June 1, 2020
Taxation of COVID-19 measures
News & Views
The onset of the COVID-19 pandemic has increased the pace of change and information in the lives of Canadians. As many find their situations in flux, the government has been delivering assistance in many forms. These include income replacement, payment supplements, debt payment deferral, and a RRIF minimum payment reduction. While the tax treatment of these measures may not be top-of-mind yet, questions may eventually start to arise. If so, let’s explore some early answers.
Income replacement and supplements
Maintaining household income has been an important initiative during this pandemic. On this front, we have seen two wage subsidies: the Temporary Wage Subsidy for Employers and the Canada Emergency Wage Subsidy (CEWS). These subsidies directly benefit eligible employers and allow them to keep eligible employees on payroll and off other income replacement programs like Employment Insurance (EI) and the Canada Emergency Response Benefit (CERB). The subsidies are available for up to three months and 12 weeks respectively.
The CERB replaces the short-lived Emergency Support Benefit and Emergency Care Benefit. It represents a significant temporary expansion of income replacement benefits. It’ll provide $2,000 every four weeks, for up to 16 weeks, to those who lost their income due to COVID-19.
Both wage subsidies and CERB are taxable amounts. The wage subsidies are taxable to the employer. An employer can be eligible for both subsidies, but the CEWS will be reduced by any benefits the employer receives from the Temporary Wage Subsidy. From the employee’s perspective, they’ll continue to receive their pay less source deductions (income tax, CPP, EI, etc.). On the other hand, the CERB benefit will be paid directly to the recipient (not the employer) and won’t have source deductions. Despite this, as mentioned earlier, the CERB payments will be taxable income for the recipient.
Finally, individuals receiving the CERB can’t receive pay from an employer who’s receiving the CEWS. Should this happen, it’s important for employers and employees to collaborate. At this time, the government is designing a process for such situations that would allow employees to cancel their CERB benefit and repay part or all of the amount received. This is intended to prevent duplication of benefits received.
Two sources of tax-free payments that are also receiving a bump are the GST/HST credit and the Canada child benefit (CCB). The GST/HST credit is a quarterly payment that helps low- and modest-income households offset some or all their GST/HST. A one-time special payment, starting on April 9, will be paid to eligible recipients. This payment will provide an average increase of roughly $400 for individuals and $600 for couples. CCB recipients will receive an extra $300 for each child on their May 2020 payment.
While these amounts are tax-free and don’t require an additional application, it’s prudent to file your 2019 tax return sooner than later. The deadline is June 1, 2020. This can help provide continuity of benefits for the next benefit year. If you owe tax when you file your return, you have until September 1, 2020 to pay without interest or penalties. Keep in mind that you can file your tax return and pay any tax balance owing separately and at different times.
Debts and RRIF payments
Two of the measures put forth address household debt repayment. The first is the suspension of payments on student loans. This includes those received under the Canada Student Loans Act, Canada Student Financial Assistance Act, and the Apprentice Loans Act. There’ll be an interest-free moratorium on repayment for all student loan borrowers until September 30, 2020. During this time, no payments are required and interest won’t accrue. On such loans, interest paid in the current year or previous five years can be claimed as a tax credit. Since no interest will be paid during this period, the tax credit won’t be increased. This is likely a small cost versus the benefit of payment and interest relief for this period.
The second provides mortgage borrowers the opportunity for payment deferral on a case-by-case basis by working directly with their financial institution. While mortgage interest isn’t usually tax deductible, it may be in cases where the borrowing was used to purchase assets/investments that have the potential to earn income (i.e., rental income, dividends). In such cases, taxpayers report either the interest paid or accrued — but not both. Either way, carefully review your annual interest statement for any changes to interest for the year that may impact what you report as deductible for the 2020 tax year.
Registered Retirement Income Fund (RRIF) minimums have been reduced by 25%. It’s important to note that the taxation of RRIF income hasn’t changed. However, this decrease creates two minimum-payment situations: the original RRIF minimum and the reduced minimum. The ripple effect may cause some confusion, which I hope to clarify below:
The required withholding tax at source won’t apply until RRIF payments exceed the original RRIF minimum.
If the account is a spousal RRIF, payments exceeding the original minimum will be used to determine spousal attribution, if applicable.
The formula for determining non-resident withholding tax on RRIF payments will still use the original RRIF minimum and not the reduced minimum.
If an individual has withdrawn RRIF payment amounts exceeding the reduced minimum and would like to recontribute the excess amount back into the RRIF, they will not be permitted to do so.
During these times health and safety are paramount. As many of you may be taking things day-by-day, eventually you may start to wonder about the tax implications of the measures our government has taken. While tending to your immediate needs is important, understanding the future implications can reduce unwanted surprises. Stay safe and healthy and keep smiling. We’re in this together and we will prevail.