If you were affected by the 2020 COVID-19 lockdowns and received the CERB (Canada Emergency Response Benefit) you may have a large tax bill coming your way.
When you receive employment income, taxes are deducted at the source and sent to the government on your behalf. This pay as you go program stops you from owing large amounts come the new year.
The amount deducted from your income reflects the annual earnings you’re expected to make at your place of business during the year. Sometimes this amount isn’t quite right because of changes in hours worked, increases or decreases in salary or credits you reported on your TD1 Forms. As a result, you may get a tax refund or owe more taxes come tax season.
Similarly, if you received regular EI Benefits, Canada Recovery Benefit, Sickness Benefits and Caregiving Benefits, which is the case for many Canadians in 2020, tax is deducted from your payment. This amount is usually less than what’ll actually owe on the amount but at least some tax is taken off to lower your tax owing come the tax season.
CERB is a different beast. To help Canadians quickly and delay the tax liability, CERB was paid without tax being taken off. That means you are on the line for the taxes on each payment you received. No money was deducted and sent to the government on your behalf.
That is up to $14,000 you received without deducting taxes. If that is the only taxable income you brought in, your liability will be lower, but if you also worked or received EI during other parts of the year, you could be in for a surprise.
And this is all assuming you didn’t receive benefits you weren’t entitled to. Because, if you claimed CERB when you weren’t entitled to it, you may owe back the full amount of payments received. Specifically, the Canada Revenue Agency (CRA) is looking to recover funds from recipients that did not meet the criteria of making at least $5,000 in the 12 months prior to applying.
To help prepare for the tax bill, you will want to start setting aside money as soon as possible. We know this is much easier said than done, especially with the job market still being unstable. But any bit that you can pay towards your tax bill will reduce penalties and interest later on.
You also have the opportunity to take advantage of your RRSP until March 1, 2021. Any contributions you make will reduce your taxable income and therefore your tax owing, so long as you stay within your contribution room and deduction limit.
You may even want to consider moving money from other saving vessels such as TFSAs or e-savings accounts where contributions are not deductible from your income. That way you can continue to save and earn interest while also lowering your tax liability.
The biggest concern with moving savings from other accounts to your RRSP is liquidity. Depending on what your RRSP funds are invested in, it may be hard to pull them out. You also have to consider that while you will enjoy tax savings upon depositing funds, you’ll have to pay tax when they are withdrawn. This could increase your tax liability in future years. Finally, once the amount is withdrawn, the contribution room is lost. That means the maximum amount you can put in your RRSP is reduced.
For more information on planning for your 2020 tax filing, contact us today. Let’s figure out the right plan for your specific situation.
