If you’re one of the many Canadians who collected Canada Emergency Response Benefit (CERB) payments in 2020, it’s not too early to start thinking about tax time. As you’re hopefully aware, CERB payments are considered taxable income when it comes to filing your 2020 personal income tax return. For many this will mean that your expected income tax refund may be reduced, or you may even owe.
What is taxable income and why is it important?
Taxable income comes in many forms and can include employment income, self-employment income, commissions, pensions, employment insurance benefits, investment income and RRSP income just to name a few. Your taxable income for the year is the basis on which your federal and provincial/territorial taxes are calculated. When you add CERB payments to your other taxable income for the year, it will increase your taxes payable.
How can I tell if I’ll owe?
While you won’t know for certain whether you will have a balance owing on your 2020 tax return until this return is filed in 2021, you can do some estimating. You can use an income tax calculator (Simple Tax or Nuevoo for example) to input your estimated taxable income for 2020 with and without including CERB payments. The difference between the total taxes payable for these two estimates would be what you may owe. When preparing these estimates keep in mind that we’re still in the 2020 tax year and taxable income expected to be earned between now and December 31 should also be taken into consideration.
What steps should I take now?
Once you have an estimate of your potential taxes owing it’s time to start saving. By starting to put funds aside now you can reduce the stress of having to come up with a last minute payment for the April 30 payment deadline. You will also save yourself from penalties and interest as a result of a late payment.
Now is also a great time to ensure that you have your tax documents in order. Make a list of your employers and any tax slips you will be receiving for the 2020 tax year. As you start to receive these slips in early 2021 check them off the list and follow-up on any missing slips not received by mid-March. This will allow you to get your 2020 taxes filed ASAP and leave you with more time make any required payment.
Keep receipts together for any deductible amounts (medical, child care, moving expenses etc.). If you’re not sure of the deductible amounts you may be entitled to seek the advise of a tax professional or see CRA’s website for further information. These amounts may reduce your taxes owing so take advantage where you can.