Taxpayers show up in federal court almost every week hoping to hang on to their COVID-19 benefits after being found ineligible by the Canada Revenue Agency, but they are usually unsuccessful.
In almost all cases, the taxpayer simply doesn’t meet the qualification criteria or their evidence strains credulity. Before delving into the details of a recent case, here’s a quick refresher of the rules.
The Canada Emergency Response Benefit (CERB) and its replacement, the Canada Recovery Benefit (CRB), were the two main COVID-19 benefits available to individuals. The CERB was offered for any four-week period between March 15, 2020, and Oct. 3, 2020. To be eligible, an applicant had to demonstrate they had income of at least $5,000 from (self-)employment income in 2019 or in the 12 months preceding their first application.
The CERB was replaced by the CRB, which became available for any two-week period between Sept. 27, 2020, and Oct. 23, 2021, for eligible employees and self-employed workers who suffered a loss of income due to the pandemic.
CRB’s eligibility criteria were similar to CERB in that they required, among other things, that the individual had earned at least $5,000 in (self-)employment income in 2019, 2020 or during the 12 months preceding the date of their application.
The CERB and CRB benefits are most commonly selected for review by the CRA when it’s unclear if the taxpayer earned at least $5,000 of income in a prior qualifying period.
The most common types of qualifying income are employment or self-employment (that is, business) income, but the CRA has accepted that non-eligible dividends (generally those paid out of corporate income taxed at the small business rate) can count towards the minimum $5,000 in income required for eligibility since business owners have flexibility in how they pay themselves (salary or dividends).
It was the issue of dividends that became a problem in the current case, which involved a taxpayer who applied for and received CERB benefits from March 15, 2020, to Sept. 26, 2020, and CRB benefits from Sept. 27, 2020, to the end of October 2021.
The CRA concluded the taxpayer was not eligible for the benefits because he did not earn at least $5,000 from employment or self-employment for 2019, 2020, 2021 (as applicable), or during the 12 months preceding the date on which he submitted his applications.
The taxpayer disagreed and ultimately took the matter to Federal Court, seeking a judicial review of the CRA’s decisions to deny him the benefits.
As with prior judicial review cases, the role of the federal court is not to conclude whether or not the taxpayer was actually eligible for benefits, but rather to determine, in light of the evidence and arguments that were presented to the CRA, whether the agency’s decision to deny the benefits was “reasonable.”
In the years prior to review, the taxpayer ran a specialized publishing business, mainly aimed at professionals and contractors in the architectural field. During the pandemic, a paper shortage had a significant impact on his ability to print, and various printing houses were forced to cease operations. He attempted to convert his publication to a digital one in order to mitigate the consequences, but his revenues plummeted.
Although his business had never been profitable save for one year in the past, the taxpayer claimed to have received $7,000 in dividends from his company in 2020. On a personal level, the taxpayer also never declared any personal income except for the $7,000 in dividends declared for 2020. This $7,000 in dividends came under CRA scrutiny due to a series of bank transfers back and forth between his registered retirement savings plan (RRSP), himself and his corporation.
The taxpayer testified that he withdrew $10,000 from his RRSP in December 2019 with the plan to transfer it to his business bank account in order to “lower his business debt ratio … to make it eligible for a grant.”
According to the bank statements he provided, he transferred $10,000 from his personal bank account on Jan. 4, 2020, to his corporation’s account. On the same day, the corporation then transferred the $10,000 back to him. Three days later, he wrote a cheque for the same amount to his brother.
The company’s accounting records showed that the transfer of $10,000 was considered a payment of $3,000 to his wife for “writing,” and the $7,000 to the taxpayer was classified simply as “Withdrawals – Owners.”
In his 2020 income tax return, the taxpayer reported this $7,000 as dividend income, but did not file a T5 slip from the company showing the dividend. The corporation didn’t produce a 2020 T5 slip until Sept. 12, 2023, following requests from the CRA and its concern that the 2020 “dividend” was “problematic.”
The judge said that under Canada’s self-reporting tax system, the onus is on the taxpayer to provide sufficient evidence to support their application for COVID-19 benefits, and the CRA is entitled to ask the taxpayer to provide additional documents or information to prove their eligibility beyond a tax return.
This is supported by previous jurisprudence, which has found that the CRA is not required to solely rely on a tax return, but can also consider the evidence as a whole, which may include invoices and customer payment receipts, as well as information available through the agency’s internal records.
Based on the sequence of transactions between the taxpayer’s personal bank account and his business account prior to the payment of the dividend, as well as that the T5 slip was only completed retroactively in September 2023 following a request from the CRA, the agency felt the evidence was “not sufficiently credible” to demonstrate that he had earned sufficient income to meet the income eligibility requirement.
The judge agreed, concluding that the CRA’s decisions to deny the benefits were “reasonable and justified given all of the evidence on record.”