When the financial impact of the coronavirus hit Canadians, the federal government moved quickly to put money into the hands of households who lost wages due to COVID-19.
The Canadian Emergency Response Benefit (CERB) allows those who stopped working due to COVID-19 to receive $2,000 for a four week period. With the program now extended to a total of 24 weeks, total CERB income can amount to $12,000 in earned income.
However, what happens when you file your 2020 tax return? Are CERB taxes or overpayments dischargeable in a bankruptcy or consumer proposal?
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CERB is a taxable payment
CERB payments are before tax money. The government does not withhold any taxes at source on these benefits. This is different than traditional unemployment insurance where the government takes a small amount off for taxes.
CERB will be considered taxable income when you file your 2020 tax return. You will receive a T4A from the Canada Revenue Agency on any benefit amount you receive. You are liable for any taxes due on that income.
The Canada Emergency Student Benefit (CESB) is also taxable to the student as would other student employment income. Students and parents will want to consider this when determining who should use tuition deductions.
Calculating how much tax you owe
The tax amount you will have to pay will depend on your total income for the year. The more you make, the higher your tax rate. If you were on CERB for most of the year and your income was low, your tax liability will not be large. If, however, you had a good job prior to COVID-19 and returned to work quickly you could be facing a larger than expected tax bill, as opposed to your typical refund.
This tax calculator by SimpleTax can help you estimate your total 2020 federal and provincial taxes. Simply enter income earned before and after CERB, plus any CERB benefit received to calculate your total taxes owing. Deduct from that any taxes withheld by your employer.
For example, if you earned $26,000 in employment income before and after CERB, plus collected eight weeks of CERB, your total income for the year will be $30,000. Assuming you have no deductions, your total taxes payable would be almost $4,900. If your employer deducted $4,000 while you were working, you will owe $900 to the CRA come tax time.
Another option is to check your effective tax rate from your prior year return. Most people have an effective tax rate of between 15% and 25%, but your rate will depend on the type of income you have and any allowable personal deductions.
As a rule of thumb, we recommend setting aside 20% of your CERB payments for future taxes.
File your taxes on time
Even if you believe you will not owe taxes due to CERB payments, file your tax returns on time to avoid any late-filing penalty. Filing past the deadline will add a penalty equal to 5% of the taxes owing, plus an additional 1% for every month your return is late (up to a maximum of 12 months).
Making your tax payments
If you have not saved enough to pay your CERB tax bill, there are still some options you can consider:
- You can make payment arrangements with the Canada Revenue Agency. You will incur interest on the balance due until it is paid in full.
- You may be able to apply under the CRA taxpayer relief provisions to cancel or wave penalties or interest if you can show ongoing financial hardship.
- You can take out a loan to pay your taxes. CRA may request that you consider this option before approving any reduction in interest or penalties. However, only do this if you can borrow at a low rate. We do not recommend taking out a high cost installment loan as this can lead to further financial difficulties.
- Yes, you can pay your taxes with a credit card through approved CRA providers. If you do this, have a plan to pay down your credit card debt as quickly as possible.
As the economy reopens and you are back to work, we strongly suggest making a plan to deal with any tax obligations.
Will CERB be dischargeable in a bankruptcy or consumer proposal?
You can file a consumer proposal or bankruptcy to clear tax debts. Under current legislation, we believe taxes owing on CERB payments will be eligible for discharge under the Bankruptcy & Insolvency Act if those debts are not due to fraud.
CERB ineligibility and overpayments
It is currently unknown how the CRA will treat repayment requirements for overdue CERB payments where the applicant was not entitled to the benefits. Based on prior experience with EI overpayments, if a CERB application was made fraudulently the repayment requirement may not be released.
The CRA lists reasons why you may not be eligible to have received CERB payments
- You earned income above $1,000 for the eligibility period even though you were not expecting to. For example you returned to work during the 4-week period you applied for and collected benefits.
- You received both CERB and EI for the same period
- You applied for CERB but realized you were not eligible
- You received double payments for CERB
If you received CERB money incorrectly, you must repay the CRA. You can return CERB money by online banking through your CRA My Account or mail a cheque to the Canada Revenue Agency. Any monies repaid prior to December 31, 2020 will be reduced from your T4A for your 2020 tax year.
If you find yourself facing an unexpected and overwhelming tax debt along with other unsecured debt once CERB has finished, contact us for a free no-obligation consultation to explore your options.