Category:

Personal Finance

If you have already repaid, the government will be sending it back to you

Postmedia may earn an affiliate commission from purchases made through our links on this page.

Article content

Sometimes, one word can make all the difference.

This week, the federal government officially backtracked on its previous position when it announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their “gross” income but not their “net” income will not be required to repay the benefit, provided they also met the other eligibility requirements.

No need to repay CERB

Readers will recall that back in December 2020, the Canada Revenue Agency sent out 441,000 “educational letters” warning individuals that they may not be eligible for the CERB. The letters were sent out to individuals for whom the CRA said it was “unable to confirm … employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application.”

The issue of whether the $5,000 income threshold for the self-employed means “gross” income (i.e. revenues) or “net” income (i.e. net of expenses) has been discussed extensively. It has always been the CRA’s view that the $5,000 refers to net income and thus if you had gross income of $5,000 in the required time period, but netted under $5,000 after deducting business expenses, then you didn’t qualify for the CERB and, until now, the CRA’s position was that you needed to return it.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

This week, the government reversed that position and said that self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay it, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria. The same approach will apply whether the individual applied through the CRA or Service Canada.

What if you already voluntarily repaid the CERB based on the government’s previous instructions to do so? Well, you’re in luck as the government will be sending you back any amounts you repaid, with additional details on how, and when, to be announced in the coming weeks.

But, the question on many other self-employed Canadians’ minds this week is: what about those individuals who didn’t apply for the CERB because their “net” self-employment income was under $5,000? It appears that they’re out of luck.

Interest relief

For some Canadians, the 2020 tax year may be the first time in their lives that they won’t be getting a tax refund and may actually end up owing some tax. That’s because, just like Employment Insurance (EI) benefits, the COVID-19 emergency and recovery benefits, including similar provincial benefits, are taxable. And, although tax was withheld at source at a rate of 10 per cent of the benefit amount for the three Canada Recovery Benefits (the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit), no taxes at all were withheld from the CERB or the Canada Emergency Student Benefit. In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of the CRB payments for every dollar in net income you earned above $38,000 (to a maximum of the CRB received in the year.) Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

To illustrate, assume Mike, an Ontario resident, was furloughed from his company in mid-2020. His pre-COVID income was $18,000 from which his employer withheld $2,200 in federal and provincial tax. He applied and received $14,000 of CERB, for which no tax was withheld. The result is that Mike would owe about $850 in taxes when he files his 2020 return, after taking into account non-refundable credits for the basic personal amount (federally $13,229), the Canada employment amount ($1,245) and the Climate Action Incentive ($300). (CPP and EI have been ignored for this example).

Now take Heather, whose 2020 income was $44,000 prior to losing her job due to COVID layoffs. She applied and received six periods of CRB for the final three months of 2020, for a total of $6,000 (with $600 withheld.) But, when she files her return, she will be forced to repay $3,000 of the CRB since her total income for 2020 was over $38,000, and the CRB is reduced by 50 per cent for each dollar of income above this amount (i.e. ($44,000 – $38,000) X 50 per cent).

But, what if Mike and Heather don’t have the funds to repay the government by the April 30, 2021 payment deadline?

To help taxpayers like Heather and Mike, the government also announced this week that it will be providing targeted interest relief to Canadians who received COVID-related income support benefits. Once you’ve filed your 2020 income tax return, if you qualify, you won’t be charged interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022, giving you more time and flexibility to pay if you have an amount owing.

Advertisement

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

To qualify for this targeted interest relief, you must have had a total taxable income of $75,000 or less in 2020 and have received income support in 2020 through one or more of the COVID-19 measures: the CERB, CESB, CRB, CRCB, CRSB, Employment Insurance benefits or similar provincial emergency benefits.

If you fall into this category, you don’t need to do a thing other than file your return, as the CRA will automatically apply the interest relief measure for taxpayers who meet these criteria. In addition, the government announced that any CRA-administered credits and benefits normally paid monthly or quarterly, such as the Canada Child Benefit and the goods and services tax/harmonized sales tax credit, will not be applied to reduce any taxes owing for the 2020 tax year.

The government estimated that the interest relief measure will provide relief to approximately 4.5 million low- and middle-income Canadians.

No change to filing deadline

Finally, the government confirmed this week that it has not extended the tax filing deadline, meaning that you should file your 2020 return by the normal April 30, 2021 deadline or risk a five per cent late-filing penalty on any amount owing. Self-employed Canadians (and their spouse or partner) should file by June 15, 2021.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

Comments

Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Depending on your total 2020 income, you may owe some tax on your COVID benefits. This is particularly true if you received the CERB or CESB, since no tax was withheld when payments were issued, so there may be a balance owing when you file.

If you received the CRB, CRSB, or CRCB, 10 per cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020. You can find the income tax deducted at source in Box 022 of your T4A slip, which should be included on line 43700 – Total income tax deducted.

In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of CRB payments for every dollar in net income you earned above $38,000, to a maximum of the CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

Jennifer Gorman, Social Care Manager for TurboTax Canada, says that if this is your first year facing a balance owing, you want to make sure you file by the deadline, even if you don’t have the cash to pay. “There are two separate penalties. You have interest that accrues if you don’t pay your balance, but there’s also a late-filing penalty,” explains Gorman. The late-filing penalty is five per cent of your balance owing, plus one per cent of the balance owing for each full month your return is late, to a maximum of 12 months.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Retirement income

The new TFSA balance of $293,728 would provide $14,985 per year for the 30 years to Marcie’s age 95, assuming three per cent annual growth after inflation. The $92,165 non-registered account would provide $4,565 over the same time frame.

In addition to investment income, Henry would have a job pension income of $30,293 per year starting at his age 65.

Their expected annual CPP benefits will be $7,426 for Marcie and $17,185 for Henry. Their Old Age Security income will be $7,384 each per year in 2021 dollars.

When Marcie retires at 65, she will able to thus draw $5,141 from RRSPs, $14,985 from TFSAs, $4,565 from non-registered investments, $7,426 CPP and $7,384 for her OAS for a total $39,500 before tax.

Henry will still be working to his age 65, drawing a salary of $77,868 per year. That’s a family total of $117,368. After splits of eligible income and 15 per cent rate on non-TFSA income, they would have $8,500 per month to spend. That’s ahead of their $8,000 monthly after-tax target.

When Henry reaches 65 and retires, the couple will lose his $77,868 salary but gain his $30,293 job pension, $7,384 OAS and $17,885 CPP based on recently revised contribution rates. That’s a total of $95,062. After splits and 13 per cent average tax that would leave them with $7,054 per month, $946 below their $8,000 per month target.

If Marcie and Henry take control of their spending now, they can make up much of that gap and enjoy their financially secure retirement.

Financial Post

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

3 Retirement Stars *** out of 5

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

We can estimate retirement income in stages: 1) the period from Wayne’s age 62 in retirement to his age 65 with Lilly still working, 2) when Wayne is 65 and drawing CPP and OAS and Lilly is still working, and 3) when both are retired and both drawing CPP, OAS and company pensions.

Retirement income

In stage 1, income will be Wayne’s $40,164 annual pension plus a $8,244 bridge to 65 and Lilly’s $43,903 salary, and $4,767 RRSP income total $97,078. In stage 2, they will have Wayne’s $40,164 pension without bridge, Lily’s $13,788 pension, her $1,716 bridge to 65, his CPP of $13,077, his OAS of $7,384 and RRSP income of $4,767 for total income of $80,896. That would last until stage 3 when their income would be Wayne’s $40,164 pension plus Lily’s $13,788 pension, plus CPP benefits of $13,077 for Wayne and $8,858 for Lilly, two $7,384 OAS benefits and $4,767 RRSP payouts for total income of $95,422.

Assuming they split eligible income, apply eligible pension income and age credits and pay 14 per cent average tax in each stage, they would have monthly after-tax income of $6,960 in stage 1, $5,800 in stage 2 and $6,840 in stage 3. That would easily cover their anticipated spending. An accumulating surplus could pay for the boat or RV or some part could go to a TFSA for a permanent emergency reserve.

Wayne and Lilly can buy the boat or the RV, travel, donate to good causes, or increase financial security by investing their surplus in TFSAs. They have left planning their future to others, but they would do well to take charge of their plans to make the most of their secure and ample resources.

e-mail andrew.allentuck@gmail.com for a free Family Finance analysis

3 Retirement Stars *** out of 5

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

This simple example may, at first glance, seem counter-intuitive. After all, with the RRSP Shira is paying tax on the dividend income at her full, ordinary Alberta tax rate of 30 per cent and if she went the non-registered route, her dividend income is only taxed at a 10 per cent marginal rate on eligible dividends. But, of course, her “net” investment in a non-registered investment is lower, and thus her dividend income is lower, because she had to pay 30 per cent tax on her employment income before she could invest.

Another way to look at is that by contributing to an RRSP, you are effectively getting a 100 per cent tax-free rate of return on your net after-tax RRSP contribution. In this case, Shira’s net (after-tax) RRSP contribution was $2,100 (i.e. $3,000 X (1 – .30)), which at a five per cent return, yields $105 of effectively tax-free dividends.

Finally, I would argue that even if your tax rate is higher in the year of withdrawal (or ultimately, in the year of death) than it was in the year of contribution, you could still be better off with an RRSP than non-registered investments because the benefits of effectively tax-free compounding might actually outweigh the additional tax cost of a higher withdrawal tax rate. This, of course, will depend on your expected rate of return, the number of years of compounding available, as well as the types of investment income you might otherwise earn by saving an equivalent amount in a non-registered account.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Some provinces have high probate fees payable on death to validate the will of the deceased before distribution. These fees can be avoided by naming beneficiaries, holding assets jointly with right of survivorship, using insurance products, or by establishing joint partner or alter ego trusts. Some provinces charge flat fees for probate, while others charge a percentage. A small percentage of a large estate can still be significant. Despite the cost of probate, the time and effort required may be reasons to try to avoid probate as well.

The risk of living too long is an important possibility to plan for and a risk to mitigate when planning retirement. Family history may contribute to life expectancy, but someone can live to a ripe old age even if their parents did not. There is a 50 per cent probability of a 65-year-old man living to age 89, and for a woman, two years longer, to age 91.

Deferring the start of a CPP or OAS pension to as late as age 70 is a good way to plan for a long life expectancy. A pensioner who lives well into their 80s may be better off in the long run, despite a delay to their pension in the short run. It may mean they need to draw down on their investments earlier in retirement while they hold off on government pensions, but this can be a beneficial strategy for someone who does not have a DB pension plan from their working years. CPP and OAS are increased for every year they are deferred, up until age 70, and are also indexed annually to inflation.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Olivia’s total invested financial assets, $492,000, put her in a position to hire an investment manager for fees well below the 2.6 per cent average charged by mutual funds. She could have the liquidity she needs, tax planning for when she is 71 and has to convert her RRSP to a Registered Retirement Income Fund and perhaps even better returns along the way. Those fee savings could go straight into her TFSA.

A custom portfolio would be structured and traded for her needs rather than the needs of others. As well, a restructuring of her investments and her tax rate, which will rise when she starts taking Canada Pension Plan and Old Age Security benefits, would be valuable.

Shopping for custom management would be worthwhile, Einarson says.

There are two final matters Olivia should consider.

First is the problem of care, should she need it. At her age, long-term-care insurance policies are costly and constrained in terms of their payouts. She could discuss arrangements for care and how it will be financed with her family as a form of pre-testamentary transfer of wealth, Einarson suggests.

Finally, Olivia also needs to consider what will happen when she passes away, for she has no spouse to whom she could transfer assets. Her capital is substantial and death will be a costly event if her registered investments still contain significant taxable sums.

Those scenarios should be years away. Olivia is healthy and employed, and her income before tax, $90,000 per year, gives her many investment and lifestyle choices. She is headed to a solid retirement.

Retirement stars: Three *** out of five

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

What is still unclear from this research, however, is whether by excluding capital gains from income, we are excluding individuals whose primary source of income annually is significant capital gains, who arguably are the so-called “rich,” as opposed to the small business owner (or real estate owner) who sold their business (property) and reported a one-time, significant capital gain that moved them into a higher tax bracket for that single year alone.

Canada vs. the world

The Fraser Institute report also compared Canada’s capital gains tax rate to that of other countries and found that Canada’s top capital gains tax rate (27 per cent) is currently above the average for countries in the Organization of Economic Co-operation and Development (OECD), and substantially above the rate in Britain (20 per cent) and the United States (20 per cent).

That being said, with the inauguration of U.S. President Joe Biden this week, and Democratic control of both the House and Senate now established, it’s quite possible that Biden’s pre-election platform to effectively increase the tax on capital gains by treating them as ordinary income for taxpayers earning more than US$1 million could actually be passed. Combined with his plan to raise the top rate on ordinary income back up to 39.6 per cent (from 37 per cent), it would nearly double the current long-term capital gains tax rate.

As for Canada, “raising the capital gains tax rate would weaken Canada’s ability to attract investment and adversely affect our economic recovery,” concluded Clemens. “Canadians across the income spectrum — and the economy as a whole — would benefit from a lower, not higher, capital gains tax rate.”

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

0 comment
0 FacebookTwitterPinterestEmail

Article content

In Ontario, a couple we’ll call Hank, 55, and Judy, 56, have built their lives with a lot of assets — and a lot of debt. They take home $11,463 per month from their jobs, his with a transportation company, hers with a petrochemical firm. They’ve lived in Canada for 20 years, raised two children to their mid-20s. Now they want to plot their retirement in 10 years.

Their problem is the debt. They must slash it if they want afford to move to someplace warm year-round for their retirement.

They have loans of $789,200 including a home mortgage of $452,000, a mortgage on a rental unit for $225,000, $12,000 for RRSP loans, an unsecured $35,000 line of credit, and $48,200 for car loans. Their $1,955,000 of assets less $789,200 liabilities leaves them with net worth of $1,165,800.

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Hank and Judy. His plan — make their portfolio more tax efficient, cut risk and redirect savings to get to a goal of $80,000 in after-tax retirement income (or between $100,000 and $110,000 before taxes).

0 comment
0 FacebookTwitterPinterestEmail

Article content continued

Victoria, for her part, makes her qualifications clear. “In terms of my credentials, I’m a financial coach, not a financial advisor. So my goal is to help you find the resources around topics, but I do not provide individual investment advice.”

Victoria later said her social media manager took down the video about how to invest $1,000 because it could potentially be misconstrued as giving advice.

“It (was) a fine line between showing people what is available and what I personally like versus what people could take as advice,” she wrote in a follow-up message.

Fulmore said she is currently working towards getting certified as a financial planner.

Heath, for one, takes no issue with the lack of credentials.

“Just because somebody is older or even holds a certain regulated financial title, it doesn’t mean their advice is necessarily good or is necessarily better,” he said. “There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice.”

As well, he was impressed by Victoria’s video on how to invest $1,000.

There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice

Jason Heath

“A lot of people in the financial industry do a poor job of communicating complex topics to consumers and that creates a void that these TikTokers are filling,” he said.

Relying on generic advice when personal finance is supposed to be, well, personal is a drawback, but not one unique to TikTok.

“Nobody should be getting all their financial advice from any one source,” Heath said.

Oriana Gomez, a 23-year-old barista at an upscale Italian cafe in Toronto, heeds that message. TikTok, for her, became one of the many tools in her arsenal she uses to achieve financial security.

0 comment
0 FacebookTwitterPinterestEmail