Pattie Lovett-Reid: Tax implications of income support
Consider it a friendly tap on the shoulder from the Canada Revenue Agency – at least for now.
The national tax collector is sending out what are termed “T4A” slips to Canadians who received COVID-19 relief benefits in 2020. Most of us are familiar with T4 slips that usually come from our employers by the end of February summarizing earnings and deductions for the year. You don’t need to file until the April 30 tax deadline but it is intended as a wakeup call for Canadians who owe to set aside some cash to avoid paying interest once the deadline passes.
At that point it’s no more Mr. Nice Guy. The interest rate is set at a draconian five per cent, plus an additional per cent each month it remains unpaid. It gets worse after that – including forced payments and potential jail time – but the point is; allowing it to fester could lead to a lifetime of regret. Under the financial strain of the pandemic, the CRA has expressed a willingness to work with anyone having trouble coming up with the money.
Like the regular T4 slips, the T4As do not provide a specific amount of tax owing, but merely a statement of income and taxes already deducted – if any. If you received the Canada Emergency Response Benefit (CERB) during the year, it is fully taxed as income. The rate of taxation depends on your marginal tax rate, which is based on your total taxable income in 2020. The higher your income, the higher the marginal tax rate.
Unlike employment income, where income tax is automatically deducted before you get it, the tax on the CERB was not deducted at the source. That means you will need to pay tax on it before the deadline.
The government should have already deducted a 10-per-cent withholding tax for other pandemic-related benefits including the Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) for self-employed individuals, or Canada Recovery Caregiving Benefit (CRCB). That means 10 per cent of the taxable amount was deducted at the source, but you still owe the difference if your marginal tax rate is higher.
In the case of the CRB, if your total net income is over $38,000 without the benefit in 2020, you could be required to pay some of it back.
The CRA has also sent out what it calls “education letters” to some Canadians who have already received CERB payments but were not eligible for the benefits, and should consider paying them back as soon as possible.
Also, for the estimated 40 per cent of the Canadian workforce sent to work from their homes in 2020, the CRA is allowing a simplified deduction of up to $400 for home office expenses. The new Simplified Temporary Flat Rate Method permits a tax deduction of $2 a day for employees who had to work from home more than half of their work time over a period of at least four weeks in a row. The deduction allows taxpayers to subtract up to $400 from their 2020 taxable income. If you are normally taxed at a rate of 30 per cent, for example, you save $120 on your tax bill.
The method is simple because no receipts or documentation are required, but those who have been keeping track of their expenses throughout the year could find the cost of running a home office was much higher than $400.
If that’s the case, the traditional method, known as the Detailed Method, normally requires the employer to fill out a form (T2200) stating the employee was required to work from home. For 2020 it will be replaced by a streamlined T2200S form.
To help determine which method would provide the biggest tax break for you, the CRA provides a calculator on its website to add up eligible expenses including office supplies and a portion of utilities.
Editor's Note: An earlier version of this post incorrectly stated that the interest rate is hiked after one year. The rate in fact does not rise due to the length of time an amount owed is overdue. BNN Bloomberg regrets error.