We recently talked about the importance of a mid year financial and tax check up. This included making sure your 2019 tax obligations were up to date and making any necessary adjustments to your return.
But this time of year is also a good time to take stock of your 2020 tax situation so that you can be prepared come year end. While this is important any year, it is especially important this year, as many of you have experienced drastic financial changes in light of COVID. Not to mention programs and adjustments made to support Canadians throughout the year.
Taxes On Canadian Emergency Response Benefit
The federal government has processed over 18 million CERB applications. But in many cases, the taxpayers who received their CERB payments are unaware that CERB is taxable income and that no income tax was deducted off of the payments.
That means that come 2021, the tax will have to be paid once tax returns are filed.
For taxpayers whose total taxable income for the year is under $48,535, tax owed on the CERB payments will be 15% plus provincial taxes. For those with income between $48,535 and $97,069, the tax rate will be 20.5% plus provincial taxes on CERB payments.
To help soften the blow of additional taxes owing come the new year, CERB recipients should start planning for the additional amounts.
The easiest way to do this is to begin setting aside money to pay these additional tax obligations. But with budgets already being tight, this may be hard to stick to.
If you are not able to put aside funds yourself, there are additional options available.
For those who have returned to work or will be before the end of the year, you can ask for additional taxes to be withheld to cover tax owing on CERB. This will mean slightly less take home each paycheque, but it will help ensure the CERB taxes have been accounted for. And you won’t have to worry about “accidentally” taking from the funds you put aside yourself.
If this is not an option, and you’re not able to set aside enough money yourself, you will likely have to dip into your savings.
If possible, withdraw from a non-registered account, such as a savings account.
Or, if there is no such account available, withdraw from your TFSA. Unlike registered accounts, money withdrawn from your TFSA will not be taxable. And if you make the withdrawal before the end of 2020, you can replace the amount in 2021.
Registered plans should be a last resort.
That’s because withdrawals from registered plans are considered taxable income, which means additional taxes will be owed on the withdrawal. In addition, you cannot replace amounts withdrawn from and registered plan – your contribution room will be lost forever.
Lastly, if you don’t have savings, you can consider borrowing money to pay your tax bill. If you do choose to go this route, you should be aware of the interest rate.
For help planning for the 2020 tax year and determining the best strategy to pay taxes owing on your CERB amounts, contact us today.