Due to the COVID-19 pandemic, you may have received government benefits last year to help you cover the cost of unemployment or healthcare. 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.
Here’s a breakdown of which COVID-19-related benefits are taxed and which are non-taxable.
Do you have to pay tax on CERB?
Last year, Canadians who were sick, quarantined, unable to work or facing unemployment because of COVID-19 were able to apply for the Canada Emergency Response Benefit (CERB). The benefit offered up to $2,000 monthly, for up to 4 months. This year, Canadians will have to pay tax on CERB. Why? Because the money you received from that benefit is taxable income.
How much tax can you expect to pay for CERB?
It’s important to note that there’s been no withholding tax taken on CERB payments. Withholding tax refers to money that’s taken directly from your income and given to the government.
For example, if you have a permanent job, it’s likely that the withholding tax has already been taken from your salary before you receive it. This way, you won’t have to pay so much in tax when you file your taxes.
However, since there’s been no withholding tax for income received from CERB, you may have to pay more tax than you would if the government had withheld taxes. The exact amount you have to pay in tax depends on your tax bracket, which is based on the income you received for the entire year, including CERB.
Tax slip: If you received CERB in 2020, look out for a T4A tax slip from the Canada Revenue Agency (CRA) in February. The slip will note the amount you received and you’ll have to file it as income.
Do you have to pay tax on Employment Insurance (EI)?
After the government discontinued CERB in September 2020, they replaced it with a new EI program. Eligible Canadians were able to receive at least $400 per week for up to 28 weeks (approximately six months).
Like CERB, EI is considered taxable income. So you’ll have to report it in your tax return.
But unlike CERB, the government 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 Canadians who are employed without paid sick days $500 a week for up to two 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 depending 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 6 months.
This benefit is also treated as income and partially taxed. 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 last year 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.
This benefit is treated as taxable income, and there’s been no withholding tax taken from it. So you’ll have to pay tax on it when you file your return.
Tax slip: You’ll get a T4A tax slip that tells you how much you got in CESB payments.
Do you have to pay tax on the Canada Recovery Benefit (CRB)?
The CRB is for self-employed Canadians who aren’t eligible for EI. It offers them $1,000 per week for up to two weeks. But you can continue to reapply until you’ve had up to six months of benefits.
The CRA sees this benefit as taxable income and withholds 10% tax at the source. This means you’ll actually get $900 per two-week period after taxes. But you may have to pay more tax on this benefit when you file your taxes. The exact amount depends on how much income you earned overall. The CRA says that you’ll have to reimburse $0.50 of the CRB for every dollar of net income you earned above $38,000* on your income tax return. But if your net income was $38,000* or less, then you won’t have to pay back the CRA.
(*Please note that this income amount excludes any payments you receive from CRB.)
Tax slip: You’ll get a T4A tax slip that tells you how much you got in CRB payments.
Which government benefits are tax-free?
Luckily, not all government benefits are taxed. Here are a few that you get to keep tax-free:
- Disability Tax Credit (DTC),
- Goods and Services Tax Credit (GSTC),
- Canada Child Benefit (CCB), and
- Guaranteed Income Supplement (GIS) 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 you figure out a strategy 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. They can also help you build a strategy where you make contributions to a registered retirement savings plan (RRSP) in order to reduce your tax bill.
How can an RRSP help lower your tax bill?
An RRSP is a personal savings account that has special tax advantages. 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.
What’s more, 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.
- 2021 guide to RRSPs: Your top questions answered
- Opening your first RRSP? Here’s what you need to know
- 6 things you may not know you can do with your RRSP
Apart from your taxes, what if you need help managing your finances?
You may want to also consider talking to an advisor. An advisor can look at your specific financial needs and goals to help you build a personalized plan.
- Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.
- 3 ways an advisor can help you during COVID-19
- Important questions to ask an advisor you’re just meeting
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.