Millions of Canadians flooded the CRA website last week to apply for CERB (along with other government support payments such as EI). CERB provides $2,000 per month ($500 per week) for up to 16 weeks to individuals who were laid off as a result of COVID-19.
As mentioned in our last post – if the government finds that you’re “cheating the system” you will need to repay all CERB amounts you were ineligible for. While I could not find any specific details, amounts clawed back may also include penalties and interest. But for the sake of argument, let’s assume you receive all the CERB payments you were eligible for; are they taxable??
The simple answer is YES! CERB payments are a form of taxable income and must be claimed on your 2020 personal income tax return. What a lot of individuals are going to forget is that CERB payments come in the form of gross income, CRA has not proactively deducted income tax. In an employment setting, your employer will automatically deduct and remit the appropriate amount of income tax, CPP and EI, leaving you with after-tax money, or the net amount. However, this is not the case with CERB.
Illustrative Example
Steven loses his job on March 31, 2020 and is unemployed until June 1st. Steven did not want to go through the trouble of applying for EI, however, he did apply for CERB and ultimately received $4,000, $2,000 for April and $2,000 for May. Let’s assume Steven’s employment income was $30,000 in 2020 and his employers already deducted $6,500 of federal and provincial income taxes. For simplicity, we will assume that Steven’s combined federal and provincial tax rate is 20%.
Without including CERB payments, Steven would receive a refund in 2020 for $500 ((30,000 * 20%) – 6,500). However, when we incorporate CERB, Steven will have a balance owing on his 2020 tax return of $300 ((34,000 * 20%) – 6,500). Steven unexpectedly transitioned from a refund position to an amount owing; so what happened?
As mentioned earlier, employers automatically deduct income taxes from the employee’s gross income. Come tax time, employees often receive a refund because income taxes were over-deducted. In the example above, the government did not deduct income taxes from Steven’s CERB payments, and therefore, he was on the hook for an additional $800 (4,000 * 20%) at the end of the year.
Summary
The moral of the story is that CERB payments will be included in 2020 taxable income, and therefore, we recommend that you plan ahead. Avoid spending the entire amount, anticipate how much tax you will owe on CERB and set that amount aside. In our simplistic example, that amount was $800. By doing this, there won’t be any surprises come tax season. Take care everyone!
This example and information shown above is for illustration purposes only. Do not rely on the amounts and information provided as a form of professional tax advice. If you have questions or concerns about your personal tax situation, it is recommended that you conduct your own research or talk with a professional.
For more information regarding CERB, visit the links below:
https://www.bdo.ca/en-ca/insights/tax/tax-alerts/canada-emergency-response-benefit-cerb/
https://www.canada.ca/en/services/benefits/ei/cerb-application/questions.html