What CERB recipients can expect at tax time

Fast Facts:

• The Canada Emergency Response Benefit (CERB) more than offset lost income for the poorest 10% of families, but there will still be 422,000 CERB recipients below the poverty line in 2020 (Market Basket Measure)—208,000 of them because they owe taxes on the CERB.
• Without urgently needed changes, those living below the poverty line will owe $232 million in income taxes.
• The poorest 20%-39% of Canadians maintained their income levels while on the CERB on average even after taxes are taken into consideration.
• The top 60% of Canadians lost more income than what the CERB offset.
• Canadians who drew upon the CERB owe $14.4 billion in taxes: $8.7 billion to the federal government and $5.7 billion to provincial governments.
• The federal government should implement a tax deduction for low-income CERB recipients to offset taxes owed on the CERB and alleviate poverty.

The start of the pandemic resulted in a historic replacement of Employment Insurance (EI) with the Canada Emergency Response Benefit (CERB).

Instead of a system meant to replace 55% of previous earnings, the CERB paid a flat rate of $500 a week, which, for most Canadians, was higher than what EI’s formula would have produced.

The CERB eligibility requirement of $5,000 in earned income in the previous year was much lower than what was required from EI.

Self-employed Canadians were eligible for the CERB, as were those who made less than $1,000 a month; under EI they were not eligible for such income support.

Essentially, the CERB represented the first major change in income security for the jobless since the major cuts to EI, formally known as Unemployment Insurance, of the 1990s.

What support did the CERB provide by income level and how much will people owe on this year’s tax deadline of April 30th?

Recent additions to Statistics Canada’s tax modelling software, SPSD/M, allow for detailed simulations of the impact that the CERB had across the income spectrum. As a result, we can determine how much the CERB offset pandemic-related employment income losses for families and individuals. It is possible to simulate how Canadians would have done in 2020 had there not been a pandemic or the CERB compared to how they did after the pandemic walloped the labour market but they had access to the CERB.

The income tax ramifications of the CERB

Under a progressive income tax system, Canadians who earn more income pay higher rates of taxation. That means those with higher incomes at year's end will pay more of their CERB income back in taxes. For individuals in the richest 10%, those who received the CERB got, on average, $6,700 and will owe $2,400 in taxes—a tax rate of 36%. It also means those with lower incomes will pay fewer taxes. For instance, Canadians in the three lowest income deciles will pay less than a 10% tax rate, but many will still owe some of their CERB income in taxes.

Income taxes owed on the CERB will total $14.4 billion and will be paid to both the federal and provincial governments. The federal government will receive $8.7 billion of CERB-related taxes, roughly 10% of the tab for the CERB program. Provincial governments will receive $5.7 billion of CERB-related taxes. They didn’t pay for CERB in the first place, so this will be an important source of income as other sources of tax revenue dried up during the pandemic. For many, the CERB effectively replaced provincially-paid social assistance in several provinces, saving provinces additional money.

It’s worth noting that the CERB tax rates and amounts that are owed by lower-income families and individuals are low, but they aren’t zero. For many, it’s unlikely that they have extra money saved for the purpose of paying taxes on CERB. With incomes that low, the CERB would have likely been spent quickly on necessities in the spring and summer of 2020.

The federal government has already taken some steps not to overburden low-income Canadians by not clawing back benefits or charging interest in the 2020 tax year for people making under $75,000. There will still be 422,000 people who, despite having received the CERB, will still be living below the Market Basket Measure poverty line. Among that group, 208,100 people would be lifted out of poverty if they didn’t have to pay taxes on the CERB income that they received during the pandemic. Put another way, CERB-related taxes, owed well after they received the benefit, will be the reason why they’ll remain below the poverty line. Those CERB recipients who are living below the poverty line will owe $232 million in taxes on the CERB by April 30, 2020.

In addition to the fact that almost everyone who received the CERB will owe tax on it, there are plenty of low-income Canadians who received the CERB but were deemed ineligible after the fact. This was highlighted recently when we learned that some self-employed people used gross, not net income, in order to initially qualify for the CERB. In that specific case, amnesty was granted—those recipients won’t have to repay the CERB.

However, amnesty for that particular group belies a bigger point: Canadians were encouraged to apply for CERB under unclear rules in the middle of a global pandemic. Many who applied and received the CERB were low-income and after the fact, may be deemed to have not been eligible. Over 440,000 CRA letters have been sent out seeking more information and threatening possible CERB repayment. For those below the poverty line and without fraudulent intent, amnesty should be broadly available.

Given the necessarily rapid implementation of the CERB and the fact that taxes weren’t withheld at source, it’s worth considering a deduction from total income that would offset taxes owed on the CERB. A deduction would be preferable to a non-refundable tax credit, since a tax credit would only apply to federal, not provincial, income taxes owed. This could be targeted to low- income Canadians who received the CERB.

It would relieve the stress for low-income Canadians who will otherwise need to come up with a big tax payment in April—potentially an impossible task in the middle of a pandemic. Providing such a deduction would reduce the taxes owed from $14.4 billion to $14 billion—a relatively small amount in the grand scheme of the program.

How the CERB impacted Canadian’s income during the pandemic

For families and unattached individuals in the lowest decile of pre-pandemic income (the poorest 10%)—those who were making under $21,000 (pre-tax) a year before the pandemic—the CERB more than offset their drop in income due to COVID-19. For those lowest-income families and singles, there are three reasons they experienced net gains, despite the pandemic:

1. They made under $1,000 a month, so they could work and still be eligible for the CERB;

2. They would have been unemployed even without the pandemic, but the CERB is more generous than EI; or

3. They received more on the CERB than they did working, particularly for those working part-time.

For families and singles in the second and third deciles who were impacted by employment loss—those who were making $21,000-$39,000 (pre-tax pre-pandemic) a year, the CERB basically matched the loss in earnings, maintaining their level of income.

For higher-income families, the CERB helped, but it wasn’t enough to stop their incomes from falling due to job loss. Higher-income households experienced larger net income losses since the CERB replaced only $500 a week, whereas job loss for higher-income earners would mean a higher loss in income.

Of course, without the CERB, families across the income spectrum would have been much worse off.

As a result of the CERB, during the worst labour market downturn in 90 years, the lowest-income Canadians received support that may have reduced, instead of increased, their poverty rates.

Statistics Canada recently reported net gains in income, on average, across all income categories. However, this included all COVID-19 supports, not just the CERB. The CERB wasn’t the only federal or provincial emergency transfer in 2020. Outside of the CERB, all other federal and many provincial measures were unrelated to the decline in employment earnings. New supports for seniors, the GST top up, additional child benefit payments, and so on, didn’t require job loss to access them.

Also, compared to the other federal supports, the CERB and the Canada Emergency Student Benefit (CESB) were the only ones where taxes would be due at tax time (as opposed to being non-taxable or having taxes withheld at source). If we look at the distribution of the CERB income and taxes owed by individual income deciles, we can see that Canadians with the lowest pre-pandemic incomes received the most income through the CERB—$11,700, on average, out of a maximum possible $14,000 in CERB payments. Canadians with lower incomes received more, on average, on the CERB because they endured longer periods of underemployment or unemployment than did higher-income Canadians.

Those making more pre-pandemic received less, on average, from the CERB. For instance, The top half of earners in Canada received roughly $7,000 a recipient from CERB, or about half of the maximum possible CERB amount of $14,000.

Methodology notes:

This analysis is based on Statistics Canada's Social Policy Simulation Database and Model 28.0. The assumptions and calculations underlying the simulation were prepared by David Macdonald and the responsibility for the use and interpretation of these data is entirely that of the authors.

The author used SPSDM 28.0, COVID v3 and glassbox modifications. All simulations are from 2020. Income deciles were constructed based on simulated incomes in 2020, pre-pandemic and without accounting for COVID-19 government supports.

This analysis only evaluates the CERB; it doesn’t include the impact of other government supports, like the GST or CCB top ups. It also doesn’t evaluate the impact of the CERB replacements: the Canada Recovery Benefit (CRB) and enhanced EI.

“Families” in this analysis refers to census families, which are any grouping of parents and children related by blood or marriage living at a single address irrespective of age. This also includes census families of one person, otherwise known as an unattached individual.

Since this was a simulation of the CERB to determine other characteristics of recipients, it differs slightly from the actual CERB amounts. We know from ESDC statistics that 8.9 million people received the CERB in 2020 and the program paid out $74.08 billion in benefits. This simulation estimated that 9.2 million people received the CERB, amounting to a $72.4 billion paid out. Therefore, the differences in the simulations amounted to 3.4% on persons receiving it and 2.3% on the total program cost.