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CERB, RRSP, TFSA and taxes: Start 2021 on the right foot

Posted on Friday January 15, 2021

CERB, RRSP, TFSA and taxes: Start 2021 on the right foot

No one is complaining that 2020 is over. Workers, especially young people, have been hard hit by the difficult economic situation created by the pandemic. Luckily, assistance measures were not long in coming, but now that tax season is just around the corner, those who received benefits have a few questions, namely, "Are the benefits taxable?” and “What type of account should be used to deposit what's left over?"

Preparing for tax season: Avoiding nasty surprises in 2021

Some say it's always better to pay off your debt before starting to invest. And no one wants to owe the government money!

CERB and CRB: Taxable benefits

Wise are those who have put money aside this year because the CERB (Canada Emergency Response Benefit), CESB (Canada Emergency Student Benefit) and CRB (Canada Recovery Benefit) are taxable. Here are some other important details to know about these benefits:

  • No tax was withheld at source on CERB or CESB payments.
  • An amount of 10% was deducted at source from the CRB and its cousins, the CRSB (for people who are ill or in isolation) and the CRCB (for caregivers).
  • If your 2020 income is over $38,000, a refund of 50% of the amounts received over and above this amount will be required in addition to taxes payable. In short, similar to Employment Insurance, a certain amount has been deducted at source, but this amount could be insufficient.

Important: You're responsible for putting money aside so that you don't end up owing the Canada Revenue Agency, which administers New Brunswickers' federal and provincial taxes. The amount of tax you pay will depend on your tax rate, which is based on your total income in 2020. Any benefits received are part of your taxable income, so avoid unpleasant surprises and put money aside right away!

Emergency fund: Invest in a TFSA

In bad times, an emergency fund – whose importance has become clearer than ever in recent months – is the best tool to bounce back. If you have some money left over from your CERB or other benefits, why not invest it in a TFSA to build up an emergency fund?

What are the advantages of a TFSA?

A TFSA is an account in which various types of investments can be placed to allow them to grow tax-free. The interest generated and the withdrawals you make later are non-taxable, meaning that they will not be added to your income in 2025 if you need them at that time. The TFSA is renowned for its flexibility since you can easily withdraw the money you put into it!

What can be done with a TFSA?

Within the TFSA, you're free to put your money into investments that correspond to your risk tolerance level, either in mutual funds or guaranteed investments. You can even invest in the stock market with a TFSA. To use it properly, read the rules to follow or compare it to other investment vehicles using our tool!

You could let your money sit comfortable and cozy in a regular savings account, but it will generate almost no interest. The TFSA is the perfect account to hold your emergency fund. Choose an investment from which you can withdraw at any time (during an emergency) and watch your money grow!

Contribute to an RRSP to reduce your taxable income

Are your taxes paid and your piggy bank full? It would be wise to think about an RRSP.

Reduce taxes payable through RRSPs

The first thing you need to know is your annual taxable income, which determines your percentage of taxes payable. Is your income high? By investing money in an RRSP, you can reduce your tax bracket while contributing to your retirement plan. In short, a great advantage of an RRSP is that it reduces your taxable income and therefore allows you to pay less tax.

For example, if you received the CERB and subsequently found a well-paying job, you may have made more money than what your expectations were last spring. How can you avoid paying more taxes than you thought you would owe? Contribute to an RRSP! By doing so, you will reduce your taxable income and pay a little less tax. And most importantly, this money will stay in your pocket – even if you won't get to enjoy it until retirement.

In fact, RRSPs can’t be withdrawn at any time without paying a tax penalty. In other words, the RRSP can’t be used as an emergency fund.

Using the HBP for your real estate projects

Each situation is different. RRSPs are especially useful for middle-income earners, so if you expect to earn a higher salary next year, remember to maintain your contribution room (carried over from one year to the next). On the other hand, if you're thinking about buying a first home in the short term, the Home Buyers' Plan (HBP) allows you to withdraw from your RRSPs to make up your down payment. If so, contributing this year would increase the amount you would have access to at the time of purchase.

Contact us for an analysis of your situation and guidance on making informed tax decisions. We'll be pleased to help you!

Mutual funds and financial planning services are offered through Credential Asset Management Inc. Mutual funds, other securities and securities-related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered trademark of Aviso Wealth Inc. The information contained in this article has been obtained from sources believed to be reliable; however, we cannot guarantee its accuracy or completeness. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell mutual funds.

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