Many Canadians rely on government benefits to make ends meet. These may include GST/HST rebates, childcare benefits, and disability benefits. Collectively, these payments can make up high percentages of a Canadian’s income.
If you are one such Canadian, you may genuinely need government benefits — doubly so if you’re out of work. Still, there’s a right way and a wrong way to go about getting them. Doing it the wrong way can cost you big time. In this article, I will explore the government benefit mistake that costs Canadians millions of dollars per year.
Understating your income: A mistake to avoid at all costs
A big mistake that many Canadians make when applying for government benefits is understating their income. If you feel tempted to do this, thinking that it might trigger an easy payout, think again. While it’s sometimes possible to get a faulty benefit application past Service Canada or Canada Revenue Agency (CRA) workers, your application is likely to be scrutinized later. If this happens, then you may have to pay back your benefits — plus interest — in the future.
2020: When “free money” wasn’t so free after all
Having the CRA come after you for past benefits is no idle threat. Such things can and do happen. Once it actually happened on a mass scale, affecting thousands of Canadians all at the same time.
In 2020, millions of Canadians applied for Canada Emergency Response Benefits (CERB), which were intended to compensate people who got laid off due to the pandemic. The money was pushed out extremely quickly: in many cases, faulty applications were approved, the rationale being that such a dire situation was not the time to nickel and dime Canadians. Many individuals applied for the benefits wrongly, understating their income in order to get the easy money.
The problem came a couple of years later, when lockdowns became less common and the financial impact of COVID benefits on the country’s finances started being talked about more. In this period, the CRA began seeking the repayment of erroneously paid out CERB benefits. By 2024, the CRA reported that it had collected about $1.8 billion worth of CERB money from Canadians who were ineligible for the benefit but received it anyway.
The takeaway: Don’t understate your income
The big takeaway from the COVID benefit soap opera of the early 2020s is that you should not understate your income when applying for government benefits. It might seem worth it initially, but if the CRA comes knocking later, you will come to regret your decision.
A note for investors
A really big takeaway for investors here is to report your investment income. If you hold investments in taxable accounts, then that income has to be reported. And contrary to popular belief, it isn’t “only” taxed when you sell: dividend and interest income are taxable on receipt.
Let’s imagine that you hold a typical TSX index fund like iShares S&P/TSX 60 Index Fund (TSX:XIU). There’s a good chance that you own this or a very similar fund in your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). If all of your investments are in RRSPs and TFSAs, then you don’t have to report any income. Otherwise, you have to report the dividend and interest income each year.
In the case of XIU specifically, it pays dividends four times per year. If it’s held in a taxable account, those need to be reported every year, whether you sell stock or not. You also need to report any capital gains you earn when you sell the fund.
When reporting investment income, you need to be aware of the dividend gross-up, the dividend tax credit, and the capital gains exclusion rate. These are complex matters that are beyond the scope of this article — be sure to speak with an accountant if you hold significant amounts of stock in a taxable account. Their fees will more than pay for themselves.
