It's tax season, which can be a confusing time for many Canadians.
But those feelings of uncertainty may be heightened this year as a result of the pandemic, especially for those Canadians who may be trying to determine how COVID-19 might impact their personal tax filings this year.
Because, for the millions of Canadians who received government support last year as a result of the pandemic – such as CERB (Canada Emergency Response Benefit) or CRB (Canada Recovery Benefit) – their personal income taxes may look very different than years past.
"Most people* who received government benefits last year due to the COVID-19 pandemic should know that nearly all benefits the federal government offered are taxable," said Tannis Dawson, Vice President of High Net Worth Planning at TD Wealth.
"CERB, which was offered until September 2020, withheld no tax on payments. So, any Canadian who received CERB will be taxed on the amount they were paid which will be reflected on their taxes this year.”
Dawson said that for those who received CRB, the federal government withheld a portion of payments (10%) for taxes. But since the lowest tax rate in Canada is 15% (federal) plus the provincial rate, Canadians who received CRB will still be required to pay additional taxes for the benefits.
However, Dawson added that there were a few benefits offered by the federal government which are tax-free, such as the one-time GST credit, the one-time OAS (Old Age Security) credit, and the one-time GIS (Guaranteed Income Supplement).
For anyone who received taxable government support due to COVID-19 last year, Dawson has a few considerations that may help to navigate your taxes this year.
Do a draft tax return sooner than later
If you received any form of COVID-19 government benefits and aren't sure what to expect as you begin the process of filing your taxes, Dawson highly recommends looking at your situation "sooner than later" and to get an estimate of what you may owe by completing a draft tax return.
"Collect your T4 (if applicable) which will give you your employment income, and your T4A which will have the total benefits you received from the government, as well as your T4E if you received EI (Employment Insurance),” she said.
“Be sure to compile other sources of income (such as your investments) and use all of this information to put together a draft tax return that will help you determine your tax situation ahead of time so you can prepare."
Draft tax returns can be completed at any time either digitally or on paper. For more information on how to file a tax return, visit the CRA website or speak to a tax professional.
File early to help avoid penalties
Every Canadian who received government benefits due to COVID-19 has a unique situation – some received benefits for a period of time but then returned to work, while others received (and are still receiving) government benefits and are using the total amount to pay their bills and living expenses.
No matter your situation, Dawson recommends filing before the April 30 tax deadline if possible, especially for Canadians who may owe taxes.
"If you file ahead of the deadline and you owe taxes, you will likely only be required to pay interest on the amount you owe which begins accruing after the April 30 deadline. But if you file late, you'll be charged both a late penalty and any interest that accrues on the amount you owe."
Canadians who received government benefits for a period but then returned to work may owe a greater amount than usual on their tax return as they will have to pay taxes on the CERB or CRB payments they received, in addition to the income they received after returning to work.
But for Canadians who received or who are still receiving support and have no other means of income, the taxes potentially coming their way may be distressing.
"It can be even more crucial for those without income to complete a draft tax return and file their taxes early. This way, they can gage how much they will owe in taxes and be prepared for a repayment plan," said Dawson.
For more information on tax filing, visit the Canada Revenue Agency website or speak to a tax professional.
Want to connect with a TD Wealth advisor to discuss how you can implement tax-efficient strategies? Visit the TD Wealth website.
*There are some exceptions. On February 9, 2021, the Government of Canada announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their gross income will not be required to repay the benefit, provided they also met all other eligibility requirements.
The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.