How relief recipients can plan for an unprecedented tax season

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The coming tax season is expected to be even more complicated than it usually is for Canadians who took advantage of the federal government’s COVID-19 relief measures, throwing off projected payments based on income and deductions from years past.

Financial advisors recommend Canadians pull documents together to prove eligibility for programs such as the Canada Emergency Response Benefit (CERB), if required, and set aside cash that might be needed to cover taxable benefits from them or the forgivable portions of business loan programs.

“It’s a good time to start thinking about the taxation of some of these programs,” says John Waters, vice-president and director of tax consulting services at BMO Nesbitt Burns Inc. in Toronto.

While tax season is often in the late winter and early spring for most Canadians, “tax planning is really a year-round affair,” Mr. Waters says.

The Canada Revenue Agency (CRA) is already doing small-scale audits on some of its pandemic-relief programs, advisors say, to ensure those receiving benefits qualify.

The key programs for individuals include the CERB, for employees who lost work because of the COVID-19 business closings, and the Canada Emergency Student Benefit (CESB), for students who couldn’t find summer jobs. Both are taxable benefits. More recently, the government introduced the Canada Recovery Benefit (CRB) to replace the soon-to-expire CERB.

For businesses, there’s the Canada Emergency Wage Subsidy (CEWS) to cover a portion of employee wages, and the Canada Emergency Business Account (CEBA), which offers interest-free loans of up to $40,000 to Canadian small businesses and not-for-profits. The Canada Emergency Commercial Rent Assistance (CECRA) program offers forgivable loans to eligible landlords of entrepreneurs worth half the tenant’s rent from April through September.

“They’re all taxable, but each one is a little bit different,” says Jamie Golombek, managing director, tax and estate planning, at Canadian Imperial Bank of Commerce in Toronto.

Some Canadians receiving the CERB may not realize that the funds are taxable, and the amount will depend on other income received during the year.

“It could be as low as zero, or as high as 53.5 per cent [in Ontario],” Mr. Golombek says, citing the province’s highest tax bracket for individuals. He recommends people receiving the CERB either work with an accountant or use an online calculator to try to estimate their taxes owing for the year.

“I would set aside that money now ... to make sure you have that ready next year when it comes time to pay,” he says.

There will be taxes withheld on the new CRB, similar to Employment Insurance, and unlike the CERB.

Students who received the CESB might also have a surprise tax bill if they have income from a registered education savings plan and a summer job.

“For the average student, I would say there [wouldn’t be] a tax liability,” Mr. Golombek says. Still, he recommends students with other income set aside about 20 per cent to 25 per cent of it to go toward their taxes – just in case.

Mr. Waters says business owners also need to be prepared to pay tax on the pandemic-relief programs they used.

“The impact of the taxation depends on the type of company, the type of income being earned and the provincial rates for small business,” he says.

For example, the CEWS is considered government assistance and would be included in taxable income for companies that used it, he says. However, Mr. Waters points out that wage expenses are tax-deductible.

“I would expect, for the most part, the income inclusion for the government assistance [such as the CEWS] would be offset by the deduction for the payment in wages,” he says. “It’s less of a concern in terms of putting the money aside, but [business owners] should be aware that it’s taxable as government assistance.”

The expectation in the tax community is that the forgivable portion of the loans offered through the CEBA and the CECRA will also be taxable, Mr. Waters says.

With the CECRA, if landlords reduce their tenants’ rent by 75 per cent, they’re eligible to receive a forgivable loan of up to 50 per cent of the total rent. For example, if the monthly rent is $8,000, the landlord would have to reduce the tenant’s rent to $2,000, or 25 per cent, and would be eligible – under certain conditions – for a forgivable loan of $4,000 for that month.

With the CEBA, 25 per cent of the loan is forgivable if paid back before Dec. 31, 2022. Mr. Golombek says he received clarification from the CRA that the forgivable portion of the loan – up to $10,000 – is taxable in the year in which the loan is received.

Sophia Ito, financial advisor with Nicola Wealth Management Ltd. in Vancouver, recommends business owners work with their advisors not just to see what they qualify for, but also what they don’t. For example, there are very specific rules for a landlord to qualify for the CECRA.

“The guidance of having an accountant to help you through the process, or having a financial advisor who is versed in understanding how to read financial statements and ask questions, can help prevent some pain points if you end up applying for the wrong benefits,” she says.

Ms. Ito also suggests business owners set aside funds now to repay loans and taxes as they come due.

“The decision on how and where to best set aside these funds should be worked out with a financial advisor,” she says.

Whether you’re a small business owner or an individual receiving COVID-19 relief benefits, it’s best to keep a record of all related actions and communications to prove your eligibility for these programs, says Tannis Dawson, vice-president of high-net-worth and business succession planning at TD Wealth Advisory Services in Winnipeg.

“The tax owing is just one aspect,” she says.

For example, people receiving the CERB should keep track of layoff notices, while students collecting the CESB should have evidence they tried to find a summer job, but couldn’t, in case the CRA asks for proof.

She also recommends someone collecting the Canada Recovery Sickness Benefit, which provides $500 a week for up to two weeks for workers who can’t work or have to self-isolate because of COVID-19, keep a record of their COVID-19 test results.

Someone getting the Canada Recovery Caregiver Benefit, which is for people who have to stay home from work to support children or other dependants, may also need to show proof of a school closing or other actions that forced them to be away from their jobs.

“The reporting is the easy part,” Ms. Dawson says, while keeping track of activities around receiving the benefits can be more challenging.