How COVID-19 Will Impact Your Taxes this Year and Next

The impacts of COVID-19 have been far-reaching, disrupting individual lives and businesses. A number of supports and benefits have been introduced, and many provinces are now in the process of reopening their economies. As things slowly return to normal, keep in mind that the pandemic has also meant new deadlines for filing your taxes, new support and benefits, and new implications for filing taxes next year. Here’s a quick look at some of the changes.

Income Tax Deadlines Extended

Due to the upheaval COVID-19 has caused in many people’s lives, income tax deadlines for individuals have been extended by the Canada Revenue Agency. Your deadline to file for the 2019 tax year is now June 1, 2020.

If you’ve already missed that deadline, you might not have to panic. Filing your taxes late in Canada is not the end of the world if the government owes you a return. However, if you have a balance owing to the CRA, you will have to pay a penalty of 5% of your balance owing and a further 1% of your balance owing for each month you are late.

If you are self-employed, the story is a bit different. The deadline to file your taxes remains unchanged at June 15, but payment has been extended to September 1, 2020.

The deadline to make a payment on any amounts owed to the CRA has been extended to September 1, 2020. If you have a June 15, 2020 installment payment due, the date for that payment has also been extended to September 1, 2020.

You will not face any penalties or interest charges as long as your payments are made by the September 1, 2020 extended deadline.

GST/HST Credit

Many households in Canada received a larger than usual GST/HST Credit this year. The Canadian government boosted this credit to about $400 for individuals as a way to put more money in the pockets of low-and-modest income Canadians during exceptional circumstances. It’s a one-time increase to the credit and you did not have to apply to receive this. As long as you filed your taxes for 2018 and were eligible to receive the credit normally, you received it.

The GST/HST credit is not taxable income. Unlike CERB payments, you will not have to pay any of this money back come tax time next year. A credit is deducted from your amount owing. You get a return when you’ve already paid more than you owe.

CERB Payments Are Taxable

If you’ve received CERB payments because you lost income, you should know that CERB payments are taxable. How much tax you pay on them will depend on your total income for the year, but they should be added to your taxable income total the same as employment income. That means you should save some of the money for tax time next year.

It may be difficult to estimate how much you anticipate earning this year with so much uncertainty in the economy. However, you can look up the federal and British Columbia combined tax rates and use that as a rough estimate. For example, the combined tax rate for income up to $41,725 is 20.06%. If you estimate you will earn less than that in 2020, hold onto to slightly more than 20% of your CERB payments, or about $100 for every $500 weekly payment.

What You Can Do About Income Tax Debt?

Income Tax

The Canada Revenue Agency (CRA) is treated as an unsecured creditor like credit card companies and other lenders in a consumer proposal or bankruptcy. That means you can get relief from income tax debt using the same tools you would use to get out of credit card debt, and both would be covered by the same filing.

There is a relatively good chance the CRA will accept a consumer proposal. Consumer proposals are voted on by all of your creditors, with their votes weighed by the amount you owe. If creditors representing 50% of your debts plus $1 accept the terms, all unsecured creditors are then bound by the proposal. When you talk to financial counsellors with Debt Help BC, they will help evaluate your financial situation and recommend next steps, which may include filing for a consumer proposal.

A consumer proposal changes your debts in several ways:

1) Your total unsecured debts are reduced. You can have a significant amount forgiven, including taxes owed.

2) You no longer face interest charges on what you owe.

3) You repay your debt in monthly installments. You make one payment to the licensed insolvency trustee who disburses the funds appropriately to each of your creditors.

4) A stay of proceedings applies to all collection actions. Creditors can recoup their money by garnishing your wages or freezing your bank account, but those actions stop when you file for a consumer proposal – including actions taken by the CRA.

Can You Deal with Income Tax Debt with Debt Management?

One option for dealing with unsecured credit is a debt management plan offered by credit counselling agencies. These involve having a credit counselling agency negotiate with your creditors to reduce interest that you’re paying on your debts. However, they do not usually cover debt to the CRA. The CRA tends to make its own payment arrangements for individuals who cannot pay in full right away. You will have to discuss making a Payment Arrangement with the CRA directly, and they will expect you to show that you have made an effort to repay taxes owing by borrowing money or reducing your expenses.

If you’re facing a large debt owed to the CRA, contact us today and we can figure out a way to help. Don’t let interest charges pile up on debt owed, and be aware that the CRA can take drastic actions to collect. Keep on top of deadlines and keep in mind that some COVID-19 benefits do count as taxable income to avoid owing in the future.