Here are answers to some of the questions you’ll face in planning for your 2020 tax return.
Do you pay taxes by installments?
If you earn income that doesn’t have income tax withheld, you may need to pay tax by installments. Tax installments are taxes you pay on the income you earn throughout the year, instead of as a lump sum on April 30.
For 2020, you’re required to pay tax by installments if you meet two conditions: your tax bill for 2020 will be above $3,000 ($1,800 in Quebec), and you owed $3,000 ($1,800 in Quebec) or more in tax for either 2018 or 2019 (or both).
In any given year, you have three options for calculating your tax installment amounts:
- The “no-calculation” option: The amount you owe is calculated for you by the Canada Revenue Agency, based on your latest assessed tax return,
- The “prior-year” option: You calculate how much you owe, based on the previous tax year (even if that tax return has not yet been assessed by the Canada Revenue Agency), or
- The “current-year” option: You calculate how much you owe based on your earnings for the current year.
For many doctors and dentists, taxable income for 2020 may be significantly different than income in previous years. If that’s the case for you and you pay tax by installments, the “current-year” option to calculate your tax amounts owing may be most appropriate for 2020. For more information, the CRA provides a calculation chart to help determine your tax installments owing.
Did you receive CEWS income to help with payroll costs?
The Canada Emergency Wage Subsidy (CEWS) program took effect retroactively, starting March 15, and the program has now been extended until June 30, 2021.
The amount of CEWS you received in 2020 will be taxable income for 2020, and you will need to include the amount you received on your Corporate or Partnership tax return. From a tax perspective, CEWS is formally structured as a deemed overpayment, and then a subsequent refund of taxes paid by recipients.
In order to validate payments under the CEWS and other programs, employers’ T4 reporting requirements are changing for 2020, and employers will be required to provide more information about when employment income was paid during the year.
Did you receive CEBA, CECRA, and/or CERS income to help with business or rental costs?
The federal government’s financial response to COVID-19 also included the Canada Emergency Business Account (CEBA) and the Canada Emergency Commercial Rental Assistance (CECRA) program, both of which include a forgivable loan component. The CECRA program was replaced in September 2020 by the Canada Emergency Rent Subsidy or CERS.
- CEBA provided emergency interest-free loans to small businesses during the COVID-19 pandemic.
- The CECRA program provided financial assistance to commercial property owners who, in turn, provide rent forgiveness to their small business tenants affected by the COVID-19 pandemic. Under the CECRA program, the federal government provided unsecured, forgivable loans to qualifying commercial property owners who agree with eligible small business tenants to forgive rent by a minimum of 75% per month for April to September 2020. If you or your corporation own the building where your practice is located, you may have received CECRA. CECRA is an optional program and is not mandatory for property owners.
- In September 2020, the CECRA program was replaced by CERS, or the Canada Emergency Rent Subsidy. CERS is a forgivable loan for rental costs and is similar to the CEWS program for payroll costs.
CECRA, CERS, and the forgivable portion of CEBA are all taxable when they are received, but are deductible if and when repaid. This means that the 25% (up to $10,000) forgivable portion of CEBA, and 100% of CECRA and CERS will be taxable in 2020.
Like most business owners, 2020 presented multiple challenges for doctors and dentists — from changes in yearly taxable income to navigating the various forms of financial support provided to small business owners and adjusting tax installment payments. The next step will be to address the tax reporting requirements associated with financial support programs. Taking the time now to understand the tax implications of any financial support you received can help make tax time smoother.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.