COVID-19 Economic Stimulus: We analyze the tax implications

The federal government’s announcement Wednesday of an $82 billion stimulus package to offset the devastating economic impact of the COVID-19 outbreak provided a modicum of reassurance to Canadian businesses. Ottawa’s message was simple: we’re here for you in tough times.

The package introduced $27 billion in direct support for businesses and individuals, as well as $55 billion in tax deferrals designed to help Canadians weather the first wave of the coronavirus storm. But as I pointed out in a previous blog, far more aid will be needed to prevent complete economic stagnation, maintain financial market liquidity and restore investor confidence.

Achieving that goal will be a delicate balance—and the long-term deficit and debt implications could have ripple effects for a decade or more. But right now the focus is, rightly, on saving lives. Balance sheets can be restored at a later date.

The business community has now had time to digest the stimulus package and the myriad tax implications. From the latter perspective, the plan leaves many questions. This isn’t surprising given the speed at which the government was forced to design the package. Many details will clearly need to be ironed out.

Here are some key areas where clarification is needed:

Employee Wage Subsidies

The temporary wage subsidy of up to three months for Canadian-controlled private corporations eligible for the small business deduction, as well as non-profit organizations and charities, offers qualifying organizations a benefit equal to 10 per cent of salaries paid during that period, up to $1,375 per employee, capped at $25,000 per employer. Businesses will be allowed to immediately reduce income tax withheld on employee remuneration to benefit from the subsidy.

To receive the maximum benefit, however, it appears that employers would need to pay out about $13,750 in wages and have contributed just over $1,000 in Canada Pension Plan and Employment Insurance premiums this year. In other words, the net benefit to the organizations who need it the most would be only about $375. This is unlikely to discourage employers from downsizing their staff headcount in the face of a steep loss in revenue. With legislation forthcoming, the government may well adjust these requirements to provide greater relief to employers, but that remains to be seen.

Tax filing deadlines

The deadline for filing 2019 individual tax returns has been pushed back to June 1, 2020, while trusts that have a tax year ending on December 31, 2019, are now required to file by May 1, 2020. Self-employed individuals and trusts without a calendar year-end will not receive extensions. Corporations, curiously, were not granted a similar extension, meaning that a CCPC with a calendar year-end will need to file by June 30, 2020. In addition, there was no mention of partnerships being granted an extension in the government’s announcement, but perhaps this may change when legislation is finally passed

Even with the extensions for individuals, prompt return filing is being recommended so individuals can ensure they receive benefits such as GST credits, without delay. On that note, the government is proposing a one-time doubling of the GST credit for the 2019-20 benefit year, equating to nearly $600 for couples and $400 for single individuals who qualify. However, GST credits are calculated based on income, which requires the filing of a 2019 personal tax return. With filing deadlines extended, many Canadians could therefore face delays in receiving this benefit, thus negating its utility as a tool to provide much-needed financial relief.

As well, personal and business income tax payments owing can be deferred until after August 31, 2020, including installments, without interest or penalties. Again, more clarity is needed to understand exactly what is included. It would seem that CCPCs with a December 18, 2019, year-end or later that have taxes due on filing, could have those tax payments deferred (i.e. the taxes become due three months after their year-end). GST/HST remittances will not be deferred, and businesses will still be required to pay payroll taxes.

As such, CCPCs that do not owe taxes beyond regular installment remittances and those that have accelerated their GST/HST payment schedule, will not benefit from the deferral.

Audits

The government announced a moratorium on post-assessment GST/HST or income tax audits by the Canada Revenue Agency for the next four weeks. The agency will also temporarily suspend ongoing audit activities for most businesses.

Taxpayers generally have up to 90 days from the date of assessment of a tax return to object to that assessment—which the CRA is required to provide ‘with all due dispatch,’ meaning within a reasonable time period. The normal reassessment period spans three to four years from the date it was initiated. Extending that period is typically not an option for the CRA, raising questions as to what will transpire in cases where the normal reassessment period is set to expire. Alternatively, if an audit is about to be statute-barred, will the CRA proceed despite the COVID-19 leniency? Taxpayers are best advised to consult their chartered professional accountant or tax lawyer if they find themselves in this situation.

Emergency Care Benefit

The new Emergency Care Benefit will provide up to $900 bi-weekly—for up to 15 weeks—for workers (including self-employed individuals) who are quarantined or ill with COVID-19, but who don’t qualify for EI sickness benefits. The government will need to clarify whether the benefit will be tied to income levels. Until then, it’s unclear who, exactly, will qualify for the benefit.

Canada Child Benefit

Canada Child Benefit payments will be increased by $300 per child for the 2019-20 benefit year, or approximately $550 on average for families. Again, it is unclear if the benefit will be tied to income-eligibility requirements, while receipt of the benefit will be dependent on the filing of a 2019 tax return to avoid interruption in benefit payments.

RRIF Withdrawals

The government announced a 25 per cent reduction in minimum withdrawals from Registered Retirement Income Funds for 2020. This change will help seniors by allowing tax deferral and will help with wealth retention in the face of devastating stock market conditions.

What is also unclear is how the Canada Revenue Agency—likely operating at sub-optimal staffing levels due to the outbreak, and generally overwhelmed at the best of times—will manage to roll out these changes, answer taxpayer questions and ensure full compliance in a month.

And while this is a promising start, tax remittance delays—which, incidentally, are irrelevant for companies that paid their taxes by installment in full by the end of 2019—and relatively modest economic stimulus, won’t be enough. Far more will be required to prevent a catastrophic recession—or even depression—from devastating businesses and the wider economy.

Armando Iannuzzi, Co-Managing Partner