Taxable Side of CERB for Individuals
Six million Canadians facing hardship as a result of the global COVID-19 outbreak, have applied for the Canada Emergency Response Benefit (CERB). The federal government’s economic response provides $2,000 every 4 weeks for up to 16 weeks, to Canadians who’ve been financially affected by the pandemic.
CERB is Taxable
While these funds will be welcome relief for many, the income is taxable and Ottawa is not withholding any deductions at source on those benefits, meaning recipients are getting the full $2,000 for now. It is important to know there is a difference between CERB and traditional employment insurance (EI) payments when it comes to taxes. While Ottawa does not hold back any money on CERB cheques and deposits, there is a little bit of tax withheld at source for EI payments.
This may lead to unpleasant surprises at tax time next April for CERB recipients, who may also have worked for part of the year. This would explain why some Canadians are already worried about the tax bill they might face in 2021, given that CERB payments had no tax withheld at source at all.
Calculating the Tax on CERB
You may be wondering about how much of your government cheque to set aside for taxes. But estimating your total income for 2020 could be tricky if you don’t know when or even whether you will be going back to work. The tax implications will depend in large part on how much income you will have for 2020 as a whole. Taxable income is simply arrived at by adding up all different sources of income regardless of their source.
For example, suppose you made $30,000 from employment in the 2020 calendar year and received the maximum CERB benefit in the amount of $8,000 for the 4 months. Your taxable income for the year would be $38,000. Both the income you received from CERB and your employment income would be taxed in the same way. If you lived in Ontario and claimed the Climate Action Incentive, your tax liability for the year would be $4,168, including both provincial and federal taxes.
Credits and Deductions
If your income falls under $12,000 for the year, you don’t have to worry about any income taxes next year. However, the amount of tax you may actually have to pay involve a variety of other factors. It’s even possible you won’t have to pay any tax at all, depending on the number and amount of credits and deductions you claim when filing your 2020 tax return next year. Typical tax credits and deductions that most Canadians claim include tuition, donations, medical, disability, interest paid on student loans, moving, and childcare expenses, to name a few, not to mention RRSP contributions.
Tax Rates and Calculators
To avoid unexpected taxes owing next tax season, you might consider setting aside a portion of any CERB income, based on your federal and provincial tax rates, which you can determine here. You can also use a tax calculator to estimate your federal and provincial taxes. Note that both calculators use the rates for the 2019 tax year, so these rates are only estimates for the 2020 tax year.
How much to save
If you’re looking for a rule of thumb, it maybe a good idea to save up to 20% of each CERB payment because most people’s effective tax rate, the average rate at which your income is taxed, falls somewhere between 15% and 25%. However, if you can’t afford to save that right now, don’t worry. This tax bill won’t arrive until April 2021, and there’s a chance that the deadline could still be extended further.
-Baber Rahim, Tax Law Clerk & JD Candidate
Baber works in our tax department assisting our tax lawyers in preparing Voluntary Disclosure Applications, Taxpayer Relief Applications, and with Appeals, Audits and Objections within the CRA. Baber’s passion for tax law was sparked by an advanced tax law professor at the Goodman School of Business at Brock University, where he received his Bachelor of Accounting (Honours) degree. He subsequently worked for the Canada Revenue Agency (CRA) for several years. After working in the federal public service for a number of years, Baber decided to pursue a career in law and is currently working towards completing his law degree at Western University, while working for Kalfa Law.
© Kalfa Law 2020