Taxpayers nonetheless preventing CRA over COVID advantages and shedding

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Taxpayers present up in federal courtroom nearly each week hoping to hold on to their COVID-19 advantages after being discovered ineligible by the Canada Income Company, however they’re normally unsuccessful.

In nearly all circumstances, 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 foundations.

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The Canada Emergency Response Profit (CERB) and its alternative, the Canada Restoration Profit (CRB), have been the 2 fundamental COVID-19 advantages accessible to people. The CERB was supplied for any four-week interval between March 15, 2020, and Oct. 3, 2020. To be eligible, an applicant needed to reveal that they had earnings of not less than $5,000 from (self-)employment earnings 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 staff and self-employed employees 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 not less than $5,000 in (self-)employment earnings in 2019, 2020 or throughout the 12 months previous the date of their utility.

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

The most typical forms 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 price) can depend 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 not less than $5,000 from employment or self-employment for 2019, 2020, 2021 (as relevant), or throughout 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, in search of a judicial assessment of the CRA’s choices to disclaim him the advantages.

As with prior judicial assessment circumstances, the function of the federal courtroom is to not conclude whether or not or not the taxpayer was really eligible for advantages, however quite to find out, in gentle of the proof and arguments that have been introduced to the CRA, whether or not the company’s determination to disclaim the advantages was “cheap.”

Within the years previous to assessment, the taxpayer ran a specialised publishing enterprise, primarily geared toward professionals and contractors within the architectural area. Throughout the pandemic, a paper scarcity had a big affect on his capacity to print, and numerous printing homes have been pressured to stop operations. He tried to transform his publication to a digital one as a way to mitigate the implications, however his revenues plummeted.

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Though his enterprise had by no means been worthwhile save for one yr previously, 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 attributable to a sequence 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 as a way to “decrease his enterprise debt ratio … to make it eligible for a grant.”

In response to the financial institution statements he supplied, 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 fee of $3,000 to his spouse for “writing,” and the $7,000 to the taxpayer was labeled merely as “Withdrawals – Homeowners.”

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

That is supported by earlier jurisprudence, which has discovered that the CRA shouldn’t be required to solely depend on a tax return, however can even contemplate the proof as a complete, which can embrace invoices and buyer fee receipts, in addition to data 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 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 reveal that he had earned enough earnings to satisfy the earnings eligibility requirement.

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The decide agreed, concluding that the CRA’s choices to disclaim the advantages have been “cheap and justified given all the proof on document.”

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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