Winner and loser in CRA pandemic benefit crackdown

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We don’t know with certainty when COVID-19 was first detected in people, however a minimum of one scientific research suggests a possible timing of the primary case was detected in China on Nov. 17, 2019. 4 years later, COVID-19 remains to be with us, however the related pandemic-related authorities advantages are lengthy gone.

But almost every week, our federal court docket system continues to work its means via greater than 1,000 COVID-19 benefit cases which can be presently beneath overview by the Canada Revenue Agency.

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Two current circumstances, determined earlier in November, give us a glimpse into the sorts of claims being reviewed, and rejected, by the CRA. The circumstances concerned the Canada Emergency Response Benefit (CERB) and its alternative, the Canada Recovery Benefit (CRB).

As a reminder, CERB was provided for any four-week interval between March 15, 2020, and Oct. 3, 2020. To be eligible for CERB advantages, an applicant needed to display they’d earnings of a minimum of $5,000 from (self-)employment earnings in 2019 or within the 12 months previous their first utility.

CERB was changed by CRB, which turned accessible for any two-week interval between Sept. 27, 2020, and Oct. 23, 2021, for eligible workers and self-employed staff who suffered a lack of earnings because of the pandemic. CRB’s eligibility standards have been just like CERB in that they required, amongst different issues, that the person had earned a minimum of $5,000 in (self-)employment earnings in 2019, 2020 or throughout the 12 months previous the date of their utility.

CERB and CRB advantages are mostly chosen for overview by the CRA when it’s unclear if the taxpayer earned a minimum of $5,000 of earnings in a previous qualifying interval. Every of the 2 current circumstances concerned taxpayers requested to show they earned sufficient earnings.

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The primary case concerned a Quebec taxpayer who utilized for and acquired CERB for seven four-week durations (March 15, 2020, to Sept. 26, 2020), and subsequently utilized for and acquired CRB for 27 two-week durations (from Sept. 27, 2020, to Oct. 9, 2021).

On Jan. 20, 2022, the CRA chosen the taxpayer’s file for an preliminary overview to find out whether or not he had met the eligibility standards for CERB and CRB. The taxpayer defined to the CRA agent that he owned his personal firm and that he paid himself in dividends as a self-employed employee. The taxpayer produced a T5 funding earnings slip for the 2020 taxation 12 months displaying dividend earnings of $7,479.60, which was filed on March 31, 2021.

Ordinarily, we consider dividend earnings as funding earnings, being the return on an funding in shares, however in terms of COVID-19 advantages, the CRA has accepted that non-eligible dividends (typically these paid out of company earnings taxed on the small enterprise price) depend in direction of the minimal $5,000 in earnings required for eligibility. That’s as a result of enterprise homeowners have flexibility in how they are remunerated: salary or dividends.

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On this case, nonetheless, the CRA agent famous the taxpayer hadn’t reported any earnings or wage since 2013, and no dividends had been paid within the earlier 9 years. The taxpayer was additionally unable to offer particulars of the work he carried out, nor when it was carried out. No invoices or receipts have been accessible.

The taxpayer challenged the CRA’s denial of his advantages, and went to court docket in search of a judicial overview of the CRA officer’s determination. In these circumstances, the federal court docket decide’s position is to find out whether or not the CRA’s determination to disclaim the taxpayer CERB or CRB was “cheap.”

In court docket, the taxpayer argued that he met the CERB and CRB standards as a result of he declared greater than $5,000 of dividends, as evidenced by the T5 slip. He additional maintained, citing a 1990 Supreme Court of Canada decision, that dividends “represent a return on an funding and never a return for work or a service {that a} shareholder offers to an organization.”

However mere receipt of dividend earnings from his company was not enough for both the CRA officer or the decide. “With out proof that the (taxpayer) carried out work and was paid, it was not unreasonable for the (CRA) officer to conclude that he didn’t meet the eligibility standards,” the decide stated. “He failed to offer proof of (i) the work he carried out, (ii) when the work was carried out, and iii) no bill or receipt to help the work carried out.”

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Consequently, the decide, regardless of being sympathetic to the taxpayer’s monetary hardship in being requested to repay hundreds of {dollars} in advantages, concluded the CRA’s determination was cheap and that no reviewable error was made.

The second current case concerned a taxpayer who went to Federal Courtroom in search of a judicial overview of the CRA’s determination to disclaim him CRB for the two-week interval of Jan. 31, 2021, to Feb. 13, 2021, and the two-week durations from Feb. 28, 2021, to Oct. 23, 2021. He was being requested to repay $16,000 in advantages.

The taxpayer’s CRB utility was denied on the idea he had not earned a minimum of $5,000 of (self-)employment earnings in 2019, 2020, or within the 12 months earlier than the date of his first utility.

The taxpayer maintained the CRA officer’s determination “was unreasonable and must be put aside” as a result of the officer didn’t correctly think about invoices from the taxpayer’s  catering enterprise. The CRA officer had famous the invoices “didn’t present clients names or tackle (sic).” In court docket, nonetheless, the decide famous the invoices do, certainly, seem to offer the purchasers’ names together with their phone numbers.

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Whereas the taxpayer needed the decide to right away declare that he met CRB’s eligibility necessities and to annul the $16,000 owing to the CRA, the decide declined to take action as there was nonetheless some uncertainty as as to if the taxpayer met the factors since he didn’t declare any self-employment earnings in his 2019 or 2020 earnings tax returns.

As a substitute, the decide ordered the matter to be reviewed “afresh” by a distinct CRA officer who can “correctly think about the entire documentation submitted by the (taxpayer) to help his eligibility for the CRB.”

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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