March 2021 will mark the first anniversary of COVID-19 changing the world as we know it. Virtually every aspect of our daily lives has been affected by the virus, and our finances are no exception.
Many different benefits came to aid millions across Canada. However, these benefits are taxable, have different tax rules, and can change the amount of taxable income you may have if you have also worked during the pandemic.
In some cases, you may owe more than you might think. To help you start this tax season on the right foot, A.C. Waring & Associates is proud to present this helpful guide so that when April 30th comes, you’re prepared.
Taxing CERB & CRB
Not a lot was made clear about how the Canadian Emergency Response Benefit (CERB) and the Canadian Recovery Benefit (CRB) would affect your finances when tax season came. In a previous blog post, we broke down dollar-for-dollar what you may owe on your taxes if you were collecting these benefits.
Here are the basics you need to know when claiming your emergency benefits on your tax form:
- CERB benefits are not taxed at the source, meaning that you will have to calculate the federal taxes you owe the same way you would calculate your income tax.
- You will have to calculate the taxes you owe alongside your provincial tax rate (in Alberta, it’s 10%).
- Income taxes are waived if you do not reach the basic personal amount of income.
- 10% of the CRB benefit is taxed at the source (instead of $1000 per payment, you will receive $900).
- However, you will also need to pay provincial taxes based on your current income tax bracket.
- If you’ve made more than $38,000 last year and still collected CRB, you will owe back $0.50 for every dollar you’ve collected.
Taxing Employment Insurance
Even your Employment Insurance (EI) is taxed during tax season. Just like with regular income and emergency benefits, you will be required to pay taxes according to your federal and provincial tax expectations.
In most cases, you will receive 55% of your regular income while on EI, provided that you are meeting the minimum requirements for the program. However, how long you get EI depends on the unemployment rate of your particular region. As of January 1, 2021, the maximum amount of insurable earnings is $56,300, meaning that you can receive a maximum of $595 a week while on EI.
In Alberta, we have a provincial income tax rate of 10% and a federal income tax rate of 15%, meaning that you may have to pay 25% in taxes on every EI benefit you receive. While some taxes may be deducted from your EI automatically when given, it usually doesn’t cover everything you owe. As a best practice, put away about 15% to 20% of your EI benefit in savings until tax season comes.
Working From Home & Utilizing Tax Deductions
While COVID-19 hasn’t made tax season any less stressful or confusing, it did open the door for many Canadians on what they can deduct from their taxable income.
The Canadian Government has helped by creating a simplified work-from-home deduction that operates at a flat rate. As a general rule, you can claim $2 a day on your taxes so long as you spent at least 50% of 2020 working from home, and there was at least one period of working from home for at least 4 consecutive weeks.
However, you can also go into more detail on your particular home office situation by claiming the square footage you need for work, the types of supplies you had to purchase, or even a portion of your utility bills (even if your utilities are part of your condo fees).
You may also have the ability to claim other deductions or credits during tax time, including:
What if I Can’t Pay Taxes Due to Debt?
You cannot get out of paying your taxes. The CRA has the ability to find the money you owe one way or another, so it’s always best to make sure you have your taxes covered. There may come a time, though, when you might not be able to pay back the taxes you owe. Rather than going through the legal ramifications of not paying your taxes, you can work with the CRA to agree on what you can pay.
Some options can include:
Payment arrangements are agreements made by you and the CRA allowing you to pay back your debt over a certain period of time.
To be approved for a payment arrangement, you must be able to show that you are attempting to pay your debt in full by reducing your expenses or by borrowing money. Once you and the CRA agree on a payment arrangement, you will pay in certain installments over time until you pay the debt.
Consumer Proposals, Bankruptcy, or Credit Counseling.
Consumer proposals and bankruptcy may be considered if you have no possible way of paying back the debts you owe to the CRA. If you are considering these, you will need to speak to our Licensed Insolvency Trustees to go over your finances before you make a final decision.
Bankruptcy halts the collection of most types of debts. However, you will have a notice of bankruptcy on all your credit reports, making it very difficult for you to borrow money in the future.
Afraid Your Debt Might Affect Your Taxes? Call Us Today
If you think your debt will prevent you from paying your taxes in full this coming tax season, our team of Licensed Insolvency Trustees will help you find meaningful solutions to your problems. Whether it’s considering bankruptcy or going through a series of credit counselling services, you can rely on us to make sense of your financial situation.