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CERB Is Not Free Money, It’s Taxable Income

When the Coronavirus outbreak happened the Government of Canada took extraordinary measures to contain it. Never before have we seen the economies of countries shut down as they have. There were good reasons, but it left many Canadians, who were already in a precarious financial situation, near financial ruin. This is why the federal government created the new CERB (Canada Emergency Response Benefit). By now everyone knows what the CERB is all about. It’s a way to help Canadians that are impacted by the Coronavirus get by while the government closes the doors. Though many people think the CERB payout is free money. It isn’t. The CERB is taxable income.

Taking CERB Can Affect Your Benefits

The fact that the CERB payment is a taxable benefit means that taking this money when you shouldn’t could have a negative effect on your benefits. Despite the fact that the CERB payment is meant for individuals that are impacted by the Coronavirus, many Canadians think they can pull a fast one on the CRA and apply for the benefit. This could result in undesired consequences.

The CERB payment was supposed to be for workers that lost income, though many Canadians see the CERB as cash grab or cash free loan. This is true in a sense because the Canadian Government implemented an honour system to get money out to Canadians as quickly as possible. The result is abuse of the system. When you reach your hand out with money in honesty, people will take it.

This means many individuals are now collecting additional income when they shouldn’t. Eventually these individuals will have to pay it back, but the CRA has taken the stance that no penalties will be applied. Yet.

Reduced Government Child Benefits

One side effect of taking CERB payments is the impact this could have on future benefits. Remember that some benefits that are income tested against individuals. This means the more money you make. The less benefits you get. One of these benefits is the Canada Child Benefit.

The Canada Child Benefit is meant to help families with children under the age of 18 raise their families. Households that make less money receive greater payments, those that have higher incomes receive little or none at all. This means the more money you make, the less money you receive next year.

Now the CERB payment counts as taxable income. This means for someone that is receiving the the CERB payment on top of your salary, it could mean less benefits. How much?

Well lets take the example of a married couple with two young children aged 8 and 10 that own their own home. One spouse is making $60,000 while the second one makes $30,000. The combined $90,000 household salary would qualify this couple for an annual benefit of $5,207.28 according the to the benefits calculator.

If the couple decides to cheat the government and take CERB payment even when they don’t need it. This would affect their benefits for the following year. If we assume the same payment in 2021 as 2020, using the calculator the couple that takes the CERB payment will now make $68,000 and $38,000 respectively. This reduces the annual benefit to $4,295.28.

So for taking money that doesn’t belong to you it will already take away $1,000 next year. This might not seem too bad considering you each person took $8,000 now, but wait there’s more.

Decreased GST Tax Credits

The Government of Canada provides a GST tax credit for those that have lesser incomes. No doubt during this Coronavirus crisis, those that are financially vulnerable are more vulnerable than ever before. However, those that still have jobs and working that might take advantage of CERB to get ahead might end up chopping off the government’s hand.

As the tax credit guide shows even a small gain in family income can have an impact on the GST tax credit. A single individual earning $40,000 may get back $332.45 in tax credit, but once you add the CERB payment of $8,000 that tax credit is eliminated completely. That’s because the $8,000 gets added as earned income. Are we now seeing why cheating the government is bad?

Reduced GIS Payments

The scam against the government isn’t only done by working parents or individuals, but it also applies to seniors as well. Some seniors are already struggling because of high living costs and little savings. As I’ve written before, many seniors are house rich but cash poor or they never understood how much they needed to retire and the CPP just isn’t enough. This might lead to pressure to take the CERB payment as a means of getting by.

Unfortunately for seniors, taking the CERB payment could have negative effects on their benefits. One of these benefits is the Guaranteed Income Supplement. The GIS payment is meant for seniors with low income. It allows a single senior to get top up payments up to $916.38 a month. This extra income is also tested against earned income and it doesn’t take much to start losing that payment. Once a senior makes more than $18,600 this payment goes to zero. Yep it goes to zero.

That means if a senior is making $12,000 on their CPP and then decides to go fishing for the CERB, they might lose their entire GIS payment next year because their earned income would rise to $20,000. Imagine that. Losing your future benefit of over $10,000 by taking money now. Not a smart move.

You Will Owe Taxes With CERB

One thing that we need to understand about the CERB payment is that the income is taxable. Since it gets added to our earned income it will get taxed at our marginal tax rate. Despite the fact that individuals will get the entire $2,000 payment, individuals that file their tax return next year will realize that they might owe taxes to the government. This will come as a shock to many.

First off, it’s important to understand that Canada uses a marginal tax system. This mean the next dollar you earn is potentially taxed at the a higher rate than the previous one. If you were earning an income prior to collecting the CERB payment, there’s no doubt your employer was paying your income taxes for you.

With the CERB benefit, the taxes are not paid for you. For example, if you had already exceeded the personal exemption of $10,949 in British Columbia and then started collecting the CERB payment, the taxes owed per CERB payment of $2,000 would be $401.20. That’s roughly 20% of the payment. Are people saving that $400 dollars of the CERB or are they spending it? Some recipients of CERB are going to be in for a rude awakening come April 2021.

There’s No Free Lunch

The government’s helping hand in offering monthly payments have been a boon for struggling Canadians. But this is no free lunch. Many may think that the CERB benefit is free money, but many will be in for a shock next year when the CERB is added as taxable income.

Trying to cheat the government for money may ultimately become a penalty in the future. Canadians may be required to pay back that money if they do not qualify and worse yet, the income might still be added into the books for 2020 as income making many income tested benefits void in the 2021 year. The selfish acts of today, could come back to haunt tomorrow.

If you are truly struggling to make ends meet, certainly don’t hesitate to take the helping hand. If you do not qualify for the benefit, think twice before applying. The money isn’t free, and though some may treat it as an interest free loan, there may be other consequences that the CRA has yet to announce. As always, you might be able to cheat your boss, or maybe even your spouse, but you can never cheat the CRA.

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  1. Cheryl
    Cheryl August 26, 2020

    If I receive a T5 for dividends for 2020, have not been working so collected CERB,
    was I actually entitled to collect CERB?

  2. […] The $2000 a month payout was so popular that many Canadians took advantage of the $12,000 stipend to boost their savings and save for a rainy day. Many took the money even when they shouldn’t have. They probably landed on Santa’s naughty list, or worse the CRAs. Some recipients actually increased their earnings versus what they might have received working. Though these individuals may be surprised to learn that the CERB payment is a taxable benefit. […]

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