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opinion

Amin Mawani is an associate professor of taxation at the Schulich School of Business at York University in Toronto.

The federal government recently announced that all Canada Emergency Response Benefit (CERB) recipients who had received benefits while earning at least $5,000 in gross income in the 12 months preceding their applications would not have to repay their benefits, even though the rules as written required applicants to have (higher) earnings of at least $5,000 in net income.

Some CRA officials mistakenly told applicants during the first three weeks of the program launch that it was their gross incomes that needed to be at least $5,000. In Fall, 2020, CRA sent out letters to 411,000 CERB recipients suggesting that benefits they received could be repayable if their net income in the 12-month period before COVID-19 was not at least $5,000.

Hypothetically, if each repayment forgiven was an average of $8,000 net of income taxes, the cost to the treasury of forgiving, say, 300,000 CERB recipients (out of the 411,000 recipients who received the letters) who may not have earned at least $5,000 in net income will be $2.4-billion.

The income taxes payable on CERB benefits reduce the cost to the treasury, but tend to be minimal at the very low end of the income distribution.

CERB eligibility criteria did not include passive investment income, so someone earning $200,000 in interest income and $5,000 in gross professional income (before deducting expenses) could have been ill-advisedly eligible for the CERB benefits – as well as for subsequent relief from repaying the CERB benefits. However, CERB recipients with significant investment income will also incur high marginal taxes on the CERB benefits, so the net after-tax relief will be correspondingly limited.

CERB was not a poverty relief program, since it did not consider passive investment incomes of applicants. Instead, it was designed to offer relief for potentially missed earned income during COVID-related lockdowns. Those earning less than $5,000 in earned income were presumed to be dependent on sustainable incomes from investments, parents or adult children, and therefore not at economic risk during lockdown.

Fixing CRA communication errors is complex, since forgiving such repayments is inequitable to those who understood and abided by the CERB rules as written. Repayment of benefits based on ability to pay could take a long time if claimants have spent the benefits or have chronically low incomes.

This is not the first time that the CRA has given incorrect advice. The Fall 2017 Auditor-General’s report found that 30 per cent of information provided by CRA’s call centres was inaccurate. Fortunately, potential taxpayer recourse does exist.

Relief for incorrect advice from CRA officials or extreme taxpayer hardship can be sought through remission orders under Section 23(2) of the Financial Administration Act. Such orders can forgive taxes owed, as well as penalties and interest. This legislation would be applicable if CERB repayments were considered unreasonable or unjust, or otherwise not in the public interest.

Remission orders have been used before for child tax benefits paid in excess of the amounts entitled, where repayment would have caused hardship. Administered by the CRA, these remissions could be granted on a partial basis depending on hardship demonstrated using tax return information.

The upside of universal relief for repayments include lower stress and anxiety for those genuinely affected; assistance to Canadians with even lower incomes than those originally targeted by CERB (since Canadians with gross incomes of $5,000 are more likely to be poorer than those with net incomes of $5,000); and administrative efficiencies for the CRA. The downside of universal relief is that some recipients likely did not need their CERB benefits, and could have repaid if requested.

Targeted relief under Section 23(2) of the Financial Administration Act could have offered universal relief from interest and penalties, and partial or total relief for CERB repayments based on CRA’s case-by-case assessment of taxpayer hardship. Such assessments of hardship would be based on recipients’ other earnings information held by the CRA. Remissions would not be granted if CRA assessments concluded that recipients could repay over several years at no interest. For example, there may be no equity reason to offer relief to CERB recipients who had significant and growing investment income.

The total cost of universal relief is reasonably significant, notwithstanding that higher government spending is clearly warranted during the pandemic. Given that universal relief could set a poor precedent, targeted relief would be a more prudent and disciplined decision. Employees at the Department of Finance and the CRA likely offered several options to the Minister of National Revenue and the cabinet, including partial repayment for some CERB recipients with no interest or penalties. The decision to offer universal relief for CERB repayments seems to be based more on political grounds.

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