Tax policy experts say government’s move to extend relief toward self-employed Canadians does not solve thorny problem
Last week, Prime Minister Justin Trudeau announced a swath of tax relief measures for beneficiaries of coronavirus-related income support, including self-employed individuals who received benefits without qualifying. But according to some tax policy experts, the government still has to contend with a thorny problem that it brought upon itself.
In a note published by the C.D. Howe Institute, Tommy Gagné-Dubé, Suzie St-Cerny, and Luc Godbout from Université de Sherbrooke noted that in its announcement relating to Canada Emergency Response Benefit (CERB) tax relief, the government said self-employed individuals who applied for the CERB even though they did not meet a maximum net-income threshold of $5,000, but would have qualified based on their gross income, will not have to repay the benefit as long as they met all other eligibility criteria.
“For the self-employed, the issue of income, gross or net, was immediately raised when the program launched,” the three experts said. “In mid-April, at a Quebec financial planning webinar, CRA officials were still unable to confirm whether the $5,000 test applied on the basis of gross or net income. A week later, the Employment and Social Development Canada (ESDC) confirmed net income was to be used.”
Unfortunately, the government appeared to fall short in ensuring that the correct details were propagated among self-employed taxpayers. In December, the Canada Revenue Agency (CRA) issued letters requesting repayment to self-employed Canadians who apparently misunderstood that their threshold for CERB eligibility should be based on gross income, when it fact it should have been net income.
At that point, Gagné-Dubé and his co-authors said the government had two options to resolve the situation. The best one, they asserted, would have been to stand pat on the net-income criterion; in this case, they said, the government should still have accepted some measure of accountability, possibly by offering interest-free repayment schedules to those self-employed taxpayers who incorrectly but apparently innocently applied for CERB.
A more expensive second option, they said, would have been a retroactive change to the income test so that it’s based on gross income, thereby addressing the initial ambiguity and ensuring consistent treatment of all self-employed people.
“Instead, the government has embarked on a third, more tortured path,” the academics said. “[T]he government’s choice to forgive self-employed workers who erroneously based their CERB claim on gross income amounts to a change solely for them. They don’t have to repay, and even those have already repaid can recover their repayment.”
With that decision, they said, Ottawa has effectively “rewarded” those who made an application without meeting the actual criteria. They are allowed to keep their CERB payment, while those who correctly understood the $5,000 net-income threshold from the outset are not allowed to apply for CERB.
“[W]ith such an approach, what will an advisor say to any future client knowing that criteria can change after the fact?” Gagné-Dubé and his colleagues said, arguing that the government must “pursue its logic to the end” by allowing self-employed workers who would have been entitled to CERB based on the relaxed gross-income approach to apply for it.
“Finally, the government will need to better justify its approach and clarify why it is permitting a double standard,” they said.