The CRA is cracking down on COVID-19 benefit payments as this taxpayer found out
The auditor general in December 2022 said a “minimum” of $27.4 billion in suspicious COVID-19 benefit payments need to be investigated by the Canada Revenue Agency because the government did not manage the various pandemic relief programs efficiently.
The auditor general’s 92-page report highlighted the government’s success in quickly setting up the six aid programs that doled out a total of $210 billion to individuals and corporations, but it also noted the CRA’s “lack of rigour” in identifying and recouping potential overpayments. The auditor general called on the government to “act now” before it’s too late since the law limits eligibility verification to 36 months after payment.
The CRA has sent out 825,000 debt notes (or “notices of redetermination”) to Canadians it suspects received ineligible or excess payments from a variety of the COVID-19 relief programs. Some benefit recipients, having received CRA notices questioning their eligibility, have taken the matter to court to let a judge determine whether the CRA was being “reasonable” in denying their benefits.
The most recent case, decided last week, involved a Quebec taxpayer who went to Federal Court in December seeking a judicial review of a decision by a CRA benefits validation officer who determined the taxpayer was ineligible to receive the Canada Recovery Benefit (CRB).
As a reminder, the CRB was introduced in late September 2020, at the end of the Canada Emergency Response Benefit (CERB) program, and was designed to offer financial support to eligible Canadians affected by COVID-19. In order to be eligible for the CRB for a given two-week period, an individual must have earned at least $5,000 of (self-)employment income in 2019, 2020 or in the 12 months prior to the date of their first CRB application.
This particular case involved a professional artist who applied for the CRB on Oct. 12, 2020. He received CRB payments of $1,000, bi-weekly, for the seven two-week periods between Sept. 27, 2020, and Jan. 2, 2021. On Jan. 12, 2021, his file was selected for an eligibility review and was assigned to a CRA benefits compliance officer. The CRA officer concluded the taxpayer had not met the minimum income threshold and was thus not eligible for the CRB.
In late January 2021, the taxpayer provided the CRA with documents to demonstrate he had earned $5,000 in 2019, made up of $5,467 of revenue relating to the rental of his Airbnb property, as well as $1,943 of revenue generated by renting out his car.
The problem was that when the taxpayer initially filed his 2019 tax return, he reported a net professional loss of $1,240, and failed to report the $7,410 in revenue that he claimed to have earned from his rental activities.
Curiously, about a week after disputing his COVID-19 benefits, he informed the CRA that he had “recently discovered an error with his (2019) tax return … and that he was applying for an adjustment.” He requested that his 2019 tax return be adjusted to report net self-employment income of $5,236.
In August 2021, the CRA’s first reviewing officer denied his CRB application, concluding the taxpayer had not met the minimum income threshold. The taxpayer subsequently applied for a second-level review. In October 2021, the second-level CRA officer informed him that the income from his Airbnb property, as well as from the rental of his car, was not considered self-employment income, but rather rental income, and did not qualify towards the $5,000 minimum (self-)employment income threshold, making him ineligible for the CRB.
The taxpayer was then granted a third-level CRA review to consider new information he wanted to submit, arguing his Airbnb rental income should be considered self-employment business income, as opposed to rental income.
As evidence, he cited the CRA’s archived interpretation bulletin IT-434RSR, Rental of Real Property by Individual, which states that “the operator of a rooming or lodging house, hotel or motel would normally be considered to be carrying on a business where, in addition to the basic services that relate to the operation and maintenance of the property … extra services such as the supply of cleaning and maid services, linens, washroom supplies, dining facilities, etc., are provided for the convenience and comfort of guests.”
The taxpayer argued he provided a variety of services to his Airbnb guests beyond merely the rental of the unit, including: cleaning services; meeting with guests to discuss restaurants, sightseeing and upcoming local events; supplying various food items such as coffee, tea, condiments and cooking oil; furnishing the unit with fresh linens and towels; 24-hour phone support if any issues arose; and fresh-cut flowers and chocolates (“for longer bookings”). As a result, the taxpayer argued his Airbnb income was self-employment income and not rental income.
Massive TFSA recontribution mistake puts taxpayer in CRA’s crosshairs
11 tax changes and new rules that will affect your finances in 2023
CRA tries to catch taxpayer who made an incorrect TFSA catch-up contribution
Five ways to take advantage of tax benefits when donating to charity
The third-level CRA officer rejected this argument, noting the Airbnb income reports separately broke down the fees that guests were charged for hosting and cleaning, but that only constituted about $550 of the total revenue in 2019, which was insufficient to qualify the taxpayer for the CRB.
In court, the taxpayer introduced a new argument, stating he “forgot to include as part of his 2019 income the sale of a large work of art for $6,000.” Some smaller prints were also sold during the year. He provided an affidavit from the purported client confirming the purchase of the artwork, but he was unable to produce any bank statement showing that payment was received. He also failed to report the income from those sales on his 2019 return, laying the blame on his partner, who “took care of their taxes and that the income from those works of art was missed — an honest mistake.”
But since this new information was not presented to any of the three CRA review officers, they couldn’t have taken it into consideration when reviewing his CRB eligibility. As a result, the judge found the CRA’s decision to deny the taxpayer the CRB to be “reasonable” and dismissed the taxpayer’s case.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.
If you liked this story, sign up for more in the FP Investor newsletter.