Introduction: Canada Recovery Benefit and The Canada Recovery Benefits Act

The Canada Recovery Benefits Act came into effect on October 2, 2020, and established the Canada Recovery Benefit ("CRB"), aiming to provide income support to employed and self-employed Canadians who were directly affected by the COVID-19 pandemic and were not entitled to Employment Insurance benefits. The CRB replaced the Canada Emergency Response Benefit on September 27, 2020, and officially ended on October 23, 2021. Although the last day to apply was December 22, 2021, tax consequences of claiming the CRB continue to impact the life of many Canadians. During the COVID-19 pandemic, the CRB application and review processes were greatly simplified in order for applicants to receive benefits quickly, which required the applicants to self assess their eligibility for the Canada Recovery Benefit. A simple questionnaire was available on the website of the Canada Revenue Agency, including questions regarding how the applicant's employment or self-employment was impacted, whether the applicant qualify for any other benefits, the applicant's residency and presence in Canada, and other personal information of the applicant.

As a result of the simplified processes, by the end of the COVID-19 pandemic when the Canada Revenue Agency began reviewing the CRB applications in detail, many applications were questioned and subsequently denied. To better understand the existing rules on CRB eligibility determination, this article discusses existing case laws and examines the Canadian Courts' decisions on whether the tax assessment of CRB eligibility by the Canada Revenue Agency was reasonable.

Section 3(1) Of The Canada Recovery Benefits Act

The eligibility requirements for CRB are set out in paragraphs 3(1)(d) and (e) of the Canada Recovery Benefits Act, providing that "a person is eligible for a Canada recovery benefit for any two-week period falling within the period beginning on September 27, 2020 and ending on October 23, 2021" if the person has had a total qualified income of at least $5,000 in 2019, 2020, or in the 12-month period preceding the day they apply for CRB. Such income, including employment and self-employment income, must be proven alongside the applicants' filed returns of income in respect of the 2019 or 2020 taxation year.

Applicants also should not have previously received any benefits under the Canada Recovery Benefits Act or have refused to work or return to work. Quarantine periods were also excluded from calculating applicants' entitlement to CRB if they were required to do so under any order made under the Quarantine Act, with certain exceptions.

Pearson v. Attorney General Of Canada ("AGC"): Voluntary Departure From Prior Employment Cannot Circumvent CRB Criterion

This Federal Court decision was released in July 2023, one of the most recent cases to discuss whether the Canada Revenue Agency has been reasonable in finding the Applicant ineligible for CRB. Mr. Pearson, the Applicant, resigned from his job in September 2020 and remained unemployed until the spring of 2021. He applied for the CRB for seven two-week periods between September 27, 2020 and February 27, 2021. In March 2021, upon the Canada Revenue Agency's review of Mr. Pearson's eligibility, he was found to be ineligible for the Canada Recovery Benefits.

After a failed second review in April 2022, Mr. Pearson filed a judicial review application against the assessment from the CRA, on the basis that his resignation happened prior to September 27, 2020. The Federal Court dismissed Mr. Pearson's application, finding that the decision of the Canada Revenue Agency was reasonable since Mr. Pearson's loss of employment was not due to the impact of the COVID-19 pandemic. The judge further noted that a person's decision to stop work voluntarily cannot "intentionally or unintentionally circumvent" the CRB criterion even where the decision predates the first CRB payment period.

Mr. Pearson's case demonstrated that the court intends to adopt a narrow interpretation of the CRB eligibility criteria. In other words, the court believes that "reasons related to COVID-19" or "due to COVID-19" should not include voluntary departure from prior employment. The Court chose not to consider the reasons why the applicant resigned or failed to work.

In Lajoie v Canada (Attorney General), 2022 FC 1088, absence from work due to a back injury during the COVID-19 Pandemic also did not count towards the loss of employment requirement. This line of ruling is unfortunate and harsh as the indirect impact of the COVID-19 Pandemic can be hard to prove. Using the scenario in Lajoie as an example, a back injury may not have prevented a taxpayer from working for an extended period of time if he or she was able to access medical service in a timely manner. Allowing the CRA to interpret the rules textually sets a dangerous precedent for the CRA to unreasonably expand their power by blaming taxpayers for incidents beyond the taxpayers' control.

Nadeem v Canada (Attorney General), 2023 FC 955 & Zaghloul v Canada (Attorney General), 2023 FC 244: Minimum Income Requirement of $5,000

Both Nadeem and Zaghloul concern decisions from the Canada Revenue Agency that the Applicants did not earn at least $5,000 of employment or net self-employment income in 2019, 2020, or the 12 months before the date of first applications of CRB.

The dispute in Nadeem focused on the $550 the Applicant allegedly earned as self-employment in addition to her employment income in 2020. The Applicant claimed that she had made the $550 in cash between January 2020 and March 2020 from working for her uncle around the house, providing domestic services. The Federal Court in Nadeem required the CRA to present reasons when making the proposition that certain income earned by a taxpayer should not be included in their income for the purposes of the CRB. Specifically, there must be "a rational chain of analysis" in CRA's decision to discount such income.

In Zaghloul, the Applicant argued that it was unreasonable for the CRA to not accept invoices instead of actual payment records as proof of income. The Applicant calculated his income based on invoices he issued. He was not paid accordingly by the company he invoiced due to that company's cash-flow difficulties. The CRA review acknowledged the invoices but decided that since the Applicant's bank statements did not show payments for those invoices, his income fell under the minimum income requirement. The Federal Court found that although the CRA did not specifically ask the Applicant to explain the invoices, the CRA has otherwise explained the inquiry of the Applicant's income and provided the Applicant an opportunity to present proof of income. In other words, the Applicant should have known the case to meet but failed to provide further relevant information to the CRA. Although the Canada Revenue Agency must inform applicants any requests for further documentation and information, the CRA is not required to inform taxpayers specifically what kind of evidence was required to support income eligibility (Hu v Canada (Attorney General), 2022 FC 1678 & Virani v Canada (Attorney General), 2022 FC 1480).

In addition, the Federal Court has held that mere rental income is not considered self-employment income in Smeele v Canada (Attorney General), 2023 FC 21. For example, with regards to income from Airbnb properties, income from providing services (e.g., cleaning, breakfast, etc.) can be included in the minimum income required for CRB but income from renting out the property must be excluded.

From the cases discussed above, the Federal Court has required the CRA to provide reasoning behind their decisions but generally accepted that the CRA has no duty to ensure taxpayers are fully aware of the decision-making process. Such precedent can be dangerous for taxpayers who are unfamiliar with CRA review processes, further creating unfair and unbalanced power structures between taxpayers and the CRA. Thus, to better prepare for CRA reviews, our experienced tax lawyers in Toronto are ready to help you navigate through the complicated administrative and legislative rules. We can help you understand your obligations and responsibilities and help you compile detailed lists of documents to establish proof or to satisfy other requirements for your tax matters.

Pro Tax Tips – Get Yourself Prepared For Possible CRB Eligibility Reviews

The Canada Revenue Agency has ramped up their efforts to review CRB applications in 2022 and 2023, leaving many taxpayers scrambling to respond to their inquiries. The most common issues in CRB eligibility reviews involve causes for loss of employment and proof of minimum income required. A Canada Recovery Benefits recipient must not have lost his or her employment due to reasons that are not directly related to the COVID-19 Pandemic. An applicant also cannot voluntarily resign and apply for the CRB. With regards to the minimum income required, the CRB eligibility review looks at the actual income someone has received in 2019 and 2020, which includes employment and self-employment income but excludes rental income.

To be best prepared for any potential or ongoing CRB eligibility reviews, you should keep track of all records of your taxes, income, revenue and expenses. If you are concerned about your obligations and responsibility in responding to the reviews, or need to challenge a CRA denial by filing a judicial review application to the Federal Court of Canada, our experienced Canadian tax lawyers can help you with preparing proof of income, filing required documents, and communicating with the Canada Revenue Agency, or with submitting a judicial review application.

Frequently Asked Questions

How Do I Know If I Was Eligible For The CRB?

You can refer to section 3(1) of the Canada Recovery Benefits Act, which sets out a detailed list of requirements and exceptions in relation to CRB eligibility. You can also search the Canada Revenue Agency website and locate the questionnaire previously used for CRB applications. The questionnaire can provide you with a simplified list of requirements that a CRB applicant has to meet.

If you have received notices from CRA requesting documents for proof of income, your CRB eligibility is under review and you should reach out to an experienced tax lawyer to understand your obligations and responsibilities.

What Happens If I Was Ineligible For The CRB?

If the CRA determines that you are ineligible for the Canada Recovery Benefits that you have claimed, they will ask you to repay the amount that the CRA believes you are unentitled to. If you refuse to pay the CRA back, they can choose to garnish your wages, impose penalties and interests, and put liens on your properties.

If you have concerns regarding your CRB eligibility, please contact our experienced Canadian tax lawyers for more information.

What Do I Do If CRA Has Denied My Application?

If your CRB eligibility is being audited, the Canada Revenue Agency usually provides you with an opportunity to submit proof prior to issuing a decision. You can apply for a second level review once you have received a negative decision from the audit. If your second level review application or your request for a second level interview is denied, then your next step will be filing a Judicial Review Application to the Federal Court. The process of preparing a long-term fight with the CRA can be daunting, especially at the Federal Court level, and we highly recommend that you talk to one of our experienced Canadian tax litigation lawyers if your application has been denied by the CRA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.