Federal government support related to COVID-19: Tax implications you can expect in 2020

TAXATION – CANADIAN

The COVID-19 pandemic is imposing unprecedented strains on our economy and on our personal financial situations. The federal government continues to modify its programs that offer targeted support for individuals, businesses and other organizations. If you have received any of these benefits, there may be personal and corporate tax implications to you. Here is an update as of October 9 on these programs and what they might mean to your 2020 income tax return.

For individuals

Some programs ended

The Canada Emergency Response Benefit (CERB) provided financial support to employed and self-employed Canadians who were directly affected by COVID-19. It covered the period from March 15 to September 26, 2020. The benefit was $2,000 per four-week period, with a maximum of seven four-week periods.

The Canada Emergency Student Benefit (CESB) was available to post-secondary students and recent graduates of high school, college and university programs. Applicants received $1,250 for each four-week period to a maximum of four four-week periods between May 10 and August 29, 2020. Disabled students and those with dependants received an additional $750 per period.

Both the CERB and the CESB payments will be included in the individual’s taxable income for 2020 and, unlike income from employment and Employment Insurance (EI) payments, no income tax was withheld at source from these payments.

New programs now available

These programs have ended and were replaced by three new benefit programs that are also taxable but, unlike the CERB and the CESB, income tax is being withheld from these payments at a rate of 10%.

The Canada Recovery Benefit (CRB) is for those who are unable to work and who are not eligible for EI. Payments are $1,000 every two weeks, with $100 withheld for income tax, for a maximum of 13 two-week periods between September 27, 2020 and September 25, 2021. In addition, if your total income for 2020 (excluding the CRB) exceeds $38,000, you will be required to pay back $0.50 of the CRB for every dollar by which other income exceeds the $38,000 threshold.

The Canada Recovering Caregiving Benefit (CRCB) is designed to support those who are unable to work because they must care for their child under 12 years old or a family member who needs supervised care if their school, regular program or facility is closed because of COVID-19 or because they are sick, self-isolating or at risk of serious health complications due to COVID-19. Payments are $500 per week, with $50 withheld for income taxes, for a maximum of 26 weeks between September 27, 2020 and September 25, 2021.

The Canada Recovery Sickness Benefit supports those who are unable to work because they are sick or need to self-isolate due to COVID-19. Payments are $500 per week, with $50 withheld for income taxes, for a maximum of two weeks between September 27, 2020 and September 25, 2021.

You can calculate your owings in advance

In the absence of income tax withholding on the CERB and the CESB, as well as relatively low withholding rates on the three new benefits, any EI payments or any withdrawals from Registered Retirement Savings Plans (RRSPs) may lead to some unexpected and unpleasant news when the 2020 tax returns are prepared.

You can estimate what you owe by first adding up all your sources of income in 2020, including pre-COVID-19 employment income, the CERB and other COVID-19 related benefits, EI payments and any other sources of income, then you estimate the income taxes that are owed on that amount, and compare that to the total income tax that was withheld from your employment income, EI or the newer COVID-19 benefits.

Tools such as the EY online personal tax calculator can be very useful to estimate the taxes payable in your province or territory (assuming that you only qualify for the basic personal amount credit).

Certain COVID-19-related benefits are not taxable and do not have to be reported on your tax return. These include the doubling of the Goods and Services tax credit and the one-time payments to seniors and individuals with disabilities. Seniors received $300 in September 2020; those who received the Guaranteed Income Supplement received an additional $200 for a total of $500. Individuals with disabilities, other than seniors, will receive one-time payments of $600 at the end of October 2020. Disabled seniors will receive “top-up” payments of either $300 or $100 to bring their one-time senior benefits noted above up to the total of $600.

For businesses

Programs still available, new ones proposed

The Canada Emergency Wage Subsidy (CEWS) covers a portion of an employee’s wages for eligible employees to allow employers to re-hire their employees or avoid layoffs. It is available to Canadian employers who have seen a decrease in revenue due to COVID-19 and is taxable for the qualifying period to which it relates, not when it is received. On October 9, it was proposed that the CEWS will be extended through June 2021.

The Canada Emergency Business Account (CEBA) provides interest-free loans of up to $40,000 to small business and not-for-profit organizations. Repaying the balance of the loan on or before the end of 2022 will result in 25% of the loan being forgiven. On October 9, the federal government proposed that an additional $20,000 interest-free loan would be available, with half this amount being forgivable if the loan is repaid by the end of 2022. The Canada Revenue Agency has confirmed that the forgivable portion of the CEBA must be included in taxable income in the year that it is received. If the forgivable portion has to be repaid (e.g., if the loan is not repaid by the end of 2022) the forgivable portion can be deducted when the loan is repaid.

The Canada Emergency Commercial Rent Assistance (CECRA) provided relief for small businesses experiencing financial hardship due to COVID-19. Over the course of the program, property owners reduced rent by at least 75% for the months of April through September for their small business tenants. The CECRA provided a forgivable loan for 50% of the rent otherwise payable, with the tenant paying up to 25% and the property owner forgiving at least 25%. As with the CEBA, the CECRA should be included in taxable income when it is received, with an offsetting deduction if and when it is repaid.

On October 9, the federal government proposed a new Canada Emergency Rent Subsidy (CERS). This will provide rent and mortgage support directly to tenants, unlike the CECRA which provided forgivable loans to landlords. It will be available to businesses, charities and non-profit organizations that have experienced drops in revenue by subsidizing rent and mortgage expenses from September 27 to December 19, 2020, on a sliding scale up to a maximum of 65% of eligible expenses. There is also a top-up available for organizations that are temporarily closed by a mandatory public health order.

It is anticipated that these payments would be taxable for the qualifying period to which they relate, similar to the treatment of the CEWS.

These government benefits have played a critical role in supporting individuals and corporations through the challenges posed by the pandemic, and it is important to understand the tax treatment of these benefits so that you are not unpleasantly surprised when you file your 2020 tax returns.