2020 round-up: Income tax impacts of key COVID-19 support programs

In this tax blog, we highlight how emergency financial help received by Canadian individuals and businesses last year is treated for income tax purposes and related tax issues arising from:

• Programs to support individuals
  • Canada Emergency Response Benefit (CERB)
  • New recovery benefits
  • Canada Emergency Student Benefit (CESB)
  • Special one-time payments
  • Foreign benefits
• Programs to support businesses, including self-employed individuals
  • Canada Emergency Wage Subsidy (CEWS)
  • Canada Emergency Rent Subsidy (CERS)
  • 10% Temporary Wage Subsidy (TWS)
  • Canada Emergency Business Account (CEBA)
  • Canada Emergency Commercial Rent Assistance (CECRA)

Programs to support individuals

The federal government introduced a number of programs to support Canadians and their families during the COVID-19 pandemic. The CRA has indicated that for most programs they are administering, they will be issuing a T4A Statement of Pension, Retirement, Annuity, and Other Income (T4A) slip to payment recipients.

Further, the CRA has noted on their EFILE news page (see December 21, 2020) that they will also provide emergency benefit information in Represent a Client, and T4As will be available in My Account as well as in the Auto-fill my Return service in certified tax software near the start of tax filing season.

Canada Emergency Response Benefit (CERB)

Amounts received through the CERB are taxable. The CRA did not withhold tax at source from these payments, so taxes may be owing on them. Canadians who received CERB payments will receive a T4A slip (T4E if paid by Service Canada) showing the total CERB amount they received in 2020. They should report this amount on Line 13000 of their T1 income tax return.

CERB repayments

The CRA has confirmed to us that if they received a CERB repayment on or before December 31, 2020, they will reduce the taxable CERB amount on the T4A slip accordingly. The repaid amount will not need to be reported separately on the T1 return. Where one of your clients has repaid some, but not all, CERB benefits in 2020, it may be worth reviewing these amounts with them to ensure that the taxable amount was indeed reduced.

CERB repayments received by the CRA after December 31, 2020 will be reported on a 2021 T4A slip issued in 2022. This amount can be deducted at line 23200 on the 2021 T1 return.

New recovery benefits

When the CERB ended, it was replaced with changes to the Employment Insurance (EI) system and three new benefit programs:

• Canada Recovery Benefit (CRB)
• Canada Recovery Sickness Benefit (CRSB)
• Canada Recovery Caregiving Benefit (CRCB) 

All of these benefits are taxable. Like the CERB, the CRA will send recipients a T4A slip showing the amount of CRB, CRSB and CRCB they received for reporting on line 13000 of their 2020 T1 return. Unlike the CERB, however, tax is withheld from these payments at 10 per cent and the withheld amount must also be reported on the T1 return.

For the CRB only, individuals will have to repay 50 cents of the benefit for every dollar in net income they earned above $38,000, to a maximum of the Canada Recovery Benefit received in the year. Net income includes amounts normally included as net income for income tax purposes (i.e., reported on line 23600 of the T1 return), with some adjustments for split income and certain repaid amounts. Net income includes any CERB, CRSB and CRCB payments received but not payments received through the CRB.

Repaid amounts are not included in taxable income. This will be reconciled on the T1 return, and the repayment will be incorporated in your total tax payable. The repayment is calculated as part of the social benefits repayment calculation on the T1 worksheet at line 23500.

Repayments based on net income are due at the same time as your T1 return for the year. The CRA will charge interest on late repayments.

Canada Emergency Student Benefit (CESB)

The CESB provided support to post-secondary students and recent post-secondary and high school graduates who were unable to find work due to the pandemic. These payments are taxable. The CRA will issue a T4A tax slip for the amount of CESB received, and individuals will need to report the amount on their 2020 T1 return on line 13000.

CESB repayments

If you repaid the CESB before December 31, 2020, the CRA will not include the repaid amount on your T4A slip.

Special one-time payments

The government delivered a number of one-time payments to support specific groups of vulnerable Canadians during COVID-19. These payments include:

• one-time OAS pension ($300) and GIS payments ($200)
• a one-time payment to persons with disabilities (up to $600)

These one-time payments are not taxable or reportable. There was also a one-time GST credit payment, which is also not taxable.

Foreign benefits

Some people may have received payments from pandemic assistance programs offered by other countries. In these cases, the payment’s nature will have to be considered in view of Canada’s tax rules to determine if the amount received should be taxable here.

For example, the CRA commented on the U.S. Economic Impact Payment (USEIP) program in technical interpretation 2020-0851811I7. The USEIP pays refundable tax credits to U.S. citizens and resident aliens as emergency assistance for U.S. individuals, families and businesses affected by COVID-19. These payments would not be considered a source of income under Canada’s tax rules, so the CRA concluded they are not taxable here. The CRA reached a similar conclusion regarding a Hong Kong assistance program.

Programs to support businesses

The federal government also introduced a number of programs to support Canadian businesses during the COVID-19 pandemic. We summarize the income tax implications of some of the key programs here.

Canada Emergency Wage Subsidy (CEWS)

The CEWS is taxable for income tax purposes. Employers must include the amount of CEWS received as taxable income on their personal, corporate or partnership income tax return. In terms of timing, subsection 125.7(3) of the Income Tax Act (ITA) deems the qualifying entity to have received a CEWS payment immediately before the end of the qualifying four-week period it relates to — and not when it was applied for or received.

For example, consider a taxpayer who reports business income based on a December 31 year-end and applies for CEWS for periods 10 and 11 in February 2021. This taxpayer would report:

• the subsidy for period 10, which ended on December 19, 2020, on their 2020 tax year
• the subsidy for period 11, which ended on January 16, 2021, on their 2021 tax year

If this taxpayer amends their claim for period 10 after filing their 2020 return, they will need to amend their 2020 return accordingly.

Implications for Scientific Research and Experimental Development (SR&ED) tax credit claims

The Department of Finance Canada stated that CEWS amounts reduce the amount of remuneration expenses eligible for other federal tax credits that are based on the same remuneration. Businesses will thus need to determine the net amount of remuneration for other tax programs such as SR&ED.

Government assistance received for a deductible SR&ED expenditure reduces the pool of deductible SR&ED expenditures, so the pool must be reduced to the extent that it includes remuneration costs on which a taxpayer received a CEWS benefit. Where this reduction exceeds the balance of the pool otherwise calculated, the excess amount is included in taxable income in that tax year.

Similarly, for investment tax credits, government assistance received that can reasonably be considered in respect of SR&ED reduces the taxpayer’s qualified SR&ED expenditure for the tax year.

This guidance also generally applies to the Temporary Wage Subsidy (see below). We understand that the CRA is preparing more detailed guidance on how to account for the CEWS for SR&ED purposes.

Canada Emergency Rent Subsidy (CERS)

The legislation for the CERS and CEWS programs is integrated, and the income tax implications and reporting are essentially the same. As with the CEWS, CERS payments are taxable and qualifying claimants must include them in their taxable business income immediately before the end of the related claim period.

10% Temporary Wage Subsidy (TWS)

The TWS is a temporary measure that allows eligible employers to reduce their payroll deduction remittances. According to the CRA, a claimant must report the subsidy amount as income for the same year that source deduction remittances were reduced.

Canada Emergency Business Account (CEBA)

Under the CEBA, loans of up to $60,000 were made available to eligible businesses in two phases. Up to $20,000 of the loans may be forgiven, as long as the program’s conditions are met and the remaining loan balance is repaid by December 31, 2022.

The part of the loan that is forgivable is included in income in the year the loan was received under paragraph 12(1)(x) of the ITA. However, CEBA funds are intended to pay for non-deferrable operating expenses of the business, including payroll, rent, utilities, insurance, property tax and scheduled debt payments. For this reason, subsection 12(2.2) allows the recipient to elect to reduce the amount of outlay or expense rather than including it in income. Although this still usually increases taxable income, a deferral could result if the application of this rule reduces an expense in the following year.

If the loan is repaid after 2022, a deduction can be claimed at the time of repayment for the forgivable portion that was previously included in income under paragraph 20(1)(hh).

The CRA has confirmed this tax treatment in several recent technical interpretations (e.g., 2020-0861461E5).

Canada Emergency Commercial Rent Assistance (CECRA)

The CECRA provided forgivable loans to commercial property owners who reduced rent for eligible small business tenants. These loans are forgivable as of December 31, 2020, as long as the program’s conditions were met. Similar to the CEBA (discussed above), these loans appear to be taxable when received under paragraph 12(1)(x). If an amount was previously taxed but later needs to be repaid because the program’s requirements were not met, the repaid amount can be deducted at the time of repayment.

Where to find more details

Our comments above only address some of the most important questions practitioners may have about the tax impacts of federal emergency support programs. You can find more details from the CRA on each of these programs by following the links throughout this blog.

NOTE: The commentary function of this page has been temporarily closed. Unfortunately, because of the volume of feedback regarding recently announced COVID-19 tax measures, we do not have the capacity to respond to individual inquiries. We strongly encourage you to visit our Canadian Tax News and COVID-19 Updates page for information.