Ottawa’s about-face to allow self-employed Canadians keep up to $14,000 in wrongly claimed emergency income support payments runs contrary to firmly established legal principles that say an honest mistake, even one based on the government’s own errors, doesn’t erase a tax debt.
Last Tuesday, the federal government said self-employed individuals who had received Canada Emergency Response Benefit payments, but who did not meet the requirement to have at least $5,000 in net income, would no longer be expected to repay their benefits. Those who had made a repayment are to receive refunds. (However, as is the case with all CERB recipients, the funds received are still considered to be taxable income.)
The decision was made after weeks of escalating anger over misinformation given out by the Canada Revenue Agency in the early days of the program, when some applicants were told that gross income could be used to meet that $5,000 threshold. Later, the CRA made it clear that only net income could be used, leaving some self-employed individuals ineligible because business expenses reduced their net income.
“We’ve heard from many Canadians who find themselves in difficult positions because of this honest [mis]understanding of their eligibility,” Employment Minister Carla Qualtrough told reporters on Tuesday, in announcing the reversal. (The government isn’t yet saying exactly how it will do so, but one option to erase those debts is to employ a rarely used power called a remission order.)
The rationale that Ms. Qualtrough cited – an honest mistake – doesn’t carry much legal weight in tax disputes, as typified by a 2014 Tax Court of Canada case involving Sylvain Deschamps, a Quebec construction worker. Mr. Deschamps contended that the Quebec revenue agency, or ARQ, had misinformed him on the need for him to charge and remit GST.
Justice Paul Bédard rejected that argument in his ruling. “The fact an employee from the ARQ misled the appellant cannot be accepted by the court and is not a valid reason to allow his appeal. The court is required to apply the provisions of the ETA [Excise Tax Act] adopted by Parliament, and not public servants’ interpretation of it,” he wrote, adding that a possible remedy for the misleading information provided to Mr. Deschamps was for the government to waive interest on the tax debt he owed.
Tax lawyers and tax accounting experts say that is typically the extent of the leniency provided to those who have acted mistakenly, but honestly, even when the government’s own mistake is at issue. Interest and penalties might be waived, and prosecution might not be pursued. But the actual tax liability will remain, leaving that taxpayer in the same position as someone else who had not acted in error.
“You owe what you owe, under the law,” said Hugh Neilson, a chartered professional accountant with Kingston Ross Pasnak LLP in Edmonton, adding that individuals who correctly interpreted the CERB eligibility rules and did not apply for payments are now at a disadvantage.
Shannon James, a senior associate in the tax group of Borden Ladner Gervais in Calgary, said taxpayers are able to ask for a remission order that does more than set aside interest and penalties, and actually erases a debt. But she said such orders are rare. (A 2019 research paper found that there were only 271 remission orders granted between 1998 and 2017.)
According to CRA guidelines, an error on the part of agency officials is one of the four legitimate bases for a remission. Extreme hardship is another possible basis.
In her comments on Tuesday, Ms. Qualtrough said the government had provided “unclear information.” And while she did not explicitly state that the government was granting relief because of financial hardship, her statements and those of Prime Minister Justin Trudeau hinted at as much.
That is certainly the case for some self-employed CERB recipients, such as Janet Ryan, a Mississauga pensioner and part-time tutor who was part of a lawsuit being assembled to challenge the government’s demands for repayment of benefits.
According to her lawyer, Jan D. Weir, Ms. Ryan had income of $28,000 in 2019, mostly from government pension payments but including around $5,000 in gross income from tutoring. Thinking that made her eligible for the CERB, she applied for benefits and received $14,000. But that money is now gone, said Mr. Weir. (For his part, Mr. Weir said he was preparing to challenge the government on the basis not that the CRA had provided erroneous information, but that the CERB legislation was worded in such a way that gross income was the correct means to assess eligibility.)
But the government is not requiring that anyone demonstrate financial hardship in order to keep their CERB payments. While it might seem self-evident that someone with net income below $5,000 would easily meet that test, the structure of the CERB program excludes many kinds of income from its eligibility calculation, including pensions and most kinds of investment income.
University of Waterloo economist Mikal Skuterud pointed out another complexity: Poverty is measured on the basis of household income, while CERB eligibility is assessed on an individual basis. So, a person with around $5,000 in income could live in a household with someone earning much more, and still legitimately qualify. A person with modest self-employment income could be part of a household with a high-earning spouse, or parent, he noted. In both cases, the individual’s income might be low, but the household’s income would be much higher – and a claim of financial hardship less plausible.
Tax and Spend examines the intricacies and oddities of taxation and government spending.