Sometimes, one word can make all the difference.
This week, the federal government officially backtracked on its previous position when it announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their “gross” income but not their “net” income will not be required to repay the benefit, provided they also met the other eligibility requirements.
No need to repay CERB
Readers will recall that back in December 2020, the Canada Revenue Agency sent out 441,000 “educational letters” warning individuals that they may not be eligible for the CERB. The letters were sent out to individuals for whom the CRA said it was “unable to confirm … employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application.”
The issue of whether the $5,000 income threshold for the self-employed means “gross” income (i.e. revenues) or “net” income (i.e. net of expenses) has been discussed extensively. It has always been the CRA’s view that the $5,000 refers to net income and thus if you had gross income of $5,000 in the required time period, but netted under $5,000 after deducting business expenses, then you didn’t qualify for the CERB and, until now, the CRA’s position was that you needed to return it.
This week, the government reversed that position and said that self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay it, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria. The same approach will apply whether the individual applied through the CRA or Service Canada.
What if you already voluntarily repaid the CERB based on the government’s previous instructions to do so? Well, you’re in luck as the government will be sending you back any amounts you repaid, with additional details on how, and when, to be announced in the coming weeks.
But, the question on many other self-employed Canadians’ minds this week is: what about those individuals who didn’t apply for the CERB because their “net” self-employment income was under $5,000? It appears that they’re out of luck.
For some Canadians, the 2020 tax year may be the first time in their lives that they won’t be getting a tax refund and may actually end up owing some tax. That’s because, just like Employment Insurance (EI) benefits, the COVID-19 emergency and recovery benefits, including similar provincial benefits, are taxable. And, although tax was withheld at source at a rate of 10 per cent of the benefit amount for the three Canada Recovery Benefits (the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit), no taxes at all were withheld from the CERB or the Canada Emergency Student Benefit. In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of the CRB payments for every dollar in net income you earned above $38,000 (to a maximum of the CRB received in the year.) Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)
To illustrate, assume Mike, an Ontario resident, was furloughed from his company in mid-2020. His pre-COVID income was $18,000 from which his employer withheld $2,200 in federal and provincial tax. He applied and received $14,000 of CERB, for which no tax was withheld. The result is that Mike would owe about $850 in taxes when he files his 2020 return, after taking into account non-refundable credits for the basic personal amount (federally $13,229), the Canada employment amount ($1,245) and the Climate Action Incentive ($300). (CPP and EI have been ignored for this example).
Now take Heather, whose 2020 income was $44,000 prior to losing her job due to COVID layoffs. She applied and received six periods of CRB for the final three months of 2020, for a total of $6,000 (with $600 withheld.) But, when she files her return, she will be forced to repay $3,000 of the CRB since her total income for 2020 was over $38,000, and the CRB is reduced by 50 per cent for each dollar of income above this amount (i.e. ($44,000 – $38,000) X 50 per cent).
But, what if Mike and Heather don’t have the funds to repay the government by the April 30, 2021 payment deadline?
To help taxpayers like Heather and Mike, the government also announced this week that it will be providing targeted interest relief to Canadians who received COVID-related income support benefits. Once you’ve filed your 2020 income tax return, if you qualify, you won’t be charged interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022, giving you more time and flexibility to pay if you have an amount owing.
To qualify for this targeted interest relief, you must have had a total taxable income of $75,000 or less in 2020 and have received income support in 2020 through one or more of the COVID-19 measures: the CERB, CESB, CRB, CRCB, CRSB, Employment Insurance benefits or similar provincial emergency benefits.
If you fall into this category, you don’t need to do a thing other than file your return, as the CRA will automatically apply the interest relief measure for taxpayers who meet these criteria. In addition, the government announced that any CRA-administered credits and benefits normally paid monthly or quarterly, such as the Canada Child Benefit and the goods and services tax/harmonized sales tax credit, will not be applied to reduce any taxes owing for the 2020 tax year.
The government estimated that the interest relief measure will provide relief to approximately 4.5 million low- and middle-income Canadians.
No change to filing deadline
Finally, the government confirmed this week that it has not extended the tax filing deadline, meaning that you should file your 2020 return by the normal April 30, 2021 deadline or risk a five per cent late-filing penalty on any amount owing. Self-employed Canadians (and their spouse or partner) should file by June 15, 2021.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.
Source: Financial Post