Introduction – Self-Employed Canadians May Not Have to Repay the Canada Emergency Response Benefit & Interest Relief for COVID-19 Income Support Recipients
In December 2020, 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 focused on contacting CERB recipients for whom it could not 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. Between March 15, 2020 and September 26, 2020, the CERB provided up to $14,000 in financial support to employed and self-employed Canadians who have been directly affected by the COVID-19 pandemic.
CRA's letters were intended to be "educational." On the one hand, CRA's letters indicated 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 asked CERB recipients for certain information to determine whether (or not) they met the income eligibility criteria for the benefit program. According to the CRA, the letters were 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 a review of the CRA website shed light to the fact 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, CRA's letters encouraged 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 was not a set repayment deadline for CERB. According to the CRA, CERB recipients who repay it back after December 31, 2020 would be taxed on the full amount of benefit received in 2020. Subsequently, many self-employed Canadians worried about whether (or not) they would 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 were worried that they may be required to repay up to $14,000 worth of benefits. While 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, CRA's letters shed light to the ongoing concerns (discussed below) associated with CERB.
In response, on February 9, 2021, the Government of Canada issued a news release addressing the ongoing conflicts associated with CERB repayment for self-employed Canadians. In particular, the Government of Canada announced that self-employed Canadians who applied for CERB and would have qualified for the benefit based on their gross income will not be required to repay it back, provided they met all other eligibility criteria (discussed below). According to the Government of Canada, this means that self-employed Canadians who reported a net self-employment income of less than $5,000 and who applied for CERB will not be required to repay CERB, provided that their gross self-employment income was at least $5,000 and they met all other CERB eligibility criteria. The Government of Canada also acknowledged that while some self-employed Canadians, whose net self-employment income was less than $5,000, may have already repaid CERB, the CRA and Service Canada will return any repaid amounts to those individuals.
In addition, the Government of Canada announced that it will provide targeted interest relief for Canadians who received COVID-19 related income support benefits. In particular, once Canadians "have filed their 2020 income tax returns, they will not be required to pay interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022". According to the Government of Canada, this will allow Canadians extra time and flexibility to pay their outstanding income tax debt, if any. To qualify for this targeted interest relief, Canadians must have had a total taxable income of $75,000 or less in 2020 and have received income support in 2020 through one or more of the following COVID-19 income support measures:
- Canada Emergency Response Benefit (CERB);
- Canada Emergency Student Benefit (CESB);
- Canada Recovery Benefit (CRB);
- Canada Recovery Caregiving Benefit (CRCB);
- Canada Recovery Sickness Benefit (CRSB);
- Employment Insurance (EI) benefits; or,
- Similar provincial emergency benefits.
The CRA will automatically apply the interest relief measure for Canadians who meet these eligibility criteria. According to the Government of Canada, any CRA administrated credits or benefits that is paid monthly or quarterly, such as the Canada Child Benefit (CCB) or the Good and Services Tax/Harmonized Sales Credit (GST/HST) will not be applied to reduce Canadians' tax debt owing for the 2020 tax year. As such, the Government of Canada is encouraging Canadians to file their 2020 income tax returns by the filing deadline, which is April 30, 2021, to ensure that their monthly and/or quarterly benefit payments continue without interruption. The Government of Canada presumes that this interest relief measure will provide an estimated 4.5 million low- and middle-income Canadians with flexibility in terms of accessing the COVID-19 income support without facing additional stress created by tax season. In this article, our top Ontario tax lawyers provide tax guidance related to CERB repayment and taxpayer relief.
The CERB Eligibility Criteria
CERB recipients received $2,000 for a 4 week-period between March 15 and September 26, 2020. Yet, to be eligible for the $2,000 CERB payment, applicants must have met the following criteria, during the period in which they applied for the benefit:
- Resided in Canada and were at least 15 years old;
- Earned a minimum of $5,000 (before taxes) in 2019 or in the 12 months prior to the date of the CERB application from one or more of the following sources (i) employment income (ii) self-employment income (iii) provincial benefit payments related to maternity or parental leave;
- Did not apply for, nor receive, CERB or Employment Insurance benefits from Service Canada for the same eligibility period;
- Applicant did not quit his or her job voluntarily;
- Met one of the following:
- Work hours were reduced due to COVID-19
- Stopped working because of COVID-19
- Unable to work because of COVID-19
- Applicant was paid Employment Insurance regular or fishing benefits for at least one week of benefits since December 29, 2019 and used up his or her entitlement to those benefits.
- Met one of the following:
- If applicant was applying for the first time: applicant stopped working, or was working reduced hours due to COVID-19, and did not expect to earn over $1,000 in employment or self-employment income (before deductions) for at least 14 consecutive days during the four-week period.
- If applicant was applying for a subsequent period: applicant was still working, or was working reduced hours due to COVID-19, and did not expect to earn over $1,000 in employment or self-employment income (before deductions), and he or she expected this to continue during the entire four-week period.
Concerns Associated with the Government of Canada's Approach to CERB Repayments
As previously mentioned, on February 9, 2021, the Government of Canada announced that self-employed Canadians who applied for CERB and would have qualified for the benefit based on their gross income (including Canadians who reported a net self-employment income of less than $5,000, as long as their gross self-employment income was at least $5,000) will not be required to repay it, provided they met all other eligibility criteria (as set out above). This information from the Government of Canada contrasts CRA's letters issued to self-employed Canadian regarding CERB and its eligibility criteria. Clearly, there is a lack of consistency from the Government of Canada and the CRA in context of CERB. This lack of consistency has resulted in many Canadians applying for CERB, subsequently being told that they do not qualify and repaying it back. Now although the Government of Canada is properly addressing concerns surrounding CERB's determination of eligibility and repaying issues for self-employment, these should have been clearly identified from the beginning of the program. Canadians have undergone significant and unnecessary stress over this improperly explained program.
In addition, as mentioned above, the Government of Canada acknowledged that while some self-employed Canadians may have already repaid CERB, the CRA and Service Canada will return any repaid amounts to those individuals. However, the Government of Canada has yet to release information and details relating to the return of repaid amounts. For instance, how long will Canadians have to wait for the return of their repaid amounts. The Government of Canada and the CRA should work collectively on prioritizing and expediting the return of repaid CERB amounts.
Concerns Associated with the Government of Canada's Interest Relief for COVID-19 Income Support Recipients
The February 9, 2021 Government of Canada announcement included interest relief measure for COVID-19 income support recipients. In particular, once Canadians "have filed their 2020 income tax returns, they will not be required to pay interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022. Accordingly, the Government of Canada is encouraging Canadians to file their 2020 income tax returns by April 30, 2021. However, it is unclear whether (or not) unfiled returns or a late filing could potentially impact a taxpayer's eligibility for this interest relief measure. The Canada Emergency Response Benefit Act does not provide for penalties on CERB repayment. 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 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 penalties arising from receipt of CERB, you can contact one of our certified specialists in taxation Canadian tax lawyers for appropriate tax guidance.
Interestingly, the Government of Canada explained that "the CRA will automatically apply the interest relief measure for Canadians who meet these eligibility criteria." This is a good concept but somewhat concerning considering all the mistakes and errors made by the CRA in context of CERB including, but not limited to: (1) providing Canadians with unclear information; (2) issuing T4As to CERB recipients with mistakes; and (3) issuing T4As in error to Canadians who did not receive CERB. So, it is likely that Canadians will have to double check their returns to ensure (1) that the CRA applied the interest relief, and (2) that the interest relief applied is accurate. The Government of Canada should acknowledge the fact that a lay person who lacks knowledge in tax matters is not likely to understand or be able to determine whether (or not) the CRA applied the interest relief and the applicable amount.
Pro Tax Tips - Tax Guidance, CERB Repayment and Tax Relief Measure
Given the financial implications and ongoing concerns associated with CERB, Canadians should bear in mind that any CRA tax audit, including an audit into a CERB application, the validation of a CERB application and the verification of eligibility, 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. 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 and with potential interest and penalties. 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 Ontario tax lawyers.
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