Tax Planning

Proactive tax planning for 2021

Out with CERB, in with …

In September 2020, the Canada Emergency Response Benefit (CERB) was switched to three different benefits:

  • The Canada Recovery Benefit (CRB) is for employees (including self-employed) who are not entitled to employment insurance (EI) and whose income has been reduced by at least 50% due to Covid-19.
  • The Canada Recovery Caregiving Benefit (CRCB) is available to people who are unable to work for at least 50% of a week because they are looking after children under the age of 12 or a sick family member.
  • The Canada Recovery Sickness Benefit (CRSB) is intended for people who are unable to work at least 50% of a week because they have become infected with Covid-19, have had to self-isolate, or have underlying diseases that make them more susceptible to Covid-19.

Ten percent is withheld as tax on payment of all three services. Those who are entitled to regular EI benefits may receive benefits similar to the CRB.

Three factors are most important to tax planning:

  1. Duration of the benefit received
  2. Taxes withheld at source
  3. Recovery of benefits (EI or CRB)

The CRSB is likely to have the lowest tax impact as the benefit is paid out over a maximum of two weeks for a total of $ 1,000. The other three options (EI, CRB and CRCB) last longer, so the risk of tax liability is higher.

If a customer’s marginal tax rate is greater than the 10% withholding tax rate or the applicable EI rate, additional taxes may be required until the 2022 deadline. EI or CRB reclaims could increase the amounts owed.

Case study

Mary, who lives in Manitoba, moved from CERB to CRB in September. She expects to hit the maximum of 26 weeks for CRB payments in 2021, which means she will receive 12 weeks of CRB payments in 2021 for a total pre-tax amount of $ 6,000. She then expects to get back to her full income, which is $ 52,000 annually.

What does Mary need to set aside when resuming her regular income to cover taxes related to the CRB (including clawbacks)? She must repay $ 0.50 of the CRB for every dollar of her 23600 line income (excluding the CRB) over $ 38,000. With a 40,000-week pro-rata income (40 weeks out of 52) and pre-tax CRB benefits of $ 6,000, your combined annual income is $ 46,000.

Table 1: Taxes with a marginal tax rate (MTR) of 27.75%
Tax on CRB at MTR $ 1,665
Less: CRB withheld at 10% (600 USD)
Clawback $ 1,000
Total owed $ 2,065

Based on our estimates, Mary will owe additional taxes (including clawbacks) of $ 2,065 on her CRB when she files her tax return for 2021. She is considering three options:

  1. Saving the funds necessary to pay this amount;
  2. make an RRSP contribution of $ 2,000 and save $ 510 to cover the remaining balance ($ 2,065 minus the reclaim and tax savings on the RRSP contribution); or
  3. make an RRSP contribution of $ 3,838 which would remove the outstanding tax amount including the recovery. With her expected return to work in the last week of March, Mary has 11 months to make RRSP contributions for 2021 (April 2021 through February 2022 inclusive) and 13 months to save (April 2021 through April 30, 2022, if taxes are due).

The options require a compromise between cost and asset accumulation (see Table 2). Just saving to pay the tax is the cheapest option, but it doesn’t create wealth. The other two options allow Mary to eliminate some or all of the tax on her CRB while accumulating RRSP assets ($ 2,000 for the combination or $ 3,838 for the RRSP only). If Mary’s cash flow can support this when she returns to work, the higher RRSP contribution would help her save on taxes while also saving for retirement.

Hopefully most of your customers, like Mary, will go back to normal this year. Estimating taxes owed and setting aside funds from each paycheck or making RRSP contributions will make the transition to a stable income smoother.

Table 2: Monthly costs for solutions (excluding interest for savings)
Monthly amount number of months total cost
Savings to pay taxes $ 158.85 13th $ 2,065
RRSP to avoid reclaims and savings $ 228.18 11 $ 2,510
RRSP contribution equal to CRB $ 348.89 11 $ 3,838

Curtis Davis, FMA, CIM, RRC, CFP, is a senior consultant in tax, retirement, estate planning services and retail markets at Manulife Investment Management.

Related Articles