Dithering and delaying on CERB

In early December, the Canada Revenue Agency (CRA) sent out 441,000 “education letters” to people who had received payments under the Canada Emergency Response Benefit (CERB). The letters told them they may not have earned the required amount of $5,000 from employment or self-employment in 2019 (or in the 12 months preceding the CERB application date) and may therefore have to pay back what they had received.

One issue that impacts thousands of these people is whether self-employment income means gross income or net income (i.e., income after expenses). This issue has been with us for months, and you would think the government might have reached a conclusion by now. It has not. In what must feel like death by a thousand cuts to many of those who received letters, Ottawa continues to dither and delay.

In early January, Employment Minister Carla Qualtrough said “it is completely unfortunate” that people were given conflicting advice by CRA representatives about whether to use gross or net income. It certainly was! But if they relied on CRA advice to use gross income, will the government cease and desist in its collection efforts? “As of now, we haven't decided to forgive them, no — I guess,” says Qualtrough, adding that “it's not impossible” that this policy could change. So CERB recipients who spent the cash on rent and groceries and cannot possibly repay so long after the fact are left dangling — I guess.

What is the basis for the new CRA position — that net income should be used? “Because that is how everything else is calculated,” says Qualtrough. Say what? Exactly what calculations is she talking about?

The CERB Act is new legislation. It refers to “total income,” and there is no guidance as to what that term means. But let's pretend — just for the fun of it — that we were looking at the tax act instead of the CERB Act, and the question was what does the term income (not total income) mean? What would the answer be?

Well, that depends. Under the tax act, income generally means net income after expenses, but not always. For example, interest expense is deductible if borrowed funds are used for the purpose of earning “income.” This must be net income right, as the minister says? Wrong. The Supreme Court of Canada has said that income means gross income under this provision, and that if Parliament had intended that income mean net income “it could have expressly said so.”

And what about penalties under the tax act? One penalty applies if a person fails to report an amount that is required to be included in computing income in the year and one of the three preceding years, with the penalty being 10 per cent of the unreported income. Does income mean net income? Nope. The CRA's position — a position it adopted more than 30 years ago — is that income means gross income.

For example, Roberta is a self-employed artist. In 2019, she earned $40,000 and had expenses of $38,000, or net income of $2,000. She failed to report this income on her personal tax returns after committing the same error the previous year. Her penalty is $4,000, which is 10 per cent of her unreported income — an effective tax rate of 200 per cent when compared with her net income.

In short, net income is most definitely not “how everything else is calculated” when the term income is used under Canadian law. In fact, the CRA was probably right to start with: the undefined term “total income” in the CERB Act means gross income. And if that is not what Parliament intended, it could have expressly said so. Which is precisely what Parliament did under the new Canada Recovery Benefits Act (CRBA), which defines income from self-employment to be revenue less expenses, a definition that does not exist under the CERB Act. CRBA may well be the right way to do it. But that's no help to CERB recipients.

Last week, the Dutch government resigned as a result of a scandal under which thousands of families were wrongly accused of child welfare fraud. Thousands of Canadians have now been accused of CERB fraud or error by this government. It will be a cold day in hell before this government resigns but it could at least admit its error, accept that total income under the CERB Act means gross income, stop distressing thousands of CERB recipients who acted in good faith, and get on with governing in the midst of a pandemic.

IT REFERS TO `TOTAL INCOME,' AND THERE IS NO GUIDANCE AS TO WHAT THAT TERM MEANS.