tax calculator with red button

As we enter the fourth eligibility period for the Canada Emergency Response Benefit (CERB), which begins June 7, 2020 and runs to July 4, clients who have been out of work for reasons related to the Covid-19 pandemic could soon have collected the maximum CERB entitlement of $8,000. CERB, which pays $2,000 for each 4-week period to qualified applicants, has been a critical source of cashflow; however, you may wish to remind clients that the monthly payments are taxable, and they may wish to plan ahead and set aside some funds, where feasible, for any tax owing next spring.

As the government states on its website, CERB is taxable, and “you will be expected to report it as income when you file your income tax for the 2020 tax year.” That being said, the Canada Revenue Agency is not deducting any income tax at source from the monthly $2,000 CERB payments, presumably to allow recipients to have full access to the cash when it is most needed.

This differs from many other common sources of income, such as employment income or RRSP withdrawals, where tax is deducted automatically at source. The result of this is that Canadians could be left owing hundreds (or even thousands) of dollars of taxes on their CERB payments come next April. How much tax someone may owe, however, is a tricky question.

CERB payments are taxable as ordinary income, just like (self-)employment income or interest income from a GIC. The amount of tax owing, therefore, depends on the recipient’s total income for 2020 and their marginal tax rate for the year.

The marginal tax rate is the amount of tax payable on an additional dollar of income. It’s based on the rates of tax applied to a given level of income, both federally and provincially. Individuals pay taxes at graduated rates, meaning that the tax gets progressively higher as taxable income increases.

Federally, there are five income tax brackets in 2020: zero to $48,535 of income (15%); above $48,535 to $97,069 (20.5%); above $97,069 to $150,473 (26%); above $150,473 to $214,368 (29%); and anything above that is taxed at 33%. Each province and territory also has its own set of tax brackets, meaning that the combined federal/provincial or territorial rate could range from a low of 19% (in Nunavut) to a high of 54% (in Nova Scotia).

To properly determine the 2020 tax owing on CERB payments next spring, we would need to know the client’s total 2020 income, which may be difficult to accurately gauge during this time of income uncertainty. A starting point would be to add their pre-pandemic income to the estimated total CERB payments (up to $8,000). The client can then use an online tax calculator to get their marginal tax rate, which can be used to estimate the taxes owing on CERB and, if practicable, set aside those funds to pay 2020 taxes next April.