COVID-19 has shaken up the economy in recent months. Small businesses have closed their doors. Larger companies have committed mass layoffs. Millions of Canadians have lost their jobs — or at least lost hours and wages — because of the pandemic.
If you’ve been one of the unlucky Canadians to lose their job because of COVID-19, you should know that the Canada Emergency Response Benefit (CERB) is available as a safety net. Applying for it could give you some crucial financial support during uncertain times.
If you’ve already taken out a loan and you’re worried about the future repayments, you should contact professional debt counsellors to see how you can better manage the debt load and budget for those upcoming deadlines. Early intervention could stop you from needing stronger debt relief methods.
As useful as CERB will be, you should know that it comes with some significant drawbacks. Learn about them early so that you don’t get caught by surprise.
The Canada Emergency Response Benefit
The Canada Emergency Response Benefit is designed for Canadian citizens who have stopped working because of COVID-19. It provides $500 of financial support on a weekly basis, lasting for up to a maximum of 16 weeks.
The qualifications for CERB applicants are as follows:
- You are a Canadian resident
- You are at least 15 years old
- You have stopped working because of COVID-19. Or, you qualify for Employment Insurance benefits (regular or sickness). Or, you have exhausted your Employment Insurance benefits.
- You had an employment/self-employment income of at least $5000 12 months before the date of that you’re filing your CERB application.
- You have not quit your job voluntarily.
You can apply for CERB through Service Canada or Canada Revenue Agency (CRA). Do not apply through both platforms.
When the emergency aid program first launched on April 6th,2020, nearly one million Canadians applied online. According to the Employment Minister’s office, 996,000 CERB claims were filed on that Monday. Months later, there have been over 7.6 million CERB applicants according to the government system. People across the country are using these benefits to cover important expenses like housing, groceries and utilities until they can return to the workforce or achieve some sort of financial stability.
The Drawbacks of CERB
Out-of-work Canadians are relieved to have a program like CERB to rely on. The temporary funding eases their financial burdens during a stressful time. It’s good that the government is keeping citizens financially supported through these turbulent months so that people don’t have to be pushed to desperate decisions, like looking for unsafe work in order to pay the bills.
But, CERB is not a perfect program. It comes with drawbacks that applicants should know about.
The Funding Is Too Low
The $2000 per month total is designed to help out-of-work citizens pay for essentials. The problem is that for certain locations in Canada, that amount is barely enough to cover the cost of rent. As of March, the average rent for a one-bedroom apartment in the city of Toronto was $2,240 — that is $240 more than what CERB offers in the entire month. That does not account for utilities, food or toiletries.
The support is not enough for citizens in locations with high costs of living. Even with emergency funding, many CERB recipients will have to take financial risks like foregoing rent payments or missing bill payments.
They Have a Deadline
Another big drawback for people depending on CERB at the moment is that they come with a deadline. The program was intended to last between March 15th, 2020, to October 3rd, 2020. Individuals can make claims for a maximum of 16 weeks. Many people who applied for CERB when it first launched are close to their final claims. What can people do when their 16 weeks are up?
The future of the pandemic is uncertain. There is no way to be sure that there will be job opportunities available. Or, even that it will be safe enough to ease social distancing measures. So far, the federal government has not committed to a CERB extension for citizens that are still in need.
The Benefits Are Taxable
The biggest drawback that many applicants are likely unaware of is that CERB payments are taxable — they are considered supplementary income, after all. The benefits do not automatically deduct the tax before they reach the recipient. So, that tax has to be accounted for later when you file your 2020 tax returns. The amount that you will owe depends on your income bracket.
If you’re a CERB recipient, you will want to start preparing for tax season in 2021 as soon as possible. Setting aside a portion of your budget for income tax savings will make it easy to afford your payments to the Canada Revenue Agency. If you don’t prepare, you may not have enough to cover these crucial payments, forcing you to miss the deadline.
Missing your payments to the CRA will come with more penalties than accruing interest. The government agency is very serious about tax collection and has more authority than the average creditor. They can take intensive collection measures like garnishing your wages or freezing your bank account without going through the court system. They can also withhold tax credits as an incentive for repayment.
Paying Your Income Tax
To deal with your income tax properly, you should read this quick refresher. The deadline for filing income tax was extended to June 1st, 2020, because of COVID-19. If you missed that deadline, you can still file.
The main problem that comes with filing late taxes is that you face a late penalty. The late penalty is 5% of your balance owing. You will also get an extra 1% to that total for every month that it’s late. This pattern continues for up to 12 months. Another problem is that you will receive benefits from the CRA at a later date.
If you do not have enough savings to cover your payments for 2019, you should still file as soon as possible. The CRA has actually pushed the 2019 payment deadlines to August 31st, 2020. If you pay by then, you will receive no additional penalties or accrued interest. So, you still have time to tighten up your budget and gather up some savings before that date arrives.
This timeline may still be too tight for you. Maybe you don’t have enough income to cover the payments, or maybe you have other debts that are taking priority. You should do two things if you can’t make the payment deadline of August 31st, 2020: call the CRA, and then contact a licensed insolvency trustee.
The CRA is aware that citizens across Canada are financially unstable because of COVID-19, so they may be flexible and make a payment arrangement. You may be eligible for the Taxpayer Relief Program. This program could offer the following provisions:
- Cancelling or waiving penalties
- Cancelling or waiving interest
- Accepting late/amended/revoked income tax elections
- Reducing the amount of tax payable
The CRA is investigating cases individually, so it could take a while to get a clear answer. Call as soon as you realize that you can’t make the payments.
Anyone who is dealing with income tax debt and worrying about penalties from the CRA should also contact a licensed insolvency trustee. They can help you recover from this problem, whether you’re only a little behind on payments or you’re overwhelmed with debt. Start by arranging a consultation with a trustee to see where you stand financially. They can assess what type of response is best for your situation.
If you’re overwhelmed and entirely unable to repay the CRA, your trustee may suggest that you consider a consumer proposal. A consumer proposal is a legally binding agreement made between a debtor and their creditors to lower their debt total so that they can manage repayments. The CRA can be included in your list of creditors. Click here to learn more about paying off your taxes when you are in debt with the assistance of a licensed insolvency trustee.
More Drawbacks for Emergency Financial Aid
CERB isn’t the only form of emergency financial aid that comes with drawbacks. Other money-saving strategies that are being advised during the COVID-19 crisis have some hidden consequences. Learn about them here:
Mortgage Deferrals
Homeowners that are struggling financially have been encouraged to call their lenders to defer their mortgage payments for a maximum of six months. This would take the most expensive monthly burden off of their shoulders, allowing them to save money and focus on other essentials. What many of them may not realize is that deferring your mortgage comes with some consequences.
One issue that can come with mortgage deferrals is that the payments are on pause, but your interest isn’t. Interest will accumulate during those six months, making your total mortgage balance higher than before. While it’s not a dramatic consequence, it will push the goal of paying off your mortgage a little further away.
Another issue is that it could hurt your credit score. Credit bureaus like Equifax and TransUnion could interpret a deferred payment as a late payment — since it is going unpaid. Late mortgage payments lower your credit score. It all depends on how your lender labels your deferral on their systems report. Be sure to talk to your lender about this problem to make sure that your credit doesn’t take an unfair hit.
If you find that your credit score is lower after making a deferral, don’t panic. Credit scores can recover. You can contact the credit bureau to correct the error, with proof that you agreed to a deferral with your lender because of COVID-19. You can also use good credit habits to boost your score over time. The number isn’t set in stone. It can recover.
Don’t let this steer you away from deferring your mortgage. Putting that financial responsibility on pause so that you can regain some stability can be very useful. Plus, avoiding a mortgage deferral could also hurt your credit score in the long run.
Without a deferral, you might not be able to afford your mortgage payments on-time, meaning they will be marked as late or unpaid. That hurts your credit score. Without it, your budget for other essentials like groceries and utilities may be too tight. You could miss important bill payments, run up the balance of your credit card, or take out a loan in order to manage. These will all impact your credit score.
In these challenging times, almost every option has a consequence. Your best strategy is to pick a consequence that you can recover from.
Emergency Business Loans
If you’re a small business owner, you may consider applying for government support through the Business Credit Availability Program (BCAP) or the Canada Emergency Business Account (CEBA). These programs are offering term loans, co-loaned term loans and interest-free loans to owners through banks and credit unions. While this funding will help you replenish cash-flow and keep staff onboard in an unstable economy, it’s a temporary fix. You will have to repay the amount in the future.
Our licensed insolvency trustees can help you file for a Division 1 Proposal, a Corporate Bankruptcy., and more You can contact us today to set up a consultation and see what will be the best recovery option for your small business.
David Sklar & Associates:
Residents of the Greater Toronto Area have had their lives turned upside-down by the pandemic of COVID-19. Here at David Sklar & Associates, we understand that many residents have been thrown into financial instability because of this health crisis and are concerned about what to do next. If you need financial help, we are still here for you.
We offer over-the-phone consultations and electronic document signing so that you can access our services from the safety of your home. We want to encourage our clients to prioritize their health as best as they can during these uncertain times.
Emergency aid for COVID-19 often comes with strings attached. It’s important that you stay informed about the consequences now so that you don’t get caught by surprise in the future. You don’t want something financially helpful now to become financially harmful later on.
