Self-employed and facing CERB repayments? There may be a simple fix, tax experts say

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Letters recently sent by the Canada Revenue Agency (CRA) have many self-employed Canadians fretting about whether they’ll have to repay thousands of dollars worth of the Canada Emergency Response Benefit (CERB).

Tax experts who spoke with Global News, however, say for some of them, there may be a simple possible solution.

Canada’s tax agency has said it’s been contacting CERB recipients for whom it can’t confirm employment or self-employment income of at least $5,000 in 2019 or in the 12 months prior to applying, which was one of the eligibility requirements for the benefit.

The letters say that, for self-employed Canadians, the qualifying income had to be “net pre-tax income,” which means gross income minus expenses, according to the CRA.

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Some self-employed Canadians who applied for CERB based on their income before claiming expenses and have less than $5,000 in net income now say they worry they’ll have to repay up to $14,000 worth of benefits, according to numerous social media posts and news reports.

But Toronto tax lawyer David Rotfleisch says there may be a straight-forward option for these CERB recipients to avoid the repayments.

“There is no obligation for a taxpayer to claim expenses,” says Rotfleisch, founder of Rotfleisch and Samulovitch Professional Corporation.

Self-employed CERB recipients who have filed their 2019 taxes should be able to easily amend their return by filing a T1-ADJ form on which they can reduce the expenses they claimed so that their net income rises above the $5,000 eligibility threshold, Rotfleisch says.

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“By potentially paying some tax … you will be able to claim and keep the whole CERB,” Rotfleisch says.

Gennaro De Luca, a certified financial planner who regularly helps small business owners with their taxes, also says amending one’s tax return should be “an easy way” to adjust net income reported to the CRA.

If, in fact, your gross revenue was above $5,000, you could eliminate some of your expenses and get your net revenue of $5,000 to fix that,” he says.

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CERB application wording ‘a large screw-up’

The CRA told Global News the letters it sent out are meant to “explain what qualifies as earned income to be eligible for CERB, and what does not.” It adds that those receiving such letters “should not interpret it as a determination that they have definitively been deemed ineligible for the CERB.”

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But many self-employed Canadians argue the wording of the online CERB application and eligibility requirements did not make it clear that applicants had to qualify based on their net income.

Global News has found a single mention of net income for self-employed CERB applicants buried deep in an official Q&A page on the CERB. The CERB application validation page, which is still online even though the benefit is no longer available, only mentions a requirement of “employment and/or self-employment income of at least $5,000.”

However, the eligibility criteria for the more recent Canada Recovery Benefit (CRB), which also has income-threshold requirements, clearly state that self-employed applicants should be looking at their net income.

“Self-employment income is your revenue minus any expenses incurred to earn the self-employment revenue,” the page reads.

Rotfleisch believes the clearer wording for the new CRB benefit is likely the result of the CRA learning from the communication issues around CERB, which he calls “a large screw-up.”

While tax experts understand that self-employment income when dealing with the CRA usually means net income, “if you’re not a tax practitioner, there is no way you would understand that from the website,” he says.

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Repayments and taxes

The CRA is encouraging CERB recipients who don’t meet eligibility criteria to repay any amounts for which they didn’t qualify by Dec. 31, 2020.

“This should not be misunderstood as a payment deadline,” the CRA told Global News via email. Canadians can repay the money after the end of the year, the agency said.

However, if you return a CERB payment after Dec. 31, “you will need to pay tax on the full CERB amount you received in 2020,” a CRA page on CERB repayments currently reads.

This raises the question of whether some taxpayers may have to pay income taxes in 2021 on benefits they already returned, De Luca says.

For example, if you returned $14,000 worth of CERB in January 2021, you may still have to pay taxes on that $14,000 on the 2020 tax return that you’ll file in the spring of 2021.

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“If an individual makes a repayment in 2021 as they have been determined to be ineligible for a benefit received in 2020, the individual will still receive a T4A tax slip for 2020 and will be expected to report the benefit as income on the individual income tax and benefit return for the 2020 tax year,’ the CRA told Global News via email.

The CRA says any taxes paid on your 2020 return for CERB amounts you repaid “will be adjusted after you file your 2021 taxes.”

Specifically, “any repayments made in 2021 will be recognized on a T4A slip for 2021, which will allow the individual to claim a deduction on the 2021 income tax and benefit return,’ the agency said via email.

The CRA also said via email that Canadians who applied for the CERB “in good faith” and are later required to pay money back won’t face penalties or interest.

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