To wrap up 2020, my final column for the year will focus on a few recent tax-related updates associated with some of the COVID-19 relief individual Canadians and small businesses may have received this past year: the Canada Emergency Response Benefit (CERB), the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Business Account (CEBA).
Earlier this month, we learned that the Canada Revenue Agency sent out 441,000 “educational letters” warning individuals that they may not be eligible for CERB. The letters were sent out to individuals whom the CRA said it was “unable to confirm … employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application.”
While the issue of whether the $5,000 qualification limit for the self-employed means “gross” income (i.e. revenues) or “net” income (i.e. net of expenses) has been discussed extensively, the CRA is standing by its view that the $5,000 refers to net income, and thus if you had gross income of $5,000, but netted under $5,000 after expenses, then you didn’t qualify for the CERB and need to repay it.
If you need to return the CERB, you may wish to return it in 2020 vs. 2021. That’s because the CERB amounts are taxable and will be reported on your T4A tax information slip for inclusion on your 2020 tax return. The CRA has indicated that amounts returned by Dec. 31 won’t need to be included on your 2020 return.
If you return the CERB in 2021, however, you will need to pay tax on the full CERB amount you received in 2020, and can claim a deduction for this amount on your 2021 tax return. While for many, this is simply a cash flow or timing difference, for others, who many not have enough income in 2021 to benefit from the deduction, you could end up effectively paying tax on CERB funds you ultimately had to return.
This potentially harsh tax treatment was confirmed by the Federal Court of Appeal in a 2007 decision dealing with the repayment of government benefits which concluded that the deduction applies only in the year the amount is repaid, not to retroactively cancel the original income inclusion. In 2009, the CRA also confirmed in a technical interpretation that the deduction could not be carried forward to a later year.
As of Dec. 13, the CEWS wage subsidy has provided more than $54 billion in support to over 368,000 unique Canadian businesses, non-profits and charities. The wage subsidy can only be claimed for employee remuneration by eligible organizations that have experienced a drop in revenue. In order to support Canadian workers and businesses through the second wave of the pandemic, the government recently increased the maximum subsidy rate to 75 per cent until March 13, 2021, for those organizations most severely impacted by COVID.
The CEWS eligibility criteria are built into the application process and subject to verification by the CRA. Penalties for non-compliance with the program can include repayment of the wage subsidy, an additional 25 per cent penalty and potentially imprisonment in cases of fraud.
This past week, the CRA launched the CEWS Registry which allows Canadians to identify which employers are using the wage subsidy to support jobs. Within minutes of its launch, I was able to determine whether my employer collected the CEWS (it did not), whether my house of worship applied (it did) and that even my dentist made a claim (via his dental professional corporation). Of note, sole proprietors have been filtered out of the published registry in order to protect their personal information.
Any company or charity that believes it has been listed in error is asked to contact the CRA at 1-800-959-5525. In addition, if you believe a business, charity or your employer has claimed the subsidy but did not meet the eligibility criteria, you can report suspicious activity by contacting the CRA Leads Program by visiting https://www.canada.ca/taxes-leads.
Finally, the CEBA provides interest-free loans of up to $60,000 to businesses to help cover their operating costs where their revenues have been temporarily reduced due to the economic impacts of COVID. As of Dec. 17, 2020, 803,123 businesses have been approved for a CEBA loan, and $37.1 billion in total funds have been approved.
The original CEBA loan was for up to $40,000 but, as of Dec. 4, 2020, an additional $20,000 CEBA loan is available to qualified applicants, for a total of up to $60,000. Those who previously received a $40,000 loan may apply for an additional $20,000. New applicants may apply for a $60,000 loan and the application deadline for new (or additional) CEBA loans is March 31, 2021. Up to $20,000 of a $60,000 loan can be forgiven if the balance is repaid by Dec. 31, 2022. For original loans of $40,000, 25 per cent of the amount (up to $10,000) may be forgiven.
In a recently published technical interpretation, the CRA has confirmed the amount that is forgivable is taxable in the year that the loan is received. For instance, if a business receives a $40,000 CEBA loan in 2020, $10,000 must be included in income in 2020. Alternatively, a business could elect to not include the $10,000 in income, and instead to reduce $10,000 of non-deferable operational expenses in respect of which the CEBA loan was received. If a CEBA loan balance is not repaid by Dec. 31, 2022, so that the forgivable portion is not forgiven, an offsetting deduction is available in the tax year in which the amount is repaid.