Six million Canadians have applied for the Canada Emergency Response Benefit (CERB) amid the novel coronavirus pandemic.
The federal income support program provides $2,000 every four weeks for up to 16 weeks to Canadians who’ve been financially affected by the pandemic. Ottawa isn’t withholding any taxes at source on those benefits, meaning recipients are getting the full $2,000 for now.
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But the money is “taxable,” Ottawa has said, and many Canadians are wondering just how much they’ll have to eventually pay back.
The short answer is, that will depend in large part on how much income you’ll have for 2020 as a whole.
“Taxable income is simply arrived at by adding up all different sources of income regardless of their source,” said Gennaro De Luca, a certified financial planner and managing director of WEALTHplan Canada.
For example, suppose you made $27,000 from work in 2020 and received the maximum CERB amount of $8,000 for four months. Your taxable income for the year would be $35,000, said Frank Fazzari, a chartered professional accountant at Vaughan, Ont.-based Fazzari + Partners.
Both the income you received from CERB and your job would be taxed in the same way, Fazzari said. If you lived in Ontario and claimed the Climate Action Incentive, your tax liability for the year would be $4,168, including both provincial and federal taxes.
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However, the amount of tax you’ll actually have to pay may involve a variety of other factors — it’s even possible you won’t have to pay any tax at all.
“If you’re under $12,000 in total income for the year, you don’t have to worry about any income taxes next year,” Fazzari said.
In fact, you may be in the clear, even if you made a little bit more than that.
For example, imagine you were an Ontario-based student with $15,000 in total taxable income, including CERB and a $5,000 tuition bill for the year. You’d be able to claim the education tax credit and end up with a tax refund of $225, assuming you also claimed the Climate Action Incentive.
Even without the education tax credit, you’d eke out a tax refund of $5, once the Climate Action Incentive is factored in, according to Fazzari.
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It’s important to know there’s a difference between CERB and traditional employment insurance (EI) payments when it comes to taxes. While Ottawa doesn’t hold back any money on CERB cheques and deposit, there is a little bit of tax withheld at source for EI payments, both De Luca and Fazzari noted.
This often leads to unpleasant surprises at tax time for EI recipients who also worked for part of the year.
“Most of the times, they’re in a position where they may have a little bit of tax owing because the rate of tax on EI benefits is generally fairly low,” De Luca said.
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This may explain why some Canadians are already worried about the tax bill they’ll face in 2021 given that CERB payments had no tax withheld at source at all.
You may be wondering about how much of your government cheque to set aside for taxes. But estimating your total income for 2020 could be tricky if you don’t know when or even whether you’ll be going back to work.
If you’re looking for a rule of thumb, De Luca suggests saving up 20 per cent of each CERB payment.
Most people’s effective tax rate — the average rate at which your income is taxed — falls somewhere between 15 per cent and 25 per cent, he tells clients.
“So I tell them 20 per cent is … probably a good idea.”
That said, if you need the full $2,000 right now to pay for necessities, it’s important to keep in mind your tax bill won’t come due until April 2021, and that’s assuming Ottawa doesn’t extend the regular tax deadline next year as well, Fazzari noted.
Canadians who go back to work once the health emergency is over may be in a better financial position to save up for their expected tax bill later on, both he and De Luca said.
“You have to deal with what’s right in front of your face first,” De Luca said. If money is tight, he said, “make sure that there’s food on the table and that your bills are paid.”
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