Cash may be king, but it can cause headaches if the taxman denies your claims

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It’s typically stated that money is king, however it could not at all times be the perfect technique of fee in the case of coping with the taxman, who could ask you some robust inquiries to justify tax-deductible bills or, on the flip facet, display you earned a minimal quantity of qualifying earnings to reap the benefits of varied advantages or credit.

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For instance, there’s been a slew of current instances 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 no 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 assorted taxpayers’ claims was challenged.

However the issue in proving money earnings may also come up outdoors 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 staff, and is obtainable 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 earnings 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 price of 15 per cent of every greenback of earnings above $23,495 for single people (with out dependents), and $26,805 for households. (Notice 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 earnings,” which is basically employment or enterprise earnings.

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

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That was the query earlier than the decide in a current Tax Court docket 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 earnings giving entitlement to the WITB.”

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

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

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Throughout the tax years in query, the taxpayer solely labored in the course of the summer time with a purpose 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 price him nothing to reside. He ate what he caught,” and testified, “Life on the ocean isn’t 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 earnings of solely $10,000 to $13,500, as a result of he was crusing for six months of the 12 months. He additionally didn’t incur, nor deduct, any enterprise bills, as his prospects purchased any vital constructing supplies.

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His buddy paid him in money, however the taxpayer didn’t preserve any documentation of the earnings he earned or a register, though, in line with the decide, “he has since realized the significance of protecting a report and preserving any supporting paperwork.” His buddy marked the work, or the quantities paid to the taxpayer, on a small calendar and, on the finish of the 12 months, did the accounting. The taxpayer didn’t deposit his earnings in his checking account, however claimed to have declared all his earnings to the CRA on his returns.

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The CRA argued that the earnings 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 buddy relied “nearly solely on their reminiscence, which is unreliable in nature.”

The decide 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 isn’t, by itself, enough grounds to dismiss a case.

Absent good books and data, the burden of proof is definitely larger and the decide should assess the credibility of the taxpayer and any witnesses, such because the tax specialist. As for operating a money enterprise, the courtroom 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 decide weighed all of the proof and was glad the earnings declared by the taxpayer in the course of the years in query did, certainly, relate to the operation of a enterprise, was corroborated by his tax specialist and constituted working earnings. The decide, 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