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Taxes

Jamie Golombek: The first instalment is due in a couple of weeks on March 15

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Earlier this month, the Canada Revenue Agency sent out instalment reminders to taxpayers who are required to pay quarterly tax instalments, reminding them of the first and second instalment deadlines for 2021. The first instalment is due in a couple of weeks on March 15, 2021, with the second due on June 15, 2021. According to the CRA, approximately 1.8 million individuals are required to pay income tax by instalments annually.

Under the Income Tax Act, quarterly tax instalments are required for this tax year if your “net tax owing” for 2021 will be more than $3,000 ($1,800 for Quebec tax filers) and was also greater than $3,000 ($1,800 for Quebec) in either 2020 or 2019.

The definition of net tax owing is somewhat complex, but essentially refers to your net federal and provincial taxes, less income tax withheld at source, plus any Canada Pension Plan contributions and Employment Insurance premiums on self-employment earnings (if applicable), as well as adjustments for certain other credits and social benefit repayments.

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There are three options that may be used to determine how much you need to pay each quarter: the no-calculation option, prior-year option and current-year option. Individuals can choose the option that results in the lowest payments.

Under the no-calculation option, the CRA calculated your March 2021 and June 2021 instalments based on 25 per cent of the net tax owing on your 2019 assessed return. The Sept. 15 and Dec. 15, 2021 instalments will then be calculated based on the net tax owing from your soon-to-be-filed 2020 return (due April 30, or June 15 for self-employed and their spouse or partner), less the March and June instalments already paid.

By contrast, the prior-year option bases the calculation solely on last year’s (2020) income. The 2021 instalments are based on your 2020 tax owing and you simply need to pay a quarter of the amount on each instalment date. This option is best if your 2021 income, deductions and credits will be similar to 2020, but significantly different than 2019, perhaps because you sold a vacation property back in 2019 and reported a large capital gain (which wasn’t sheltered by the principal residence exemption.)

Finally, under the current-year method, you simply base your 2021 instalments on the amount of estimated tax you think you will owe for this year and you pay one quarter of the estimated amount on each instalment date. This option is useful if your 2021 income will be significantly less than 2020. For example, if you are self-employed and your income has dropped significantly due to COVID, you can make 2021 instalments based on your estimated lower income this year.

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Provided you make the required instalments and they are remitted on time, no interest or penalties will be assessed.

Thinking of ignoring the instalment reminder you just received? The government could charge you instalment interest and, in some cases, an instalment penalty. Instalment interest is compounded daily at the prescribed interest rate, which is currently five per cent for overdue taxes. The instalment interest clock starts ticking from the day your instalment was due until the date it is paid (or, if unpaid, until April 30, 2022.) Fortunately, the government chooses the instalment option that results in the least amount of interest.

An instalment penalty may also apply if the instalment interest is more than $1,000. The penalty is calculated by subtracting from the instalment interest the greater of either $1,000 or 25 per cent of the instalment interest calculated if no instalment payments had been made for the year. Half of this difference is the amount of the penalty.

A tax case decided last month demonstrates what can happen if you ignore the instalment reminder from the CRA. The case came before a three judge panel of the Federal Court of Appeal, which heard the case by online video conference. The taxpayer was appealing a prior judgment of the Tax Court of Canada which had dismissed his appeal concerning $599.24 of arrears interest the taxpayer was charged for the failure to make tax instalment payments for the 2016 tax year.

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The taxpayer worked in Egypt for a non-Canadian petroleum company but was still considered a resident of Canada for tax purposes for the year 2016. He chose not make any Canadian tax instalment payments for the year.

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The taxpayer argued that he should not be required to make Canadian instalment payments because source deductions were taken by his employer on account of his tax liability in Egypt. The taxpayer wanted the court to reimburse him for the arrears interest charged.

The taxpayer attempted to seek relief using an article of the Canada-Egypt tax treaty, which states that, “The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.”

The taxpayer interpreted this provision to mean that the CRA was required to take into account source deductions taken with respect to tax in Egypt in calculating the instalment payments that were then required to be paid in Canada.

The appellate court disagreed and found that the treaty provision being invoked did not apply to the taxpayer’s case. It ruled that instalments were, indeed required, and, as the lower Tax Court found, any source deductions taken for tax in Egypt do not affect the instalments that were required under the Canadian Income Tax Act. The court therefore upheld the arrears interest charged for failing to make the required tax instalments when due.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Personal finance expert Rubina Ahmed-Haq speaks about what’s different this tax year

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Personal finance expert Rubina Ahmed-Haq speaks with Financial Post’s Larysa Harapyn about what’s different this tax year.

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Jamie Golombek: Here’s how making an RRSP contribution could save you big bucks for 2020 and beyond

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The March 1 deadline for registered retirement savings plan (RRSP) contributions for the 2020 tax year is less than 10 days away, and, even if you’ve never contributed before, this is the year you may want to consider making one to claim a deduction on your tax return and save some tax on any COVID-19-related benefits.

Let’s review the basic rules and then look at a couple of examples of how making an RRSP contribution could save you big bucks for 2020 and beyond.

To claim a deduction on your 2020 return, you need to contribute by March 1, 2021, and the maximum amount you can contribute can be found at the very bottom of your “RRSP deduction limit statement” on your 2019 Notice of Assessment. It can also be looked up online using the Canada Revenue Agency’s My Account portal.

Your deduction limit for 2020 was based on 18 per cent of your 2019 earned income (up to a dollar limit of $27,230), less any pension adjustment from your employer, plus any unused deduction limit from previous years. Earned income includes employment, self-employment and rental income (as well as a few other things.)

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It’s important to note, however, that an RRSP contribution can be deducted against any source of income, not just earned income. In other words, contributing to an RRSP can help you save tax on your employment income as well as your investment income, taxable capital gains and even government COVID-19 related benefits that are taxable.

If you’re one of the millions of Canadians who received COVID-19-related government benefits in 2020, you need to report most of these amounts on your 2020 return. Reportable amounts include: the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB), all of which are considered taxable income and should be reported on Line 13000 – Other income.

Depending on your total 2020 income, you may owe some tax on your COVID-19 benefits. This is particularly true if you received CERB or CESB payments, since no tax was withheld when they were issued, so there may be a balance owing when you file. If you received CRB, CRSB or CRCB payments, 10-per-cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020.

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In addition, if your 2020 net income was more than $38,000, you may have to repay 50 per cent of your CRB payments for every dollar in net income you earned above $38,000, to a maximum of CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not CRB).

By making an RRSP contribution by the deadline, you may be able to reduce or eliminate tax owing on any COVID-19 benefits as well as possibly keep more of the income-tested CRB.

Let’s walk through two examples to illustrate how two taxpayers could benefit from making an RRSP contribution and claiming a deduction on their 2020 returns. (For simplicity, CPP/QPP and EI contributions and credits/deductions have been ignored to focus on the income taxes owing.)

Example 1

Tom, an Ontario resident, earned $60,000 annually prior to COVID-19, but lost his job on March 15, 2020. Prior to this, he earned $12,500 in employment income for the first three months of 2020, for which his employer withheld $2,600 in federal and provincial tax. He applied for CERB, and received the full $14,000 in benefits with no taxes withheld. He subsequently applied for CRB, which replaced CERB, and received a total of $6,000 for the last three months of 2020, on which 10 per cent, or $600, was withheld.

Tom’s total income for 2020 was $32,500. His tax liability, after taking into account the enhanced basic personal amount, Canada employment amount and Climate Action Incentive, is $3,419. Since the taxes withheld at source via his employer and the government were only $3,200, Tom would need to pay additional tax of $219.

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If Tom contributes about $730 to his RRSP, he could reduce his tax bill for 2020 to the $3,200 that was withheld so he wouldn’t need to pay any further tax. Of course, whether it makes sense to do so will depend on the rate of return he can achieve on his tax-deferred savings, his anticipated tax rate on withdrawal, and how many years he can leave it in there before withdrawing it in retirement.

Example 2

Jerry, an Alberta resident, was self-employed for much of 2020, earning $50,000 before shutting down his business in the fall and collecting $6,000 in CRB (less 10-per-cent withholding). If he doesn’t make an RRSP contribution, he will be forced to repay the entire $6,000 in CRB since his net income (excluding CRB) for 2020 was $50,000 and he must repay 50 cents of CRB for each dollar of income above $38,000, for a repayment of $6,000 (i.e., ($50,000 – $38,000) x 50 per cent).

Jerry’s taxable income would be $50,000, since he’s not taxed on amounts he didn’t get to keep, and the net federal and Alberta tax liability (assuming just the basic personal amount and Climate Action Incentive) is $8,170. After taking into account the $600 withheld on CRB, Jerry would need to pay additional tax of $7,570, as well as repay $6,000 in CRB received for a total amount owing of $13,570. (For simplicity, we have ignored any tax instalment payments made in 2020, which affect cash flow and not the tax ultimately owing.)

But if Jerry can reduce his income to $38,000 by making a tax-deductible RRSP contribution of $12,000, perhaps by borrowing the funds via an RRSP loan, he would cut his tax owning and get to keep his full $6,000 in CRB (less the associated tax). His tax liability would drop by $1,581, for an effective marginal effective tax rate savings of 63 per cent ($7,581/$12,000).

Even if Jerry withdraws funds from his RRSP well before retirement, provided his marginal effective tax rate in the year of withdrawal was lower than 63 per cent, contributing to an RRSP will have been a smart tax decision. And, to the extent the funds can be left inside the RRSP, Jerry may also be able to enjoy decades of effectively tax-free investment growth to fund his retirement.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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If you have already repaid, the government will be sending it back to you

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Sometimes, one word can make all the difference.

This week, the federal government officially backtracked on its previous position when it announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their “gross” income but not their “net” income will not be required to repay the benefit, provided they also met the other eligibility requirements.

No need to repay CERB

Readers will recall that back in December 2020, the Canada Revenue Agency sent out 441,000 “educational letters” warning individuals that they may not be eligible for the CERB. The letters were sent out to individuals for whom the CRA said it 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.”

The issue of whether the $5,000 income threshold for the self-employed means “gross” income (i.e. revenues) or “net” income (i.e. net of expenses) has been discussed extensively. It has always been the CRA’s view that the $5,000 refers to net income and thus if you had gross income of $5,000 in the required time period, but netted under $5,000 after deducting business expenses, then you didn’t qualify for the CERB and, until now, the CRA’s position was that you needed to return it.

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This week, the government reversed that position and said that self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay it, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria. The same approach will apply whether the individual applied through the CRA or Service Canada.

What if you already voluntarily repaid the CERB based on the government’s previous instructions to do so? Well, you’re in luck as the government will be sending you back any amounts you repaid, with additional details on how, and when, to be announced in the coming weeks.

But, the question on many other self-employed Canadians’ minds this week is: what about those individuals who didn’t apply for the CERB because their “net” self-employment income was under $5,000? It appears that they’re out of luck.

Interest relief

For some Canadians, the 2020 tax year may be the first time in their lives that they won’t be getting a tax refund and may actually end up owing some tax. That’s because, just like Employment Insurance (EI) benefits, the COVID-19 emergency and recovery benefits, including similar provincial benefits, are taxable. And, although tax was withheld at source at a rate of 10 per cent of the benefit amount for the three Canada Recovery Benefits (the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit), no taxes at all were withheld from the CERB or the Canada Emergency Student Benefit. In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of the CRB payments for every dollar in net income you earned above $38,000 (to a maximum of the CRB received in the year.) Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

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To illustrate, assume Mike, an Ontario resident, was furloughed from his company in mid-2020. His pre-COVID income was $18,000 from which his employer withheld $2,200 in federal and provincial tax. He applied and received $14,000 of CERB, for which no tax was withheld. The result is that Mike would owe about $850 in taxes when he files his 2020 return, after taking into account non-refundable credits for the basic personal amount (federally $13,229), the Canada employment amount ($1,245) and the Climate Action Incentive ($300). (CPP and EI have been ignored for this example).

Now take Heather, whose 2020 income was $44,000 prior to losing her job due to COVID layoffs. She applied and received six periods of CRB for the final three months of 2020, for a total of $6,000 (with $600 withheld.) But, when she files her return, she will be forced to repay $3,000 of the CRB since her total income for 2020 was over $38,000, and the CRB is reduced by 50 per cent for each dollar of income above this amount (i.e. ($44,000 – $38,000) X 50 per cent).

But, what if Mike and Heather don’t have the funds to repay the government by the April 30, 2021 payment deadline?

To help taxpayers like Heather and Mike, the government also announced this week that it will be providing targeted interest relief to Canadians who received COVID-related income support benefits. Once you’ve filed your 2020 income tax return, if you qualify, you won’t be charged interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022, giving you more time and flexibility to pay if you have an amount owing.

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To qualify for this targeted interest relief, you must have had a total taxable income of $75,000 or less in 2020 and have received income support in 2020 through one or more of the COVID-19 measures: the CERB, CESB, CRB, CRCB, CRSB, Employment Insurance benefits or similar provincial emergency benefits.

If you fall into this category, you don’t need to do a thing other than file your return, as the CRA will automatically apply the interest relief measure for taxpayers who meet these criteria. In addition, the government announced that any CRA-administered credits and benefits normally paid monthly or quarterly, such as the Canada Child Benefit and the goods and services tax/harmonized sales tax credit, will not be applied to reduce any taxes owing for the 2020 tax year.

The government estimated that the interest relief measure will provide relief to approximately 4.5 million low- and middle-income Canadians.

No change to filing deadline

Finally, the government confirmed this week that it has not extended the tax filing deadline, meaning that you should file your 2020 return by the normal April 30, 2021 deadline or risk a five per cent late-filing penalty on any amount owing. Self-employed Canadians (and their spouse or partner) should file by June 15, 2021.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Depending on your total 2020 income, you may owe some tax on your COVID benefits. This is particularly true if you received the CERB or CESB, since no tax was withheld when payments were issued, so there may be a balance owing when you file.

If you received the CRB, CRSB, or CRCB, 10 per cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020. You can find the income tax deducted at source in Box 022 of your T4A slip, which should be included on line 43700 – Total income tax deducted.

In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of CRB payments for every dollar in net income you earned above $38,000, to a maximum of the CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

Jennifer Gorman, Social Care Manager for TurboTax Canada, says that if this is your first year facing a balance owing, you want to make sure you file by the deadline, even if you don’t have the cash to pay. “There are two separate penalties. You have interest that accrues if you don’t pay your balance, but there’s also a late-filing penalty,” explains Gorman. The late-filing penalty is five per cent of your balance owing, plus one per cent of the balance owing for each full month your return is late, to a maximum of 12 months.

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This simple example may, at first glance, seem counter-intuitive. After all, with the RRSP Shira is paying tax on the dividend income at her full, ordinary Alberta tax rate of 30 per cent and if she went the non-registered route, her dividend income is only taxed at a 10 per cent marginal rate on eligible dividends. But, of course, her “net” investment in a non-registered investment is lower, and thus her dividend income is lower, because she had to pay 30 per cent tax on her employment income before she could invest.

Another way to look at is that by contributing to an RRSP, you are effectively getting a 100 per cent tax-free rate of return on your net after-tax RRSP contribution. In this case, Shira’s net (after-tax) RRSP contribution was $2,100 (i.e. $3,000 X (1 – .30)), which at a five per cent return, yields $105 of effectively tax-free dividends.

Finally, I would argue that even if your tax rate is higher in the year of withdrawal (or ultimately, in the year of death) than it was in the year of contribution, you could still be better off with an RRSP than non-registered investments because the benefits of effectively tax-free compounding might actually outweigh the additional tax cost of a higher withdrawal tax rate. This, of course, will depend on your expected rate of return, the number of years of compounding available, as well as the types of investment income you might otherwise earn by saving an equivalent amount in a non-registered account.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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What is still unclear from this research, however, is whether by excluding capital gains from income, we are excluding individuals whose primary source of income annually is significant capital gains, who arguably are the so-called “rich,” as opposed to the small business owner (or real estate owner) who sold their business (property) and reported a one-time, significant capital gain that moved them into a higher tax bracket for that single year alone.

Canada vs. the world

The Fraser Institute report also compared Canada’s capital gains tax rate to that of other countries and found that Canada’s top capital gains tax rate (27 per cent) is currently above the average for countries in the Organization of Economic Co-operation and Development (OECD), and substantially above the rate in Britain (20 per cent) and the United States (20 per cent).

That being said, with the inauguration of U.S. President Joe Biden this week, and Democratic control of both the House and Senate now established, it’s quite possible that Biden’s pre-election platform to effectively increase the tax on capital gains by treating them as ordinary income for taxpayers earning more than US$1 million could actually be passed. Combined with his plan to raise the top rate on ordinary income back up to 39.6 per cent (from 37 per cent), it would nearly double the current long-term capital gains tax rate.

As for Canada, “raising the capital gains tax rate would weaken Canada’s ability to attract investment and adversely affect our economic recovery,” concluded Clemens. “Canadians across the income spectrum — and the economy as a whole — would benefit from a lower, not higher, capital gains tax rate.”

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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At this point, the taxpayer retained a tax lawyer to deal with the CRA, who in February 2016 requested that the CRA reconsider its decision to refuse administrative relief. The CRA again denied his request but suggested that the taxpayer apply for a remission order. So, in January 2017, the taxpayer’s lawyer did just that, requesting relief of taxes, interest and penalties related to the 2005 and 2006 tax years.

In his request, the taxpayer argued that the reassessments were inaccurate because, due to circumstances beyond his control, the taxpayer had not been able to respond effectively to the concerns raised by the CRA’s auditor or to contest the reassessed amounts. Specifically, the taxpayer had relied on tax professionals to deal with the matter for him because he was unable to do so at the time, but the first accountant was unable to respond to the audit and the second accountant inexplicably failed to pursue the matter. As he explained, “If he had been able to respond effectively, he would have been able to show that the income and expenses he reported were as filed. He remains able to show that the income and expenses he reported were as filed and that the Reassessments were incorrect.”

In 2019, after reviewing the background to the matter and examining the merits of the request, the CRA concluded that remission was “not recommended as none of the criteria apply and there are no other circumstances which would support relief.” The taxpayer appealed the CRA’s decision to the federal court which heard the case by videoconference in August 2020, with the judge in Ottawa and the taxpayer in Toronto.

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Her initial request was denied and her “reward” for coming forward was a CRA assessment totalling $27,641 in tax, penalties and interest for her excess and non-resident TFSA contributions, effectively wiping out her retirement savings. The taxpayer then requested a second, independent review by the CRA of her request for a waiver, which was also denied on the basis that she “continued to make excess and non-resident contributions to her TFSA after she was notified that she had over-contributed in 2009.”

As the harshly worded CRA letter stated, “(T)here are no circumstances that would support the cancellation of the tax on excess and non-resident TFSA contributions. It is the individual’s responsibility to educate themselves about the TFSA rules after being notified.”

The taxpayer appealed the CRA’s second-level decision to the Federal Court and the case was heard in August, via teleconference, by a judge sitting in Toronto, and the taxpayer being represented by Dentons Canada LLP in Edmonton, where she used to live.

In court, the taxpayer argued that the CRA’s decision was “unreasonable” because she was a Canadian resident in 2009, and she, therefore, did not “repeat the same mistake” when she contributed to her TFSA as a non-resident after 2009. Therefore, she believed that the CRA’s decision was not justified by its reasons.

Fortunately for the taxpayer, the judge agreed. Discretionary decisions by the CRA refusing to waive taxes and penalties are reviewed on the “reasonableness standard.” In addition, a reviewing court must determine whether the decision bears the “hallmarks of reasonableness: justification, transparency and intelligibility.”

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The original CEBA loan was for up to $40,000 but, as of Dec. 4, 2020, an additional $20,000 CEBA loan is available to qualified applicants, for a total of up to $60,000. Those who previously received a $40,000 loan may apply for an additional $20,000. New applicants may apply for a $60,000 loan and the application deadline for new (or additional) CEBA loans is March 31, 2021. Up to $20,000 of a $60,000 loan can be forgiven if the balance is repaid by Dec. 31, 2022. For original loans of $40,000, 25 per cent of the amount (up to $10,000) may be forgiven.

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In a recently published technical interpretation, the CRA has confirmed the amount that is forgivable is taxable in the year that the loan is received. For instance, if a business receives a $40,000 CEBA loan in 2020, $10,000 must be included in income in 2020. Alternatively, a business could elect to not include the $10,000 in income, and instead to reduce $10,000 of non-deferable operational expenses in respect of which the CEBA loan was received. If a CEBA loan balance is not repaid by Dec. 31, 2022, so that the forgivable portion is not forgiven, an offsetting deduction is available in the tax year in which the amount is repaid.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

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