In recent weeks we looked at both unemployment and the Canadian housing market. Just because people are losing their jobs doesn’t mean that their monthly housing costs decrease. We all still need money to survive. That is where the Canadian Emergency Response Benefit (CERB) comes in.

To combat the detrimental effects that COVID has had, the Canadian Government established the Canadian Economic Response Benefit (CERB). CERB is an income replacement for anyone who has stopped working due to COVID-19. The benefit provides $500 a week for up to 16 weeks.

Eligibility for CERB is dependent on the following:

• Reside in Canada and at least 15 years old
• Have stopped working because of reasons related to COVID-19
• Had employment income of at least $5,000 in 2019 or the 12 months prior to application
• Have not quit your job voluntarily

Canadian Emergency Response Benefit (CERB)

Although the idea behind CERB may be a worthy endeavor, it may be doing more harm than good. For those that truly need it, it keeps a roof over their head, ensures utilities stay on, and food is on the table. However, it is a faulty system that seems very easy to take advantage of.

According to statistics on the Government of Canada website, as of the time of this writing, more than $43.5 Billion has been paid out. To put that into perspective, the federal expenditures for 2019 was ~$346 Billion.

So in roughly two months of CERB, the federal government has spent nearly 15% of the previous years’ total expenditures. That’s just two months, and there is talk of CERB being extended to January 2021. Assuming payouts continue at the same pace, we could be looking at about $200 billion of CERB paid out.

One important thing to remember is that you are allowed to earn up to $1,000 a month and still collect CERB.

Pre-Tax not Tax-Free

What a lot of people fail to take into account is that CERB is paid pre-tax. That is different than tax-free. The money you receive from CERB will have to be reported on the recipient’s tax return for 2020.

Let’s assume you’re an average Canadian. You have an average income (~$60,000), and an average marginal tax rate (we will go with 25%). You qualified for CERB and received $8,000 in benefits which was included in the $60k mentioned earlier. Since no tax was paid on that $8,000, you could owe an addition $2,000 come tax time (i.e., $8,000 * 25% = $2,000).

So, hopefully you have been prudent with that money and haven’t been spending it without consequence. If you have, don’t be surprised when you receive an income tax bill of $2,000 next spring.

One Size Fits All

This is a point of contention. For those on the lower end of the income scale, this is a huge benefit. For those on the higher end of the income scale, less so. The CERB is not pro-rated based on salary/wage.

This means that if two people directly affected by COVID are unable to work they will receive the same $2,000/month. Previous earnings, currently salary, position, industry, or anything else are not taken into account.

Assuming people are working full-time, $2,000 a month equates to about $12.50/hour. Slightly more than minimum wage. However, in order to qualify for that $2,000 you only had to have an income of more than $5,000 in 2019 or the last 12 months.

Assuming someone makes $12/hour, $5,000 of pay is only 416 hours of work. Stretched over a 12 month period, that is just over 8 hours a week. This means that someone who worked one shift a week, and someone who potentially worked 60 hours a week last year, would receive the same benefit.

This hardly seems fair, rational, or logical. Additionally, it seems that this money is just being handed out without a thought of who may need it most. Nearly 8.5 million unique applications have submitted and a total of almost 15.5 million applications have been processed. This handout could also see inflation pushed higher but in the wrong parts of the economy.

Making More Being a Potato

Due to the fact that the CERB is a “one-size-fits-all” benefit, there are a number of people that have been receiving more money now, than when they were working.

As mentioned above, even if you only worked 8 hours a week, you could get approved for CERB. This could even include high school students (older than 15). As long as you haven’t quit voluntarily and have stopped working due to COVID.

Let’s assume you have a part-time job that you enjoy. At this assumed job, let’s say you make $1,250/month. Why would you return to the job, even if you like it, if you can make an extra $750/month sitting on the couch? You wouldn’t!

It seems safe to say that CERB is not encouraging people who earn lower incomes, who are capable of working to find jobs or return to work. If you think of CERB as an unemployment benefit, the amounts you receive, especially as a lower income earner, is quite high.

For instance, Employment Insurance (EI) pays out 55% of your average insurable weekly earnings, up to a max of $54,200. This is a benefit of $573/week. EI can be collected for 14 weeks, and in some circumstances up to 45 weeks.

This means that for anyone making ~$47,000 or less, CERB is paying out more ($500/week) than if you were on regular EI (i.e., ($47,000 * 55%) / 52 = $497.12).

For more information on CERB, click here.

Other Benefits

In addition to CERB there are a couple other note worthy benefits.

Canadian Emergency Student Benefit (CESB)

CESB is for post-secondary students, graduates, or high-school graduates who do not qualify for CERB or EI, and cannot find work due to COVID.

There are two tiers of benefits; $1,250 for each four week period, or $2,000 for each four week period if you have dependents or a disability. This benefit is much the same as CERB but a drastically lower amount (if you have no dependents or disabilities). The benefit period runs from May to August.

As a recent graduate or current post-secondary student, $1,250 a month is not a significant amount. During normal circumstances, most would be able to find a job that would pay more than that. Granted, you can still earn up to $1,000 a month of employment income and still collect CESB.

For more information on CESB, click here.

Canadian Emergency Wage Subsidy (CEWS)

If you are a Canadian employer and have been affected by COVID, you could be eligible for a subsidy of 75% of your employees wages for up to 24 weeks. The CEWS benefit period is retroactively from March 15, and runs till August 29.

The goals of CEWS are to allow business to rehire employees that were previously laid off, help prevent further job loss, and better position business to resume normal operations.

To be eligible to receive the wage subsidy, you must:

• Be an eligible employer
• have experienced an eligible reduction in revenue, and
• have had a CRA payroll account on March 15, 2020

For more information on CEWS, click here.

Conclusion

Although CERB has helped a lot of people during this unprecedented time, it is also a program that has been exploited. The Government has sent out billions of dollars of benefits to date. This looks as though it will continue with lots of people pushing for an extended benefit period.

Not only will CERB have consequences now, some good and some bad, but these consequences will linger. This government deficit will have to be repaid at some point. If that doesn’t happen directly (i.e., higher taxes), it will happen in the shadows (i.e., inflation).

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Sources:

https://ca.finance.yahoo.com/news/canada-revenue-agency-extend-2-130059126.html

https://www.canada.ca/en/revenue-agency/services/benefits/emergency-student-benefit.html

https://www.canada.ca/en/department-finance/economic-response-plan.html

https://www.canada.ca/en/services/benefits/ei/cerb-application.html