Owe 2020 Taxes? Time to Plan for 2021

Many Canadians are in for a real shock when they file their 2020 taxes thanks to receiving Federal relief benefits like the Canadian Emergency Relief Benefit (the “CERB”).  In a sheer panic last year, most of the 6.5 million Canadians who applied for CERB didn’t realize (or care) that it was taxable. They were just happy to have the cash after an abrupt end to pay cheques due to business closures. The tax implications were a distant afterthought. There were those planners who knew it was taxable and could afford to put money aside for the 2020 tax bill that would follow. There were others that needed all the money to live day to day and couldn’t afford to squirrel away any money for taxes. Then there were others really didn’t care and would deal with it later. Unfortunately, later is now.    

Fast forward one year later. If you filed your 2020 tax return and owe, don’t panic. It’s critical you file on time (before April 30) to avoid late filing penalties.  Now some good news. The Canada Revenue Agency (CRA) has done something unheard of. If you meet certain criteria, CRA will automatically apply for interest relief on the 2020 taxes owing until April 30, 2022.  Keep in mind this only applies to 2020 taxes owing and not on previous or other debts to CRA. For more information check out Canada.ca.

That gives you up to a year to plan for the balance to be paid in full.  It’s important to create a plan to pay the amount you owe as soon as possible.  If you can pay the debt in full, do it now. If you can only make a partial payment, do it.  If you can’t pay anything now, divide the amount you owe over 12 months (or bi-weekly) and pay installments to CRA each month/pay period. That will guarantee the debt will be paid by April next year before interest starts. Have a plan, work the plan!

It’s critical you convince yourself you have a debt to pay each pay and just do it. Otherwise, a year from now you’ll be in a panic about how to pay the debt and interest will be added daily.  Let’s not forget, CRA has many enforcement techniques like taking your GST to pay your tax debt, garnishing wages, and seizing assets. If the tax debt is large, seek the advice of a Licensed Insolvency Trustee who can explain CRA debts can be compromised in a consumer proposal or released with a bankruptcy proceeding. Don’t ignore the tax debt. CRA is a creditor to be taken seriously.

You should also be planning for the next tax year. It is possible you may owe again next year. With the transition of CERB to unemployment benefits, unemployment only takes a nominal amount of income tax at the source (usually 10%). If you go back to full-time work during the 2021 year, your employer will deduct income tax from your pay but only as if it was the only income you earned for the entire year. At the end of the year when you add the earnings from one job (or several) AND unemployment benefits, there may be a tax debt because you didn’t pay enough tax for the total amount you earned. Seniors who get pension and work, face the same tax problem, as do people who work several jobs during any given year. If you think you could owe next year, ask your employer to take more tax each pay or set aside savings from each cheque to pay next year's tax bill.

Filing your taxes is not just about finding out if you are getting a refund or if you owe. It’s also about planning for the next calendar year. Taking a few moments to analyze your projected income for 2021 and making a plan to manage the tax implications can save you money and a lot of stress in the future.