CERB & Bankruptcy

October 5, 2020

CERB & Bankruptcy have had an interesting and inverse relationship – but that may be about to change.  We have already blogged about how the CERB has slowed, stalled, or stopped bankruptcy and proposal filings and will likely maintain that status quo for the next year, but we should talk about some of the other elements of the CERB & Bankruptcy relationship.

The CERB was originally set up to provide compensation to people who had lost their jobs, “temporarily”, but didn’t qualify for EI benefits.  The idea was to provide some funds to meet the recipients’ basic needs.  By allowing anyone who had “earned” more than $5,000 in the previous year the benefit would have allowed families to cover the necessities of life for a brief period of time.

However, the rollout was poorly managed by the federal government and actually, perhaps inadvertently, enriched people who were not contemplated as being recipients in the original design of the programme.  Instead of just working people, who lost income as a result of the lockdown, getting the benefit it became available to anyone who could answer four very basic questions over the telephone.  People who were in receipt of other government programmes were able to receive funds, people on Disability Support programmes, people receiving government pensions and General Welfare benefits have been able to access CERB funds.

In fact, in some cases provincial case workers were confused and advising benefit recipients to apply for the funds.  The result was that of the nearly 9,000,000 recipients a significant percentage received benefits they shouldn’t have had.  The federal government tried to push through Bill C-17, an omnibus bill, that would have deemed the benefits to have been received fraudulently.  The implications would have been two-fold:

1.  Fraudulent debts cannot be discharged in a bankruptcy; and

2.  The recipient would have been required to repay three times the full amount of funds received.

Fortunately, the bill was defeated at first reading by the opposition.  In any event, all recipients are responsible for deducting their own taxes from the benefits and paying them after they file their T1 returns in 2021.  Unpaid taxes will be subject to the usual penalty and interest charges levied by the CRA.

The CERB was intended only to be available for a short period of time, but the lockdown has allowed the government to avoid accountability for policy and spending decisions and it appears that they are desperately prolonging the lockdown measures.  The CERB, originally designed to end this fall, has been extended to April of 2021 and the payments have been, subtly, increased.  The benefit was originally set at $2,000 per month but has now been increased to $2,165 by making it payable at the rate of $500 per week (there are 4.33 weeks to the month).

We are unaware of any additional measures taken by the government to stop sending funds to people who do not qualify for the benefit.  The government has table plans for the CRA to automatically file T1 returns for people with simple income situations.  Clearly then, the CRA that has charge of distribution of CERB payments has the ability to screen applicants and stop payments to people who should not be receiving them.  Yet, the government has failed or neglected to use this information for the more effective administration of these benefits.

The effect of CERB on bankruptcy filings has been, and continues to be, very significant.  Families accustomed to living on Disability benefits have seen their incomes increase by several thousands of dollars.  For example, a family of four receiving long term ODSP benefits would have been paid $2,800 per month, plus Child Tax Benefits.  After the lockdown they were able to pitch, unscreened, applications for CERB – if the two kids were over the age of 15 each family member received an additional $2,000 per month. 

This is significant because in a consumer insolvency practice, low income earners may represent up to 60% of the client base.  Using CERB funds, folks have been able to pay off their credit cards and payday loans, clean up their furniture store accounts, and will defer filing for bankruptcy for a year or two after the benefits stop – because it will take them that long to get back into debt.  If they find themselves cut-off at the end of April and required to make restitution for funds received bankruptcy may be an option.  But, the consequence of not paying taxes or repaying CERB amounts that should not have been received may not be all that dire.  After all, with no input credits they would not be entitle (much of) a refund anyway and it is doubtful the government would claw back much of their ODSP benefits.

Hopefully, the government will do more to address the roll out of future benefits to ensure they are being paid to people who are properly qualified.  The benefit has also, inadvertently perhaps, proven to be a disincentive to return to work.  Many recipients have been enriched as a consequence the low bar set to qualify – if they only earned $5,000 last year but have been receiving benefits since mid-March, they have already received triple last year’s income for staying home.  And people who were working part-time and earned $10,000 – $20,000 in the prior year have also had a significant increase.  Then of course, full-time, minimum wage earners, would only get an additional $200 per month by going back to work.

At the moment, absent any rules or regulations to the contrary from the federal government, bankruptcy may allow CERB overpayments and the resulting tax debts to be discharged.  The full economic impact of the lockdown is only starting to unfold, and we may yet see the often touted “tsunami” of insolvency filings, but it seems doubtful it will be the ‘usual suspects’ filing.  As the middle classes find their incomes decreasing, they do not qualify for CERB top ups to maintain income levels, yet their bills do not diminish.  Many small businesses have been faltering as a result of the lockdown measures, some have already closed permanently. 

Small businesses that lost income had no access to funds to keep them buoyant except in the form of debt.  The government has encouraged about 700,000 small business owners to take on $40,000 worth of additional debt through the CEBA programme.  There are many problems with this strategy including the debt becomes a personal liability for the business owner and if the business cannot survive the ravages of the continued lockdown the business owner must personally repay the debt.  Whether repaid or not, the effect is the erosion of assets for the so called “middle class”.   

There is a promise that $10,000 of the $40,000 will be forgiven if $30,000 is repaid within a two-year term, interest free.  If repaid in regular monthly payments that would be at a rate of $1,250 per month.  We understand the $10,000 would still be taxable as income for the business or business owner.  Any unpaid amount would be converted to a regular three-year bank loan with interest charged at the rate of 5%.  Debt is usually acquired during a period of business expansion not contraction – so one must question the wisdom of acquiring the debt during this period of economic downturn.