Over the past year, many Canadians have received financial support through one or more government benefits to address the financial impacts of the COVID-19 pandemic. If you received benefits related to COVID-19, you should be aware of the tax implications and requirements for reporting when completing your tax filings. In this article, we will discuss why you may wish to consider your overall income and expenses for 2020 to identify potential tax savings opportunities in advance of the April 30 tax payment deadline for individuals.    

Tax considerations for COVID-19 benefits

For individuals, the Canada Revenue Agency (CRA) announced that they will be issuing T4A slips to all COVID-19 emergency and recovery benefit recipients¹ which will provide the amounts of benefits received from the CRA in 2020 for each of the following: 

• Canada Emergency Response Benefit (CERB);
• Canada Emergency Student Benefit (CESB);
• Canada Recovery Benefit (CRB);
• Canada Recovery Sickness Benefit (CRSB); and
• Canada Recovery Caregiving Benefit (CRCB)

T4E slips will be issued to those that applied for the CERB with Service Canada, as well as any Employment Insurance (EI) benefits. 

¹If you believe you should be receiving a COVID-19 benefit tax slip but have not received it by March 10, 2021, you are encouraged to check your My Account for Individuals or contact the CRA directly at 1-800-959-8281.

*The CRA did not withhold tax for the 2020 CERB and the CESB payments but will withhold 10% tax at source from amounts distributed through new COVID-19 recovery benefits announced by the federal government.

As highlighted above, tax treatment of the pandemic-related benefits may differ depending on which you have received. Once all other sources of income, deductions and credits have been calculated, some individuals may discover that they owe money when they file their returns in addition to what may have already been deducted.

For further information about COVID-19 benefits, see Questions & Answers about Canada Recovery Benefits.

What if I received benefits that I may not have been eligible for?

Under the various programs, certain conditions must have been met to qualify for the benefit to be received. In some cases, these conditions may have been assessed in the application process. In others, there may have been no up-front assessment.

As part of their review process, the CRA sent out letters to a significant number of individuals informing them that they may not be eligible for CERB. The letters were simply to indicate that CRA was unable to confirm certain eligibility requirements for the CERB program. Any individual that is found not to have been eligible will, of course, need to repay the amount and may be responsible for certain reporting on their 2020 tax filing.

If you received CERB benefits in 2020 but need to repay the amount after December 31, 2020, you will still be responsible for including the benefit amount in your income for the 2020 tax year. You may then claim a deduction for the amount on your 2021 tax return. This may cause a cash flow timing difference where you may need to pay tax in April 2020 but will not receive the benefit of the corresponding deduction until next year’s filing.

Tax planning for 2020

Due to the pandemic, income and expenses for the 2020 tax year will likely vary to some degree for many when compared to previous years. Some benefits received may be taxable, as discussed above, and you may be facing a larger tax bill than anticipated, have taxes owing or both. On the other hand, you may be eligible for various credits and deductions and it’s important to explore all options  to possibly reduce your tax bill. If your income was significantly lower in 2020, you may also qualify for extra credits or benefits as a result, such as the GST/HST credit, Canada Child Benefit and more.

Minimization of taxes payable, planning for payment of taxes owing and use of taxes refunded as a result of your yearly filing are just some of the considerations typically reviewed, and different planning strategies may exist depending on your situation. Here are a few items you may want to pay extra attention to when completing your tax filing for 2020:

1. Canada Recovery Benefit

If you received the CRB, 10% tax would have been withheld at the source, although that may not be the amount of tax that you will be responsible for. You must report the CRB payments that you receive as income when you file your personal income tax return and, depending on how much income you earned for the year, you may need to pay more (or less) when you complete your personal income tax return.

You may earn employment or self-employment income while you receive the CRB. If you report more than $38,000 in net income in the calendar year, excluding the CRB payments, you will be required to repay $0.50 of the CRB for every dollar of net income over $38,000. 

2. Medical expenses

Canada has a publicly funded health care system that provides many of the health care services that may be required as a direct result of the pandemic. However, some individuals will also incur certain medical costs directly. If this applies to your situation, you may be able to claim eligible medical costs on your tax return for expenses paid in any 12-month period ending in 2020, provided they were not otherwise claimed or reimbursed. Some common eligible medical expenses include health plan premiums, prescription drug costs and dental services. For a more thorough list, please see eligible medical expenses you can claim.

Usually, it will be most beneficial for the spouse with the lower income to claim the total medical expenses for the family. The amount of the claim available is calculated by subtracting the lesser of $2,397 or 3% of your net income from the total amount of eligible expenses. Because of the 3% rule, the lower earning spouse has a lower threshold to reach before the medical expenses are eligible for a credit. Further, if your income has declined in 2020, you may be able to claim a larger amount of medical expenses than in prior years, even if your actual medical expenses remained similar.

For example, Jody and Matthew have eligible medical expenses of $4,300. Jody’s net income is $32,000 and Matthew’s is $48,000. For Jody, 3% of net income is $960, and because this is less than $2,397, she subtracts $960 from $4,300 and is able to claim $3,340 on her tax return. In contrast, Matthew’s net income is $48,000, with 3% equal to $1,440. Subtracting $1,440 from the $4,300 in medical expenses is $2,860, the maximum amount he could claim on his tax return. In this case, it is better for Jody to claim their family medical expenses. 

An exception may occur if one spouse has enough credits to reduce taxes owing to zero. In this case, the medical expenses may be wasted if this spouse claims them. Most tax preparation software includes an optimization feature to determine which spouse should claim any medical expenses. 

3. Child care expenses

As a result of parents working from home, child care costs may vary from previous years. Those who were able to balance working at home with caring for their children may have saved on daycare costs. Or, perhaps other child care expenses were incurred as your usual child care facility was closed due to the pandemic. In either case, it’s worth noting that these changes in expenses might also affect your tax situation for 2020. 

Costs of having someone look after your children while you work or go to school are generally deductible from income for tax purposes up to certain dollar limits. Eligible expenses include payments to an eligible child care provider who is not the child’s mother or father nor a person under 18 who is related to you (such as an older child).

Amounts paid to a person 18 or over who is related to you are permitted as eligible child care expenses, as long as there was no tax credit claim for that person as an eligible dependant or for the caregiver amount. This may be relevant where you paid your parent (i.e. your child’s grandparent), for example, to care for your children. The family member receiving the income would then be required to report the amount as income.

Child care costs are a deduction from income and can result in noticeable savings on one’s tax bill. On the other hand, if you have claimed child care expenses in previous years but will have lower child care expenses to deduct for 2020, then you should also be prepared for a higher tax bill (or lower refund) without the corresponding deduction, all else being equal. 

If you have taxes owing

Your overall tax situation will depend on your total income, deductions and credits for the year. For those who may have a combination of employment income and government benefits for the year, setting aside some funds might be wise until you complete your tax filing. If your taxable income is low, you may have little or no tax liability. Alternatively, you may owe a significant portion of the government benefits amount received if you also earned other income for the year. Free online tools are available to help assess your tax situation but as a very general rule of thumb, average income earners may want to set aside 20% to 30% of the CERB payment to account for possible taxes owing on the amount received. 

RRSP Contributions

Every dollar you contribute to your RRSP, up to your available contribution room, can be deducted from your taxable income, thus, reducing your taxes payable. For the first 60 days of each calendar year, eligible RRSP contributions are allowed to be made and deducted from the previous year’s income. This presents an opportunity to manage your tax situation if you suddenly discover that your tax bill is higher than expected or that you have an amount owing. Your RRSP deduction limit for 2020 can be found on your 2019 Notice of Assessment, via My Account or by calling 1-800-267-6999. 

You can either offset a tax liability associated with government benefits received in 2020 or elect to use the deduction in a future tax year instead.

If you have a tax refund

If you are entitled to a refund, this is an excellent opportunity to invest in your financial well-being. Depending on your financial situation, you may want to consider each option available to you in determining how to maximize the benefit of your refund.

Generally speaking, paying off high-interest debt can often provide the best “return” on the use of funds. A penny saved is a penny earned, and with high-cost debt that you might carry, each dollar of interest you don’t have to pay is a dollar that stays in your pocket. 

If you’ve received or renewed your mortgage in recent years, chances are that you have a relatively low interest rate on it. Nevertheless, paying down your mortgage can also provide a good long term return when you consider the total amount of interest paid over the life of the mortgage. Usually, a lump sum payment on a mortgage is directed straight to the principal. However, before you do this, check-in with your lender to determine the details of your mortgage and what paydown options are available. 

A tax refund can also be considered a bonus to your financial planning and savings goals. Creating or topping up an emergency fund, saving for retirement, tax planning and working towards other financial goals are all part of your overall financial health. 

For more information on financial planning, we are always here to help. For tax advice, we recommend seeking professional guidance from an accountant.

For further information on other personal tax topics for the 2020 tax filing season, you may be interested in the following articles:

Home office expenses, automobile benefits and your 2020 personal tax return

Understanding your personal taxes in Alberta