A Guide to CERB Repayments and Tax Debt

You may be one of the many Canadians who signed up for CERB at the height of the pandemic, only to receive a notice saying you need to repay the benefits you received.

On top of that, you may already be dealing with financial stress as rising inflation eats into your personal savings. Don’t worry - many Canadians are in the same position and there are solutions that can help you manage your repayments.

We’re here to answer your questions about CERB repayment and what you should do next if you can’t pay back your CERB debt or any other tax debt immediately.

How do I pay back my CERB benefits?

Why do I owe on my income tax return?

What are my options to deal with income tax debt?

How do I know which option to consider?

What can CRA do to get what they’re owed?

How do I pay back my CERB benefits?

The government introduced CERB payments during the COVID-19 pandemic to provide $2,000 for each eligible four-week period to Canadians who were unable to work during lockdown.

The program was rolled out quickly to respond to the urgent situation. Many people signed up without understanding if they met the eligibility criteria and collected payments they were not eligible to receive. Some people also received multiple payments by mistake.

If you are one of those many Canadians, the government may now be requiring that you repay the full $2,000 for each four-week period that you were not eligible to receive it.

You can pay back your CERB overpayments in full or over a period of time. The Canada Revenue Agency (CRA) does not charge interest on COVID-19 benefit debts and can help you arrange a repayment plan. The repayments can be made to the CRA online, by mail, or in person.

If you are struggling to pay back your CERB benefits, don’t hesitate to reach out for help. MNP Licensed Insolvency Trustees can help you review all your options to choose the solution that works best to help you manage your CERB repayments and achieve a debt-free future.

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Why do I owe on my income tax return?

Most of us are accustomed to seeing income tax payments on our paycheques. These payroll source deductions approximate what you should owe at tax time, assuming your current income is representative of what you’ll earn throughout the year.

These calculations are typically quite accurate for most salaried and hourly employees — barring any significant changes to employment status, income, or investments — which is why comparatively few have a significant balance owing at tax time.

The tax deficit can build up quickly if your deductions are not in line with your annual income or you are not regularly remitting income taxes to CRA, as is the case with many self-employed individuals, investors, and CERB recipients. Miscalculating your total annual tax burden and/or failing to set enough money aside to pay your taxes can leave you with a hefty bill come tax time.

Neglecting your taxes for several years can generate a similar, seemingly insurmountable deficit.

What are my options to deal with income tax debt?

Owing the government money can be very intimidating as it's assumed the government has a limitless ability to collect the debt through any means necessary.

Owing debt to CRA can create fear and uncertainty as they are in control of issuing income tax credits and other government-issued income sources. People worry this debt will result in loss of income and an inability to meet daily household expenses if the government cuts off their income or benefits.

There are a few options available to you, depending on your financial circumstance and the amount you owe:

Payment arrangements

If you’re unable to pay your outstanding income tax debt as a lump sum, reach out to CRA as soon as possible. Explain your financial situation and propose a reasonable amount you can afford to pay every month. Being proactive can help avoid significant interest and other penalties for non-payment.

Consolidation loan

If you can’t make a favourable arrangement with CRA, reach out to your bank or another private lender to discuss options for a consolidation loan. This would effectively allow you to pay off the income tax debt, plus combine any other outstanding debts into a single monthly payment. Just remember the goal here is to make your debt more affordable. If you cannot find a better interest rate than what CRA is charging, it is likely not beneficial to consolidate just to eliminate an income tax debt.

Bankruptcy or Consumer Proposal

If your income tax debt has put you in a position where you can’t afford the payments and your other monthly expenses, the Bankruptcy and Insolvency Act (BIA) can likely deliver the relief you need. Income tax, GST, payroll source deductions (e.g. CPP, EI), and debts owing to Canada Mortgage and Housing Corporation may all be included in a Bankruptcy or Consumer Proposal. 

How do I know which option to consider?

MNP offers free confidential consultations to individuals who are struggling with unmanageable debt and need a financial fresh start.

During this no-obligation initial meeting, a Licensed Insolvency Trustee will review your entire financial situation, including your outstanding debts, income, and income tax situation.

They will use this information to outline all your options in detail and provide you with an unbiased recommendation to help you deal with your debts.

Why Consumer Proposal?

A Consumer Proposal may be your best option when dealing with CRA if you’re financially able to make payments but can’t afford the entire amount owing.

Depending on your situation, the Licensed Insolvency Trustee will likely be able to negotiate a reduction in the total value of the debt — in line with your household budget — and stop any ongoing interest.

Payment of your Consumer Proposal could be a single lump sum, or monthly payments over a period of up to five years. Once you complete your payment arrangements and fulfill your duties you would be released from your debt.

Why Bankruptcy?

A Bankruptcy may be your best option if you:

• Have an excessively large amount of debt
• Don’t own a large number of realizable assets
• Don’t earn enough to make a Consumer Proposal which your creditors would be likely to accept
• Don’t expect your income situation to change over the next year

What can CRA do to get what they’re owed?

The CRA does have the ability to take collection measures without having to go through the court system. For example, they can:

• Garnish your wages
• Put a freeze on your bank account and seize the funds on deposits
• Withhold certain tax credits such as GST refund cheques or the Trillium benefit to pay down the debt owing
• Arbitrarily assess any income tax returns not yet filed and apply penalties and interest to the debt owing
• File a lien on your property that would ensure the debt is paid if the property is sold.

How can I avoid these actions?

The CRA usually takes these measures when they are unable to come to an agreement with an individual tax filer or the tax filer disregards their statutory obligations under the Income Tax Act. This may mean failure to file income tax returns or other tax documents such as GST/HST returns.

The first thing you’ll want to do is file any outstanding tax documents and continue to file your income tax returns on time each year. This will show CRA that you are trying to improve your situation by complying with the tax laws. It also helps you determine the amount of debt owing in total.

This knowledge is important for two reasons. First, you can't plan how to get out of debt if you don't know how much you owe in total. Second, you need to figure out how much you should be setting aside each month for next year's income tax debt so you don’t continue to have debt owing year after year. Setting aside the money for future income tax debt will help stop the cycle of debt.

After your returns have been filed, be proactive and contact CRA to make payment arrangements. The CRA may ask you to provide various documents to help them determine a suitable monthly payment. This may include an income and expense statement that outlines your other financial obligations.

Cooperation with this process will usually result in a reasonable arrangement. Expect to sacrifice the extra things in life, such as recreation or vacations, to get this debt under control. 

And finally, make sure you stick to the payment plan that was agreed upon. If you can't make a payment, make sure you contact CRA to discuss the missed payment and any changes to your circumstances. The CRA wants to see a concentrated effort and compliance with the income tax obligations.

It’s never to late to reach out for help and work towards becoming debt-free. For more information on how to repay government debts and to learn more about the options available to you, reach out to an MNP Licensed Insolvency Trustee.