Did you receive government benefits last year due to the COVID-19 pandemic? These benefits may have been to help you cover the cost of:
- child care or
- health care.
Now that it’s tax season, however, you may have to declare those government benefits in your tax returns. And possibly pay some of it back. But, while you may have to pay, contributing to your RRSP may reduce that amount. See how an RRSP help lower your tax bill.
Here’s a breakdown of how COVID-19-related benefits may affect your taxes:
- Do you have to pay tax on Canada Recovery Benefit (CRB)?
- How much tax can you expect to pay for CRB?
- Do you have to pay tax on Employment Insurance (EI)?
- Do you have to pay tax on Canada Recovery Sickness Benefit (CRSB)?
- Do you have to pay tax on the Canada Recovery Caregiving Benefit (CRCB)?
- Do you have to pay tax on the Canada Emergency Student Benefit (CESB)?
- What do you do if you owe a lot in tax?
- How can an RRSP help lower your tax bill?
- Apart from your taxes, what if you need help managing your finances?
Do you have to pay tax on Canada Recovery Benefit (CRB)?
Beginning in September 2020, the CRB* provided $1,000 — later scaled back to $600 — every two weeks to Canadians who:
- couldn’t work for reasons related to COVID-19, or
- had seen a reduction of at least 50 per cent of their weekly income (compared to the previous year) because of COVID-19, and
- were not eligible for Employment Insurance (EI).
These are the main qualifications, though there were other qualifications for benefits. Visit the Government of Canada’s website to learn more.
While the CRB ended in October 2021, Canadians who received the benefit in 2021 will have to pay tax. Why? Because money received from the CRB is taxable income.
*Note: The CRB replaced the Canada Emergency Response Benefit (CERB).
How much tax can you expect to pay for CRB?
Unlike the CERB, the Government withheld 10 per cent tax at source on all CRB payments. However, recipients may have to pay more tax on their CRB income at tax time. Anyone with net income above $38,000 in a year will have to repay $0.50 for every $1 of CRB benefit they received above the threshold. The $38,000 net income amount does not include CRB income itself. But it does include payments from other emergency response benefits, like the:
- Canada Recovery Sickness Benefit (CRSB) and
- Canada Recovery Caregiving Benefit (CRCB).
Here are a few examples to help explain how this works:
- If your net income for the year was $40,000 (not including the CRB benefit) and you had received $4,000 in CRB benefits, you must repay $1,000 of the CRB benefits you received. ($0.50 on every dollar up to $2,000 is $1,000. You’d get to keep the remaining $3,000 in CRB benefits.)
- But if your net income was $50,000 and you had received $4,000 in CRB benefits, you must repay the entire $4,000 in CRB benefits you had received. ($0.50 of $12,000 in net income above the $38,000 threshold is $6,000, more than the $4,000 in CRB benefits you received).
Tax slip: You’ll get a T4A tax slip that tells you how much you got in CRB payments.
Do you have to pay tax on Employment Insurance (EI)?
After the government discontinued CRB, they replaced it with a new temporary EI program. Eligible Canadians were able to receive at least $400 per week for up to 28 weeks (approximately six months).
Like CRB, the Government:
- Considers EI taxable income. So you’ll have to report it in your tax return.
- Has already withheld some taxes for EI payments. So you may not have to pay as much tax when you file your return.
Tax slip: The CRA will send you a T4E slip for EI. It’ll tell you how much income you received in EI.
Do you have to pay tax on Canada Recovery Sickness Benefit (CRSB)?
The CRSB offers eligible employed Canadians, without paid sick days, $500 a week for a maximum of six weeks.
This benefit is taxable income and it’s partially taxed at the source. This means the CRA withholds 10% of this benefit before it goes to you. But you may still owe additional taxes on this benefit. This will depend on your total income and your provincial tax rates.
Tax slip: You’ll get a T4A tax slip that tells you how much you got in CRSB payments.
Do you have to pay tax on the Canada Recovery Caregiving Benefit (CRCB)?
The CRCB is available to Canadians who can’t work because they’re caring for a family member due to COVID-19. It offers $500 per household for each week, for up to 44 weeks, between September 27, 2020 and May 7, 2022. Note that because of the May 7, 2022 deadline the 44 week window is shrinking.
The Government also treats this benefit as income and is partially taxed at source. So, the CRA has already withheld 10%. But you may have to pay additional taxes depending on your overall income and tax bracket.
Tax slip: You’ll get a T4A tax slip that tells you how much you got in CRCB payments.
Do you have to pay tax on the Canada Emergency Student Benefit (CESB)?
The CESB was available in 2020 to post-secondary students and recent high school and post-secondary graduates. It offered $1,250 for a four-week period, for up to 16 weeks, between May 10 and August 29, 2020. If applicants had a disability or dependents, they could get an extra $750 for each four-week period.
The government closed the CESB. They will not accept any more applications for it.
This benefit was treated as taxable income, and there was no withholding tax taken from it. If you received this benefit, you would have reported the income you received from it on your 2020 tax return.
Tax slip: You would have received a T4A tax slip in early 2021. It tells you how much you got in CESB payments.
What do you do if you owe a lot in tax?
Let’s say you received a lot of taxable income through some of these COVID-19-related benefits. But there’s been little, or no withholding tax taken. In such a case, you may get stuck with a large tax bill. So, what can you do to reduce it? One tip is to talk to a tax professional (like an accountant).
A tax professional can help give you an estimate of:
- your tax liability and
- how much you’ve already paid through withholding taxes.
If you find yourself with a large estimate, a tax professional can help. They’ll help figure out a strategy to help you to start saving right away. This way, you can make sure you’ve got enough money by the end of April to pay your taxes.
Working with a tax professional can help ensure you’re:
- following all the tax rules and
- making the most out of any tax deductions and credits available to you.
How can an RRSP help lower your tax bill?
An RRSP is a personal savings account that has special tax advantages. Adding money to your RRSP will offset the amount you have to pay in taxes in a calendar year. That’s because all your RRSP contributions are tax deductible. This means you can reduce the amount of your taxable income. For example, let’s say you earned $50,000 last year and qualify for $20,000 in tax deductions. This means you’ll only have to pay taxes on $30,000 of your income. Even better, the $20,000 you don’t have to include in income would have been taxed at your highest marginal rate.
Apart from your taxes, what if you need help managing your finances?
You may want to also consider talking to an advisor to decide the most strategic way to contribute to your RRSP. An RRSP can hold different types of investments – like stocks, bonds and mutual or segregated funds. Your investments grow tax-deferred. This means you won’t have to pay taxes on them until you start withdrawing funds. Plus, a spousal RRSP may help you pay less tax as a couple.
An advisor can look at your specific financial needs and goals to help you build a personalized plan.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.