Depending on the benefits their clients accessed, CPAs need to keep tabs on the federal COVID-19 emergency programs in order to accurately assess the tax impact on those clients (Getty Images/Drazen_)
2020 could be considered a tax year like no other.
The impact of COVID-19 on Canadian business and personal finances varies far and wide—from closures and bankruptcies to readjusting organizational priorities and shifting emergency benefit programs to consider and reflect in filings.
CPAs must, therefore, be up-to-date on the changes simultaneously occurring and the impact these will have on the clients they’re serving.
Here are three tips for accurately and efficiently meeting your clients’ needs this tax season.
1) STAY ON TOP OF CHANGES
Canada's COVID-19 Economic Response Plan’s emergency benefits—including the Canada Emergency Response Benefit (CERB), Canada Recovery Benefit (CRB), Canada Emergency Wage Subsidy (CEWS) and Temporary Wage Subsidy (TWS)—vastly shifted over the year in terms of their details, access and eligibility.
CPA Michael Espinoza, senior manager, national tax office, Grant Thornton LLP, highlights the importance of keeping tabs on these programs in order to accurately assess the impact on individual clients, dependent upon the benefits they accessed and their unique tax situation.
“It’s understanding all of those nuances, how they’ve changed over time and which clients took advantage of which programs,” he says. “That’s going to be the biggest difference this year, because you have to deal with all these new programs, on top of all the usual things you would be dealing with during tax season.”
Provincial emergency benefits, which will vary across the country, will also need to be taken into consideration, Espinoza adds.
Additional federal programs clients may not be aware of that are subject to tax include the Canada Emergency Business Account (CEBA) and the Canada Emergency Rent Subsidy (CERS), as they are deemed government assistance. For more details on this, see CPA Canada’s tax blog, 2020 round-up: Income tax impacts of key COVID-19 support programs.
“Most of the support measures have tax issues associated with them, so that will be the key thing to keep in mind as we head into tax season,” says Bruce Ball, CPA Canada’s vice-president of tax.
2) PREPARE CLIENTS FOR PAYMENTS
Since emergency benefit programs were introduced back in April 2020, confusion has arisen over which were taxed and by how much, as well as the financial toll this will have on Canadians during tax season.
For example, the CERB, received by approximately nine million Canadians, was not taxed at source, while tax at 10 per cent was withheld from CRB payments. Dependent on a client’s individual tax rate, however, benefits, such as the CRB, could be subject to additional tax, warn experts. Individuals may also be moved into a different tax bracket, dependent upon the benefit amount received and their total annual income.
For those self-employed, business-specific benefits such as the CEBA, CEWS, CERS, as mentioned above, are subject to taxation. Read the CPA Canada tax blog, for full details on how payment and relief programs will be taxed.
“The CEWS and CERS are taxable and deemed to have been received for tax purposes on the last day of the relevant claim period and not when the application was made or subsidy was received. In the case of CEBA, the forgivable portion of the loan is taxed when the loan was received,” explains Ball.
Given the complexity, now is the time to prepare clients for potential tax payments, if you haven’t already done so, says Espinoza.
Furthermore, encouraging clients to meet payment deadlines to avoid income tax penalties is advisable, he adds. If unable to pay their full tax bill, clients should pay what they can and communicate this to the CRA in advance.
“Have those conversations early with clients so that they are prepared for the upcoming tax bill,” he says. “In some instances, where there is financial hardship, it may even be possible to setup a payment plan with the CRA.”
Presently, the federal income tax (T1) guide indicates that taxpayers should adhere to the regular April 30 deadline however, CPA Canada and other stakeholders are in discussion with the CRA about the possibility of deadline extensions due to the continued impact of COVID-19.
3) COMMUNICATE DEDUCTION AND CREDIT CHANGES
New and advantageous to Canadians who worked remotely due to the pandemic is the ability to claim home-office expenses, without having to meet the usual requirements, when filing their taxes this year. [Read CPA Canada’s tax blog, Employee home office expenses: Special rules for 2020 claims for more details.]
Employees who worked from home more than 50 per cent of the time over four consecutive weeks in 2020 due to the pandemic can claim a home-office expense deduction of $2 a day, up to a maximum of $400 (equal to 200 working days). Additional filing complications, such as summarizing expenses and computing portioned costs incurred when self-employed, are avoided. Multiple individuals working from the same home can make a claim.
“It’s been simplified so the average Canadian can take advantage of employment expenses, under what is called the temporary flat-rate method,” says Espinoza. “All [who meet the eligibility criteria] are entitled to it.”
Alternatively, individuals can calculate specific expenses (using T2200 and T2200S forms from their employers) and, therefore, will need to keep receipts in case they are requested, explains Ball. Eligible expenses for salaried employees include electricity, heating, water, utilities portion of condo fees, home internet fees, maintenance and repair costs, and rent. Commission-based employees are also entitled to claim home insurance, property taxes, and lease of equipment, including cell phone, computer or laptop or tablet, that relate to commission-earned income.
“Advisers may want to alert clients that a choice may have to be made and more work will be needed under the detailed method, which could also increase preparation fees,” says Ball.
CPAs may also want to remind their clients, adds Ball, about new credits and programs the CRA is offering, including a digital news tax credit from 2020 to 2024 for expenses paid on subscriptions with qualified Canadian journalism organizations, and a Canada Training Credit for 2020 and later tax years, for those eligible.
COVID-19 AND TAXES
CPA Canada works collaboratively with the Canada Revenue Agency to bring clarity on pressing tax questions and COVID-19 tax updates.
You can also visit CPA Canada’s tax blog for analysis on the 2020 tax season and sign up for the latest news by checking Tax Blog under My Subscriptions in your profile.