As 2020 has come to an end, we are now entering a tax-filing season like no other. Covid-19 caused various levels of government to introduce new benefit programs, such as the Canada Emergency Response Benefit (CERB) and the Canada Recovery Benefit (CRB), and many Canadians received income from sources that did not exist in earlier tax years.
This is leading to questions such as: “How much tax will I owe on my CERB and other government benefits I have received?” and “Do I have to make a CERB repayment?” These are really two separate issues to discuss.
Taxes on Canada Emergency Response Benefits (CERB)
The first issue, of how much tax you will owe as a result of receiving CERB or other government Covid-19 benefits, will vary greatly depending on things like your total income for the year, your age and your dependents. As such, it is impossible to give a specific “rule of thumb” regarding a percentage or amount of your CERB that you will owe in taxes at the end of the year.
Your tax calculation for the year is done at the time your tax return is prepared. Your return is then “assessed” by the Canada Revenue Agency (CRA). The assessment that you receive back from CRA confirms the amount in taxes you owed for the year based on the information that they have.
It also calculates how much you owe them (a payable) or they owe you (a refund) in order to adjust the amount of taxes you have paid in the year to the correct amount that you actually owe for that year. The taxes owed are based on your total income for the year, including CERB, CRB, Employment Insurance (EI) and most of the other programs offering assistance to Covid-affected people.
No Additional Income & CERB
That Covid-19 benefits are just one component of your taxable income is what makes it difficult to determine what its impact will be on your overall tax return. For instance, if you received $9,500 of CERB in 2020, and you didn’t have any other income, you wouldn’t have any taxes owing as a result. In Manitoba, income taxes usually aren’t payable on the first $9,838 of income, so the CERB wouldn’t cause tax to be owing.
Additional Income & CERB
However, if you had a well-paying job, earned income prior to the pandemic, and went back to work when restrictions were loosened over the summer and resumed earning your employment income, then $9,500 in CERB received could lead to a significant tax bill.
For example, if your employment income during the year was $80,000, the tax due on every dollar earned above $72,885 is 37.9%. Therefore you would owe $3,600 of income tax on your $9,500 of CERB. As you can see, the tax impact of CERB can vary considerably.
If you are wondering how much tax you will owe on your CERB, one way to estimate it is by using a table that shows the combined federal and provincial tax rates for your province, such as this one.
If you take a rough estimate of how much you earned in non-CERB income in the year, you will be able to find the “marginal tax rate” for your level of income. The marginal tax rate is the percentage of tax that you will owe on each additional dollar earned (until you reach the next range). For instance, if you earned $36,000 in 2020, then the tax rate on the $9,500 of CERB from our example above would be 27.75%, resulting in $2,636 in taxes.
Taxes on Canada Recovery Benefits (CRB)
To further confuse things, tax is withheld on CRB (as opposed to CERB) payments before it is sent to you. When CRA approves your claim for two weeks of CRB ($1,000), they withhold $100 (10%) and keep it against your income taxes owing at the end of the year, meaning that you only receive $900.
However, this doesn’t mean that the tax is taken care of. In our example above where someone made $36,000 in employment income, if they were eligible for $9,500 in CRB, $950 in tax would have been withheld and they would have received $8,550. As we see above, the true tax owing on this amount would be $2,636. Therefore this person would owe a further $1,686 when they file their tax return at the end of the year.
Another possibility is that more tax was withheld than is necessary. In a situation where $9,500 in CRB was your only income received in the year, no tax would be owing on this benefit received. Despite this, the standard 10% ($950) would have been withheld. When you file your taxes, this money would come back to you in the form of an income tax refund.
As you can see, it can be difficult to guess how much you will owe in taxes because of your CERB or CRB benefits received. By estimating using the tax rate for your level of income, you will have an idea of how much to set aside and hopefully avoid an unpleasant surprise when filing your 2020 income taxes.
Will You Have to Repay the CERB or CRB Payments You Received?
The second issue resulting from CERB and CRB that Canadians may encounter in 2021 is being asked to return funds which CRA deems them to have been ineligible for. This issue was in the news recently when CRA sent out approximately 441,000 “education letters” to people who they have judged to be ineligible for CERB and/or CRB according to the conditions of those programs.
The government has admitted that there was confusion in regards to the eligibility requirements, which they are blaming on the haste with which the programs were implemented. Nevertheless, they are insisting that any money received which the recipient was not eligible for will have to be repaid.
Assurances have been given that CRA will discuss reasonable repayment plans for people who made good-faith mistakes in applying, but repayment is still likely to cause difficulties for hundreds of thousands of Canadians who are being asked to repay large sums of money while still dealing with the economic impacts of the pandemic.
What If You Owe Income Taxes or CERB / CRB That You Can’t Repay?
If you have a debt owing to CRA, either because of taxes owing on your CERB or CRB payment or because you have been deemed ineligible for the benefit, you do have options. As stated above, CRA has pledged to work with people to come up with suitable repayment plans, particularly those who made good faith errors in applying for the benefits. However, they will only be willing to negotiate on the terms of payment, not the reduction or outright cancellation of the debt.
If you believe that you will be unable to repay the amount owing, regardless of the flexibility that CRA may allow, you may wish to speak to a Licensed Insolvency Trustee such as LC Taylor. The only way that CRA will allow the settlement of debt principal owing to them is through the filing of a Consumer Proposal or a Bankruptcy.
In Canada, only Licensed Insolvency Trustees have been granted authorization from the federal government to make these filings. Give us a call at 204-925-6400 or send us an email at email@example.com to discuss your options with respect to both income taxes owing and CRB or CERB repayment.