Taxpayers still fighting CRA over COVID benefits and losing

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Taxpayers present up in federal court docket nearly each week hoping to hold on to their COVID-19 benefits after being discovered ineligible by the Canada Revenue Agency, however they’re normally unsuccessful.

In nearly all instances, the taxpayer merely doesn’t meet the qualification standards or their proof strains credulity. Earlier than delving into the main points of a current case, right here’s a fast refresher of the principles.

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The Canada Emergency Response Benefit (CERB) and its alternative, the Canada Restoration Profit (CRB), have been the 2 foremost COVID-19 advantages accessible to people. The CERB was provided for any four-week interval between March 15, 2020, and Oct. 3, 2020. To be eligible, an applicant needed to exhibit that they had earnings of no less than $5,000 from (self-)employment earnings in 2019 or within the 12 months previous their first software.

The CERB was changed by the CRB, which grew to become accessible for any two-week interval between Sept. 27, 2020, and Oct. 23, 2021, for eligible staff and self-employed staff who suffered a lack of earnings as a result of pandemic.

CRB’s eligibility standards have been just like CERB in that they required, amongst different issues, that the person had earned no less than $5,000 in (self-)employment earnings in 2019, 2020 or through the 12 months previous the date of their software.

The CERB and CRB advantages are mostly chosen for evaluation by the CRA when it’s unclear if the taxpayer earned no less than $5,000 of earnings in a previous qualifying interval.

The commonest kinds of qualifying earnings are employment or self-employment (that’s, enterprise) earnings, however the CRA has accepted that non-eligible dividends (typically these paid out of company earnings taxed on the small enterprise charge) can rely in direction of the minimal $5,000 in earnings required for eligibility since enterprise house owners have flexibility in how they pay themselves (wage or dividends).

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It was the problem of dividends that grew to become an issue within the present case, which concerned a taxpayer who utilized for and obtained CERB advantages from March 15, 2020, to Sept. 26, 2020, and CRB advantages from Sept. 27, 2020, to the top of October 2021.

The CRA concluded the taxpayer was not eligible for the advantages as a result of he didn’t earn no less than $5,000 from employment or self-employment for 2019, 2020, 2021 (as relevant), or through the 12 months previous the date on which he submitted his purposes.

The taxpayer disagreed and finally took the matter to Federal Courtroom, searching for a judicial evaluation of the CRA’s choices to disclaim him the advantages.

As with prior judicial evaluation instances, the function of the federal court docket is to not conclude whether or not or not the taxpayer was really eligible for advantages, however somewhat to find out, in mild of the proof and arguments that have been introduced to the CRA, whether or not the company’s determination to disclaim the advantages was “affordable.”

Within the years previous to evaluation, the taxpayer ran a specialised publishing enterprise, primarily geared toward professionals and contractors within the architectural discipline. In the course of the pandemic, a paper scarcity had a major impression on his capacity to print, and varied printing homes have been compelled to stop operations. He tried to transform his publication to a digital one with the intention to mitigate the results, however his revenues plummeted.

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Though his enterprise had by no means been worthwhile save for one 12 months up to now, the taxpayer claimed to have obtained $7,000 in dividends from his firm in 2020. On a private degree, the taxpayer additionally by no means declared any private earnings aside from the $7,000 in dividends declared for 2020. This $7,000 in dividends got here underneath CRA scrutiny on account of a collection of financial institution transfers backwards and forwards between his registered retirement financial savings plan (RRSP), himself and his company.

The taxpayer testified that he withdrew $10,000 from his RRSP in December 2019 with the plan to switch it to his enterprise checking account with the intention to “decrease his enterprise debt ratio … to make it eligible for a grant.”

In accordance with the financial institution statements he offered, he transferred $10,000 from his private checking account on Jan. 4, 2020, to his company’s account. On the identical day, the company then transferred the $10,000 again to him. Three days later, he wrote a cheque for a similar quantity to his brother.

The corporate’s accounting data confirmed that the switch of $10,000 was thought-about a fee of $3,000 to his spouse for “writing,” and the $7,000 to the taxpayer was categorised merely as “Withdrawals – House owners.”

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In his 2020 earnings tax return, the taxpayer reported this $7,000 as dividend earnings, however didn’t file a T5 slip from the corporate displaying the dividend. The company didn’t produce a 2020 T5 slip till Sept. 12, 2023, following requests from the CRA and its concern that the 2020 “dividend” was “problematic.”

The choose mentioned that underneath Canada’s self-reporting tax system, the onus is on the taxpayer to supply adequate proof to assist their software for COVID-19 advantages, and the CRA is entitled to ask the taxpayer to supply extra paperwork or data to show their eligibility past a tax return.

That is supported by earlier jurisprudence, which has discovered that the CRA just isn’t required to solely depend on a tax return, however may contemplate the proof as an entire, which can embody invoices and buyer fee receipts, in addition to data accessible by the company’s inside data.

Primarily based on the sequence of transactions between the taxpayer’s private checking account and his enterprise account previous to the fee of the dividend, in addition to that the T5 slip was solely accomplished retroactively in September 2023 following a request from the CRA, the company felt the proof was “not sufficiently credible” to exhibit that he had earned adequate earnings to satisfy the earnings eligibility requirement.

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The choose agreed, concluding that the CRA’s choices to disclaim the advantages have been “affordable and justified given the entire proof on report.”

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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