Introduction
There are instances when you have to repay the COVID‑19 benefits you received (i.e., CERB, CRB, CESB, etc.). You are taxed on these benefits in the year you receive them. You can deduct repayments. Before Budget 2021, you were only able to deduct repayments in the year you repay them. This resulted in people having to include the benefits in income in 2020, and not being able to deduct repayments until 2021.
Budget 2021 proposes to allow individuals to deduct the repayment in the year that the taxpayer received the benefit rather than the year that it was repaid In the case study below, we highlight a scenario where it may make sense to deduct repayments in 2021.
Case Study
Even though we only have less than one week remaining before the personal tax deadline of April 30th, we are still receiving documentation to get personal taxes prepared. A client emailed us a pdf of his source documents and included a T4A issued from the CRA for CERB benefits.
He calls me up – “Hey, I repaid the CERB in early January, but for some reason, they didn’t reflect the repayment in the T4A. Am I paying tax on this even though I repaid this? I checked out your budget update and your blogs, and I could have sworn that the Federal Budget allows me to deduct the CERB repayment for my 2020 taxes even though I repaid it in 2021.”
Like any other accountant, I respond: “Yes, you are correct; there is now a clear option to deduct the repayment for your 2020 income even though you repaid it in 2021.”
“Perfect, can you please make the appropriate adjustments? I don’t want to pay tax on this 2020 CERB benefit if I’ve already repaid it.”
I respond to him: “That may not be a good idea in your case.”
So I begin to dive into our logic. In 2020, like a lot of CERB recipients, this client had very little personal income. He had received $10,000 of CERB but also had $20,000 of additional income, but we knew this was a steep drop compared to what he normally makes. In 2021 we knew that he was going to make around $100,000.
I present him with two options:
Option 1: Deduct in repayment in 2020
| Gross income | $30,000 |
| Less: Deduction for CERB | $10,000 |
| Taxable income for 2020 | $20,000 |
Option 2: Deduct repayment in 2021
| Gross income | $100,000 |
| Less: Deduction for CERB | $10,000 |
| Taxable income for 2021 | $90,000 |
At this point, he says, “oh…ok, I get it.”
The benefit of the deduction is much more useful in 2021 than in 2020. In 2020, he is at an extremely low tax bracket. Any deduction wouldn’t be that useful, so it may be better to save that deduction for when his income his high.
Although it would be much more convenient for him and us to simply take the deduction and offset his 2020 T4A, he is in a much better tax position by waiting until next year to claim that deduction.
So the conclusion is: there isn’t a correlation that requires you to deduct your COVID benefit repayment directly against the COVID benefit you receive. You can deduct the repayment against other sources of income to potentially arrive at a much better tax position!
