COVID 19- Tax Update
September 15, 2020 | Posted by: Patrick Mulhern
The CRA is expected to soon commence audit activities to review payments made pursuant to three of Canada’s COVID-19 relief programs: the Canada Emergency Wage Subsidy (“CEWS”), the Canada Emergency Response Benefit (“CERB”), and the Canada Emergency Student Benefit (“CESB”).
The CRA’s National Business Resumption Plan (“NBRP”) indicates that the CRA planned to launch a CEWS “post payment compliance project” on a date to be determined. The National Post recently reported that the CRA confirmed it will launch a small-scale audit pilot project by the end of the summer. Through this pilot project, the CRA says it intends to audit payments made to a “statistically valid” sample of corporate CEWS recipients to determine the extent of non-compliance with the program’s eligibility criteria. The CRA will then use the information gathered to better allocate resources when it launches a larger-scale audit project in the fall. The CRA did not specify how many audits it will conduct during the pilot project phase or how it will select which corporations will be audited.
As discussed in our in-depth analysis of the CEWS as enacted in April 2020 and our detailed review of the July 2020 amendments to the CEWS, both the eligibility criteria for the CEWS and the calculation of the CEWS can involve a great deal of complexity. The CRA’s audits will seek to find and recover any amounts paid to CEWS recipients in excess of what they were entitled to under the program, whether the ineligible or inflated claims were made intentionally or inadvertently.
Accordingly, a CEWS audit can result in the CEWS recipient being required to repay any ineligible amounts received plus interest and penalties. The potential penalties are summarised in Question 34 of the CRA’s Frequently Asked Questions on the CEWS, in which the CRA also confirms it will consider applying third-party penalties to representatives – such as accountants or tax preparers – who have filed incorrect claims on behalf of their clients.
In addition to these potential civil penalties, if the CRA concludes that an ineligible or inflated claim was made fraudulently, it can initiate a criminal investigation which can lead to criminal charges and prosecutions. A person convicted of a criminal offence related to a fraudulent CEWS claim can face additional fines on top of the civil penalties, and even the possibility of imprisonment. Third party representatives who have assisted clients in making fraudulent claims can also find themselves the targets of a CRA criminal investigation.
The NBRP also indicates that audit programs are set to be introduced in September to verify recipients’ entitlement to payments made pursuant to the CERB and CESB. Non-compliance with the eligibility criteria for these programs can similarly lead to an obligation to repay the ineligible amounts received with interest, penalties, and the potential for criminal liability in the case of fraudulent claims.
Finally, to “help validate payments” under the CEWS, CERB, and CESB, the CRA recently announced that employers will be required to include additional information on their employees’ 2020 T4 slips. Specifically, new information codes are being introduced for employers to report employment income, including retroactive payments, earned by employees during COVID-19 pay periods.
In light of the serious risks potentially involved in a CEWS, CERB, or CESB audit, it is imperative that recipients under audit and their representatives understand their rights and obligations in this situation to ensure that their interests are protected.