Are Your COVID-19 Benefits Taxable?

As 2020 comes to a close, it’s time to assess your yearly finances and prepare for tax time. Since this year involved many unprecedented government benefits, it’s left many wondering how to proceed when it comes time to file. The key to success is gaining a thorough understanding of the benefits and how the government plans to tax them. Equipped with this information, you can make plans that best serve your long-term financial goals. 

Learn how taxes work it Canada.

Individual Tax Benefits

Tax benefits issued to an individual, as opposed to a business or organization, can cause a lot of confusion when it comes to claiming them on an income tax return. Each benefit is a little bit different, with some withholding tax and others paying it out in full. Understanding the process for each benefit is essential to properly file your return. 

Check out these tax tips for gig workers.

Canada Emergency Recovery Benefit (CERB)

• What it is: The CERB was issued to Canadians who made at least $5000 after tax in 2019, whose income was impacted directly by COVID-19, and who made no more than $1000/month during the claiming period. 
• How much you could receive: The benefit amounted to $2000/month or $500/week for the period of March 15, 2020, to September 26, 2020. Eligible recipients could receive up to $14,000. 
• How it’s taxed: No funds were withheld, meaning the CERB benefit will be taxed as regular income when you file. The government will issue a T4A for reporting this benefit. This slip will show the total amount of money received. Recipients must report the CERB benefit on their income tax returns. 

Find out what you should do if you received double payments for the CERB?

Canada Recovery Benefit (CRB)

• What it is: The CRB offers support to both unemployed and employed Canadians who are not eligible for employment insurance. This includes self-employed individuals and those who ran out of insurable hours.  
• How much you could receive: The benefit amounts to a gross total of $500/week for a period of 26 weeks. It runs from September 27, 2020, through to September 25, 2021.
• How it’s taxed: This benefit is taxable and has 10% of the amount withheld at the source. However, depending on your tax return, it may not be enough to cover your tax liability. Should the individual’s income exceed $38,000 for the 2020 year, they will be obligated to repay CRB. 

Canada Recovery Sickness Benefit (CRSB)

• What it is: The CRSB is income support to both self-employed and employed people who cannot work due to sickness or the need to isolate because of COVID-19. It is also available for those with health issues that put the individual at greater risk of contracting COVID-19. 
• How much you could receive: The benefit amounts to $500/week for a period of two weeks. The benefit is available between September 27, 2020, and September 25, 2021.
• How it’s taxed: This is a taxable benefit that has 10% of the total amount withheld at the source. It applies to your total annual income and is taxed accordingly when you file your income taxes. 

Check out these tax tips for low-income earners.

Canada Recovery Caregiving Benefit (CRCB)

• What it is: The CRCB is available to individuals who are at least 15 years old, have a valid social insurance number and are either self-employed or employed on the day before receiving a benefit. The individual must have made at least $5,000 in the preceding year.  It’s meant for those who must care for a child under the age of 12 or a family member who requires supervision. 
• How much you could receive: The gross amount of this benefit is $500/week. The benefit is done on a weekly basis, meaning you need to reapply every week. It runs for a period of 26 weeks total between September 27, 2020, and September 25, 2021.
• How it’s taxed: This taxable benefit has 10% of the amount withheld at the source. It is taxed as regular income and needs to be claimed as such when you file your 2020 return. 

Learn more about these new government benefits.

Employment Insurance (EI)

• What it is: EI is a benefit that is meant to provide income support when a recipient is between jobs. It is effective whether the pandemic caused unemployment or not, though it was often expedited for those who were impacted by COVID-19. 
• How much you could receive: Before the pandemic, Employment Insurance worked somewhat differently, it is now fairly standardized. Recipients can receive $500/week for a period of 26 weeks, beginning on September 27, 2020. 
• How it’s taxed: The applicable taxes are withheld at the source, making it somewhat easier to file your income tax in the coming year. It is taxed as regular income. 

Do you owe the CRA money? Check out how to deal with tax debt.

Business Tax Benefits

Businesses, like individuals, were adversely impacted by the pandemic. As such, the Government of Canada instituted a variety of benefits to help offset the expenses. While there are some similarities between the support structures, because income structures for businesses and individuals are inherently different, so are the available benefits. 

Check out how to file an income tax return as a business.

Canada Emergency Wage Subsidy (CEWS)

• What it is: The CEWS is a nation-wide subsidy program with a value that totalled $73 billion. It is designed to support businesses in keeping staff on their payroll. It also aimed to reduce the strain on the employment insurance system by keeping staff reliant on their existing employment when it was an option. 
• How much you could receive:  The subsidy covers up to 75% of the staff member’s wage, up to $58,700 of that employee’s gross annual income. This means that the most a business could receive for an employee was $847/week. The subsidy is available for a period of three months, meaning per employee, the business could total $10,164. Backdated benefits are available as far back as March 15, 2020. 
• How it’s taxed: This benefit is taxable and must be included on the Corporate Income Tax filings for the 2020 year. When determining your taxable income, this amount must be included.   

Temporary Wage Subsidy for Employers (TWS)

• What it is: TWS is a 10% subsidy designed to limit the payroll deductions an employer is required to remit to Revenue Canada. It is applicable to territorial, provincial, and federal income tax portions of the total remittance. 
• How much you could receive: Eligible employers can retain 10% of the amount paid between March 18, 2020, and June 19, 2020. The total available subsidy for each individual employee is $1,375. Each employer is eligible to claim up to $25,000 in total. 
• How it’s taxed: The total amount claimed through the TWS benefit is termed as income tax and must be declared accordingly on your annual return. 

Check out these government financing programs for businesses.

How do I Calculate The Taxes Owed on My Covid-19 Benefit? 

When it comes time for taxes, it’s helpful to have at least a rough idea of what to expect in terms of payment. Since this has been a unique year, in terms of finances especially, it is important to account for taxes. While taxes are standardized in terms of the procedure, there are still many variables. 

Total Income

The amount of tax you are required to pay is determined on a sliding scale. The amount you owe depends on your total income for the 2020 fiscal year. This includes all taxable benefits, standard income, and money from other sources like your investment portfolio. 

Five Income Brackets

In Canada, there are five income brackets that determine the amount you will be taxed. The structure of these brackets is designed to place less of a tax burden on those who will not be able to afford the expense. It is structured so that the more you earn, the more you pay. The brackets function as follows:

Using these brackets, you can calculate the amount of tax you can expect to pay when it comes time to file. Keep in mind that Quebec residents must also file an income tax return with Revenue Quebec. The funds earned in these benefits apply to this total as well. However, for those residing in other provinces, only a Revenue Canada income tax report is necessary. 

Need help filing your taxes? Check out Turbotax. 

Final Thoughts

To prudently manage your finances, especially when taxes are involved, it’s important to plan ahead. This is all the more true during unprecedented situations like the COVID-19 global pandemic. While government benefits offer a lifeline to countless businesses and individuals, until tax time is completed, the process is not complete. 

If you received benefits during 2020, it is prudent to do some calculations on the taxes you can expect to pay. If you need to offset this expense, there are options available such as TFSA and RRSP investments. To understand how much you need to invest, it’s important to calculate all of your income, including benefits. With this information, you can plan ahead, set some funds aside, and ensure that no unpleasant surprises arise when you pay your income tax for 2020.