September 24, 2020
One of my favorite stand-up comedians explains that if he were to come home and his friends jumped out from behind his furniture when he opens his front door, they don’t need to yell at him how to feel.
Surprises are often associated with good things like surprise parties, but not all surprises are good. “Tax surprises” are, for many of us, far from enjoyable. So, I’m going to list the top tax surprises for you to watch out and prepare for as we get closer to the end of 2020. This edition will focus on my top two COVID relief program surprises. In the next edition, we will discuss some other possible pandemic related tax surprises.
1. COVID relief programs for individuals are generally taxable benefits.
It’s hard to keep up with all the programs made available for individuals for COVID relief. There are a lot. Not to mention programs evolve, even change completely, with almost identical acronyms to try and adapt to an unprecedented and fluid situation. There was the Canada Emergency Response Benefit (CERB) then the Employment insurance (EI) COVID program. In September, we were introduced to programs like the Canada Recovery Benefit (CRB), Canada Recovery Caregiving Benefit (CRCB) and the Canada Recovery Sickness Benefit (CRSB). All these programs have one thing in common. They are taxable. If you have or are receiving benefits from these or similar programs you will likely have to include them in your income when you file your taxes for the year (there are very few exceptions). The newest programs, including the CRB, CRCB and CRSB, will have 10% taxes withheld from the benefit, called withheld at source, like how a paycheque has taxes that are withheld. The amount withheld, though, may not be enough to cover your entire tax bill on that income depending on your total taxable income from all sources.
So, you may be used to getting a refund or owing very little extra taxes when you have filed your tax return in the past. This tax year though, things could end up being quite different when you file. Especially tricky if you’re self-employed and estimating your taxes was difficult to begin with. You may owe more than you expected if by the time you file you’ve forgotten about money received from the programs.
2. COVID relief programs for Corporations – CRA Requests for Information or Audits
One of the most discussed support programs for businesses has been the Canada Emergency Wage Subsidy (CEWS). CEWS had a significant overhaul effective July 27, 2020. This was to try and better adapt to the needs of businesses and place an appropriate amount of support where it’s viewed by the government as most needed. The thing is when programs try to be more precise, they become more complex. With complexity comes the risk of error, this risk is a two-way street. There is the risk you get less than what your business should get, or a risk that you claimed more than you should have.
Additionally, higher risk of error tends to mean higher probability of CRA audits or “information requests”. There's a lot of money that is being distributed. The cynical side of me believes we should expect an increase in audit activity. The information requests that are distributed to business owners are already very exhaustive. To avoid any further surprises, ensure your business has been keeping good documentation. Documents that support your CEWS calculations include monthly revenues and elections. Also, detailed weekly employee payroll records and accounting records of monthly revenues for all relevant current and past periods is important. It would be wise to have your accountant very involved in helping your business navigate the various corporate programs. Don't forget to bring them in for any correspondence your business has with the CRA to help ensure everything goes as smoothly as possible. You want to avoid any surprise of having to repay benefits you may have needed to spend but weren’t entitled to because of an unforeseen error.
The next edition will highlight my other top tax surprises for 2020. While they won’t be specific to Government Programs, they can certainly be considered COVID related.
This writing is for general information purposes only and is not intended to provide legal, accounting, tax or professional advice. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.
Jared Burns CPA, CA is an estate and tax planning manager with Louisbourg Investments. Comments or questions may be submitted to firstname.lastname@example.org.