2020 Year-End COVID-19 Considerations

Due to COVID-19 the past year has brought financial challenges to both businesses and individuals. A series of tax and economic measures were introduced under Canada’s COVID-19 Economic Response Plan (“Response Plan”) to support the Canadian economy.  As the end of the year approaches business owners and individuals should be aware of how the Response Plan will impact them.

Corporations

T4 reporting requirement
As part of the Response Plan, the Government of Canada has made payments to businesses under the Canada Emergency Wage Subsidy (“CEWS”) to cover a portion of wages for eligible employees, as well as payments to individuals under the Canada Emergency Benefit (“CERB”) and the Canada Emergency Student Benefit (“CESB”) programs. Consequently, the CRA has announced new T4 reporting requirements for the 2020 tax year.  All employers must use the following new information codes to report employment income and retroactive payments paid in the following periods:

The additional reporting requirements will help the CRA validate payments under the CEWS, CERB and CESB. Due to the additional information disclosure, it is important for business owners to plan ahead or reach out to their payroll provider to ensure the appropriate information is on hand well before the T4 deadline on February 28, 2021.

Employment insurance (“EI”) premium rate
As the result of COVID-19, the Government of Canada announced a temporarily freeze of the Federal EI premium rate for 2021 and 2022 at the current level. The premium rate for employees is $1.58 per $100 of insurable earnings and $2.212 per $100 of insurable earnings for employers. However, the maximum insurable earnings for 2021 will increase to $56,300 (up from $54,200 in 2020).

Canada Pension Plan (“CPP”) premium rate
The basic exemption amount for 2021 remains at $3,500, but the employee and employer contribution rate for 2021 will increase to 5.45% (up from 5.25% in 2020), and self-employed contribution rate will  increase to 10.9% (up from 10.5% in 2020). The maximum pensionable earnings will increase to $61,600 (up from $58,700 in 2020). 

Canada Emergency Business Account (“CEBA”) and Canada Emergency Commercial Rent Assistance (“CECRA”) loans
The CEBA provides interest-free, partially forgivable, loans of up to $40,000 to small businesses and not-for-profits to help cover employment costs or non-deferrable operating expenses such as rent, utilities, insurance and property taxes. On October 9, 2020, the Government of Canada has expanded the CEBA program by allowing for an additional loan of $20,000. If the balance of the loan is repaid on or before December 31, 2022, up to 25% of the original loan and up to 50% of the additional loan will be forgiven.

The CECRA provides commercial rent relief and assistance to small business tenants and property owners and the financial assistance provided by CECRA is forgivable as of December 31, 2020.

Both the CEBA and CEBRA programs provide forgivable loans. The forgivable portion received from either of these programs is taxable on receipt of payment. However, an election can be filed to exclude the payment from income but instead be used to reduce the related expenses. This election may be helpful in deferring the income if a portion of the related expenses has not yet incurred.

Individuals

CERB, expanded EI and other ‘recovery’ benefits
Eligible workers who stopped working or reduced work hours due to COVID-19 were able to apply under the CERB program to receive a taxable benefit of $2,000 every 4 weeks between March 15 and September 26, 2020. Retroactive applications for CERB will be accepted until December 2, 2020.

Individuals should expect to receive a T4A slip for the CERB payments received during 2020. The CERB payments are taxable and must be included in income on your 2020 individual income tax return. Since no taxes were withheld at source, individuals should set aside cash to cover the estimated tax liability. The CRA and Service Canada provide various repayment options if the taxpayers later found that they were overpaid in their CERB benefits. Individuals must repay any CERB overpayments prior to December 31, 2020 to avoid receiving a T4A slip from the CRA.

Effective September 27, 2020, temporary changes were made to the EI program to lower the eligibility requirements so more individuals can access the EI program. Individuals that are not eligible for EI but are still in need of financial support may be eligible for one of the three new benefits program.

• Canada Recovery Benefit (“CRB”) – provides $500 per week for up to 26 weeks for workers who have stopped working or at least a 50% reduction in income due to COVID-19
• Canada Recovery Sickness Benefit (“CRSB”) – provides $500 per week for up to 2 weeks for workers who are unable to work due to COVID-19 or must self-isolate
• Canada Recovery Caregiving Benefit (“CRCB”) – provides $500 per week for up to 26 weeks per household for workers unable to work to care for a child under the age of 12 or a family member with COVID-19

Unlike CERB, payments received from the CRB, CRSB and CRCB programs are subject to a 10% tax deduction at source, and the CRA will issue T4A slips for payments made from these programs. Taxpayers can earn employment or self-employment income while receiving CRB. However, taxpayers are require to repay $0.50 of the CRB benefit for every dollar of annual net income above $38,000 in the calendar year (up to the amount of CRB received). Net income includes any CERB, CRCB and CRSB payments received but excludes the amount of CRB received, and repayment of CRB benefit is due at the same time as the T1 income tax return filing deadline.

Work-space-in-the-home expenses

Due to the COVID19 pandemic, many businesses have closed their offices and employees are now required to work from home. Many employees have incurred work-space-in-the-home expenses and are asking whether these expenses may be deductible from their employment income for the 2020 tax year.

CRA is working on providing clarity on the availability of the work-space-in-the-home expense deduction and has started a process to consult with business groups. It is anticipated that the CRA will provide further guidance over the next couple of months. An employee can deduct work-space-in-the-home expenses if they meet one of the following conditions:

• The work space is where the employee mainly (more than 50% of the time) does their work.
• The employees uses the workspace only to earn their employment income. The employee also has to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of their employment duties.

In order for an employee to deduct work-space-in-the-home expenses the employee must be required to incur these expenses pursuant to the terms of their employment. The CRA has stated the requirement to work from home does not need to be in writing and it is expected that employees forced to work from home under the current COVID restrictions will meet this requirement.

In addition, employers must provide employees with a properly completed Form T2200 certifying that the employees is required to incur work-space-in-the-home expenses. The CRA has asked for input on a proposed revised “short-form” T2200. Business groups have provided input to the CRA that this revised form may help reduce administrative work but it is still a significant compliance burden for employers and have requested alleviating this burden by amending the T4 slip.

What expenses can be deducted?

The type of employment income earned will determine which expenses can be deducted. Employees that are paid commissions are eligible to deduct more expenses than employees that are paid by salary only.

Employees earning salary only are allowed to deduct the following expenses:

• Heat and electricity
• Cleaning materials
• Repairs and maintenance that specifically relate to the work space area
• A portion of rent

Employees earning commissions are eligible to deduct all of the above expenses, and also the following:

• A portion of property taxes
• A portion of home insurance

It is important to note that employees earning either salary or commissions are NOT eligible to deduct mortgage interest or capital cost allowance.

What about costs relating to home phone and internet service?

Home phone and internet service costs are considered supplies. Supplies also include items such as stationery items, stamps, toner and ink cartridges. Supplies are only those materials you use directly in your work, and used exclusively for work.

Monthly costs for basic home phone and internet service are not deductible as supplies as they would not be used exclusively in employment activities. Long distance charges for calls relating to work are deductible as supplies.

How do you calculate the deductible portion of work-space-in-the-home expenses?

To determine the portion of rent, property tax or insurance to deduct, the employee should compare the square footage of the area used as a work space to the total square footage of the home. The portion should also consider the personal use of the space if it is not exclusively used as a work space. For example, if the work space is 10% of the total floor area of the home and is used 50% of the time as a work space and 50% of the time for other personal use, a reasonable portion would be 5%.

Work-Space-In-The-Home Expenses – CRA administrative policies relating to COVID-19

The CRA has recognized that both employers and employees have been significantly impacted by COVID-19. As such, they have announced some temporary administrative policies as follows.

Home office equipment

Where an employee is reimbursed by their employer for home office equipment and the employee retained ownership of the equipment this would ordinarily be a taxable benefit to the employee. The CRA has relaxed this rule so an employee can now be reimbursed for the purchase of home office equipment upon submitting an invoice to the employer, and the first $500 will not result in the assessment of a taxable benefit to the employee.  Home office equipment would include items such as computer equipment, desks, or chairs.

Commuting costs

Where an employer reimburses employees for travel between home and a regular place of employment this would ordinarily be a taxable benefit to the employee. The CRA has recognized that, during the COVID-19 pandemic, an employee’s regular place of employment may be their home. As such, the CRA has temporarily allowed for commuting costs between the home and the employer’s place of business to be reimbursed to the employee without a taxable benefit being assessed to the employee.

Parking costs

Where employers provide parking to their employees at the employees regular place of employment this would ordinarily be a taxable benefit to the employee. The CRA has relaxed this rule where if the regular place of employment is closed during the COVID-19 pandemic the employer-provided parking is not a taxable benefit to the employee.