Taxpayers still fighting CRA over COVID benefits and losing

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Taxpayers present up in federal court docket virtually 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 virtually 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 latest 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 essential 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 reveal that they had revenue of not less than $5,000 from (self-)employment revenue in 2019 or within the 12 months previous their first utility.

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 workers and self-employed staff who suffered a lack of revenue because of the pandemic.

CRB’s eligibility standards have been much like CERB in that they required, amongst different issues, that the person had earned not less than $5,000 in (self-)employment revenue in 2019, 2020 or in the course of the 12 months previous the date of their utility.

The CERB and CRB advantages are mostly chosen for overview by the CRA when it’s unclear if the taxpayer earned not less than $5,000 of revenue in a previous qualifying interval.

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

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

The CRA concluded the taxpayer was not eligible for the advantages as a result of he didn’t earn not less than $5,000 from employment or self-employment for 2019, 2020, 2021 (as relevant), or in the course of the 12 months previous the date on which he submitted his purposes.

The taxpayer disagreed and in the end took the matter to Federal Court docket, searching for a judicial overview of the CRA’s selections to disclaim him the advantages.

As with prior judicial overview instances, the position 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 gentle of the proof and arguments that have been offered to the CRA, whether or not the company’s determination to disclaim the advantages was “affordable.”

Within the years previous to overview, the taxpayer ran a specialised publishing enterprise, primarily aimed toward professionals and contractors within the architectural subject. Through the pandemic, a paper scarcity had a major influence on his means to print, and numerous printing homes have been compelled to stop operations. He tried to transform his publication to a digital one to be able to mitigate the implications, however his revenues plummeted.

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Though his enterprise had by no means been worthwhile save for one 12 months previously, the taxpayer claimed to have acquired $7,000 in dividends from his firm in 2020. On a private degree, the taxpayer additionally by no means declared any private revenue apart from the $7,000 in dividends declared for 2020. This $7,000 in dividends got here underneath CRA scrutiny on account of a sequence of financial institution transfers forwards and backwards 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 to be able to “decrease his enterprise debt ratio … to make it eligible for a grant.”

In line 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 information confirmed that the switch of $10,000 was thought of a cost of $3,000 to his spouse for “writing,” and the $7,000 to the taxpayer was categorized merely as “Withdrawals – Homeowners.”

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In his 2020 revenue tax return, the taxpayer reported this $7,000 as dividend revenue, 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 decide stated that underneath Canada’s self-reporting tax system, the onus is on the taxpayer to offer ample proof to help their utility for COVID-19 advantages, and the CRA is entitled to ask the taxpayer to offer extra paperwork or info to show their eligibility past a tax return.

That is supported by earlier jurisprudence, which has discovered that the CRA isn’t required to solely depend on a tax return, however can even take into account the proof as a complete, which can embrace invoices and buyer cost receipts, in addition to info accessible via the company’s inside information.

Primarily based on the sequence of transactions between the taxpayer’s private checking account and his enterprise account previous to the cost 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 reveal that he had earned ample revenue to fulfill the revenue eligibility requirement.

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

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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