side, the husband would report the $10,000 of interest income – versus the 60,000 dollars reported in previous years.
Effectively, the benefit of this strategy is that it shifts 50,000 dollars of income (or 5%) from the husband's return to the wife’s return where it is now taxed at lower marginal rates. This tax savings can be achieved on an annual basis as long as the arrangement is properly maintained.

You see, obviously, it's not as simple as this you should contact a tax lawyer or a tax accountant who's familiar with this strategy.

If you want to be notified about our new tax updates, please do consider subscribing to our youtube channel-

How to use Holding Company for your advantage (December 2021)

As a small business owner, You may have heard of holding companies, but you aren't sure what they are or why someone would incorporate one.

Well, let's start with a discussion of what is a holding company, you see, in simple words, it is a company that doesn't produce goods or services but holds shares of an operating company.

The holding company is simply inserted between you, the business owner and the active business that allows profits to be flowed up as tax-free dividends and retained in the holding company or Holdco in short form. That income can be held inside that Holdco until, perhaps, a later year when you, the business owner, actually need the money. You see, this gives you more control to plan when you want to receive the money and pay tax. This flexibility is also beneficial where multiple shareholders hold shares in the operating company, in short form Opco, through their individual holdcos.

Please beware, new anti-avoidance rules may treat inter-corporate dividends paid in excess of retained earnings as a capital gain, So, you will need expert tax advice from A CPA  to determine the number of dividends that may be safely paid.

Another reason you might want to use a holding company is for asset protection. "If a creditor of your opco decides to sue your opco, [the creditor] could have access, theoretically, to all of the Opcos assets."

You see, to prevent these assets can be protected by removing excess cash or investments not needed for business operations to a holding company.

You might also wonder whether the investments which you already own personally should be transferred to a holding company for tax purposes. The answer is generally no, as

There's actually a tax cost from earning investment income inside a private company compared to earning that same investment income personally.

Moreover, as the Small Business Deduction dollar limit must be shared among associated corporations.

Passive Investments in Holdco affect an associated operating company's ability to claim the small business rate.  You might want to watch the video on the top left to get more details.

As a small business owner, if you are interested in creating a holding company, you might want to first seek assistance from a lawyer and a CPA.

If you want to be notified about our new tax updates, please do consider subscribing to our youtube channel-


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