This week’s federal budget provided some relief to taxpayers who were required to pay back certain Covid benefits they received by allowing some flexibility as to when the repayments can be deducted.
You may recall that in late 2020, the Canada Revenue Agency (CRA) sent out 441,000 “educational letters” warning individuals that they may not be eligible for the Canada Emergency Response Benefit (CERB). The letters were sent out to individuals when the CRA 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.”
Individuals who needed to repay the CERB were encouraged to return it in 2020 (vs. in 2021) since the CERB amounts are taxable and would be reported on the T4A tax information slip for inclusion in income in the year they were received.
The government previously indicated that if the CERB wasn’t returned until 2021, CERB recipients would have been required to pay tax on the full CERB amount received in 2020, and then they could claim a deduction for the CERB tax payment on their 2021 tax return. For many, this is simply a cash flow or timing difference, but for others who may not have enough income in 2021 to benefit from the deduction, this could have resulted in effectively paying tax on CERB funds they 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.
Fortunately, the government realized that this harsh treatment would be unfair to many Canadians. As a result, this week’s federal budget proposed changes to the tax rules to allow individuals the option of claiming a deduction for repaid Covid benefits in computing their income for the year in which the benefit amount was received, rather than the year in which the repayment was actually made. This option is available for benefit amounts repaid at any time before 2023. For these purposes, Covid benefits would include: the CERB, Employment Insurance emergency response benefits, Canada Emergency Student Benefits, the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit.
Note that taxpayers can only deduct benefit amounts once they have been repaid. If a recipient has made a repayment but has already filed their return for the year in which the benefit was received, they can request an adjustment to the return for that year.