Updates on COVID-19 Benefits Taxation
Today we are going to talk all about COVID-19 benefits taxation and how some recently released updates will be change how these tax bills will be treated. We’ll also talk about what is going to happen to those small businesses that thought that they qualified but were later told that they didn’t.
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COVID-19 Benefits Taxation – Turning Into A Debt
So millions of Canadians received some form of COVID-19 benefits during 2020 to help support them during the ongoing pandemic. We’re pretty familiar with these benefits now but they include CERB, CESB, and more. We’ve spoken extensively about all of these on the show in the past.
With tax season quickly approaching, understanding how these benefits will be taxed is really important. For many, the tax bills will quickly turn to a debt for many Canadians.
How COVID-19 Benefits Taxation is Different
To understand how taxes work, let’s first look at what most Canadians are used to – when you’re an employee.
In these cases, employees pay the majority of their income taxes every time they are paid and not when they file their taxes in the spring. The tax filing deadline is more of a period to make adjustments if they didn’t pay enough – or if you’re lucky, paid too much and get a return.
Taxes are withheld from an employees pay before it’s deposited or paid out which is prepaying your taxes in advance.
On the flipside, many of the COVID-19 support programs didn’t have taxes withheld. This was because the government took the position that individuals would be financially better off if they had the full amount of the benefit upfront and resolved the tax burden later in 2021.
Now, as we quickly approaching the tax filing deadline, more details have arisen with how outstanding tax bills due to COVID benefits will be treated. In addition, they also explicitly stated that the tax deadline will not be pushed back this year unlike 2020.
Interest Relief For Some With COVID-19 Tax Bills
The government recently announced that if you have a tax bill due to COVID-19 benefits and meet certain conditions, you do not have to pay interest on the debt until April 30th, 2022. This is the equivalent of converting any eligible tax debt to an interest free-loan that is fully payable by the next tax deadline.
To qualify, the receiver must have also had total taxable income of $75,000 or less.
This is going to offer some well needed breathing room for many Canadians that received the benefits and are still out of work or working reduced hours.
Canadians can already begin estimating their tax bills by using online income tax calculators and entering in all income that you have received. The documentation that shows your benefits payment is already available on CRA MyAccount and have already been mailed a couple weeks ago.
Many have also not received their employer T4s yet, but you can use your end of year paystub to find fairly accurate annual earnings amount.
This will also allow you to analyze the impact of a possible RRSP contribution before the March 1st deadline date.
So to give you a real example of taxation, let’s say that person A living in Ontario made $10,000 at their job and received the full $14,000 in taxes. This would turn into a tax bill of $2,734 minus any taxes that were withheld on the $10,000 they earned on their job.
Had $20,000 and $14,000 in benefits? Now the tax bill would be approximately $5,347.
As you can see, this can turn into a burden.
Some COVID-19 Benefits Withheld Taxes
It wasn’t until the second wave of support programs were issued that partial taxes were withheld off of COVID-19 benefits. The main programs here are CRB, enhances EI and a few other ones.
For example, CRB payments have 10% withheld that would be applied against any income taxes oweing.
Planning For COVID-19 Benefit Taxation
So if you do find out that you owe an amount to the CRA for the benefits, it would be a good idea to start looking at creating a payment schedule to have the amount paid off within a year. For example, a $2,500 tax bill would be approximately $96 from a bi-weekly pay cheque over the year.
Time is very valuable here because payment amounts increase as one gets closer to the due date.
Also, since this debt is zero percent, it also may be worth considering focusing on paying down high-interest debt before putting money aside for the tax bill. However, you should speak to a financial professional about this before you follow this path as this creates other types of risks.
We also have to be realistic about this tax bill as many individuals will not be able to service this debt as many industries are still shutdown. In these situations, I would hope that there is additional support given by the CRA or federal government.
Updates On Small Business Disqualification
Another important announcement was made about small businesses that believed that they were eligible for the COVID benefits only to be sent a letter by the CRA demanding repayment.
The error here was due to the way that the qualifiers were written on official releases and websites by the federal government. One of the qualifiers for CERB was that individuals had earned $5,000 or more in 2019 or the 12 months preceding the application.
For those that had small businesses, it was not clear if that mean $5,000 in revenue or $5,000 in profit after expenses had been deducted.
So what happened was that many small businesses with net income under $5,000 were contacted by the CRA saying that they didn’t qualify after they received the support payments.
This led to a lot of stress and blowback against the government.
Thankfully, the most recent update also announced that the government sided with small businesses and allowed them to qualify for the program as long as all other requirements were met.