What You Need to Know about CERB Tax
Jan 11, 2021
Many Canadians who received CERB are wondering if they will have to pay a portion of it back on their tax bill. How do you know where you stand?
Since the Canada Emergency Response Benefit (CERB) officially ended in September, a new EI has taken its place, introducing new conditions as well as some new benefits for self-employed workers. But questions still remain regarding CERB. What will your tax bill look like this April? Because CERB is considered taxable income, recipients of the benefit will have to pay a portion of it back.
And what about CERB eligibility? To accelerate the relief process during the first wave, the government postponed tax collection as well as the necessary checks that come with tax benefits, like assessing eligibility. Consequently, many people are wondering what they should do if they received CERB but were, in fact, ineligible for the benefit.
If you received CERB, tax season will not be that much different from previous years. You will receive a tax slip and will have to report the benefit as taxable income on your 2020 tax return. Any balance due is payable as of April 30, 2021.
But what if you are unable to repay the CERB tax debt owing? If you have concerns about being able to repay CERB, here is a Q&A about what we know about the situation so far. We’ll continue to make updates, so be sure to bookmark this page.
1. How much tax will I have to pay on CERB?
Unlike other sources of income, CERB taxes were not withheld at source; it will be collected as part of your income taxes in 2021. In other words, the CRA will view your CERB payments as part of your total employment income.
This means that tax bills this year won’t be that different. There isn’t a special “CERB tax” that you will have to pay separately. Your taxes will be calculated based on your total income for the year, CERB and employment income combined.
In order to get a good estimate of your total federal tax bill, you can find out which tax bracket you belong to here.
2. What if I received a CERB overpayment?
The CRA has already started issuing formal collection letters to Canadians who have received CERB overpayments. How did overpayments happen? When CERB was first announced, Canadians could apply through either Service Canada or the CRA. However, some people applied for the benefit through both agencies, oftentimes by accident, and received a double payment. If this happened to you, the best course of action is to use the CRA’s CERB repayment tool. If you are unable to repay, please refer below to question 6.
3. What if I received CERB and wasn’t eligible?
If you applied for CERB but weren’t eligible, don’t panic. The eligibility criteria for CERB weren’t exactly clear at the beginning of the program. Consequently, many people may have applied for CERB thinking they were eligible and later discovered that they weren’t.
The main reference points for determining eligibility are around income prior to COVID-19 and income during COVID-19.
- Prior to the pandemic, you are eligible for CERB if you earned at least $5000 in 2019 or in the 12 months before applying.
- During the pandemic, you are eligible for CERB if your income was impacted by the pandemic but does not exceed $1000 per month.
For self-employed workers, the minimum earning requirement of $5000 has been subject to some confusion. As a rule, the CRA interprets the requirement as net and not gross income, but never used this exact wording in their eligibility requirements for CERB. The CRA has started issuing CERB repayment notices for self-employed workers whose net (after tax) income is below this threshold.
It’s also important to note that for some people, “income” could mean different things. For the CRA, however, “employment income” is directly related to your paycheque. It doesn’t include:
- Pension income
- Disability benefits
- Student loans and or bursaries
- Family support payments
- Social assistance payments
- EI earnings
- Canada Child Benefits (CCB) or Working Income Tax Benefit (WITB)
- Investment income
You may have lost a source of income due to COVID-19, but if your employment income (excluding the above benefits) was less than $5000 in the 12 months before applying, you’re unfortunately ineligible for CERB. On the other hand, if your employment income was affected by COVID-19 and your gross income is less than $1000 (excluding these benefits) you are still eligible for CERB. (For self-employed individuals, net income must be less than $1000 for each 4-week period). (For self-employed individuals, net income must be less than $1000 for each 4-week period).
You can read more about eligibility for CERB here.
4. What will happen if the CRA audits my CERB payments?
Are you worried the CRA will audit your CERB payments? It’s a good idea to retrieve any supporting documentation that relates to your employment before and during your application. Did you receive any correspondence from your employer explaining the impact of the pandemic on your employment? Save any emails, letters or paystubs that can help you establish your eligibility should the CRA decide to audit you.
5. What can I do to repay my CERB tax debt?
- File your taxes on time
The first step is to get on top of your tax situation by completing and submitting your 2020 tax return as soon as possible. When you know exactly how much you owe, you will be better prepared to figure out how to manage your CERB tax debt.
- Communicate with CRA
Once you have a clear idea of how much CERB tax debt you owe, contact the CRA and establish a payment schedule that you can afford. Note that the CRA typically charges interest on remaining balances at a rate of 5 per cent, plus penalties if the tax return is filed late.
6. What if I can’t repay my CERB tax debt?
We still don’t know how the CRA will collect CERB repayment. But it’s most likely that CERB will be treated like any other form of tax debt. If this is the case, here are your options:
- Apply for taxpayer relief
If you can’t pay your tax debt due to events beyond your control, like a serious illness, natural disaster, or loss of employment, you may apply for tax relief, which can waive or cancel penalties or interest. You may also need to engage the services of a tax professional to assist you with this application.
- Reducing tax debt through a consumer proposal
It may be possible to negotiate with the CRA about the amount of tax you owe by filing a consumer proposal.
A consumer proposal is a legal form of debt forgiveness, sanctioned by the Bankruptcy and Insolvency Act that provides protection from your creditors, lawsuits or wage garnishments, including the CRA.
In a consumer proposal, a Licensed Insolvency Trustee reduces your unsecured debts (credit card, line of credit, tax debt) to a significantly lesser amount by negotiating with your creditors. You can expect to pay back 30 to 80 per cent of your debts.
- Eliminating tax debt by filing bankruptcy
If you can’t pay your tax debt to the government and have explored all other options, you might consider filing for bankruptcy.
Similar to a consumer proposal, bankruptcy is a legal form of debt forgiveness. Both programs either reduce or eliminate unsecured debts, including tax debt. But there are many differences between a consumer proposal and bankruptcy that you should understand.
If it’s CERB or any other tax debt that you are dealing with, the first step for dealing with the situation would be to schedule a free consultation with a Licensed Insolvency Trustee (LIT). An LIT can help you explore all your debt relief options, from debt consolidation and debt management plans to formal debt forgiveness programs.