Introduction -T4A Slips and COVID-19 Benefits
Millions of Canadians have been impacted by the ongoing COVID-19 pandemic. To ensure that Canadians continue to receive the financial support that they need, the Government of Canada introduced several benefit programs including, but not limited to: the Canada Emergency Response Benefit (CERB), the Canada Emergency Student Benefit (CESB), the Canada Recovery Benefit (CRB), the Canada Recovery Sickness Benefit (CRSB), the Canada Emergency Wage Subsidy (CEWS) and the Canada Recovery Caregiving Benefit (CRCB). As indicated by CRA, these benefits are taxable.
On January 11, 2021, the Government of Canada announced that the CRA will begin issuing T4A slips to COVID-19 benefit recipients to support their 2020 personal income tax filing. In particular, T4A slips will be issued by the CRA between January 11 and March 10, 2021. The T4A slip is similar to the T4 slip that Canadians receive from their employer, but the T4A slip includes the COVID-19 benefit amounts received during the 2020 taxation year. COVID-19 benefit recipients who applied for any of the above-mentioned benefits through their CRA My Account or an automated telephone service will receive a T4A slip from the CRA. However, COVID-19 benefit recipients who applied for and received Employment Insurance (EI) benefit payments or CERB, or both, from Service Canada will receive a T4E Statement of Employment Insurance and Other Benefits (instead of a T4A slip). The T4E slips include amounts received from EI and CERB received from Service Canada and is used by taxpayers to complete their personal income tax returns. Further, Québec residents will receive both a T4A slip and RL-1 slip. Similarly, the RL-1 slip provides employment and other income and is used by Québec residents to complete their personal income tax returns.
COVID-19 benefit recipients who do not receive a T4A slip from the CRA before March 10, 2021 may obtain their T4A slip information from their CRA My Account or by contacting the CRA by telephone. In addition, the Government of Canada is encouraging Canadians to contact the CRA as soon as possible if (i) they do not receive their T4A slip by March 10, 2021 (ii) they think there may be a mistake on their T4A slip (iii) they received a T4A slip in error (as they did not receive the COVID-19 benefit payment indicated on the T4A slip). On January 11, 2021, the Government of Canada explained that it will continue exploring options to response to mistakes and errors associated with the T4A slips as it continues to provide financial support to Canadians throughout the ongoing COVID-19 pandemic.
Canadians who receive a T4A slip, an RL-1 slip or a T4E slip are required to report the information as income when filing their 2020 personal income tax and benefit returns. COVID-19 benefit recipients who are registered for CRA My Account could have this information entered automatically if they select the "Auto-Fill My Return" function and file their 2020 income tax returns through the NETFILE-certified software. For COVID-19 benefit payments issued through CRB, CRSB or CRCB, there is a 10% tax withheld at source. However, tax was not withheld at source for CERB or CESB benefit payments. On January 11, 2021, the CRA explained that the T4A slips issued to Canadians are statements of income and they are not necessarily statements of amounts owed. Yet, many Canadians are worried about whether (or not) they will owe money once they file their 2020 income tax returns, as a result of the COVID-19 benefits that they received or errors relating to their T4A slip. This article provides tax guidance related to CRA's T4A slips in context of COVID-19 benefits, with specific focus on CERB.
The Concerns Associated with T4A Slips Issued by the CRA for COVID-19 Benefit
Canada's income tax system is self-reporting system. Accordingly, T4A slip, RL-1 slip and T4E slips support Canadians in their personal income tax filing. Yet, there are significant concerns associated with the T4A slips issued from the CRA to COVID-19 benefit recipients.
As previously mentioned, the Government of Canada is encouraging Canadians to contact the CRA if there are mistakes on their T4A slip or if they have been issued a T4A slip in error. First, why does the Government of Canada think that there may be errors associated with the T4A slips issued by the CRA. This perspective by the Government of Canada raises concerns about the impact of COVID-19 benefits on the tax affairs and the finances of its recipients. The fact that the Government of Canada is acknowledging that a T4A slip may include a mistake or may be issued in error reflects its admission to CRA's mistakes and raises concerns relating to the CRA's uncertainty in administering and enforcing Canadian tax law and the COVID-19 Emergency Response Act. Perhaps the Government of Canada's acknowledgement of potential T4A slip errors is a reflection of the ongoing issues associated with the COVID-19 emergency benefit programs and their regulations. Even more problematic is the potential impact that such errors could have on Canadians and their taxable income. For example, a T4A slip error may result in some Canadian reporting inaccurate amounts of taxable income in their 2020 income tax returns.
Second, there should already be checks and balances set in place to reduce mistakes and prevent errors including, but not limited, issuing T4A slips that include mistakes or issuing T4A slips in error. The CRA is responsible for administering and enforcing the COVID-19 Emergency Response Act and it should provide its agents with the necessary training to prevent future and reoccurring mistakes from happening. Third, as previously mentioned, the Government of Canada is encouraging Canadians to contact the CRA concerning mistakes (made by the CRA) on their T4A slip. This is problematic because both the Government of Canada and the CRA should acknowledge the fact that a lay person who lacks knowledge in tax matters is not likely to understand the content of a T4A slip and/or recognize mistakes made by the CRA.
Article 11 of the Taxpayer Bill of Rights grants taxpayers the right to expect the CRA to be accountable for its actions, errors and omissions. This means that when the CRA makes a decision pertaining to a taxpayer's benefits and tax affairs, the CRA must be able to explain its decision and inform the taxpayer of their rights and obligations pertaining to the relevant decision. In this context, the CRA is accountable through Parliament to all taxpayers on the performance and results of its service standards. Just like the CRA is holding taxpayers accountable their decisions pertaining to their personal tax affairs, then the CRA should also be held to the same standard of accountability.
CRA's T4A Slips and CERB
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 were directly affected by the COVID-19 pandemic. Unlike other COVID-19 benefits (such as the CRB, the CRSB or the CRCB), tax was not withheld at source for CERB payments. As such, CERB recipients will receive a T4A slip or a T4E Statement of Employment Insurance and Other Benefits from the CRA and will have to report the information as taxable income when filing their 2020 income tax return. In addition, taxes owed on CERB benefit payments received will be reflected in the taxpayer's income tax balance.
The Concerns Associated with T4A Slips Issued to CERB Recipients
There are significant concerns associated with CRA issuing T4A slips to CERB recipients. As previously mentioned, on January 11, 2021, the Government of Canada acknowledged that the CRA may be issuing T4A slips with mistakes or it may be issuing T4A slips in error. On the one hand, CRA is issuing T4A slips to support Canadians in their 2020 income tax filings. On the other hand, the CRA is issuing T4A slips to Canadians with potentially inaccurate information that could result in many taxpayers reporting inaccurate amounts on their 2020 personal income tax filings.
In December 2020, the CRA issued over 650,000 "educational" letters to Canadians regarding the (i) verification of CERB eligibility; (ii) validation of CERB applications; and (iii) repayment of CERB. In particular, the CRA 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. While CRA's letters reflect its ongoing efforts to protect Canadians from fraudulent benefits claims and non-compliance and to ensure compliance with Canada's tax system, these letters and the potential errors associated with T4A slips issued for CERB confirm the ongoing issues associated with CERB. 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, a position that our top Canadian tax lawyers dispute. 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, Canadians are worried about whether (or not) they will have to repay back CERB and whether they will be taxed on income amounts from benefit that they did not receive.
In addition, 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. While CRA's letters make reference to "net pre-tax income," the CERB application does not mention "net pre-tax income." In addition, while CERB's eligibility criteria refer to "employment or self-employment income (before deductions)" the application did not define these terms. CRA's letters shed light to the fact that 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. Further, the fact that the CRA is issuing T4A slips with mistakes and is issuing them in error serves as further evidence of the ongoing concerns associated with CERB. Even more problematic is that while the Government of Canada acknowledged that communications, both the information provided to CRA's call centre agents and on the CERB website pertaining to the benefit have been unclear, now it is acknowledging that T4A slips may include mistakes or may be issued in error. This lack of consistency has led to the current situation of some Canadians having applied for CERB and subsequently being told they don't qualify. Moreover, this lack of consistency could result in many Canadians reporting inaccurate income amounts on their 2020 income tax returns, and some may even pay taxes on taxable income from benefits that they did not receive. Specifically, Canadians who received CERB in 2020 and who are subsequently found to be ineligible for the benefit will have to repay CERB in 2021 (assuming they did not repay it in 2020) and pay tax on their 2020 CERB income even though they repaid it (CERB) in 2021.
Further, there are ongoing concerns associated with the COVID-19 Emergency Response Act and the Canada Emergency Response Benefit Act. In particular, neither of the terms "gross income" or "net income" is used in the Canada Emergency Response Benefit Act. Rather, the term used is "total income". Yet, 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 the CRA has to apply the rules. So, it is the opinion of our certified specialist in income tax Canadian tax lawyer 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 well come down to a judicial interpretation. In addition, issuing T4A slips with mistakes or issuing them in error could further complicate taxpayer's understanding of their net income, total income and taxable income, and CERB's potential impact on their 2020 personal income tax returns. When designing a 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.
As previously mentioned, both the Government of Canada and the CRA should acknowledge the fact that a lay person who lacks knowledge in tax matters is not likely to understand the content of an erroneous T4A slip pertaining to CERB. So, it is entirely possible that taxpayers may overlook CRA's mistakes on their T4A slip and this is more likely to occur in circumstances where the taxpayer prepares and files his or her own returns (as opposed to engaging the services of a tax professional). Even more problematic is that taxpayers who receive a T4A slip in error, or who end up repaying the amount in 2021, and subsequently include such amounts as taxable income in their 2020 personal income tax returns may end up paying taxes on CERB amounts that they did not receive. Moreover, a T4A slip that is issued in error could result in the taxpayer ending up in a different tax bracket and therefore subjecting their entire income to a higher income tax bracket. Accordingly, T4A slips should be accurate and correct from the beginning and they should not be issued to Canadians who did not receive CERB. This demonstrates the need for carefully crafted and precisely designed benefit programs and applicable tax slips and information that include clearly defined terms, eligibility criteria, benefit amounts received and the applicable tax (whether it is withheld at source or not).
Clearly, there are ongoing concerns about the impact of CERB on taxes and the finances of its recipients. As previously mentioned, CERB recipients are required to report the amount on their T4A slip as income in their 2020 personal income tax returns. As such, all CERB recipients will be required to pay tax on the amount of CERB received and some will have to repay CERB. In December 2020, the CRA encouraged CERB recipients, who were subsequently found to have not met the eligibility criteria, to repay back any amounts for which they did not qualify by December 31, 2020. Furthermore, Prime Minister Justin Trudeau, subsequently, informed Canadians that they do not have to worry about repaying CERB "during Christmas" and they do not have to think of the "January 1, 2021 as any deadline" to repay CERB.
The ongoing COVID-19 pandemic has created much uncertainty and therefore many Canadians did not have the funds to repay back CERB (by December 31, 2020), and some of whom are unsure as to how or when they will pay it back. CERB recipients who repay it 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 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 which will not be filed until the year 2022. As such, CERB recipients who did not repay CERB back by December 31, 2020 will become burdened with the income tax liability in addition to the repayment amount. In addition, some Canadians may also not be capable of repaying CERB during 2021, in which case their refunds (for repaid amounts) will be further delayed. This demonstrates that need for benefit programs that have clear eligibility requirements and realistic expectations from all Canadians.
While the Canada Emergency Response Benefit Act does not provide for penalties on CERB repayment, and it also states that "no interest is payable on any amount owing" due to an "erroneous payment or overpayment." 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.
Pro Tax Tips - Tax Guidance and CRA's T4A Slips
As previously mentioned, information on a T4A slip must be reported as income when filing the 2020 personal income tax returns. Interest and potential penalties may be applicable for failure to report amounts provided in a T4A slip. Given the financial implications and ongoing concerns associated with T4A slips and 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. 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. Taxpayers should pay close attention to the information provided on their T4A slip to ensure that such information reflects the COVID-19 benefit amounts that they received and to avoid paying taxes on benefit amounts that they did not receive. If you have questions concerning your T4A slip or if you received a T4A slip from the CRA for a COVID-19 benefit payment that you did not receive 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.
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