2 Bills to Watch Out for After Getting CERB and Payment Deferrals
By Kevin Sun and Julie Jaggernath
When the COVID-19 pandemic forced Canada into lockdown, many Canadians relied on CERB and payment deferrals to make ends meet. As these support programs reach their end, many may soon be faced with costs that they’re not prepared for. Here are 2 bills to keep in mind and what you can do now to be ready for them.
The CERB Tax Bill
The $2000 per month Canada Emergency Response Benefit (CERB) payments are meant as temporary replacements for pay cheques from work. However, you shouldn’t automatically treat them like cash in your wallet. That’s because CERB payments are taxable income, but no tax is withheld before you get them.
What does that mean? If you have a job, then chances are that the taxable money you earn is taxed before you get it. Employment Insurance (EI) is also taxed before you get it. All of the money you take home then is your money. However, the taxable $2000 CERB payments the government gave were not taxed on payment, meaning that a part of it isn’t your money, but money the government will take back later in taxes.
It might sound weird for the government to give you money just to take some back later, but the CERB is meant to help Canadians get through hard times. Whether you were able to save part of those payments or had to spend it all to get by, the tax bill will still come (usually between April and June). How big that bill will be depends on your overall income for the year. The best way to figure this out is to use the Canadian government’s federal and provincial tax bracket guides. The sooner you know this number, the sooner you can start purposefully saving for the bill. This is also one of the most important bills you must pay; if you don’t, then you might lose access to government support in the future.
The Rent or Mortgage Payment Deferral Bill
In addition to the CERB, the pandemic also caused many landlords and lenders to offer rent or mortgage payment deferrals. However, these deferrals are not about giving you money now, but putting off your housing bills to later.
Deferred Rent Payments
If you deferred your rent payments, then you may have signed an agreement with your landlord that would have outlined the exact details of that deferral. For example, the agreement might say that at the end of the deferral period, you’ll have to pay regular rent plus part of the deferred rent every month; you would do this until you paid all the deferred rent. In some provinces, the government laid out how repayment of missed rent can take place. Make sure you understand the details of your own agreement. If it seems like you’ll have problems paying back your deferred rent, then talk to your landlord as soon as possible so that you can both work on a solution.
Deferred Mortgage Payments
If you deferred your mortgage payments, then things look a little different. That’s because a payment deferral only defers the principal, not the interest. If you’re making partial payments to cover the interest on the mortgage, then you’ll simply carry on making the same payments as you were before. Your balance will not have decreased during the time you deferred the principal payments, but you at least had some breathing room in your budget.
However, if you haven’t been making any payments on your mortgage, then the interest costs will have built up during the deferral time and things can get a bit more complicated. When your deferral period ends, that built up interest will be added to the principal of your mortgage balance that is still owing. This means you’ll pay interest on your deferred interest for the rest of your mortgage amortization; your payments might even increase during the current term of your mortgage because your principal amount has increased. To avoid this added expense, ask your lender what the total deferred interest amount will be. If you can, pay as much of that amount back as soon as your deferral ends. Be sure to reach out to your lender if you plan to do this. They will need to ensure that the lump sum payment goes towards the accrued interest and not just against the principal.
How to Get Ready for CERB Income Tax and Payment Deferral Bills
If you’ve been using the CERB without setting tax money aside, or been on a deferred payment program without being prepared for increased payments afterwards, don’t panic. Many people are in a similar situation. What’s important now is that you look over your finances and make a plan to stay or get back on track.
If you haven’t already, the best way to start is to create a budget. Make sure you have at least as much money coming in as you have going out. Then figure out how much you’ll have to pay come tax season or when your deferral ends. Using your budget as a guide, decide how you’ll prepare for the unexpected expenses that are coming. Maybe you have enough money left over each month that you can save it up. Or if you’re finding yourself short, there might be costs you could cut to free up more cash.
You may end up having to make some tough choices, but they will help keep you safe from even worse financial emergencies later. However, if you’re already in a tough spot and know that there’s not much else you can do, keep an open dialogue with those you owe money to. Depending on your situation and how the COVID-19 pandemic progresses, they might be able to work with you on a solution.
What to Do If You Feel Unprepared for Incoming Bills and Unexpected Expenses
There’s nothing wrong with accepting help when you need it, but misunderstandings over how the CERB and payment deferrals work may get many Canadians into trouble with unexpected expenses. If you feel overwhelmed by bills you didn’t know you had to pay, we’re here for you. Call us toll-free at 1-888-527-8999, send us an email, or chat anonymously to get started. One of our credit counsellors would be happy to answer your questions and help you find solutions in a free and confidential appointment. Get back on track and find peace of mind; we’re here for you and ready to help.