TORONTO -- For many Canadians this year has been a challenge. Families have been hit hard by the pandemic, and for many, health concerns linger. Financially it has been tough as jobs were lost and lockdowns persist. Government programs and bailouts were the financial lifeline to families in need; however, if you don't plan for it properly it could become the anchor that sinks you in 2021.
In fact, a recent survey out by Scotiabank highlights almost one in five Canadians have received CERB to assist them financially while two-thirds are concerned about the effect the benefit will have on their tax return especially those between the ages of 18-34 (72%) and 35- 54 (71%). This is concerning as time is running out for year-end tax planning.
Let鈥檚 look back: If you were unable to work your regularly scheduled hours due to the COVID-19 pandemic, due to a job loss, quarantine, or even forced to care for family members in 2020 you were eligible for the CERB benefit for up to 28 weeks at $500 per week to a maximum of $14,000. The CERB was available until September 26, and yet you could still apply retroactively until, December 2.
It was telegraphed loudly at the time by CRA that no tax was deducted at the source. As a result. the government will be issuing you a T4A reporting slip for the total amount of CERB you received. In turn, it must be then reported as income when filing your 2020 taxes. The actual amount you owe will depend on your 2020 marginal tax rate.
When the CERB wound down in September it was replaced with three separate programs:
- Canada Recovery Benefit (CRB): If you are self-employed and not eligible for EI you can receive a taxable benefit of $500.00 per week for up to 26 weeks. The government will withhold 10% in taxes on any payments, but beware it may not be enough to cover off your tax liability. As well, there is a threshold limit of $38,000 excluding CRB, meaning if you earned more then $38,000 you may be required to pay back the government at a rate of $0.50 for each dollar of CRB received over this amount.
- Canada Recovery Sickness Benefit (CRSB): If you become ill or have to self- isolate due to COVID-19 and don't get paid sick leave, this benefit will pay you $500 per week, for up to 2 weeks and is available from September 27, 2020 to September 25 2021. Similar to the CRB, the amount paid to you is taxable and subject to a 10% withholding tax.
- Canada Recovery Caregiving Benefit (CRCB): This plan is available for those having to care for a family member due to COVID-19. It amounts to $500 per week and runs in duration similar to the CRSB. This benefit, like the others, is a taxable benefit and subject to withholding tax of 10%.
My fear is that the benefits offered by the government, a necessary lifeline for families, has been taken at face value and the tax consequences ignored. I get it. Families needed the money to make ends meet. All the money they could get their hands on and the tax consequences were not the priority. However, fast forward to today, and the reality is these benefits are considered to be income and will be taxed accordingly at your marginal rate for the 2020 taxation year.
The new programs now have 10% withholding tax embedded in them, yet for some that still may not be enough money held back for taxes, depending on how much income has been earned and your corresponding marginal tax rate.
For others who benefited from the CERB it is all on you to tuck some money aside for payment back to the government come April.
You don't need to make a tough year tougher on yourself financially, so a little year-end tax planning estimation will cost you time today but could save you money come April when you file your 2020 taxes.
Call to action:
- Estimate your 2020 income from all sources, including the government.
- Look for ways to reduce your 2020 income by making a contribution to your RRSP, a charitable donation, pooling medical and dental expenses and search out all avenues to lower your 2020 tax bill.
- Reduce any discretionary costs and tuck aside unused money for the tax liability that is coming your way.
- For some, the withholding tax of 10% will be sufficient; however, for many it won't be. Determine today what you will owe and plan accordingly.
