For the second year in a row, people across Canada are figuring out how to pay their taxes during a period of economic downturn and job instability. If you’re in this situation, keep reading.
These are the taxable COVID-19 benefits in 2021 for individuals:
When you receive your tax slip for COVID-19 benefits (in the mail or online), you’ll enter that amount as income on your tax return.
Ten percent of the payment was already taken as tax before you received the benefit, but may be adjusted after you submit your income tax return. Depending on your tax bracket and total taxable income, you may end up paying a bit more or less. The best way to prepare for tax on your benefits is to predict which tax bracket you’ll be in by estimating your total income for the year.
If you received CRB payments in 2021, you may be subject to a mandatory payback. If you earned a net income over $38,000 (not including CRB), you have to reimburse 50 cents for every additional dollar of net income you earned. This cannot exceed the total amount you received from the benefit.
Whether or not COVID-19 put you in this situation, you’re far from alone. The good news is that enough people have been in your shoes to create a bit of a playbook.
Even if you can’t pay all or part of what you owe to the Canada Revenue Agency (CRA), you must file your tax return on time. Not filing is penalized harshly:
Contact the CRA to work out a payment plan. Filing on time would go a long way in the negotiations. Remember the CRA has the ability to garnish wages, pensions, and other benefits. If you don’t feel comfortable negotiating with the CRA, speak to a Licensed Insolvency Trustee (LIT). An LIT will review your debt situation and help you decide how to resolve your tax debt.
Add up your assets, income, and liabilities to get a better idea of your current financial responsibilities. What, if anything, can you de-prioritize to free up money to pay your taxes? This is a strong guide to follow.
If you haven’t already, consider creating an emergency fund for unexpected expenses like a tax bill. While you’re at it, ask yourself what else you might need to add or remove from your budget. Have any of your financial goals changed due to the pandemic?
One way to do this is to join the ‘gig economy’. Finding a few smaller contract jobs to increase your cash flow at the start of the year is a solid way to pay off your tax debt and put some money towards your savings. If it works well with your lifestyle, you could even try doing gig work full-time.
Another way to pay off tax debt is by reviewing benefits you’re not currently collecting. The new rules for EI pays a minimum of $500 per week for 26 weeks if you lose your job (without fault) and you’ve worked at least 120 insurable hours over the last 52 weeks. This could provide enough financial coverage for the start of the year to help you pay your tax debt.
A third way is looking into employment expenses if you worked from home more than 50% of the time and for at least four consecutive weeks. In that case, you’re eligible to deduct home office expenses. You can claim $2 per day for up to $500. Depending on your tax bracket, this might be enough to make up for any taxes on your benefits.
You should reach out when you feel overwhelmed by your tax debt or you’re afraid your taxes will push you over the limit of what you can handle. If you’re there, a Licensed Insolvency Trustee can take you through your finances, outline your debt relief options, and help you get your tax debt in order.
Are you worried that you won't be able to pay the taxes on your COVID-19 benefits? Contact a BDO Licensed Insolvency Trustee for a free consultation.
Call 1-855-BDO-Debt or fill out the form below. Your story is more than your debt and we’re here to help.
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