For millions of Canadians who have lost their jobs as a result of the COVID-19 pandemic, the Canada Emergency Response Benefit (CERB), which pays $2,000 per month (up to a maximum of $8,000) to qualified applicants, has been a critical source of cash flow. But it’s important to remember that the monthly CERB payments are taxable, which could come as an unexpected surprise next year when we file our 2020 tax returns.
Let’s review the CERB and how the payments are taxed so you can set aside some funds, where feasible, for any tax owing next spring.
What is the CERB?
The CERB covers the period from Mar. 15, 2020 to Oct. 3, 2020, and provides eligible applicants $500 per week for a maximum of 16 weeks. The benefit is available to residents of Canada who are at least 15 years old and who have stopped working because of reasons related to COVID-19. To qualify, you had to have had (self-)employment income of at least $5,000 in 2019 or in the 12 months prior to the date of your application and have not quit your job voluntarily. When submitting your first claim, you cannot have earned more than $1,000 in (self-)employment income for 14 or more consecutive days within the four-week benefit period of your claim. For subsequent claims, you cannot have earned more than $1,000 in (self-)employment income for the entire four-week benefit period of your new claim.
As of April 19, the federal government has processed 8.4 million applications for the CERB and paid out a total of $19.8 billion to Canadians in CERB payments.
Taxation of CERB payments
The government states on its website that the CERB is taxable, reminding recipients that “you will be expected to report it as income when you file your income tax for the 2020 tax year.” That being said, the Canada Revenue Agency is not deducting any income tax at source from the monthly $2,000 CERB payments, presumably to allow recipients to have full access to the cash when most needed.
This differs from many other common sources of income, such as employment income or RRSP withdrawals, where tax is deducted automatically at source. The result of this is that Canadians could be left owing hundreds, or even thousands, of dollars of taxes on their CERB payments come next April. How much tax you will owe, however, is a tricky question.
How much tax will I owe?
The CERB payments are taxable as ordinary income, just like (self-)employment income or interest income from a GIC. The amount of tax you will owe, therefore, depends on your total income for 2020 and your marginal tax rate for the year.
Your marginal tax rate is the amount of tax you would pay on an additional dollar of income. It’s based on the rates of tax applied to a given level of income, both federally and provincially. Individuals pay taxes at graduated rates, meaning that your rate of tax gets progressively higher as your taxable income increases.
Federally, there are five income tax brackets in 2020: zero to $48,535 of income (15 per cent); above $48,535 to $97,069 (20.5 per cent); above $97,069 to $150,473 (26 per cent); above $150,473 to $214,368 (29 per cent); and anything above that is taxed at 33 per cent. Each province also has its own set of provincial tax brackets, meaning that your combined federal/provincial rate could range from a low of 20 per cent (in Ontario) to high of 54 per cent (in Nova Scotia).
To properly determine the 2020 tax you will owe on your CERB payments next spring, you would need to know what your total 2020 income will be, which can be very hard to gauge during this time of income uncertainty. A starting point would be to add your pre-pandemic income to your estimated total CERB payments (up to $8,000). You can then use an online tax calculator to get your marginal tax rate which you can use to estimate the taxes owing on your CERB and, if practicable, set aside those funds for next April’s tax payment. As you will see by the following examples, the tax liability can vary dramatically by taxpayer.
Tom, Dick and Harriet
To illustrate, let’s take a look at three taxpayers who have experienced job losses as a result of COVID-19 and who are each eligible for the full $8,000 in CERB payments.
Tom, a B.C. resident, worked part-time during the first part of 2020 and was furloughed on March 15. His income for the first ten weeks of 2020 was $2,000 and he will collect $8,000 in CERB. If that was his only 2020 income, he would owe no tax on the CERB payments since his total estimated income of $10,000 is below the basic personal amount federally and in B.C. If he earns more income later this year, he would need to recalculate his tax owing for 2020.
Dick, an Ontario resident, earned $12,000 until March 31, 2020 when he was laid off. He is expected to collect $8,000 in CERB for 2020, bringing his 2020 estimated income to $20,000. If he lived in Ontario, he should set aside 20 per cent or $1,600 of his $8,000 CERB to cover his tax liability for 2020. Again, if he gets re-hired later this year, he may owe a bit more tax on the CERB come next spring.
Finally, Harriet is a self-employed professional in Nova Scotia who earned $50,000 in the first 10 weeks of 2020 until she shut down her practice as a result of COVID-19. She’s optimistic that she will be able reopen her practice this summer and estimates her 2020 income will exceed $250,000. She will need to set aside $4,320 (i.e. 54 per cent) of her $8,000 CERB payments to cover the tax owing next spring.