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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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