After COVID-19 surfaced, countless Canadians applied for the Canada Emergency Response Benefit for financial support. Some relied on the CERB program until they found employment opportunities and regained their stability. Others relied on it until the program ended in September 2020 and turned to different financial aid programs offered by the federal government.
The pandemic shook the country’s economy, leaving people suddenly without income to care for themselves or their families. CERB helped them stay safe and stay afloat during the unstable time, giving them enough funds to cover the costs of essentials like housing, food and utilities every month.
Although the program ended last year, CERB’s influence isn’t entirely over. It will still have an effect on this year’s tax season. If you used the benefits program last year, you will want to consider how it will impact your income taxes.
CERB and Taxes
The Canada Emergency Response Benefit is considered taxable income. This means that you have to include every payment that you received through the benefits program in your income calculations when you are filing for your 2020 tax returns.
One of the original drawbacks of the government’s COVID-19 financial help was that taxes were not deducted at source. These CERB tax implications put the onus on the recipients to carefully calculate their income and figure out how much tax they owe. They also set up recipients to make larger payments to the CRA than if the government had withheld taxes in the first place.
This is why budgeting for taxes during COVID was, and is, such an important strategy for Canadians to follow. If you didn’t budget accordingly for this tax season, consider our budgeting tips and prepare for the 2021 tax season. You’ll be relieved that you had the foresight to prepare so early.
CERB is over. The federal government replaced the benefits program with the CRB program and expanded EI benefits for citizens who continue to have their employment opportunities upended by the pandemic.
Will these benefits affect your tax season? If you received CRB or EI in 2020 — even if it was only during the final three months of the year — you will need to report it as income. The good news is that, unlike CERB, these benefits programs deducted 10% of taxes at source. This feature should make filing a little easier and could reduce any payments that you owe to the CRA.
Click here to learn about other important CERB updates that could impact your finances in 2021.
How to Calculate Your Taxable Income
You may be wondering: “How much tax will I pay on CERB? What’s the CERB tax rate? Is there a CERB tax calculator?” Unfortunately, you won’t be able to figure out how much tax you owe on CERB by itself. It does not have a specific rate or calculator.
If you want to figure out how much tax you owe for 2020, you will have to add up all of your income for the year — this includes the earnings you’ve made from a full-time employer, any second jobs/side-hustles and any financial aid (for example, CERB).
Your employer should send you a T4 slip before the tax filing deadline. This slip will list the total income that you’ve earned from this position in 2020. The Canada Revenue Agency or Service Canada will send you T-slips for whatever benefits you received during the year. Any additional income made through side hustles or side jobs will be considered self-employed income. You will need to calculate that on your own. Ideally, you should have records of your self-employed income, like invoices and receipts, to support your calculations.
You will have to add these various income streams together. Don’t worry, this isn’t your total. You still need to apply any deductions that you’re eligible for. These deductions can include childcare expenses, moving expenses and RRSP contributions for the year. After subtracting all of those payments, you officially have your taxable income.
Your taxable income will let you know what tax bracket you land in and which federal tax rate you should pay. Click here to see what the federal tax brackets are for this year. If you barely brought in any income other than CERB benefits in 2020, it’s possible that you do not owe any tax or that you’re entitled to a significant refund for 2020.
Getting Tax Help:
If you are having trouble calculating your income, figuring out what deductions to claim or how to even file, you should seek professional help. You don’t have to empty your wallet to talk to an accountant. You can attend a tax clinic instead. These clinics are completely free, and they’re virtual, so you don’t have to worry about putting your health and safety at risk.
There are also online tax programs that include help features such as FAQs,live chats or telephone consultations. These services may be free or have a cost associated with them. However, if you are not sure what to do, the cost may be well worth it to ensure you properly complete your taxes and claim all benefits available to you.
What Happens Next
The tax filing process will reveal one of two options: you will owe no tax and only receive a refund from the CRA after filing your return, or you will have a balance owing to the CRA.
If your result is the former, all you have to do is file your return and then wait to receive your refund. If you file online, it typically takes 2 weeks to receive the refund. It takes approximately 8 weeks when you file a paper return. When you live outside of Canada, it can take up to 16 weeks to receive.
If your result is the latter, then you will have to pay the CRA what you owe. Ideally, you should make the payment in full by the filing deadline of April 30th, 2021. It will help you avoid accumulating interest and penalties. If you can’t do it in full, you can make a partial payment to reduce interest.
If you have a balance owing to the CRA, there’s no need to panic about payments just yet. If you received any emergency financial aid in the past year, and your total taxable income was less than $75,000, the CRA is offering you some relief. Once you file your 2020 income tax return, you will not have to face any interest charges on 2020’s outstanding income tax debt until April 30th, 2022. This strategy removes financial stressors like accumulating interest, giving you the rare opportunity to manage your personal finances and collect enough savings to pay the CRA.
This targeted interest relief isn’t just for recipients of CERB. It applies to Canadians who received benefits from the following:
- Canada Recovery Benefit (CRB)
- Canada Emergency Student Benefit (CESB)
- Canada Recovery Caregiving Benefit (CRCB)
- Canada Recovery Sickness Benefit (CRSB)
- Employment Insurance (EI)
Struggling with Tax Debt
If you’re struggling financially and you don’t think that you can pay down your balance owed to the CRA, there are a few things that you can do to improve your situation. The first thing that you should do is to file your taxes — even if you can’t pay the CRA. Skipping this crucial step will make you collect late filing penalties.
The next thing that you can do is contact the CRA to see if you can make a payment arrangement due to financial hardship. They might pause or waive interest and penalties so that you’ll have an easier time repaying them what you owe.
Or, if you’re having a tough time managing debts to multiple creditors — not just the CRA — book a free consultation at David Sklar & Associates. During that consultation, one of our debt help professionals (licensed insolvency trustees) can look over your finances to see what’s the best strategy for repaying your creditors and finding long-term debt relief.
Your trustee might suggest that you file for a consumer proposal. This is a legally binding agreement made between you and your unsecured creditors. It allows you to pay a reduced portion of your debts with no interest or penalties. It also stops the creditors from taking any collection actions against you — this includes collection calls, wage garnishment and bank account freezing.
The CRA is an unsecured creditor, which means that your debts to them will be covered in a consumer proposal.
Taxes and Consumer Proposals
If you intend to file a consumer proposal, you will have to take some actions to guarantee that the CRA agrees to your terms:
- You will have to file all tax returns to date. If you have several years’ worth of back taxes to file, you will have to file them.
- You will have to file tax returns during the proposal period, which can last for a maximum of 5 years. You must file these returns by the scheduled deadlines.
- You will have to pay the taxes owed during the proposal period.
Be sure to learn more about how taxes work in a consumer proposal and how they work in personal bankruptcy.
The Canada Emergency Response Benefit was an incredibly useful program that you could turn to when you were in desperate need of financial support. What you might not have realized at the time, however, was that this financial aid wasn’t entirely “free.” Every benefit you received was considered taxable income.
As debt experts, we understand that it’s easy to focus on the advantages that financial decisions bring you and forget about the disadvantages. When you receive an emergency benefit, you’re not thinking about how it will affect your tax return — you’re thinking of how it can help with your hydro bill or your groceries. That’s why we want to give you the tools to manage these disadvantages, even when you feel like it’s too late.