Being paid in cash causes problems for two taxpayers who claimed COVID-19 benefits

being paid in cash causes problems for two taxpayers who claimed covid-19 benefits

If you’re getting paid in cash, make sure you have a record of it.

It’s perhaps no secret that nearly all casual babysitting services are paid in cash. After all, it’s fast, easy and convenient. But the main reason a sitter may request cash for their services is that there’s no record of them having received the income, making the amounts nearly impossible to trace should the Canada Revenue Agency question the sitter’s reported income under our self-assessment, “honour” tax system.

But the lack of appropriate records can prove problematic for some taxpayers. For example, a parent who incurs babysitting costs to enable them to earn income from employment, carry on a business or attend school may be able to claim those costs as tax-deductible child care . It would be wise for them to hang on to proof of payment should the CRA question the deductibility of those expenses.

The receipt of cash, even if reported on a return, can also be problematic for the sitter. Two recent cases dealt with babysitter claims for COVID-19-related benefits , each of which hinged on whether they could prove they earned at least $5,000 in income to qualify. Let’s take a brief look at each case.

The Alberta grandmother

The first case involved an Alberta taxpayer who immigrated to Canada from Bangladesh following the death of her husband in 2001. She lives with her son and his family, and provided babysitting services for her son’s children, for which she was paid in cash. In 2020, she applied for benefits under the Canada Recovery Benefit (CRB) program, and collected benefits for two periods in the fall of 2020.

Subsequently, the CRA conducted a validation review for CRB eligibility and asked the taxpayer to submit documents to support her claim that she met the criteria of having a minimum earned income of $5,000 in 2019, 2020 or in the 12 months preceding the date of her benefit application.

The taxpayer submitted a letter dated Nov. 27, 2020, enclosing babysitting receipts for 2019 and 2020, as well as a partnership income statement for the 2019 tax year relative to a business in Bangladesh. The CRA, after reviewing the documents, concluded she didn’t meet the criteria. The taxpayer asked for a second review, which was conducted in February 2021, but the CRA reached the same conclusion.

The taxpayer then appealed to Federal Court, asking it to determine whether the CRA’s decision to deny her the CRB was “reasonable.” As with prior decisions, the court must decide whether the decision under review “bears the hallmarks of reasonableness — justification, transparency and intelligibility — and whether it is justified in relation to the relevant factual and legal constraints that bear on that decision.”

The taxpayer claimed she was paid $3,500 in babysitting income in 2019, and $1,600 in 2020, which, when combined with her Bangladesh income, would exceed the $5,000 required threshold. But all payments were made in cash, and the evidence that was submitted — a combination of invoices and bank statements — “did not add up,” according to the CRA.

The CRA concluded there was insufficient documentary evidence to support the taxpayer’s claim of babysitting income. As a result, the judge found “no reviewable error” in the CRA’s decision, and thus no basis for judicial intervention.

The Quebec babysitter

The second case, which was decided last week, involved a babysitter who claimed the Canada Emergency Response Benefit (CERB) for the seven four-week periods from March 15, 2020, to Sept. 26, 2020, receiving a total of $14,000 in government benefits.

In October 2020, the taxpayer’s file was selected for a first review of CERB eligibility. In order to be eligible, a taxpayer had to meet two criteria: income of at least $5,000 from (self)employment in 2019 or in the 12 months preceding the first CERB application, and have stopped working due to COVID-19.

The taxpayer stated he worked in 2019 as a babysitter in a private home. That year, his employer lost his job and the sitter found himself unemployed. He looked for new work, but was unsuccessful.

The reviewing CRA officer requested proof of income for the amount of self-employment income claimed, noting that the taxpayer had “no documentation supporting the invoices submitted, and no bank statement, since he was paid in cash and did not deposit the amounts paid” in a bank account.

The CRA also had trouble with the second criterion. Although the taxpayer was working in 2019, he was terminated in 2019 after his employer lost his job. Since “there was no talk of COVID-19 in 2019,” the taxpayer cannot have lost his job due to COVID-19. The CRA agent, therefore, concluded the taxpayer was ineligible for the CERB based on the information submitted.

The taxpayer requested a second-level review, which was conducted by a different CRA officer in December 2020. That officer also concluded he was ineligible for the CERB.

In November 2021, the taxpayer asked the Federal Court to determine whether the CRA’s decision to deny him the CERB was reasonable. The judge, after reviewing all the evidence, concluded that “the reasons given by the (CRA) agent for rejecting the CERB application are intelligible and justified in light of the evidence and the CERB legislative regime.”

As the judge cautioned, “A taxpayer who wishes payment in cash must be all the more concerned to be able to prove the payment in order to obtain a benefit under the act. It was up to the officer to assess the sufficiency of the evidence and, in this case, she was not satisfied with the evidence filed by the (taxpayer).”

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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