Home » Investing » Canada Revenue Agency: How to Avoid Paying Taxes on 2020 CERB Payments
Canadians should explore credits to avoid taking a big hit from the Canada Revenue Agency on CERB payments in 2021.
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Ambrose O'Callaghan
Ambrose O'Callaghan graduated with a BA in Political Science from McMaster University. After that, he jumped into the banking world. He worked from the front line to an investment associate role. After that, he found a way to marry his experience and knowledge in the world of banking and finance to his love and passion for writing. Ambrose is a passionate believer in Warren Buffett's value investing model.
The Canada Emergency Response Benefit (CERB) was launched by the federal government in March. This ambitious and radical program was introduced to provide much-needed support to the millions of Canadians who had been upended by the COVID-19 pandemic and subsequent lockdowns. In October, the Canada Revenue Agency revealed that there were 8.9 million unique applicants for the CERB. The government had paid out a total of $81 billion in CERB payments.
Unfortunately, some applicants were unaware of the finer details of the CERB. The federal government sought to make applications easy in a time of crisis, but this also opened the door to carelessness, oversights, and even fraud. Suffice it to say, the Canada Revenue Agency will have its work cut out for it sifting through recipients in 2021.
Today, I want to discuss how Canadians can avoid paying those pesky taxes on CERB payments when they file in 2021. Moreover, I want to look at alternatives, which will allow Canadians to avoid headaches like these in the future.
Canada Revenue Agency: Why CERB recipients need to prepare for 2021
The CERB was introduced as a taxable benefit in March. However, the ball was in the court of recipients who received the full $2,000 month payment. Those who failed to account for this reality may be in for a tough time next year.
With that in mind, let’s do a quick round up and give a snapshot of what Canadians may owe as we look ahead to a new year.
How to determine where you sit for this taxable benefit
Canadians who qualified for the CERB but earn less than the Basic Personal Amount (BPA) do not have to pay any tax. Those with incomes under $48,536 but above the BPA will be taxed at 15%. Of course, there are also differences across provinces. That can be a substantial surprise when tax season rolls around. For many Canadians, it is time to start planning.
Those who have lost out on expected income for part of 2020 could be eligible for child credits or GST/HST credits they would not have qualified for previously. This could lighten the load of a CERB-related tax bill. Canadians also have the option of contributing to a Registered Retirement Savings Plan (RRSP). However, the deferred tax would likely not add up to a substantial amount.
Small business owners have the option to apply operational losses against taxable income for the past three years through the Canada Revenue Agency. Moreover, business owners who have filed for bankruptcy also have options in this area.
Future planning: Avoid paying the Canada Revenue Agency an invest in a TFSA!
Back in the summer, I’d suggested that Canadians should look to building long-term passive income in a Tax-Free Savings Account (TFSA) rather than leaning on the CERB program. The CERB provided valuable financial support to many Canadians in this difficult year. However, all Canadians should aspire to construct a long-term passive-income stream. The TFSA allows you to stash income-generating vehicles without having to pay capital gains to the Canada Revenue Agency.
Canadians looking to go this route should consider AltaGas (TSX:ALA) for their TFSA. The company provides energy infrastructure in North America. Its shares have dropped 3.2% in 2020. However, this is solid considering the tough year for the oil and gas space. AltaGas stock last possessed a price-to-earnings ratio of 15 and a price-to-book value of 0.8. That puts this dividend stock in favourable value territory.
Moreover, AltaGas currently offers a monthly dividend of $0.08 per share. This represents a strong 5.2% yield.
If your goal is long-term savings, think about getting a Tax-Free Savings Account ( TFSA ). You don't pay tax on the interest you make and the money you withdraw from a TFSA .
NO – You are never allowed to deduct federal taxes on your income tax. Let's say you haven't filed taxes in two years and are now paying two years' worth of federal income taxes; you may not claim the additional deduction on this year's taxes.
If you can't pay your taxes, the CRA may withhold tax credits as a means of recovering the outstanding tax debt. This can mean forgoing GST/HST tax credits, the climate action incentive payment, and other tax credits until the CRA has recovered the amount owed.
To lower your tax bill, you can try adjusting paycheck withholding, voluntarily withholding tax on non-wage income, planning for self-employment taxes, and recalculating taxes when life changes occur. If you can't pay your tax bill immediately, set up an IRS payment plan through TaxAct when tax filing.
There is no specific limit or threshold that would cause the IRS to tax it. That being said, ant cash deposits of $10,000 or more would be reported by the bank in a Currency Transaction Report (CTR) to FinCEN, an arm of the Treasury Department.
If you cannot pay what you owe, you can request an additional 60-120 days to pay your account in full through the Online Payment Agreement application or by calling 800-829-1040; no user fee will be charged.
Generally, you must file an amended return within 3 years after the date you filed your original return or 2 years after the date you paid the tax, whichever is later. If you filed early, count from the April tax deadline.
The latest date, by law, you can claim a credit or federal income tax refund for a specific tax year is generally the later of these 2 dates: 3 years from the date you filed your federal income tax return, or. 2 years from the date you paid the tax.
The prescribed limitation period in the Income Tax Act is 10 years; this means that after 10 years, the Canada Revenue Agency is legally prevented from collecting on a tax debt.
This may result in a garnishing of wages or other income, or even a seizure of assets. According to the collections limitation period (CLP) for individual tax, the CRA has 10 years to collect a tax debt. After that period, the CRA can not take any further action to collect the debt, but the debt is still outstanding.
The longer you wait to file your taxes, the more penalties you will owe, and the likelihood of the CRA seeing your avoidance as tax evasion increases. If you haven't filed in years and the CRA has not yet contacted you about your late taxes, apply to the Voluntary Disclosure Program as soon as possible.
Be Super-Rich. Finally, it's quite easy to pay no income taxes if you're extremely rich. In our tax system, money is only subject to income tax when it is earned or when an asset is sold at a profit. You don't have to pay income taxes on the appreciation of assets like real estate or stocks until you sell them.
Certain types of debt are not subject to taxation, however, such as debt that is canceled due to a gift, bequest, or inheritance, certain types of student loan forgiveness, and debt discharged through Chapter 7, 11, and 13 bankruptcy.
The IRS will not charge you an underpayment penalty if:You pay at least 90% of the tax you owe for the current year, or 100% of the tax you owed for the previous tax year, or. You owe less than $1,000 in tax after subtracting withholdings and credits.
When you earn money, you pay tax – that's a fact of life. The interest you make on the money in your savings account is no different than your other income, and it will be taxed at the same rate.
Contributions to an RRSP lower your taxable income. You can generally contribute up to 18% of your previous year's earned income up to an annual maximum ($27,830 for 2021). The investments in the plan can grow tax-free until you withdraw the funds.
Introduction: My name is Jeremiah Abshire, I am a outstanding, kind, clever, hilarious, curious, hilarious, outstanding person who loves writing and wants to share my knowledge and understanding with you.
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