Winner and loser in CRA pandemic profit crackdown

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We don’t know with certainty when COVID-19 was first detected in people, however not less than one scientific research suggests a possible timing of the primary case was detected in China on Nov. 17, 2019. 4 years later, COVID-19 continues 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 by greater than 1,000 COVID-19 profit circumstances which are presently beneath overview by the Canada Income Company.

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Two latest 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 Profit (CERB) and its alternative, the Canada Restoration Profit (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 show that they had revenue of not less than $5,000 from (self-)employment revenue in 2019 or within the 12 months previous their first software.

CERB was changed by CRB, which turned 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 revenue 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 revenue in 2019, 2020 or through the 12 months previous the date of their software.

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. Every of the 2 latest circumstances concerned taxpayers requested to show they earned sufficient revenue.

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The primary case concerned a Quebec taxpayer who utilized for and obtained CERB for seven four-week durations (March 15, 2020, to Sept. 26, 2020), and subsequently utilized for and obtained 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 revenue slip for the 2020 taxation yr displaying dividend revenue of $7,479.60, which was filed on March 31, 2021.

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

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On this case, nevertheless, the CRA agent famous the taxpayer hadn’t reported any revenue or wage since 2013, and no dividends had been paid within the earlier 9 years. The taxpayer was additionally unable to supply 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 looking for a judicial overview of the CRA officer’s determination. In these circumstances, the federal court docket choose’s function 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 docket of Canada determination, 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 revenue from his company was not enough for both the CRA officer or the choose. “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 choose stated. “He failed to supply proof of (i) the work he carried out, (ii) when the work was carried out, and iii) no bill or receipt to assist the work carried out.”

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In consequence, the choose, regardless of being sympathetic to the taxpayer’s monetary hardship in being requested to repay 1000’s of {dollars} in advantages, concluded the CRA’s determination was cheap and that no reviewable error was made.

The second latest case concerned a taxpayer who went to Federal Court docket looking for 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 software was denied on the idea he had not earned not less than $5,000 of (self-)employment revenue in 2019, 2020, or within the 12 months earlier than the date of his first software.

The taxpayer maintained the CRA officer’s determination “was unreasonable and ought to be put aside” as a result of the officer did not correctly contemplate invoices from the taxpayer’s  catering enterprise. The CRA officer had famous the invoices “didn’t present prospects names or tackle (sic).” In court docket, nevertheless, the choose famous the invoices do, certainly, seem to supply the shoppers’ names together with their phone numbers.

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

As a substitute, the choose ordered the matter to be reviewed “afresh” by a special CRA officer who can “correctly contemplate all the documentation submitted by the (taxpayer) to assist 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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