Self-Employed Canadians Do not Have To Repay CERB – Employment and HR

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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:
    • 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:
    • 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.

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.