What to do if you’re worried about CERB tax debt

Nancy does a great job of demystifying the topics of taxes on CERB and other COVID-19 benefits, how to avoid tax debt and what to do if you can’t. To learn more about our conversation, read the full transcript below.

Financial Wellness Podcast Transcript

Tera:

Hello, and thank you for joining us. This is the BDO Financial Wellness podcast, and I’m your host, Tera Beljo. I’m going to start this episode off by asking you a question. Did you receive government assistance or benefits to help you survive the financial impact of COVID-19? If you answered yes, you are not alone. Literally millions of Canadians received the Canada Emergency Response Benefit, better known as CERB. And when CERB ended, many people transitioned to the new Employment Insurance or EI.

There’s a long list of pandemic benefits that people accessed in 2020, and many benefits that they continue to access in 2021. There is no question that the tax implications for COVID-19 benefits will be confusing and stressful for a lot of households, especially those households that are still trying to get by on reduced income, living paycheque to paycheque or facing heavy debt.

What if you can’t afford to pay the taxes you owe on the government benefits, or what if you received CERB payments mistakenly, even though you weren’t eligible? I had the pleasure of sitting down with Nancy Snedden, BDO Licensed Insolvency Trustee, to get her thoughts and expert advice on navigating these financial challenges.

1. File your taxes on time to avoid penalties and added debt.

Tax time is always a little stressful, no matter who you are and what your financial situation is. So Nancy, will you start by talking about how filing your taxes can affect your debt?

Nancy Snedden:

Sure Tera, no problem. When it comes to tax time, it’s always a stressful time, no matter what your income level is, because there are different tax brackets for what you’re going to owe in tax, but it doesn’t change that everyone will need to pay tax and may end up owing tax at this time of year. So it is always stressful.

So it’s always important to consider first what goes into your tax filing and make sure you’re including all your sources of income, so that you’re calculating properly to know what you may owe. And I think the impact that filing your taxes can have on your debt is, if you do owe taxes and you’re unable to pay it in a lump sum, you’re now needing to include a monthly payment plan with Revenue Canada, to make that payment, in addition to the debt payments that you already have.

And many people will say, I owe taxes. I can’t pay them. So I’m not going to file it right now. That’s a mistake. You really want to make sure that even if you can’t afford to pay the lump sum on your taxes that you are filing your taxes on time, because you want to avoid the interest in penalties that come along with not filing those on time. And they’re quite substantial.

You’re going to pay five per cent on any balance owing just for filing late. That is increased by one per cent per month that you’re late filing (your tax return). So it can add up very, very quickly. And always, of course, so important to make sure that you file your taxes if you’re able to access government benefits. So things like the child tax benefit, income supplement for seniors, GST credits, all those things are only going to be available to you if you file your taxes. So super important to make sure that you do that.

Tera:

So Nancy, will you discuss why you avoid paying taxes late or not getting your child tax benefit? The Canada Child Benefit for example, is so important for people with affordability issues or debt challenges.

Nancy Snedden:

Many people rely on those forms of income, Tera, to make their monthly budget work, especially now when we’re in the pandemic, and people, in some cases, are on a reduced income because they’re working reduced hours or they’ve been laid off or whatever the case may be. So things like child tax benefit become even more important (if they weren’t already), to planning your monthly budget and being able to make sure you’re meeting your monthly commitments. So any delay in receiving those can have a detrimental impact to your family.

Tera:

And is there a calculator or something that can help people estimate what they may owe in April?

Nancy Snedden:

Absolutely. There are many online calculators and tools available. We have some tools available on our BDO Debt Solutions website, Revenue Canada, and the FCAC would also have tools available on their websites for you to try to figure that out.

2. List your COVID-19 benefits and their dollar amounts.

Tera:

That’s great. So a great number of people who received COVID-19 government benefits like CERB, EI, and CRB, continue to deal with financial challenges like reduced affordability and large debt loads. Any uncertainty or confusion about how much tax they’ll owe on these benefits will certainly cause emotional and financial stress for a lot of Canadian households. So before we discuss what debt solutions are available for people who may not be able to pay their taxes, could you review the COVID-19 government benefits that are taxable?

Canada Emergency Response Benefit (CERB)

Nancy Snedden:

Absolutely. There were several benefits available from the government. They changed throughout the course of the pandemic, but I guess the one to start with would be the Canada Emergency Response Benefit. That certainly was the one that was most popular. It’s the one that started right out of the gate when the pandemic hit, and we had those stay at home orders being issued.

So if you lost your job and your income was reduced, or if you had to stay at home to help take care of your family, CERB was offered as an income support to you. It was $2,000 a month or $500 a week, every four weeks. And you could get that for up to 28 weeks. It began on March 15th, and it went through until September 26th of 2020. And the total you could apply for was $14,000.

Now that number is important for a couple of reasons. The basic tax credit for individuals with Revenue Canada is $13,000 to 29 (per cent) for 2020. So if you received the full amount of CERB at $14,000, you’ve received income above that personal threshold, which means you will have some tax payable.

Where it’s going to become a problem for people though, is if you had income over and above the CERB. So if you worked prior to receiving the CERB, if you worked after receiving the CERB, that’s going to put your income at a different threshold. And because the government did not withhold taxes on CERB, you’re likely going to have a tax bill. If you haven’t set money aside, that may become a problem for you.

Tera:

That is probably the best explanation I’ve heard!

Employment Insurance (EI)

Nancy Snedden:

Thank you. So the next one will be the simplified Employment Insurance program. That started when CERB ended. So that would’ve started September 27, and the government rolled out this new EI program to replace CERB, because the government knew at that time, of course, that people were still going to need some financial support, because we were still in the midst of this pandemic.

So the minimum benefit was $400 a week. And recipients got that for at least 26 weeks of regular benefits. The advantage of this program though, is that you’re still eligible for it, even if you did receive other income. So similarly to EI, you can’t supplement that and still receive those benefits. You can keep 50 per cent of this additional income up to 90 per cent of the weekly insurable earnings used to calculate your EI benefit amount.

And the other important thing with this new program is that they are withholding tax on these amounts – only at 10 per cent though. So you’re still going to want to estimate your total income and look at if you should be putting money aside, because you may owe taxes based on those earnings as well.

Canada Recovery Benefit (CRB)

The other one is the Canada Recovery Benefit. So when the government launched a simplified EI program, they also rolled out this benefit program. And it was meant for people who were operating in the gig economy, or they were self-employed, and therefore they didn’t qualify for the simplified EI program. So these recipients were receiving $400 a week for up to 26 weeks. However, you will have to pay back 50 cents for every dollar in net income that you earned over $38,000. That excludes the amount you received from the Canada Recovery Benefit program.

So I know that that can be really confusing, and it is confusing for many people who are applying for these benefits. So as an example, let’s say that you’ve got CRB payments and you have whatever income you’ve made. So you’ve got CRB, and you’ve made up to $38,000 a year in net income. You don’t have to pay back the CRB, but then say you made $45,000 in net income and you got CRB, you’d be $7,000 over that $38,000 threshold. So because of that, you’d be reimbursing 50 per cent of that net income you earned over and above the 38. So you’re going to be paying back the $3,500.

Tera:

That makes sense.

Canada Recovery Sickness Benefit (CRSB) and Canada Recovery Caregiving Benefit (CRCB)

Nancy Snedden:

So there’s a couple of others, of course, that the government has out there. One is the Canada Recovery Sickness Benefit, and the last one being the Canada Recovery Caregiving Benefit. So these two are if you couldn’t work due to COVID-19, whether employed or self-employed, and don’t have a paid sick leave program, or you had to miss work because you’re taking care of someone with COVID-19. So they provide for $500 per household, not per person, with regards to the caregiving benefit. With the sickness benefit, it would be $500 per individual that is sick, because you’re applying for it as an individual versus a household.

CRA is also withholding tax on those. But again, it’s at a 10 per cent threshold. So depending on your level of income for the entire year and what tax bracket you fall into, you may still end up owing taxes after receiving those benefit amounts.

Canada Emergency Student Benefit (CESB)

And I guess the final one is the Canada Emergency Student Benefit (CESB). So this benefit actually closed on September 30th of 2020, but it was for post-secondary students and recent high school or post-secondary graduates. Applicants got $1,250 for a four-week period, up to a maximum of 16 weeks. That program went from May 10th to August 29th. So if they had dependents or had a disability, they could receive as well, an additional $750 for that four-week period.

But it (CESB) was not taxed at source. So, similar to the Canada Emergency Response Benefit, students who received this money, they’re going to want to see the income they had prior to, the income they received after, and they may end up owing taxes if they haven’t set money aside, or they’re over that $13,000 to 29 (per cent) income threshold.

Tera:

Okay. So what should people do if they want to know what they owe? What if they can’t afford to see an accountant, is there non-profit tax assistance for people with a low income?

Nancy Snedden:

There are many organizations actually across the country that set up tax clinics. So I would ask your city and see if there’s any clinics that are set up in your city that they’re aware of. The other important source for people would be CPA Canada or their provincial CPA Institute. All the CPA institutes in the country do have tax clinics for low income and seniors. You do have to sign up for them and it is by appointment. They’re not walk-in clinics for the most part, but reach out if you need some support in filing your taxes and find out if you qualify.

3. Reach out to Revenue Canada for CERB tax debt help.

Tera:

Great, thank you for that. So Nancy, let’s talk more about the Canada Emergency Response Benefit, better known as CERB. According to federal figures, 8.9 million Canadians received CERB. So I’m sure a lot of our listeners are concerned about the effect of CERB on their tax situation. Inevitably, there are people who receive CERB overpayments, and some who receive CERB payments even though they weren’t eligible.

For anyone who has received those payments, has received repayment notices from CRA, or who believe they may have to make CERB repayments, what steps do you advise they take?

Nancy Snedden:

So regardless of whether you can pay the debt or not, as I said, it’s important to reach out to Revenue Canada. Communication is always going to be the first step. You need to speak with them, acknowledge that you understand you have this debt, and try to come to a payment arrangement with them. In most cases, Revenue Canada will work out a payment arrangement with you that you can afford, especially in these uncertain times with the pandemic.

My understanding, in the media that I’ve seen and the press releases and stuff that I’ve read, is that Revenue Canada is going to try to work with individuals on this. Important to note, though, that they will still be taking collection efforts as they do with any other debt at some point in the future. They’re not doing them (collection efforts) as of today, but it is debt that would qualify for those collection efforts. So they can garnish your wages, they can place liens on your assets. And they’re one of the only creditors that is able to garner sources of income like EI and pensions and that kind of thing. So even pension income is not out of the purview of Revenue Canada when it comes to collection efforts.

So if you come to the point where you can’t come to an arrangement that’s affordable to you with Revenue Canada, or you come to the arrangement, but you get down the road, and you’re finding that it’s not manageable, and you actually are still struggling to meet that payment commitment in addition to the other commitments that you have, talk to a Licensed Insolvency Trustee about your situation.

It never hurts to have a free initial, no-obligation consultation with a Licensed Insolvency Trustee. At least then you’re going to know what your options are, whether or not you avail of those options at that time or at a future date, you’re making an informed decision about what the best course of action is for you.

Tera:

And what about self-employed workers?

Nancy Snedden:

For self-employed workers, there was a minimum threshold and net income that they had to meet in order to qualify. Your net income had to be a minimum of $5,000 for the 12 months preceding the pandemic. As with most self-employed individuals, you’re putting through your business expenses to reduce the amount of tax that you’re going to have payable on your income. Under the law, it’s under the rules of the Income Tax Act, you’re fully eligible to do that.

One thing that they may want to talk to their tax accountant about is, does it make sense to file an amended tax return so that you can meet that $5,000 requirement? Now, it may or not make sense. You’re definitely going to want to get professional advice from your tax accountant on whether it does make sense for you to take that option, but you’re then going to weigh the interest in penalties and tax you may owe on that additional income due to the amendment, versus the repayment amount under CERB.

4. Talk to an LIT about CERB tax debt relief options.

Tera:

Great. So for those people who owe taxes on CERB income, or must repay CERB payments, what should they do if they can’t repay what they owe by the tax deadline?

Nancy Snedden:

So as we said, Tera, you’re still going to want to make sure you’re making the filing. And contact Revenue Canada to make payment arrangements, knowing that you can’t make the lump sum at the tax deadline, but you want to avoid those interest and penalties. If you aren’t able to do that, reach out to a Licensed Insolvency Trustee, like I said, to find out what your options are.

It may be that a consumer proposal is the right option for you, because income tax debt is a debt that’s covered by a consumer proposal. It may mean that a bankruptcy filing is the best way to eliminate that tax debt. But reaching out to the Licensed Insolvency Trustee will help you figure out what the best path forward is.

5. Increase your knowledge to decrease your tax debt stress.

Tera:

And is there any other advice that you could give to somebody who’s in this situation before we close?

Nancy Snedden:

Knowledge is power. So rather than sitting and worrying about: How are you going to be able to pay back this money? If you have to pay back this money, what is the impact going to be to your finances? If you’re unable to pay back this money, if you have other debt, and that’s what you’re really struggling with. How am I going to manage to pay the debt I currently have in addition to repaying the CERB or the tax that is now due on these government benefits?

And the best way to relieve that stress is to have a conversation. So if you want to do some research online, I always recommend that’s a good first step, because then you’re educating yourself a little bit, but you’re also then equipped to know, what are the questions you want to ask when you do sit down with someone to talk about your personal financial situation?

There’s some great knowledge building tools on the internet. Like I said, the FCAC has a great website that you can visit. We have a lot of information on our Debt Solutions video site, a lot of blogs around CERB and tax repayment as well. That would be beneficial as an educational tool, but nothing can take away the importance of meeting with someone who is a professional who can talk to you about your specific situation, so you know exactly what the impact is for you and your family.

Tera:

Thank you so much again, Nancy, it’s always a pleasure talking to you.

Nancy Snedden:

Thanks, sure. My pleasure.

Tera:

I want to thank BDO Licensed Insolvency Trustee Nancy Snedden for joining me today, and you for listening. For more Financial Wellness Podcasts, along with videos, debt management resources, tools and expert advice, visit our website, DebtSolutions.BDO.ca. And remember, we are here to help you turn the page on debt.

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