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Money could also be king, however it could possibly trigger complications if the taxman denies your claims


Jamie Golombek: With no data, the burden of proof is definitely greater as this ‘impartial spirit’ from PEI came upon

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It’s typically stated that money is king, however it could not all the time be the most effective technique of fee with regards to coping with the taxman, who might ask you some robust inquiries to justify tax-deductible bills or, on the flip facet, reveal you earned a minimal quantity of qualifying revenue to make the most of numerous advantages or credit.

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For instance, there’s been a slew of current circumstances coping with taxpayers’ eligibility for COVID-19-related advantages, such because the Canada Emergency Response Profit (CERB) and Canada Restoration Profit (CRB), through which taxpayers needed to show that they had earnings of not less than $5,000 to qualify for these advantages. If these earnings had been paid in money, and by no means deposited in a checking account, the validity of varied taxpayers’ claims was challenged.

However the issue in proving money earnings can even come up exterior the realm of pandemic advantages. Take a current case involving a taxpayer’s declare for the Working Revenue Tax Profit (WITB), since changed by the Canada Staff Profit (CWB). The profit is a refundable tax credit score that dietary supplements the earnings of low-income employees, and is accessible to people 19 years of age or older who aren’t in class full time.

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For 2022, the CWB is the same as 27 per cent of every greenback of working revenue above $3,000, to a most credit score of $1,428 for single people with out dependents, and $2,461 for households ({couples} and single mother and father). The CWB is phased out at a fee of 15 per cent of every greenback of revenue above $23,495 for single people (with out dependents), and $26,805 for households. (Be aware that quantities could also be totally different for residents of Alberta, Nunavut and Quebec.)

In 2018, about 1.4 million Canadians acquired the WITB. The important thing to qualifying for the WITB (or the CWB now) is that the person claiming the credit score will need to have “working revenue,” which is basically employment or enterprise revenue.

However how does one show working revenue if you happen to’re paid completely in money?

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That was the query earlier than the choose in a current Tax Courtroom of Canada case involving a Prince Edward Island resident and his WITB declare for the 2015, 2016 and 2017 taxation years. The taxpayer’s claims had been denied as a result of the Canada Income Company concluded he “was not actively working a enterprise” and had “not earned any working revenue giving entitlement to the WITB.”

By the use of background, the taxpayer lives “very modestly” in a trailer together with his spouse and was described by the court docket as a person “gifted with an impartial spirit.” All through his life, he has held numerous jobs, together with as a bar singer in Montreal, in addition to gigs in know-how and development and renovation.

In court docket, the taxpayer was represented by a childhood good friend, a tax specialist, who additionally ready his tax returns for the three years in query. His good friend additionally occurs to personal a number of properties, the place the taxpayer carried out all types of labor, together with the renovation of loos, set up of flooring, restore of flood injury and development of galleries and balconies, in addition to plumbing and electrical energy — briefly, something associated to renovation or upkeep.

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Through the tax years in query, the taxpayer solely labored through the summer time so as to earn sufficient cash for him to spend the winter on a sailboat within the Bahamas. He didn’t want some huge cash as a result of he didn’t have any dependents and had only a few private bills. The annual bills for his sailboat amounted to $5,000. Every winter whereas on his boat, “it value him nothing to reside. He ate what he caught,” and testified, “Life on the ocean will not be costly … To reside on his sailboat … is … the very best life; it’s heaven on earth.”

In 2015, 2016 and 2017, the taxpayer declared enterprise revenue of solely $10,000 to $13,500, as a result of he was crusing for six months of the yr. He additionally didn’t incur, nor deduct, any enterprise bills, as his clients purchased any mandatory constructing supplies.

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His good friend paid him in money, however the taxpayer didn’t hold any documentation of the revenue he earned or a register, though, in response to the choose, “he has since realized the significance of protecting a file and preserving any supporting paperwork.” His good friend marked the work, or the quantities paid to the taxpayer, on a small calendar and, on the finish of the yr, did the accounting. The taxpayer didn’t deposit his revenue in his checking account, however claimed to have declared all his revenue to the CRA on his returns.

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The CRA argued that the revenue the taxpayer declared was not associated to the operation of a enterprise or employment, as a result of he performed a cash-only enterprise, stored no data, incurred no enterprise bills and produced no supporting paperwork to help his claims. The taxpayer and his tax specialist good friend relied “virtually solely on their reminiscence, which is unreliable in nature.”

The choose acknowledged that “in a self-assessment system like we now have in Canada, protecting books and data is essential,” however the failure to maintain good data will not be, by itself, ample grounds to dismiss a case.

Absent good books and data, the burden of proof is definitely greater and the choose should assess the credibility of the taxpayer and any witnesses, such because the tax specialist. As for operating a money enterprise, the court docket cited prior jurisprudence which concluded: “The usage of money is authorized and bonafide … and it doesn’t essentially result in a conclusion of tax avoidance.”

The choose weighed all of the proof and was glad the revenue declared by the taxpayer through the years in query did, certainly, relate to the operation of a enterprise, was corroborated by his tax specialist and constituted working revenue. The choose, due to this fact, concluded the taxpayer was entitled to the WITB for the three years in query.

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

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