REDUCE
An RRSP contribution can help cut tax owing on covid benefits.
the March 1 deadline for registered retirement savings plan (rrsp) contributions for the 2020 tax year is less than 10 days away, and, even if you’ve never contributed before, this is the year you may want to consider making one to claim a deduction on your tax return and save some tax on any Covid-19-related benefits.
Let’s review the basic rules and then look at a couple of examples of how making an rrsp contribution could save you big bucks for 2020 and beyond.
To claim a deduction on your 2020 return, you need to contribute by March 1, 2021, and the maximum amount you can contribute can be found at the very bottom of your “rrsp deduction limit statement” on your 2019 Notice of Assessment. It can also be looked up online using the Canada revenue Agency’s My Account portal.
your deduction limit for 2020 was based on 18 per cent of your 2019 earned income (up to a dollar limit of $27,230), less any pension adjustment from your employer, plus any unused deduction limit from previous years. earned income includes employment, self-employment and rental income (as well as a few other things.)
It’s important to note, however, that an rrsp contribution can be deducted against any source of income, not just earned income. In other words, contributing to an rrsp can help you save tax on your employment income as well as your investment income, taxable capital gains and even government COVID-19 related benefits that are taxable.
If you’re one of the millions of Canadians who received Covid-19-related government benefits in 2020, you need to report most of these amounts on your 2020 return. reportable amounts include: the Canada emergency response benefit (Cerb), Canada emergency Student benefit (Cesb), Canada recovery benefit (Crb), Canada recovery Sickness benefit (Crsb) and the Canada recovery Caregiving benefit (Crcb), all of which are considered taxable income and should be reported on Line 13000 – Other income.
depending on your total 2020 income, you may owe some tax on your COVID-19 benefits. This is particularly true if you received Cerb or Cesb payments, since no tax was withheld when they were issued, so there may be a balance owing when you file. If you received Crb, Crsb or Crcb payments, 10-per-cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020.
In addition, if your 2020 net income was more than $38,000, you may have to repay 50 per cent of your Crb payments for every dollar in net income you earned above $38,000, to a maximum of Crb received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any Cerb, Crsb and Crcb payments received (but not Crb).
by making an rrsp contribution by the deadline, you may be able to reduce or eliminate tax owing on any COVID-19 benefits as well as possibly keep more of the income-tested Crb.
Let’s walk through two examples to illustrate how two taxpayers could benefit from making an rrsp contribution and claiming a deduction on their 2020 returns. (For simplicity, CPP/QPP and ei contributions and credits/deductions have been ignored to focus on the income taxes owing.)
Example 1
Tom, an Ontario resident, earned $60,000 annually prior to COVID-19, but lost his job on March 15, 2020. Prior to this, he earned $12,500 in employment income for the first three months of 2020, for which his employer withheld $2,600 in federal and provincial tax. He applied for Cerb, and received the full $14,000 in benefits with no taxes withheld. He subsequently applied for Crb, which replaced Cerb, and received a total of $6,000 for the last three months of 2020, on which 10 per cent, or $600, was withheld.
Tom’s total income for 2020 was $32,500. His tax liability, after taking into account the enhanced basic personal amount, Canada employment amount and Climate Action Incentive, is $3,419. Since the taxes withheld at source via his employer and the government were only $3,200, Tom would need to pay additional tax of $219.
If Tom contributes about $730 to his rrsp, he could reduce his tax bill for 2020 to the $3,200 that was withheld so he wouldn’t need to pay any further tax. Of course, whether it makes sense to do so will depend on the rate of return he can achieve on his tax-deferred savings, his anticipated tax rate on withdrawal, and how many years he can leave it in there before withdrawing it in retirement.
Example 2
Jerry, an Alberta resident, was self-employed for much of 2020, earning $50,000 before shutting down his business in the fall and collecting $6,000 in Crb (less 10-percent withholding). If he doesn’t make an rrsp contribution, he will be forced to repay the entire $6,000 in Crb since his net income (excluding Crb) for 2020 was $50,000 and he must repay 50 cents of Crb for each dollar of income above $38,000, for a repayment of $6,000 (i.e., ($50,000 $38,000) x 50 per cent).
Jerry’s taxable income would be $50,000, since he’s not taxed on amounts he didn’t get to keep, and the net federal and Alberta tax liability (assuming just the basic personal amount and Climate Action Incentive) is $8,170. After taking into account the $600 withheld on Crb, Jerry would need to pay additional tax of $7,570, as well as repay $6,000 in Crb received for a total amount owing of $13,570. (For simplicity, we have ignored any tax instalment payments made in 2020, which affect cash flow and not the tax ultimately owing.)
but if Jerry can reduce his income to $38,000 by making a taxdeductible rrsp contribution of $12,000, perhaps by borrowing the funds via an rrsp loan, he would cut his tax owning and get to keep his full $6,000 in Crb (less the associated tax). His tax liability would drop by $1,581, for an effective marginal effective tax rate savings of 63 per cent ($7,581/$12,000).
even if Jerry withdraws funds from his rrsp well before retirement, provided his marginal effective tax rate in the year of withdrawal was lower than 63 per cent, contributing to an rrsp will have been a smart tax decision. And, to the extent the funds can be left inside the rrsp, Jerry may also be able to enjoy decades of effectively tax-free investment growth to fund his retirement.
Uber Technologies Inc.’s defeat in a U.K. legal battle over the way it treats its drivers is set to trigger a wave of complaints from workers across the region.
Britain’s Supreme Court ruled Friday that Uber must treat its drivers as “workers,” giving them access to vacation pay, rest breaks and minimum wage while they’re using the app. The ruling applies to the handful of people who brought the case in 2016. Jamie Heywood, regional general manager for Northern and Eastern Europe, said Friday Uber has made “significant changes” since then.
The decision nevertheless opens the way for additional claims — and not just from Uber drivers. Those making deliveries for companies like Amazon.com Inc., which uses third-party services that employ freelance workers, as well as other, smaller players, now have a clearer path for challenging the terms of working for their platforms, said Mick Rix, a national officer for the GMB union. The GMB, which has more than 620,000 members, will use the decision to take on other tech platforms, he said.
“It wasn’t just about Uber, it was about the gig economy,” Rix said. “It’s a bogus, false model of employment, and it’s wrong and people are being exploited.”
With its booming tech scene, the U.K. is one of the most important markets in the region for platforms that connect independent workers with jobs, from ride-hailing to food delivery to other freelance work. It’s San Francisco-based Uber’s biggest European market.
“Any business with a gig economy model should take heed today,” said Michelle Hobbs, employment law expert at Stevens & Bolton. “This landmark ruling undoubtedly revs up the pressure on gig-economy businesses to provide much better terms and conditions to those working for them.”
These platform workers are generally employed as independent contractors, allowed to set their own hours and choose which jobs they take. But criticism has grown as these people become a larger part of the workforce.
The COVID-19 pandemic turned couriers into essential, front-line workers, putting them at risk of exposure to the disease and piling pressure on tech companies to ensure they have benefits like insurance or sick pay if they have to stop working.
Representatives for Amazon didn’t immediately respond to requests for comment.
European Union policy-makers are expected to publish recommendations for improving working conditions later this month. In Spain, the government is preparing labour law changes that could mean food-delivery platforms have to formally employ couriers. A French court said last year that the relationship between Uber and a driver constitutes an employment contract.
Some tech-oriented food deliverers have taken a different approach. The chief executive of Just Eat Takeaway.com NV, a Dutch competitor to Uber’s food-delivery service in Europe, said in a post on his Twitter page on Friday that the ruling is “pretty much the end of the gig economy in Europe.” The company pays its drivers hourly wages and other benefits as part of its Scoober service, while its much more profitable marketplace service lets restaurants deliver the food themselves.
In a letter to Financial Times editors published Friday, Jitse Groen said platforms’ use of independent contractors “has led to precarious working conditions across Europe, the worst seen in a hundred years.” He called on policy-makers to implement rules that would define all food-delivery workers as staff.
However, the outcome for many companies that rely on these workers will hang on the details. The U.K. law distinguishes between employees, which are entitled to all statutory employment rights such as redundancy payment, and workers, which are eligible for minimum wage and holiday pay but not for the full range of benefits.
Strict labour laws will “severely limit flexibility” and could ultimately be a bad thing for couriers, said Sacha Michaud, cofounder of Spanish delivery app Glovo. “It goes without saying that it will also have a negative impact on our operations, stifling our geographical expansion to smaller towns and cities, and the impact of that will be felt by local, independent SMES that aren’t able to offer their own delivery services.”