Introduction – Will Self-Employed Canadians Have to Repay the Canada Emergency Response Benefit?
Recently, the Canada Revenue Agency (CRA) issued over 650,000 letters to many self-employed Canadians regarding the repayment of the Canada Emergency Response Benefit (CERB). In particular, the CRA is focused on contacting CERB recipients for whom it cannot confirm (1) employment or (2) net self-employment income of at least $5,000 earned in 2019 or the 12 months prior to applying to CERB, which is one of CERB's eligibility criteria. The CERB provided up to $14,000 in financial support to employed and self-employed Canadians who were directly affected by the COVID-19 pandemic.
CRA's letters are intended to be "educational." On the one hand, CRA's letters indicate that for self-employed CERB recipients, the "qualifying income had to be net pre-tax income." In this context, net pre-tax income means gross income minus expenses. On the other hand, these letters are asking CERB recipients for certain information to determine whether (or not) they met the income eligibility criteria for the benefit program. Subsequently, many self-employed Canadians are worried about whether (or not) they will have to repay back CERB. In particular, self-employed Canadians who applied to CERB based on their gross income but have reported less than $5,000 in net income are worried that they may be required to repay up to $14,000 worth of benefits.
According to the CRA, the letters are meant to "explain what qualifies as earned income to be eligible for CERB, and what does not" and they should not be "interpreted as a determination" of whether (or not) CERB recipients have been "deemed ineligible" for the benefit. Yet it is apparent from a review of the CRA website that the wording in CERB's online application and eligibility criteria did not make it clear that qualifying for the benefit was based on net income. In addition, although CERB in no longer available, its application validation page is still online, which mentions that additional documents required to validate Taxpayers' CERB application must have been provided to the CRA by December 7, 2020. While the CERB application validation page does not specify the consequences for Taxpayers who miss the December 7, 2020 deadline, it does state that in certain circumstances verification of information is required to process the application. In this context, it is likely that Taxpayers who do not meet the December 7, 2020 deadline for submitting additional information will likely be deemed ineligible for CERB and their application process will be deemed incomplete.
In addition, the CRA is encouraging CERB recipients who did not meet the eligibility criteria to repay back any amounts for which they did not qualify by December 31, 2020. Yet, the CRA explained that the December 31, 2020 is not a set repayment deadline for CERB. According to the CRA, CERB recipients who repay it back after December 31, 2020 will be taxed on the full amount of benefit received in 2020. For example, a self-employed CERB recipient who repays it back in January 2021 will be required to pay income tax on the repaid amount once he or she files their 2020 income tax returns. However, any taxes paid on a Taxpayer's 2020 income tax return for CERB amounts already repaid will be adjusted in the Taxpayer's 2021 income tax return. This means that CERB repayments made in 2021 will allow the Taxpayers to claim a deduction on their 2021 income tax return. According to the CRA, Canadians who applied to CERB in "good faith" and are subsequently required to repay it back will not face penalties or interest.
Yet, there are ongoing concerns associated with the repayment of CERB. As such, if you receive a letter from the CRA regarding the CERB repayment, it is highly recommended that you contact one of our certified specialists in taxation Canadian tax lawyers for appropriate tax guidance.
The Concerns Associated CERB Repayment
CERB repayment requests reflects CRA's ongoing efforts to protect Canadians from fraudulent benefits claims and non-compliance and to ensure compliance with Canada's tax system. However, there are significant issues associated with CRA's approach to CERB repayment. First, there is a clear gap between the words used in CERB's online application and eligibility criteria by the CRA, and their interpretations by Canadians. When designing the benefit program, the CRA should have acknowledged the fact that a lay person who lacks knowledge in tax matters is not likely to understand the meaning of net income or self-employment income, pursuant to Canada's Income Tax Act. In addition, the fact that the CRA is issuing letters to explain to self-employed CERB recipients what qualifies as earned income, when the benefit is no longer available, is problematic. This seems to suggest that the CRA is acknowledging the fact that CERB's application missed critical information for its eligibility criteria and now the CRA is attempting to correct its errors. CERB's application and eligibility requirements should have been clearly set from the beginning of the program in March 2020 and should have included clear definitions for net income and self-employment income. In particular, the CERB application should have required self-employed applicants to provide their gross income, expenses and resulting net income and it should have clearly indicated that if an applicant's net income is less than $5,000 (in 2019 or the 12 months prior to applying to CERB) he or she does not qualify for the benefit.
Second, the income tax liability may incentivize many Canadians to repay back CERB by December 31, 2020. However, the ongoing COVID-19 pandemic has created much uncertainty and therefore many Canadians do not have the funds to repay back CERB, some of whom are unsure as to how or when they will pay it back. As such, the repayment of CERB after December 31, 2020 will create an income tax liability for many Canadians, specifically self-employed recipients. Imposing an income tax liability on CERB repayments made after December 31, 2020 demonstrates how the Canadian government failed to consider the fact that many Canadians are unemployed due to the ongoing COVID-19 pandemic, most of whom do not have up to $14,000 for CERB repayment. Accordingly, CERB recipients who do not repay it back by December 31, 2020 will likely become burdened with the income tax liability in addition to the repayment amount. In addition, CRA's reference to Taxpayers' eligibility to claim a deduction on their 2021 income tax return (for CERB repaid in 2021) is also problematic because it overlooks the fact that some Canadians may also not be capable of repaying CERB during 2021, in which case their refunds will be further delayed. This demonstrates that need for benefit programs that have clear eligibility requirements and realistic expectations from all Canadians.
Third, as previously stated, the CRA explained that Canadians who applied to CERB in "good faith" and are subsequently required to repay it back will not face penalties or interest. However, this raises questions surrounding Canadians who applied for CERB in good faith and are later required to repay it back, but do not have the funds for the repayment. In particular, will Canadians who are unable to repay CERB for two to three years face penalties or interest? In addition, this raises questions around penalty and interest that can potentially be imposed on Canadians who are unable to pay the income tax imposed on CERB repayments made post December 31, 2020. It should be noted that the "Request for Taxpayer Relief – Cancel or Waive Penalties and Interest" (Form RC4288) (previously known as a fairness application) is a viable option for Canadians with a tax debt consisting of potentially large interest and penalty amounts, including those arising from receipt of CERB. As such, if you are considering making a request for taxpayer relief to cancel or waive potential interest and penalties arising from receipt of CERB, you can contact one of our certified specialists in taxation Canadian tax lawyers for appropriate tax guidance.
Fourth, according to the CRA, the Government of Canada's communications were "unclear" when CERB was first introduced to Canadians. The CRA acknowledged that there was a lack of clarity between the CERB webpages and the information and instructions provided to CRA's call centre agents (from the Canadian government) on the CERB eligibility. Consequently, CRA agents provided Canadians with incorrect information including that CERB's eligibility criteria was based on gross income, not net income. The CRA explained that the "lack of consistent clarity" between the information it received from the Canadian government and the incorrect information it (the CRA) provided to Canadians resulted in some self-employed Taxpayers mistakenly applying to CERB, despite their ineligibility for the benefit. This is problematic because it seems that the CRA is attempting to shift the focus away from its own errors and omissions, to the Government of Canada. The CRA is responsible for administering and enforcing the Income Tax Act and therefore it must acknowledge its errors and omissions and consider how its wrongdoing can create financial hardship for Canadians. Even if the CRA is correct and that its agents were provided the wrong information about CERB eligibility criteria and those agents passed such incorrect information onto Canadians, taxpayers should not have to pay for the errors or omissions made by the CRA and/or the Government of Canada.
There are ongoing concerns associated with the repayment of CERB including, but not limited to, the determination of eligibility criteria and potential income tax implications. This demonstrates the need for carefully crafted and precisely designed benefit programs that include clearly defined terms and eligibility criteria. The CRA must take responsibility for its misinformation and misguidance in the CERB application and eligibility requirements. In particular, the CRA should also be held accountable for its failure to set clear income threshold requirements and definitions accordingly. In addition, the Canadian government should honor CERB's application and eligibility criteria that it set in place at the beginning of the program in March 2020, not after the program is no longer available.
How Self-Employed Canadians Can Avoid the CERB Repayment?
Self-employed CERB recipients who filed their 2019 T1 personal income tax return showing gross income in excess of $5,000 but net income below $5,000 can amend those returns by filing Form T1-ADJ wherein they can reduce the expenses claimed to increase their net income to above $5,000 in order to meet the CERB eligibility threshold. Although this may result in some CERB recipients potentially incurring a tax liability, they should thereby qualify for CERB and be able to avoid the repayment. The key is that while Canadian taxpayers are required to report all income they are not obligated to claim expenses on their income tax returns. As such, CERB recipients should be able to amend their 2019 income tax return in order to be eligible for CERB and avoid having to repay it.
As previously mentioned, one of CERB's eligibility criteria is: employment or self-employment income of at least $5,000 earned in 2019 or the 12 months prior to applying to CERB. In addition, to become eligible for CERB, Canadians must meet the following conditions:
- An applicant did not apply for, nor receive, CERB or EI benefits from Service Canada for the same eligibility period;
- An applicant did not quit his or her job voluntarily;
- Must be present in Canada;
- Must be at least 15 years old;
- One of the following is applicable:
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- Work hours were reduced due to COVID-19;
- Employment ceased because of COVID-19;
- Applicant is unable to work due to COVID, because he or she is caring for another person; or,
- Applicant was receiving EI or fishing benefits for at least one week of benefits since December 29, 2019 and have used up his or her entitlement to those benefits.
- One of the following is applicable:
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- Applicants applying to CERB for the first time: must have stopped working, or working hours were reduced due to COVID-19, and does not except to earn over $1,000 in employment or self-employment income (before deductions) for at least 14 days in a row during the 4-week period; or,
- Applicants applying to CERB for a subsequent time: applicant is still not working, or is working reduced hours due to COVID-19, and does not expect to earn over $1,000 in employment or self-employment income (before deductions), and expects this to continue during the 4-week period.
In summary, CERB applicants must meet one of the above-mentioned criteria. As such, self-employed Canadians must have earned at least $5,000 in 2019 or the 12 months prior to applying to CERB. In this context, net income can be earned right up to the date of the CERB application, which would include income earned in 2020. Alternatively, self-employed Canadian can file Form T1-ADJ to amend their 2019 income tax returns in order to reduce the expenses claimed and increase their net income to above $5,000 to meet the CERB eligibility threshold. However, it is not clear that the CRA criteria are supported by the legislation.
The COVID-19 Emergency Response Act
In March 2020, the Canadian government introduced the COVID-19 Emergency Response Act. The purpose of the Act is to introduce and outline certain income tax measures as part of the Canadian government's response to the COVID-19 pandemic. In particular, part two of the COVID-19 Emergency Response Act enacts the Canada Emergency Response Benefit Act to "authorize the making of income support payments to workers who suffer a loss of income" due to the COVID-19 pandemic.
Yet, there are ongoing concerns associated with the COVID-19 Emergency Response Act and the Canada Emergency Response Benefit Act. In particular, the term "income" is not stated in the Canada Emergency Response Benefit Act. Rather, the term used is "total income". Furthermore, the term "total income" is also not defined in the Canada Emergency Response Benefit Act nor is it defined in Canada's Income Tax Act. This is problematic in context of determination of eligibility and how Canadians may (or may not) interpret the CERB legislation and governs how CRA has to apply the rules. So, it is entirely possible that the CRA interpretation of net income is incorrect and may not be supported by the courts if challenged. If CRA does not back down on their position it may welcome down to a judicial interpretation.
Further, the COVID-19 Emergency Response Act does not grant Canadians rights to object or appeal CRA's decision in context where their CERB claims are denied. This seems to overlook taxpayers' rights set out under the Taxpayer Bill of Rights. The Taxpayer Bill of Rights presents 16 rights relating to the treatment to which taxpayers are entitled to when dealing with the CRA and includes various avenues that taxpayers pursue if they believe that the CRA has not respected their rights. In particular, Article 4 of the Taxpayer Bill of Rights grants taxpayers the right to a formal review and a subsequent appeal. This means that if a taxpayer believes that he or she did not receive their full benefit entitlement under the Income Tax Act or the taxpayer is unable to reach an agreement with the CRA concerning their tax affairs, they (the taxpayer) may request a preliminary review of their CRA file. If the taxpayer is still not happy with the decision reached by the CRA officer assigned to conduct the preliminary review, they (the taxpayer) can appeal or seek a judicial review of that decision in the appropriate court and certain matters can be heard by the Canadian International Trade Tribunal. Under Article 4, objections, appeals and reviews may pertain to income tax assessments and reassessments, GST/HST assessments and reassessments, benefits and credits, pension and employment insurance assessments as well as relief requests and voluntary disclosures.
Further, under subsection 12(1) of the Canada Emergency Response Benefit Act, if the CRA determines that a CERB recipient is ineligible for the benefit or that he or she received an amount in excess of their eligibility amount "the person must repay the amount of the payment or the excess amount, as the case may be, as soon as is feasible." Note that, pursuant to section 14 of the Canada Emergency Response Benefit Act, interest is not payable on CERB repayments arising from "erroneous payment or overpayment." As previously mentioned, the ongoing COVID-19 pandemic has created much uncertainty and therefore many Canadians do not have the funds to repay back CERB, some of whom are unsure as to how or when they will pay it back.
If your CERB application was denied or if you received a letter from the CRA regarding CERB repayment and you disagree with CRA's decision, you can apply to the Federal Court of Canada for judicial review. An application for judicial review must be made to the Federal Court of Canada within 30 days from the date indicated on CRA's decision letter. While it is not cost justified for an individual taxpayer who is told that the $14,000 CERB has to be repaid to apply for judicial review, it is certainly possible that a legal aid clinic may fund an application.
Pro Tax Tips – Tax Guidance and the Repayment of CERB
Given the ongoing concerns associated with CERB, Canadians should bear in mind that any CRA tax audit, including an audit into a CERB application, can result in the CRA requesting access to details, including personal and financial records, that may not be relevant to the CERB claim as part of a broader tax audit. As previously mentioned, CERB recipients who are subsequently found to be ineligible for the benefit can face tax audit and will have to repay the amounts with income tax. If you have questions concerning CERB's eligibility criteria, or if you received a letter from the CRA pertaining to the repayment of CERB and you would like to dispute the CRA's decision please contact our tax law office for tax guidance from one of our top Canadian tax lawyers.