Why this message to you today? If your current income is being impacted by the Covid-19 health crisis, so too will your tax picture. This could be a positive impact or a negative impact. Understanding how your tax picture might change is extremely important.
Here are some examples to consider:
- Example #1: If you are receiving the Canada Emergency Response Benefit or Employment Insurance during these times, remember that this income is taxable to you AND no tax has been withheld before it was paid to you. This means that next April 2021, when you file your 2020 tax return, you will need to have the money to pay these taxes. If your income through the remainder of 2020 remains low, then you may not pay much tax on this money. If your income returns to normal in the coming months, then 30% to 40% of the money you receive today may need to be paid in taxes.
- Example #2: What if you are a two income family where one spouse loses their job, or suffers a significant loss in income, and the other spouse retains the same amount of income? If you have children under the age of 18 your Canada Child Benefit amount may rise significantly, which will help to offset some of the lost income. The basic personal exemption amount is then transferred to the higher income spouse, which may also help to reduce total taxes paid.
- Example #3: What if one spouse loses their job but is then able to earn some contract or self-employment income? Since income at lower levels is taxed at a lower rate, the amount of income you retain could be more than you think. If you are now working at home, you may have much lower transportation costs and lower meal costs, if you are not eating out as much. You may also have new deductible expenses such as your home office. As a result, you may not need to fully replace your previous income. Some of this lost income could be recouped from having lower expenses, some could be recouped by being taxed at lower levels while some may be recouped by receiving more from the Canada Child Benefit.
- Example #4: However, if one spouse loses their job while the other spouse increases their income, then the total tax paid will likely go up. Two lower incomes will always pay less tax than one larger income.
The bottom line: Lost income or a lost job is a very significant issue. However, the somewhat good news is that other aspects of your income picture will change as well: family expenses may naturally decline, your tax picture will decline and your other benefits (such as the Canada Child Benefit or the GST Credit) may then rise. Good planning will help you identify how to get the very best value in your employment activities going forward.
Road To Mastery Principle: It doesn’t matter what you have, it only matters what you keep, after-taxes, fees and inflation. The Masters plan their affairs proactively, the begin with the end in mind, and are very focused and purposeful in their decision making.