Living in the eye of the COVID19 income security hurricane
We enter the most prolific part of the hurricane season in August. As part of hurricane lore, we are reminded that major hurricanes have a well-formed ‘eye’ where a tranquil calm prevails for a short period following the turmoil of the hurricane’s leading edge.
We also live in the tranquil eye of the COVID19 income security hurricane. We entered the storm with the COVID19 pandemic but the Canada Emergency Response Benefit (CERB) and a variety of other federal and provincial programs saw us through the first part of the COVID19 storm. We now live in strange summer calm. The dog days of summer are upon us.
With COVID19 benefits – principally those receiving the CERB – food is purchased reasonably easily, rent is paid, and mortgage payments are met. Incidentals are covered; water and hydro bills are paid up on time. Credit card balances are paid up. As long as you are not poor and experiencing social assistance clawbacks and RGI housing rental increases, you are not doing badly. Other clawbacks come later.
There’s nothing like an unexpected boost of $12,000 to help meet the household bottom line. For the eight million Canadians who are receiving the CERB, its extension will deliver payments until early October, 2020. (GST credit recipients got a much smaller one time boost early on.)
Hurricane Hazel, the last hurricane to hit Toronto, arrived in October (1954). And without a new program to replace the CERB, a different type of hurricane will arrive this October.
This is no time for the complacency of a safe summer stroll during the eye of a storm. The dangerous wall of the eye is looming just a heartbeat away.
Our personal income tax system will be centre stage
What happens next will have a lot to do with our personal income tax system since the $70+ billion CERB, the largest income security program in our nations’ history, is paid as a taxable benefit through the income tax system.
That income tax system is administered by the Canada Revenue Agency (CRA). Some us still like to call it the more comfortable sounding ‘Revenue Canada’.
A government agency might sound like an odd place to house billions of dollars of payments to Canadians but it’s the Ministry of Finance that’s generally responsible for tax policy. The CRA is responsible to implement it.
Personal income taxation began 103 years ago in 1917 to pay off World War I, to bankroll conscription, and to replace the revenues that would be lost on consumable alcohol when Canada drifted into Prohibition in 1918. The UK had widely introduced personal income taxation in 1909 under Churchill and Lloyd George. It was added in the US in 1913 by Woodrow Wilson following an amendment to the US Constitution.
The Canadian government had only one real job in personal income taxation for the 61 years from 1917 to 1978; it collected taxes.* In 1978, the federal government introduced refundable tax credits which meant that people could get money from the government regardless of how much they owed. All tax credits up until then were mostly provided in the form of exemptions, deductions and non-refundable credits that resulted in refunds only when taxes were overpaid.
In 1999, Revenue Canada became an agency of government in order to take on the task of recovering government debt taken on by individuals – and has since become the largest government collection agency in Canada.
These three responsibilities: collecting personal income taxes, paying refundable credits and operating a massive Canada wide collection agency is now in place and that’s set the stage for the government’s response to the COVID19 pandemic.
There are many payment and enforcement options in our tax system
The federal government in the form of the CRA, had lots of options when it came to COVID19 but somewhat unfortunately, it decided to use too many of them for our own good.
First, it announced the CERB as income replacement in the form of a taxable benefit which in CRA lore is known as ‘other income’. Canada’s government had most recently introduced large scale taxable income security benefits in 2006 under Stephen Harper in the form of the Universal Child Care Benefit (UCCB). The Trudeau government got rid of this taxable benefit when they came in in 2015.
But they must have liked the idea.
The CERB shows up on line 13000 of our personal income tax return. Using this line on the tax form has usually meant that provincial and territorial social services would claw the payment back from social assistance and public housing authorities would charge rent on it. It also meant that income security programs like the federal Guaranteed Income Supplement (GIS) would claw it back at up to 75 cents on the dollar.
To stop the social services clawback, another Minister (Carla Qualtrough) not responsible for CRA announced well after the fact that provinces and territories should exempt the CERB. The result was predictable: some did and some did not while others clawed back in part.
About the same time, a special one time doubling of the GST refundable credit was announced: up to $443 to a single person and $580 for a couple, a bit more on behalf of children.
The third income security measure was the Canada Emergency Student Benefit CESB that goes to full time students who are Canadian citizens. The CESB is also taxable and attracts a T4A. This time, there was another addition to line 13000. This time, no federal Minister called on Provinces and territories to exempt it. Students living in public housing will have rent charged on it. The odd low income senior will also lose up to 75% of the CESB through lower GIS payments.
Then the federal government had a change of heart ….or maybe they didn’t. They began to choose to pay COVID19 payments – just like the special GST payment – that were not subject to income taxation.
The fourth benefit they chose to pay out was a $300 one-time untaxed payment to all Old Age Security (OAS) recipients. This is important as it marks the first time an OAS payment has been made in decades that has not been taxed.
There is little evidence that this payment was required by the 69% of seniors who are not low income. Many had COVID19 dividends from lower costs of self-isolation; less gas, fewer meals out, fewer entertainment opportunities. Even seniors with income so high as to not qualify for OAS each got the $300. each. Go figure that one!
At the same time, the federal government added a fifth benefit: a $200 one-time untaxed payment to low income seniors receiving the Guaranteed Income Supplement (GIS). These seniors have received $500 in all and for the 31% of OAS recipients who also receive GIS, the payment was both needed and welcome.
The surprise package is that most low income seniors who are also CERB recipients will lose at least half of their CERB payment because GIS is reduced by the CERB. One guesses that the federal government doesn’t much like poor working seniors who lost their jobs due to COVID19. Why? Who knows?
Then the federal government used the personal income tax system for the 6th time to pay a one-time non-taxable disability benefit of $600 to people with disabilities in receipt of the Disability Tax Credit, CPP (disability) and Veterans Disability payments.
But there will be no double dipping here. Low income seniors with disabilities who have already received $500 in special OAS and GIS will only get $100. Higher income seniors will get three times that ($300). Bottom line: the most any senior with disabilities can get is capped at $600.
Will clawbacks be double recovered?
Then there is the matter of CERB repayment for the ineligible and partially eligible. Few have thought through the fact that the federal government holds all the cards. If you are ineligible for CERB and have to pay it all back, it’s only $12,000 and it won’t take too long for CRA to retrieve that kind of money from future tax refunds. And the poorer you are the more refundable credits you get. It will take a lot less time for the feds to square their books.
And to make matters worse, when they do recover the money from future refundable tax credits, there is no current mechanism to reconcile money already clawed back by other programs in either benefits or rent charges. Why? The money the feds recover in refundable credits is already exempt under these programs. Anyone experiencing a CERB clawback just might lose the money twice: once to clawbacks and twice to repayments. Stay tuned!
Clearly the federal government started out with taxable COVID19 benefits in the form of the CERB and CESB. They then asked provinces and territories to refrain from clawing back benefits from social assistance but did not take their own advice to refrain from clawing back their own program for low income seniors.
They were agnostic about charging rent on the CERB and CESB under CMHC- so rent is being charged across the country.
Then they paid out four non-taxable benefits that may or may not be clawed back – mostly not. However, increased rent will be charged on these benefits in subsidized housing. So the 6 in order look like this: taxable; taxable; non-taxable; non-taxable; non-taxable; non-taxable.
Is there a pattern here? Should we be reading the tea leaves?
For low income Canadians, there will be two full rounds of clawbacks. The first is in 2020 when social assistance payments will be subject to clawbacks in real time in all but 3 jurisdictions. Rent will be charged on most COVID19 benefits in 2020 again in most jurisdictions.
At tax time in 2021 for tax year 2020, a whole new set of clawbacks will begin for deferred rent reviews in subsidized housing while GIS recipients will start to see their clawbacks start based on the CERB they received in 2020.
Can we please do this differently next time?
When October 2020 arrives, we will be in two hurricane seasons: the one caused by our climate and the one caused by the end of current federal COVID19 benefits.
The poor are the most affected by the pandemic but they have not fared well with COVID19 benefits due to incessant clawbacks and rental charges.
Accordingly, we need the federal government to get together with their provincial, territorial and municipal counterparts to try a different approach.
Let them all gather together and reform EI, avoid a large and needless surge in social assistance payments, pay out all future special benefits as non-taxable payments and figure out a pan Canadian approach to clawbacks and rental charges on COVID19 benefits.
As EI reform will be insufficient in the near term, all three levels of governments and many others should be present to invent the ‘son of CERB’ as a non taxable benefit and keep it away from the confiscation machines that governments invent to gobble down various forms of income that get paid to lower income Canadians.
The first round of this taught us much. Let’s make sure we learned our lessons well.
* Revenue Canada also had the job of custom s enforcement until 2002 when that task was transferred to the Border Services Agency: