If we’re talking about how governments responded to the COVID-19 pandemic, Canada is considered to have done quite well. A major reason being the financial support the Canadian government provided citizens and residents to stay afloat during “unprecedented times.”
While these emergency benefits assisted Canadians throughout 2020, a downside arose — As a result of how quickly COVID-19 affected the economy, the eligibility criteria was often unclear and the benefit distribution systems not 100% effective. Some received double payments in error, while others were given financial support for which they were ineligible. To rectify the situation, the government is requesting Canadians return emergency benefits they shouldn’t have received in the first place.
How are they doing this exactly? With tax season upon us, the Canada Revenue Agency (CRA) is collecting tax debt from Canadians, including incorrectly distributed emergency benefits. We know this process can seem daunting and complicated, which is why we’ve written this comprehensive guide — to help you understand why the CERB system emerged, how the CRA is collecting emergency benefits, and what to do if you can’t repay.
The emergency benefit repayment issue
COVID-19 began to drastically change the lives of Canadians in March 2020. Many people lost their jobs or experienced a reduction in hours as a result of mandatory lockdowns. From there, a ripple effect occurred, impacting nearly every Canadian in one way or another.
To address these unemployment and financial issues, the federal government offered emergency benefits such as the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), and several others. After the setup of these benefits, many began to claim them despite their ineligible status. Some even received double payments to no fault of their own. In spite of these errors, the government rightfully focused on giving money to those in need, rather than reclaiming amounts paid incorrectly. But as 2020 came to a close, the CRA began the collection process.
The CRA has expressed they understand many Canadians received emergency benefits in honest error and are trying to fairly alleviate the situation. They began the process in the last quarter of 2020, by issuing formal collection letters to those who incorrectly received a COVID-19 emergency benefit. Canadians were given the opportunity to voluntarily repay the benefits before the end of 2020 to avoid tax or penalty consequences, but many have still not repaid.
In fact, the CRA’s benefit recollection notice encountered a notable push back. Many felt it was unfair of the CRA to take back the benefits as the eligibility criteria was unclear and dynamic. Specifically, the CRA interpreted “self-employment income” as net income, not gross income, for CERB eligibility. As a result, many self-employed individuals claimed CERB because they reported gross, not net, income.
On February 9, 2021, the CRA formally responded to the issue, stating that “self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their gross income will not be required to repay the benefit, provided they also met all other eligibility requirements.” As for everyone else, you still owe money if you received a letter or tax slip from the CRA.
"With tax season upon us, the Canada Revenue Agency (CRA) is collecting tax debt from Canadians, including incorrectly distributed emergency benefits."
Taxation of emergency benefits
All government-issued COVID-19 emergency benefits are considered taxable income. This means you must report these benefits as income on your tax return and pay taxes on them. The amount of tax you will pay depends on your tax bracket and tax credits claimed.
The Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB), and Canada Recovery Caregiving Benefit (CRCB) withheld a 10% tax at the source, but this may not cover the entire tax liability for everyone. Other benefits, such as CERB and CESB, did not withhold any tax at the source.
If you claimed a COVID-19 emergency benefit, you will likely owe money in taxes this year. This is also true for individuals who correctly received their emergency benefits, so keep this in mind when filing your taxes this year.
How do I know if I owe the CRA money?
Towards the end of 2020, the CRA began the collection process of incorrectly paid emergency benefits. If you owed money, you likely received a letter from the CRA by mail detailing the amount owed. It also communicated that if you voluntarily repaid the amount by December 31, 2020, you wouldn’t face tax consequences.
If you didn’t repay your debt before the end of 2020 or you claimed an emergency benefit, the CRA will issue a T4A tax slip. The tax slip will also detail how much you owe for the 2020 year in relation to these benefits.
What will happen if I don’t repay?
If you don’t repay, the CRA can put future tax benefits, including tax refunds and credits, towards your debt. They can also escalate the collection process by garnishing your wages or freezing your bank accounts — scary stuff, we know!
Remember that the CRA is not a normal creditor; they have significantly more power to collect debts. For this reason, you should settle tax debt as soon as possible to avoid adverse financial consequences.
I can’t afford to repay, what do I do?
You’re not alone — some Canadians owe over $10,000 to the CRA. Your first step is to communicate with the CRA, so you can start building a repayment plan and avoid repercussions like frozen bank accounts. The CRA is more reasonable than we think; if you keep open lines of communication, they are more likely to help.
"If you claimed a COVID-19 emergency benefit, you will likely owe money in taxes this year."
Targeted interest relief
On February 9, 2021, the Minister of National Revenue announced that Canada will provide targeted interest relief to eligible Canadians, giving them until April 30, 2022 to repay their emergency benefit debt without interest penalties.
To qualify for targeted interest relief, individuals must have had a total taxable income of $75,000 or less in 2020. In addition, they must have received some sort of income support in 2020 through one of the following COVID-19 emergency measures:
Canada Emergency Response Benefit (CERB)
Canada Emergency Student Benefit (CESB)
Canada Recovery Benefit (CRB)
Canada Recovery Caregiving Benefit (CRCB)
Canada Recovery Sickness Benefit (CRSB)
Employment Insurance (EI)
Similar provincial emergency benefits
The CRA will automatically apply the interest relief measure for individuals who meet this criteria. This means you do not need to separately apply for this benefit.
You will, however, need to create your own repayment plan. Due to the sizable amount of people in this predicament, the CRA will not provide a repayment plan for this group. So, if you qualify for targeted interest relief, we suggest you begin building your repayment plan by revisiting your budget and calculating how much you need to save every month to complete the repayment. April 30, 2022 seems far away, but it’s best to start early to ensure the future you won’t owe interest or face other penalties.
How you fit into the bigger picture
Repaying our debt has more meaning than we think. According to the fiscal update in November 2020, Canada has amassed a massive deficit of $382 billion for the 2020 to 2021 period. A major contributor to this swell in debt? Emergency benefits. While these benefits were and are absolutely necessary, we can’t ignore the reality — the more Canadians take, the more Canada will have to repay in the long run. In other words, higher taxes for all of us.
By repaying what you owe as an individual, you’re helping to reduce Canada’s debt. What you repay might be small, but you’ll be making a big impact.
Getting help when you need it
Upon digesting all this information, you might be feeling worried, maybe even defeated, over your finances. Perhaps you’re wondering how on earth you’ll repay the CRA while meeting your other obligations. But starting is half the battle — and, as mentioned, you can start by simply connecting with the CRA to create your repayment plan.
Of course, you might need additional support. Consider asking friends and family for financial support or advice to repay the debt. Credit counselling is another resource you can use to devise a repayment plan. Remind yourself that it’s okay to seek help during this time. After all, we are living through an international pandemic — we’ve all struggled at one point or another.