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Financial Independence

Should Canadians Still Invest in An RRSP If They Received CERB During 2020?

Many Canadians struggled financially through a challenging 2020 amid the ongoing pandemic, social distancing, remote work and lockdowns. Some 8.9 million people applied for the Canada Emergency Response Benefit (CERB), a government fund to help the unemployed during the lockdown. Now that the CERB program is closed, many people are asking what that means for taxes and RRSP investments in 2021.  

Specifically, many people who received a CERB payment still have some of their emergency funds left. As they return to work this year, those Canadians want to know how CERB influences their taxes and whether investing the emergency fund into their retirement plan is a good idea.  

If not, what can Canadians do with CERB funds they still have? Is a GIC investment a better option, or what about simply keeping the benefit for a rainy day? In the article below, we answer those questions: 

What is the CERB? 

The lives of most Canadians changed when the COVID-19 pandemic brought lockdowns and an economic downturn during 2020. Many people were left making financial choices they had never had to consider before. Cutting back if necessary and finding the best financial tools such as the most affordable insurance, best GIC rates, or available benefits became important for most households. 

Canada’s federal government developed several programs to help people weather the economic storm spawned by COVID-19.  

One such program was CERB, an initiative to support workers nationwide financially. It allowed the employed and self-employed to receive $2,000 in financial aid over a four-week period if directly affected by the pandemic. There were seven rounds of CERB funding, meaning some Canadians got $14,000 in benefits. 

What is an RRSP? 

A Canadian Registered Retirement Savings Plan (RRSP) is a self-investment plan that lets people establish a retirement fund. Both the account holder and spouse/common-law partner can contribute to the RRSP, with deductibles helping reduce tax payments.  

That’s because income earned in the RRSP is usually tax-exempt if funds remain in the account. Payments received from the plan typically come with taxes.  

CERB, Taxes, and RRSP Payments 

Understanding whether you will pay tax on a CERB fund depends on your taxable income last year and the current marginal tax rate. People have different tax rates, and CERB may affect tax payments on an individual basis. For example, a top-level earner can repay more of the money they received, while low-income Canadians will have less tax liability.  

One recommendation is to leave some of the received CERB payments to cover potential taxes. A good number would be around 30% of the total received. If you lost your job or were partly unemployed, you may have received the total CERB funds up to $14,000. However, people question whether it would be better to park CERB money into an RRSP instead of keeping some of the funds ready for taxes. 

If you have contribution space and funds, contributing to your RRSP can help offset taxes related to the CERB benefit. That sounds great on paper, but there are some caveats that people should not ignore: 

Eligibility Concerns. Since ending the CERB program last September, the government says it has sent 441,000 letters to Canadians who it believes were ineligible for the payments. These “education letters” state that those who received a CERB payment but were later deemed ineligible must repay the money. 

Recipients who have been incorrectly given financing say the Canada Revenue Agency is to blame for providing confusing eligibility standards. Either way, it is risky to rush ahead and invest any CERB funds in an RRSP before confirming eligibility from the CRA.  

Does an emergency fund work as an RRSP contribution? Keep in mind that while RRSP contributions decrease taxable income, they do not remove taxes altogether.

For example, if a person contributes $10,000 to an RRSP, they will not owe tax on that amount. If the person fell into the 35% tax rate, this contribution would reduce their taxes by $3,500 ($10,000 x 35%). In other words, you won’t get a dollar-for-dollar reduction in taxes and may still need to pay some tax on the CERB funds you received.

Another important consideration is the emergency fund may still be helpful. COVID-19 isn’t going away yet, despite Canada embarking on a nationwide immunization program. The pandemic is still here, and further lockdowns are possible. It can be risky to invest the remaining emergency funds in an RRSP if there is a chance you may need the money for living expenses later.

Just remember, the funds in an RRSP can be difficult to withdraw. RRSP holders have to request to withdraw their funds, and the money you withdraw is also subject to withholding taxes. Once you make a withdrawal, you will not be able to get the contribution room back, impacting retirement savings.

Holding out on an RRSP investment. RRSP accounts are great because they work for you to help lower your tax bill from the previous year. That’s one of the main benefits of this retirement investment under normal conditions. However, 2020 was not an average year, and people receiving CERB benefits earned less income during the year. 

As your earnings rise back to normal levels in 2021, it may be worth waiting to make RRSP contributions. That’s because your tax rate was lower in 2020 due to the drop in income. With full employment and earnings in 2021, your rate may rise. RRSP accounts can provide more tax cuts for higher-income tax brackets. That means it may be worth skipping RRSP contributions instead of using them for 2021 earnings because you get a more significant tax cut.  

Conclusion 

RRSPs are healthy investments that help lower your tax bill, but timing is everything. Using your CERB funds to pay into an RRSP is probably not the best use of those benefits. If you have some of that cash left, using it to pay your 2020 tax bill is a good idea. Still, it is worth making sure you were eligible for the CERB payment you received before using the funds. 

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Financial Independence

If You’re Selling in 2021, Fix These Outdated Fixtures First!

Have you ever noticed that every commercial that takes place in a home is beautifully designed, updated, and looks fresh out of a HGTV makeover show? They never show homes with older appliances, pine cabinets, formica countertops and outdated tiling. They never show homes that look like what most of our homes probably look like. 

The name of the game is update, update, update. People want the newest appliances, latest trends, and fixtures that don’t look like they’re decades old. And, if you’re thinking about selling your house anytime soon, you may want to look around your home for areas that need work.

Here are some outdated home features to fix up before selling.

1. Mismatch paint colors, bold colors, and/or wallpaper

You may have painstakingly chosen the paint colors in your home that matches your aesthetic, but not all buyers are going to be smitten with that neon green dining room or that powder room with gold brocade wallpaper. If you’re going to sell, you’re going to have to roll up your sleeves and cover the bold colors and patterns with a neutral color palette

Neutrals are more appealing because it’s easier for the buyer to seem themselves and their belongings in the space. Neutrals allow them to pay attention to details in the home without being distracted by overwhelming paint colors.

2. Outdated, stained, or worn flooring

Buyers aren’t going to look too favorably on homes with carpeting that’s seen better days, vinyl flooring from the 70s, or scratched up hardwood to name a few examples. Today buyers are interested in hard surface flooring. Colors and styles can vary, but cool tones, shades of grey, flooring in creative patterns, and (interestingly enough) wood that looks a little distressed. 

3. Kitchens with old fixtures, appliances, and more

Kitchens are the heart of the home and buyers want a kitchen that feels more like a dungeon. Buyers want kitchens with stainless steel appliances, islands, walk-in pantries, and stylish backsplashes among other things. Buyers also want lots of storage space so their many small appliances can be tucked away out of sight and have plenty of space so they can stock up on food for emergencies.

4. Neglected patios and/or decks

Patios and decks were incredibly popular in 2020 because people wanted a space in their home where they could enjoy some fresh air. So, if you have a deck whose stain is faded, has loose boards or railings, or the planks are cracking which could cause splinters… You might want to invest some time and money into improving the deck’s condition. If your patio is cracked or there are weeds growing in between the pavers, take care of that as soon as possible. Power washing is also a great way to give your decks or patios a fresh look. You’d be amazed at how old years of dirt and grime build up can age things!

5. Energy inefficiencies

According to insights from top agents for selling in 2021, energy efficiency is a huge selling point for buyers. Not only are they interested in being eco-friendly, they want to save money! You can improve your home’s energy efficiencies by replacing doors and windows, air sealing and insulating your attic, plant shade trees around your home to keep it cooler in the summer, and upgrade appliances and systems to be more energy efficient. 

Sellers shouldn’t have much difficulty selling their houses because there’s no shortage of qualified buyers out there. Heck, there are more buyers than houses in many markets! However, if you want to attract a wide range of buyers and even get multiple offers, you need to get rid of the outdated features and invest in what buyers want. It may cost you money, but if you choose your upgrades wisely, you could add a lot of value to your home. You know the saying – you need to spend money to make money!