For those of us who had mastered the thousands of different acronyms for government programs, 2020 may have come as a relief or a new challenge. Here we have a whole new alphabet soup to try and untangle!
More challenging yet, how do we do tax planning around the CERB, CRB, CRSB, CRCB, CESB, EI, rent and debt abatement and the one-time extra payments on some existing programs?
The main thing to remember is to put money away for your 2020 taxes, as most of these benefits are taxable but with little or no tax withheld at source.
The most common was the Canada Emergency Response Benefit (CERB), which was replaced in November by the Canada Recovery Benefit (CRB). The new CRB differs in that its payments have 10% tax withheld, versus nothing for CERB and other programs.
People eligible for the CERB could have received up to $14,000 taxable income, but with no income tax withheld. That may work out fine for someone whose only income for the year is the CERB, or if they have tuition credits or other significant deductions.
But someone in a well-paying job, whose income was interrupted for a few months and then resumed work, might owe as much as 40% of that CERB payment when they go to file their income taxes for 2020, in April 2021.I recommend that you try now to estimate what your 2020 income will be and check an online income tax calculator for your marginal tax rate. That will give you an idea of how much you might owe.
Remember that any quarterly tax instalment payments you make will reduce the amount you would otherwise owe next April.
If you’re in a high tax bracket and have cash reserves, you might consider an RRSP contribution before March 1, 2021 to offset CERB or other income that did not have withholdings. (This assumes you have some contribution room.) Every dollar into an RRSP offsets one dollar of taxable income.
Also keep a record of your layoff notices, COVID test results, job searching history if you are a student and other documentation relevant to the criteria for any program under which you received benefits. CRA may ask.
Here are the programs that are taxable:
Canada Emergency Response Benefit (CERB)
Canada Recovery Benefit (CRB)
Canada Recovery Sickness Benefit (CRSB)
Canada Recovery Caregiving Benefit (CRCB)
Canada Emergency Student Benefit (CESB)
Employment Insurance (EI) benefits.
There were a number of one-time benefits that are not taxable, but remember that your regular benefits under these programs have the same tax treatment as before.
These extra payments included GST/HST credit, Canada Child Benefit payment, extra OAS and GIS payments and extra payment for persons with disabilities.
Business owners may have similar tax issues, as the forgivable portion of the loan programs are also taxable.
Plan ahead to avoid surprises when you complete your tax return.
* * *
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Portfolio Manager and Senior Vice President with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.