Introduction – The Canada Emergency Response Benefit and Tax Audit
Millions of Canadians have been impacted by the ongoing COVID-19 pandemic. While some individuals have stopped working, others have been working reduced hours. In response, the Government of Canada introduced the Canada Emergency Response Benefit (CERB) in March 2020.
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. The purpose of CERB was to ensure that Canadians had the financial support that they needed.
In October 2020, the Canada Revenue Agency (CRA) announced that it will conduct benefits validation review to ensure that they have the correct information on file and that Canadians are receiving the right amount of benefits that they are entitled to. Consequently, in December 2020, the CRA issued over 650,000 letters to Canadians regarding the (i) verification of CERB eligibility; (ii) validation of CERB applications; and (iii) repayment of CERB. This article provides tax guidance related to CERB and CRA’s tax audit of CERB claims.
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.
The CERB Application Process
CERB applicants applied for the benefit through their CRA My Account or an automated telephone service. The CERB application asked individuals to disclose the period of eligibility for which they were applying for and then to certify that they met the above-mentioned eligibility criteria.
The CERB Claim Period
As previously mentioned, between March 15 and September 26, 2020, CERB recipients received $2,000 for a 4 week-period. The eligibility periods were as follows:
- Period 1: March 15 to April 11, 2020
- Period 2: April 12 to May 9, 2020
- Period 3: May 10 to June 6, 2020
- Period 4: June 7 to July 4, 2020
- Period 5: July 5 to August 1, 2020
- Period 6: August 2 to August 29, 2020
- Period 7: August 30 to September 26, 2020
Effective September 27, 2020, CERB recipients may have been eligible to transition (from CERB) to Employment Insurance or the Canada Recovery Benefit (CRB). The purpose for this transition was to ensure that Canadians continue to receive the financial support that they needed during the COVID-19 pandemic.
CERB Review and Tax Audit
As previously mentioned, recently the CRA issued over 650,000 letters to CERB recipients pertaining to the (i) verification of CERB eligibility; (ii) validation of CERB applications; and (iii) repayment of CERB. The purpose of benefits review and tax audit include, but are not limited to, (i) the CRA ensuring that they have the correct information on file, and (ii) that Canadians are receiving the amount of benefit to which they are entitled.
Verifying CERB Eligibility
The CRA is verifying whether (or not) CERB recipients are eligible to receive the benefit. Accordingly, CERB recipients may have received (or may receive) a letter from the CRA asking them to contact the CRA to validate their CERB application. In certain circumstances, the CRA will be comparing employers’ payroll records with the information provided by CERB recipients to ensure that claimants who returned to work and who have therefore become ineligible for the benefit repay the applicable amounts. As such, CERB recipients who are subsequently found to be ineligible for the benefit will be asked to repay the applicable amount.
The Validation of CERB Applications
The CRA is validating CERB applicants to maintain public confidence in Canada’s income tax system and to ensure that payments were made to Canadians who needed them the most. Some CERB recipients may have received (or may receive) a letter from the CRA asking them to contact the CRA to validate their CERB application. In particular, CERB recipients may be asked to contact the CRA to (i) confirm their personal information (ii) verify that they meet CERB’s eligibility criteria (iii) review their account activity, where the CRA detects any suspicious behavior.
In addition, the CRA also issued letters to many self-employed Canadians regarding the repayment of the CERB. In this context, 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.
As previously mentioned, the CRA is also examining and comparing payroll records with the information provided by CERB recipients to ensure that those who are subsequently found to be ineligible for the benefit repay back the applicable amounts. As such, in certain circumstances, CERB recipients have been asked to provide the CRA with any of the following documents:
- Recent pay slips
- Employer name and address
- Record of Employment
- Statement of Benefits
- Invoice for service(s) rendered
- Receipt of payment for service(s) provided
- Other relevant and applicable information
To validate a CERB application, the CRA will review claimants’ information on record and consider any support documents provided to establish eligibility. In addition, the CRA may contact third parties, including issuers of supporting documents to authenticate the contents of the document provided.
Although CERB in no longer available, its application validation page is still online, which mentions that additional documents required to validate CERB applications 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.
The Benefits & Concerns Associated CERB
CERB reflects the Government of Canada’s commitment to providing financial support to Canadians who are impacted by the COVID-19 pandemic. However, there are ongoing concerns regarding CRA’s (i) validation of CERB applications (ii) verification of benefit eligibility (iii) CERB repayments, and (iv) its potential financial implications on Canadians.
As previously mentioned, recently the CRA issued letters to self-employed Canadians pertaining to the repayment of CERB. 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, there are significant issues associated with CRA’s approach to CERB repayment. 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. 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. In addition, while CRA’s letters make reference to “net pre-tax income,” the CERB application does not mention “net pre-tax income.” Further, while the above-mentioned eligibility criteria refer to “employment or self-employment income (before deductions)” the application does not define these terms. Even more problematic is that 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. This lack of consistency has led to the current situation of some Canadians having applied for CERB and now being told they don’t qualify.
In addition, 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 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 well come down to a judicial interpretation.
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, CERB’s application and eligibility criteria 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 (before deduction). Accordingly, 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. This demonstrates the need for carefully crafted and precisely designed benefit programs that include clearly defined terms and eligibility criteria.
Further, there are concerns about the impact of CERB on taxes and the finances of its recipients. CERB recipients are required to report the amount from their T4A tax slip in their 2020 income tax return and some will have to repay back the applicable amount. 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. Yet, 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 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 which will not be filed until the year 2021. 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.
Moreover, the CRA recently expressed 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. 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 CERB Tax Audit
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 Canadian tax lawyers.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."