Paying the piper - the taxation of pandemic benefits (March 2021)
Over the past month, millions of Canadians have received what was probably an unexpected (and unwelcome) communication from the Canada Revenue Agency (CRA), in the form of a T4A slip. That T4A slip lists the amount of pandemic benefits which were received by the individual in 2020 and represents, more significantly, the amount which must be reported on that individual’s income tax return for 2020 — and on which tax must be paid.
When a public health emergency was declared in March of 2020, the focus for both the federal government and benefit recipients was getting benefits into the hands of eligible recipients as quickly as possible, to help mitigate the sudden financial crisis faced by so many. No income tax was deducted from the first round of benefit payments made, and it’s likely that not many recipients were focused on the fact that tax would eventually have to be paid on the amounts received.
However, tax filing time is now upon us, and the general rule is that all benefits received during 2020 under any of the following federal programs must be reported as taxable income on the return for 2020, and tax paid on that income:
Canada Emergency Response Benefit (CERB)
Canada Emergency Student Benefit (CESB)
Canada Recovery Benefit (CRB)
Canada Recovery Caregiving Benefit (CRCB)
Canada Recovery Sickness Benefit (CRSB)
The first program — the Canada Emergency Response Benefit — was utilized by nearly one quarter of the Canadian population, as nearly 9 million Canadians applied for partial or full CERB benefits. CERB was payable at a flat rate of $500 per week for a maximum of 28 weeks between March and September of 2020, meaning that the maximum benefit which could be received by one individual during 2020 was $14,000.
The Canada Emergency Student Benefit paid $1,250 every four weeks, for a maximum of 16 weeks, to post-secondary students who were unable to find summer or post-graduation employment due to the pandemic. The total amount payable to any one individual under the CESB program was generally $5,000, although higher amounts were paid to students who were disabled or who had dependants.
No income tax was deducted from any payments made under the CERB or CESB programs.
The last three programs — the Canada Recovery Benefit (CRB), the Canada Recovery Caregiving Benefit (CRCB) and the Canada Recovery Sickness Benefit (CRSB) — replaced the CERB and CESB benefit programs, starting in September 2020. The benefit payable under each of those programs is $500 per week, but the amount of time for which that benefit is paid varies by program. Under the CRB, which is an income replacement program, the $500 per week benefit can be paid for up to 26 weeks. Benefits can be paid for a similar time period to those who must stay home for at least 50% of the week because they must care for a child under the age of 12 or other family member because schools, daycares, or care facilities are closed due to the pandemic, or because the child or family member is sick and/or required to quarantine, or is at high risk of serious health implications. Since these benefits became available starting on September 27, 2020, the maximum benefit which could have been paid to an individual in 2020 under either program was $7,000.
The final benefit — the CRSB — is available to individuals who are ill or who are required to quarantine, but only for a two-week period, meaning that the maximum CRSB benefit payable is $1,000.
The tax treatment of CRB, CRCB, and CRSB benefits paid out does differ slightly from CERB or the CSRB, in that the federal government deducted 10% withholding tax from CRB, CRCB, and CRSB benefits paid.
Whatever the source or amount of pandemic benefit received, the tax consequences are the same. All such benefits must be reported on line 13000 of the income tax return for 2020, and included in taxable income for that year. On that line of the tax return, there is a space provided in which the kind of benefit received should be specified.
The amount of tax payable on those benefit amounts will depend on the province of residence of the recipient and the amount of other income he or she received during 2020. As a basic rule of thumb, the federal tax on benefit amounts received will be at least 15%, while provincial tax payable can range from 4% (for residents of Nunavut) to 15% (for residents of Quebec). Where the total 2020 income of benefit recipients exceeds approximately $45,000, those tax rates will be higher.
Of course, the pandemic and the resulting financial stresses and losses have not yet ended. Many Canadians are still in a precarious financial position and it’s entirely possible that paying tax on benefits received during 2020 will be difficult for such taxpayers. Where paying such tax poses a real financial hardship, there are alternatives. The CRA is willing to enter into a payment arrangement with Canadians to pay their taxes over a period of time (generally through monthly instalments) where, owing to financial hardship, those taxes can’t be paid in full as required on April 30, 2021. In addition, the federal government has announced that interest relief on late tax payments will be provided to individuals who received pandemic benefits during 2020 and have income for that year of less than $75,000.
More information on the taxation of pandemic benefits, and the relief which may be available to those who can’t pay their 2020 taxes on time and in full can be found on the CRA website at https://www.canada.ca/en/services/taxes/income-tax/personal-income-tax/covid19-taxes.html.