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The Canada Emergency Response Benefit has played a pivotal role in shielding many Canadians who have lost their jobs as a result of COVID-19 from undue financial hardship, but recipients could find themselves scrambling for extra cash next tax season if they don’t plan ahead.
As of July 26, the federal government had paid out nearly $63 billion in payments to 8.46 million unique applicants. Unlike with regular income from an employer, the federal government decided against withholding any tax at source from CERB payments to give Canadians access to the full benefit when they need it most — but figuring out your future possible tax burden can be a daunting process.
CIBC managing director of tax and estate planning Jamie Golombek said the first steps involve estimating your total income for 2020 including any regular income and CERB payments, and then Googling a Canadian online tax calculator.
“[Your tax rate] could be from zero to 54 per cent depending on how much your income was and where you live in Canada,” he told BNN Bloomberg in a phone interview.
Taking those steps can give you an idea of how much of the CERB payment you should be setting aside.
There are also some ballpark percentages most Canadians can abide by.
If you believe your total 2020 income will be under $40,000, Golombek suggested putting away 25 per cent of your CERB income, as a general rule.
If you earn a higher income, he said you should stash away up to 35 per cent, while Canadians in the upper tax brackets should set aside 40 to 50 per cent of the benefit for tax purposes.
“Set aside the money now. Don’t try to look for it next April because if you file and don’t have the money you owe, you’ll be hit with interest and possible penalties,” he said.
Josee Cabral, advanced tax specialist at H&R Block, agreed.
“Fifteen per cent is the minimum you should keep aside but I’m telling my clients to keep 20 per cent aside,” she said in a phone interview with BNN Bloomberg.
There are a small number of CERB recipients who will not have to pay any tax at all.
Canadians who earn less than the federal basic personal amount will not have to pay any tax on that income including CERB as long as the total is under that threshold.
The federal government is widely expected to increase the basic personal amount to $13,229 for 2020.
Golombek said everyone’s situation is different but a person’s level of income is the number one factor that impacts their tax burden, less any deductions, followed by the numerous credits that can reduce the amount of taxes owing.
Back to basics
Jason Abbott, president of WEALTHdesigns.ca, does not take it for granted that all CERB recipients fully understand the tax implications of the benefit.
“It’s kind of all over the map. Some people get it inherently, some people need a reminder,” he told BNN Bloomberg in a phone interview.
Some Canadians on CERB have suddenly found themselves with much less money coming through the door. In which case, advisors have to go back to the basics with clients, which involves discussions about cash flow and debt management, Abbott said.
Aside from cutting back on discretionary spending to cope with a recent reduction in income, Abbott said if you’re a homeowner, the best bet is a home equity secured line of credit.
“That’s always going to be the cheapest way to access debt.”
“If you don’t have that option, there are more expensive options out there where some people will have an unsecured line with a higher rate. Others will carry an ongoing credit card balance which is a very expensive proposition. So if you have to take on debt, make sure you access it at the lowest rate available — that’s always home equity,” he said.
Some Canadians might want to get creative by investing in their Registered Retirement Savings Plans (RRSPs) and using the tax refund to help take care of the potential tax bill next year, but Abbott suggested avoiding this mindset for the time being.
“There’s so much uncertainty, I would tend to think if you’re investing in RRSPs — don’t do it,” he said.
“Just put it on hold. Stack that cash. If you can get one to 1.5 per cent on a high-interest offering, do that instead. If things right themselves and next year rolls around and you want to drop that money into your RRSP to get the income deduction, you have the ability to do that for the first 60 days (of 2021).”
He added the worst-case scenario would be having to pull the money out of your RRSP after the fact because you misjudged your work and financial situations, so it’s better to defer that decision to early next year when you’ll have a better picture of your circumstances.
Canadians whose regular income is substantially higher than the CERB’s $2,000 monthly benefit might find they actually have a lower tax bill stemming from CERB than those making approximately the same monthly amount.
“Think of an employee making $60,000 or $80,000 a year — if they didn’t tap into CERB until four or five months into the year, they would’ve contributed withholding tax from their regular salary at their higher rate. So what will happen is the CERB benefit will lower their income for the year and they might find they’ll have a little tax bill differential when they file,” Abbott said.
A person whose typical monthly employer income is comparable to CERB won’t have that same advantage so they’re likely going to have a bit of a tax bill, he added.
What is universal, however, is that this time in our lives is truly unlike anything we’ve seen before, and Abbott said people should be more forgiving of themselves.
“For the person that simply can’t make all their obligations right now, do the best you can. Give yourself a break. Don’t beat yourself up for it. The situation is going to be vastly different in six to 12 months,” he said.