How much tax will I have to pay because of CERB?
Is CERB money taxable? Absolutely.
Background: The Canadian Government introduced the Canadian Emergency Response Benefit (CERB) in March of 2020. This purpose of this benefit was to support employees who were unemployed due to the financial downturn caused by the COVID-19 outbreak. It also supported employees who couldn't work because they were sick, quarantined or were taking care of someone who was sick with COVID-19. This benefit provided $2,000 a month for individuals who lost their income because of COVID. This benefit quickly replaced EI benefits for most individuals due to the sheer volume of applications.
Taxes withheld: Normally as an employee, tax is withheld when you are paid. Your employer remits the tax to the government typically within a couple days of paying you. The same is true for Employment Insurance (EI) payments and any payment received is after tax is taken off. However, with the CERB, tax was not withheld. I suppose the idea was to put more money in Canadians pockets when they needed it most. The consequence of this, however, is that those who received the CERB payment will have to pay tax on this money at tax time.
Example: I created an example of someone who earns $4,000 a month while working in the 2020 tax year. Each row in the below table shows a different scenario.
For example, the first row, the individual worked 11 months of the year, while only taking 1 month of CERB. In this case, the individual will owe approximately $500 at tax time.
However, let's say you worked 4 months in 2020, earning $4,000 per month while working. You were forced to take the CERB for all 7 months that it was available. For one month you did not received CERB or employment income. You can expect to pay approximately $3,072 at tax time.
These calculations can vary significantly depending on the employment income you earned in the working months of 2020. There are also many other credit and benefits that could impact how much you owe, such as the medical expenses, the Canada Training Credit, or child care expenses. Finally, how much your employer withheld on your employment income will change these figures.
Next steps: You may be wondering what you should do next. Most importantly, you should start putting money aside now in order to plan for this tax bill. The CRA expects that you pay any money owing by April 30th, 2021. If you are unable to pay by April 30th, the CRA will start charging you interest on money owed. This can be a difficult hole to climb out of if you don't plan properly. Start putting even a couple hundred bucks aside each month now so it isn't a shock to your finances in April.
You should also ensure that you take advantage of all tax deductions and credits that are available to you. If you are unsure which deductions and credits you may be eligible for, reach out to a tax specialist for more information.