US citizens living in Canada will NOT pay US tax on $1200 US Cares Act payment but likely will pay US tax on Canada’s CERB Payment

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Prologue – The Only Certainties Are Death And Taxes

The above tweet references an article in the Globe and Mail on May 7, 2020. The article contains interesting perspectives, but much has changed since that time.

COVID-19 and the role of government assistance

Both the US $1200 payments under the CARES Act and Canada’s CERB payments were designed to fulfill the same purpose. Specifically, that purpose was to get relief money into the hands of individuals who were suffering from the the COVID-19 pandemic. It appears that payments were made generously with few qualifications for receipt of payments. The qualification appears to have been that an individual was a tax resident of the country. The $1200 CARES Act payment and the CERB payment were to fulfill the same function. Therefore, it would seem logical that both the CERB and CARES Act payment should be taxable in each country or neither payment should be taxable in the country. But, different characterizations of the payments appear to lead to different results.

First let’s review what we do know.

Part A: Is The U.S. $1200 CARES Act Payment Taxable Income?

The US $1200 CARES Act Payment As Taxable Income In Canada – The Canada Revenue Agency Perspective

Think if it. As confirmed (apparently) by the Canada Revenue Agency US citizens living in Canada, who are tax residents of Canada, with their homes in Canada will NOT pay tax in Canada on their $1200 payments from the US Government. How can this be?

Canada and the US have different definitions of what qualifies as taxable income. Let’s consider how those definitions differ.

Canada’s Definition Of Income:

DIVISION B

Computation of Income

Basic Rules

Marginal note:Income for taxation year

3 The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s income for the year determined by the following rules:

(a) determine the total of all amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property,

https://laws-lois.justice.gc.ca/eng/acts/i-3.3/page-1.html#h-279747

Clearly the Canada Revenue Agency has determined that the form of the $1200 CARES Act Payment – which is in the form of a tax credit – does NOT qualify as income (from an office, employment, business or property).

The $1200 CARES Act Payment As Taxable Income In The United States – IRS Perspective:

Because the payment is delivered in the form of a tax credit, the payment is not taxable in the United States.

Bottom Line: The $1200 CARES Act payment – because it is characterized as a tax credit – is not taxable by either the United States or Canada.

__________________________________________________________________________

Part B: Is Canada’s CERB Payment Taxable Income?

The Canadian CERB Payment As Taxable Income In Canada – The Canada Revenue Agency Perspective

It’s clear. The CERB payment (presumably because it is an income replacement) is taxable income in Canada.

The Canadian CERB Payment As US Taxable Income To US Citizens Living In Canada – Speculation

Will Canada’s CERB payments to US citizens living in Canada be treated as taxable income for US tax purposes?

It appears that – US citizens who do not live in the United States – may be required to include their Canadian CERB payment as income taxable in the United States. At first blush this seems odd. Is it really the case that the $1200 US payment to US citizens living in Canada is NOT taxable income and the equivalent Canadian CERB payment IS taxable income? Different definitions of income may lead to different results.

Are US citizens living in Canada required to pay US tax on their Canadian CERB payments?

The US Definition of Income:

26 U.S. Code § 61. Gross income defined

(a) General definition Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Income from life insurance and endowment contracts;
(10) Pensions;
(11) Income from discharge of indebtedness;
(12) Distributive share of partnership gross income;
(13) Income in respect of a decedent; and
(14) Income from an interest in an estate or trust.

https://www.law.cornell.edu/uscode/text/26/61

In 1954 the Supreme Court Of The United States decided the case of Glenshaw Glass. Chief Justice Warren ruled (in a narrow context involving punitive damages) that income should be defined as “any accretion in wealth”.

Justice Warren ruled:

Here, we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that they compensate for damages actually incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable, but not the additional amount extracted as punishment for the same conduct which caused the injury. And we find no such evidence of intent to exempt these payments

Because it is an accretion to wealth, Canada’s CERB payments to US citizens living in Canada would qualify as income under Section 61 of the Internal Revenue Code.

I recently had the opportunity to discuss the Glenshaw Glass case with Anthony Parent of IRS Medic.

One possible defence to the claim that the CERB payment is income for US tax purposes …

Section 104 of the Internal Revenue Code excludes gifts from the definition of income. Had Canada NOT made a decision to include CERB payments as income, it might have been possible for one to argue that the CERB payment was a gift. Gifts are excludable from income under the Internal Revenue Code.

Probable conclusion …

As odd as this seems (because the payments serve the same function):

On the one hand, the $1200 US CARES ACT payment is NOT taxable as US income to US citizens living in Canada

On the other hand, it appears that Canada’s CERB payment is taxable to US citizens living in Canada.

Although unreasonable, it is part of a long tradition and pattern of imposing different taxation on things that are foreign. The US $1200 CARES Act payment is not taxable. The Canadian CERB payment is taxable.

The average person on the street could be forgiven for thinking that this disparity is outrageous.

The CERB payment is sourced in Canada.Therefore, Canadian taxes paid on the CERB payment can be used as a tax credit against any US taxes owing.

John Richardson – Follow me on Twitter @ExpatriationLaw

3 thoughts on “US citizens living in Canada will NOT pay US tax on $1200 US Cares Act payment but likely will pay US tax on Canada’s CERB Payment”

  1. suzi Dix

    your comment re: CERB taxation in USA returns for 2020 has been a loophole for me. Where is this claimed on my SR1040? Even the IRS International Law office I’ve phoned twice has never heard of CERB. Help

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  2. SarahRose Werner

    As things have turned out, CERB income was reported to taxpayers on T4E slips and treated as employment insurance benefits. What are your thoughts on applying Article XXII of the Canada-US tax treaty and claiming that CERB income received by a US citizen resident in Canada does not have to be reported to the IRS, as it’s “other income” that did not arise in the US? Note the treatment of US unemployment benefits in Guo v Commissioner, in which the court ruled that Article XXII applied.

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