If you are receiving the CERB (Canada Emergency Response Benefit), you should know how it will affect you in the 2021 tax season. There are millions of Canadians who have applied and are receiving the Canadian government’s temporary COVID-19 supports. It’s an essential support for an unprecedented time that’s helping families pay bills and get by while much of the economy has been shutdown.
CERB is being treated as taxable income, much like Employment Insurance payments. Whereas EI is taxed at the source (before the money is sent out to you), CERB payments are not, so you will have to keep track of it yourself.
How Much Money Will You Have to Pay Back?
CERB distributes $2,000 for a 4-week period and remains available to Canadians affected by the pandemic for the period from March 15, 2020 to October 3, 2020. You will also be able to apply for retroactive payments until as late as December 2, 2020. You can receive the benefit for a maximum of 16 weeks, meaning some applicants will be getting as much as $8,000 in total CERB payments. What many Canadians don’t know is how much they will have to pay back.
That depends on what their total income for 2020 will be – something many who have been laid off or who work for small businesses that have been shut down cannot answer right now. But it can give you an idea of what you might have to repay.
All taxable employment income is added up for the year, regardless of which sources it comes. In other words, CERB payments will be added on to what you’ve earned on your paycheque. For example, if you earn $30,000 from working in 2020 and receive $8,000 in CERB payments, your total income for the year will be $38,000 and you will pay taxes at the appropriate rates.
In Canada, tax rates change by income bracket. For example, the combined federal and British Columbia tax rate is 20.06% on the first $41,725 you earn above and beyond the Basic Personal Amount credit in 2020. The rate at the next bracket from $41,725 to $48,535 is 22.70%, but the higher rate only applies to the money you make above and beyond.
Don’t worry if that sounds complicated. An income tax calculator can give you an idea of the total amount you will have to pay at the end of the year. There are also many credits you may be available for that will reduce how much you have to return. Working with an accountant may be the best way to make sure you get all the credits you are eligible to receive.
However, CERB payments won’t be reflected in your payroll deductions once you go back to work. You may have to return some of the money to the CRA. One way to prepare is to estimate what you will earn at work this year and use an income tax calculator to see what you will owe in total. Subtract what you can expect to pay on payroll deductions and the remainder will be a rough estimate of how much of your CERB payments you will have to return.
How Do People Wind Up Owing Money to the CRA?
If you’ve spent your career primarily working one job as an employee, with your payroll taxes including income tax, EI, and CPP collected automatically from your cheque, you might wonder how someone can end up in a tax debt hole in the first place.
Professionals, self-employed individuals, and gig workers are all responsible for remitting their own taxes. Since they collect money directly from clients and consumers, there’s no payroll at which point what they owe can be deducted. They may also be responsible for collecting and remitting GST/HST for their services, just like any business or store.
When you’re collecting your own income, you can quickly wind up owing large sums of money, and sometimes not even know that you owe it. If you go into business for yourself, you have to know when to start collecting GST/HST, because that’s money you will owe whether you’ve collected it on your invoices or not. And in case this applies to you, you should register for a GST/HST number when you earn:
- $30,000 in a single calendar quarter (3 consecutive months),
- Or $30,000 within the previous four consecutive calendar quarters (12 consecutive months regardless of calendar year).
People who work two jobs can also wind up owing the CRA, since automatic payroll deductions don’t take into account their double income. Likewise, if you get paid entirely or partially in cash (such as in tips), you are still expected to pay income tax on that income. There are many ways to wind up owing the CRA, and you don’t need to be wealthy to do so. If you’re self-employed, the most effective way to avoid this problem is keeping good track of the money you collect and deadlines set by the CRA, as interest collects on overdue payments.
How Can You Handle Tax Debt?
Should you wind up owing money to the Canada Revenue Agency (CRA), it can use sweeping powers to collect. They can use a wide range of collection actions against you.
- Charge interest compounded daily according to prescribed rates,
- Garnish wages, collecting straight from your paycheque,
- Lien assets,
- Freeze bank accounts.
Ignoring the CRA is one of the worst things you can do if you are in debt. There are often ways you can arrange payments with the agency and there are other options for dealing with tax debt such as normal debt relief solutions.
By filing for a consumer proposal or bankruptcy with the help of a licensed insolvency trustee, a stay of proceedings applies to the CRA’s actions just as they would to credit card companies. That means all collection actions stop, including holds on your bank accounts and garnished wages.
If you have to file a bankruptcy or consumer proposal due to tax debt, our credit counselling services may help you avoid future problems with the CRA. You will learn how to budget income and remit your taxes appropriately.
Start by talking to debt counsellors about your options. It’s always better to deal with debt proactively than wait for your creditors to start acting.