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It’s been more than three years since the government launched its various COVID-19 relief programs, but although the programs have long ended and the payments have ceased, the Canada Revenue Agency’s ongoing collection and audit activities continue as it attempts to recoup billions of dollars in questionable benefit payments.
Occasionally, a dispute will find its way to court, where a taxpayer will challenge the CRA’s decision to deny them benefits and ask the court to review the decision to determine whether it was reasonable. As in prior such cases, the court’s role is not to substitute its decision for that of the CRA officer, but to determine whether the agency’s decision was “reasonable,” meaning “one based on an internally coherent and rational chain of analysis that is justified, transparent and intelligible in relation to the applicable factual and legal constraints.”
The most recent COVID-19 benefits case, decided late last month, involved a Quebec couple who own several rental properties, including a house located near Quebec City on the north shore of the St. Lawrence River, which they rent out on Airbnb Inc.
In March 2020, due to the pandemic, the couple’s Airbnb rentals dried up completely for a period before slowly beginning to recover. Each spouse applied for and received the Canada Emergency Response Benefit (CERB) for seven two-week periods. Subsequently, the CERB was replaced with the Canada Recovery Benefit (CRB), and each of them received the CRB for 12 two-week periods. Although they had applied for additional CRB periods, these payments were frozen by the CRA pending a review of the couple’s eligibility.
After review, the CRA determined the couple was not eligible to receive the CRB because they had not satisfied the eligibility criteria, specifically that they had each not earned at least $5,000 net of employment or self-employment income in 2019, 2020 or the 12 months preceding their applications. The couple didn’t have a history of self-employment income, and the CRA noted the couple only recently amended their respective 2019 tax returns to reclassify $5,400 of rental income (each) as self-employment income.
The CRA has provided some guidance in recent years on how to report income from the “sharing economy,” which includes income from ridesharing and accommodation sharing. The CRA defines accommodation sharing as renting part or all of a property, typically for a short period. It can include renting out a primary or secondary residence, and encompasses any rentals facilitated by a third-party website, such as Airbnb and Vrbo.
It’s clear that all the income a taxpayer receives from an accommodation-sharing arrangement is subject to income tax, but the CRA may consider it to be either rental income from property or self-employment business income. The type of income affects how it should be reported on a tax return, which has consequences for registered retirement savings plan (RRSP) room (rental income counts as earned income for RRSP contribution room purposes), among other things.
To determine which type of income it is, the CRA advises taxpayers to consider the number and types of services provided to tenants. In most cases, the CRA will consider accommodation-sharing income to be rental income from property if the taxpayer rents out the space and provides only basic services such as heat, utilities, parking and laundry facilities.
On the other hand, the income may be considered self-employment business income if the taxpayer provides other services to tenants such as meals, security and cleaning. As the CRA notes, “the more services you offer, the greater the chance that income from your rental operation is considered business income.”
In the current case, the couple argued that part of their Airbnb income should be classified as self-employment income to properly reflect “the work they put into the property, namely the housekeeping services they perform between each rental along with the administration of the rental of the property.” They based the value of each cleaning service at $150, which, when calculated based on 72 rentals in 2019, totalled $10,800, or $5,400 each. The couple thus amended their 2019 tax returns to reclassify $10,800 of net rental income as self-employment income.
The CRA, however, was only prepared to allow a $60 housekeeping charge per rental, which was the amount indicated on a number of the Airbnb invoices submitted by the taxpayers, which ranged from $0 to $60. The CRA said taxpayers are permitted to engage in prospective tax planning, but “one cannot simply go back and reclassify rental income after the fact in order to qualify for the CRB.”
The taxpayers countered that the CRA officer “erred by taking into account the amounts indicated in the Airbnb invoices as they do not evidence the true cost of the cleaning services.” They said it was a “commercial strategy as to how much to charge the clients for the cleaning services,” and that the amounts on the invoices were “artificially low.”
At the trial, the judge said there was “no doubt … that the (taxpayers) were the ones who cleaned and prepared the property between Airbnb rentals.” But the role of the court is not to assess the time and effort they put into cleaning and preparing the property between rentals, but rather to determine whether it was reasonable for the CRA officer, based on the record before him, to make the conclusion he did.
The judge said that where a “certain level of services (is) provided alongside simply renting a property, a portion of the income may be business income.” Notwithstanding this, however, the judge noted the CRA did consider the taxpayers’ position as to the cleaning services, but chose instead to be guided by the amount indicated on a number of the Airbnb invoices provided by the taxpayers, adding that the taxpayers failed to provide any evidence whatsoever as to why a $150 cleaning charge per rental was a more appropriate sum.
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The judge ultimately dismissed the taxpayers’ case, concluding that they were “unable to point to a sufficiently serious shortcoming or flaw that would render the (CRA’s) decisions unreasonable.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected].
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