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Tax Planning for CERB: What you need to know to plan for your 2020 taxes

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The Canada Emergency Response Benefit (CERB) was a lifeline for many Canadians during the COVID-19 pandemic. In fact, almost nine million people applied for CERB in 2020.

Many of those people may now be wondering, do I have to pay back CERB? While the benefit helped countless furloughed workers to keep paying the bills, a lot of people may not have been aware that, as far as the CRA is concerned, CERB in Canada is taxable. However, tax is not taken off at source (before you receive it), as it is with most pay cheques, so, you may owe tax when you file in 2021.

For those of you wondering, how much should I put away for taxes, we take a look at how a CERB tax might affect your returns and what you can do from a tax planning perspective.

What you need to know for tax planning in Canada for 2020

Given that CERB in Canada is taxable, you should plan for a possible CERB tax bill in April. There are a few things to consider:

  • How much money in total have you received in 2020 from CERB?
  • Were you taxed on other income this year from your employer?
  • How much non-CERB income did you make this year?
  • Did you save money to cover taxes on self-employed income?

Knowing these figures is a good starting point for anyone wondering, how much do I have to pay back in taxes?

Getting to the exact figure of CERB tax that you will owe will also depend on where you live, your age and any tax credits you might qualify for. It can be a complicated process, and while many people may find that they owe money, others might not owe anything.

How much do I need to pay in CERB tax?

Tax specialists and accountants are advising their average income clients to set aside around 20% of their CERB income to cover any possible CERB tax. “Average” income would be around $48,000 or less. However, if you earn a lot more or considerably less than the average, 20% may not apply.

For example, if you qualified for CERB but your total income for the year was less than $13,229, you may not owe a cent in CERB tax. That figure is the basic personal amount, which is the amount of earnings on which you don’t pay any tax. If your total earnings for 2020 are closer to $80,000, you might owe as much as 35% in CERB tax.

Working out your CERB tax bill

To get a more accurate idea of how much you might owe, add up your total income (before tax) and your total CERB payments for 2020.

Next, go onto an online tax calculator, and enter your home province, all income details, including from investments (for example, dividends and realized capital gains), plus your CERB income.

The calculator will work out your total tax bill for the year. Divide that amount by 52 to calculate how much tax you need to pay each week. Next, multiply that dollar figure by the number of weeks in which you received CERB.

Here’s an example: Susannah lives in Quebec and asks: do I have to pay back CERB? In 2020, she was furloughed from her job for 16 weeks and received $8,000 in CERB. Over the course of the rest of the year she earned $22,000.   

According to the tax calculator, she will owe a total of $5,355 in tax for the year.

$5,355 divided by 52 = $102.98 tax per week.

$102.98 x 16 weeks of CERB = $1,647.68 owing in CERB tax.

So, to answer Susannah’s question, do I have to pay back CERB? Yes, she needs to pay back $1,647.68. This is just a rough calculation: you should talk to your accountant or tax specialist to get the precise figure.

How much should I put away for taxes?

As with regular tax planning in Canada, ideally you would have saved part of your CERB payments every month at a percentage that matches your overall income, as shown above.

If you didn’t do this, there is still time to put enough money aside (the tax filing deadline for 2020 taxes is April 30, 2021 if you are employed). Work out how much you owe, divide that by the number of months left until the deadline, and you have the monthly amount you need to save.

If you file late, you could be charged interest and possibly late payment penalties.

What are my options if I can’t save enough for my CERB tax bill?

If you’re aged under 55, the best option is to contact the CRA directly and work out a payment plan. This will spread out the amount you owe over a longer period, but you will probably also have to pay interest and a penalty.

If you’re a homeowner aged 55 and over and have very limited income, you could pay for your CERB tax bill with a reverse mortgage. This is a loan based on the equity in your home, rather than your income. The best part is that you don’t have to make any monthly payments, so it won’t affect your retirement income. You only pay what you owe when you move out or sell your home.

Call us today at 1-866-522-2447 to find out how much you could borrow to pay off your CERB tax and boost your retirement income. 

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