CRA denies taxpayers' CRB declare for Airbnb housekeeping costs

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It’s been greater than three years because the authorities launched its numerous COVID-19 aid applications, however though the applications have lengthy ended and the funds have ceased, the Canada Income Company’s ongoing assortment and audit actions proceed because it makes an attempt to recoup billions of {dollars} in questionable profit funds.

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Sometimes, a dispute will discover its option to court docket, the place a taxpayer will problem the CRA’s choice to disclaim them advantages and ask the court docket to assessment the choice to find out whether or not it was cheap. As in prior such circumstances, the court docket’s position is to not substitute its choice for that of the CRA officer, however to find out whether or not the company’s choice was “cheap,” which means “one based mostly on an internally coherent and rational chain of research that’s justified, clear and intelligible in relation to the relevant factual and authorized constraints.”

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The latest COVID-19 advantages case, determined late final month, concerned a Quebec couple who personal a number of rental properties, together with a home positioned close to Quebec Metropolis on the north shore of the St. Lawrence River, which they lease out on Airbnb Inc.

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In March 2020, as a result of pandemic, the couple’s Airbnb leases dried up utterly for a interval earlier than slowly starting to recuperate. Every partner utilized for and acquired the Canada Emergency Response Profit (CERB) for seven two-week durations. Subsequently, the CERB was changed with the Canada Restoration Profit (CRB), and every of them acquired the CRB for 12 two-week durations. Though that they had utilized for added CRB durations, these funds had been frozen by the CRA pending a assessment of the couple’s eligibility.

After assessment, the CRA decided the couple was not eligible to obtain the CRB as a result of that they had not glad the eligibility standards, particularly that that they had every not earned at the least $5,000 web of employment or self-employment revenue in 2019, 2020 or the 12 months previous their purposes. The couple didn’t have a historical past of self-employment revenue, and the CRA famous the couple solely not too long ago amended their respective 2019 tax returns to reclassify $5,400 of rental revenue (every) as self-employment revenue.

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The CRA has offered some steerage lately on how you can report revenue from the “sharing economic system,” which incorporates revenue from ridesharing and lodging sharing. The CRA defines lodging sharing as renting half or all of a property, sometimes for a brief interval. It may embrace renting out a major or secondary residence, and encompasses any leases facilitated by a third-party web site, equivalent to Airbnb and Vrbo.

It’s clear that every one the revenue a taxpayer receives from an accommodation-sharing association is topic to revenue tax, however the CRA might think about it to be both rental revenue from property or self-employment enterprise revenue. The kind of revenue impacts the way it ought to be reported on a tax return, which has penalties for registered retirement financial savings plan (RRSP) room (rental revenue counts as earned revenue for RRSP contribution room functions), amongst different issues.

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To find out which sort of revenue it’s, the CRA advises taxpayers to think about the quantity and kinds of companies offered to tenants. Usually, the CRA will think about accommodation-sharing revenue to be rental revenue from property if the taxpayer rents out the area and supplies solely primary companies equivalent to warmth, utilities, parking and laundry services.

Alternatively, the revenue could also be thought of self-employment enterprise revenue if the taxpayer supplies different companies to tenants equivalent to meals, safety and cleansing. Because the CRA notes, “the extra companies you provide, the higher the possibility that revenue out of your rental operation is taken into account enterprise revenue.”

Within the present case, the couple argued that a part of their Airbnb revenue ought to be labeled as self-employment revenue to correctly mirror “the work they put into the property, specifically the housekeeping companies they carry out between every rental together with the administration of the rental of the property.” They based mostly the worth of every cleansing service at $150, which, when calculated based mostly on 72 leases in 2019, totalled $10,800, or $5,400 every. The couple thus amended their 2019 tax returns to reclassify $10,800 of web rental revenue as self-employment revenue.

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The CRA, nevertheless, was solely ready to permit a $60 housekeeping cost per rental, which was the quantity indicated on quite a lot of the Airbnb invoices submitted by the taxpayers, which ranged from $0 to $60. The CRA stated taxpayers are permitted to interact in potential tax planning, however “one can’t merely return and reclassify rental revenue after the actual fact to be able to qualify for the CRB.”

The taxpayers countered that the CRA officer “erred by considering the quantities indicated within the Airbnb invoices as they don’t proof the true value of the cleansing companies.” They stated it was a “business technique as to how a lot to cost the shoppers for the cleansing companies,” and that the quantities on the invoices had been “artificially low.”

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On the trial, the choose stated there was “little question … that the (taxpayers) had been those who cleaned and ready the property between Airbnb leases.” However the position of the court docket is to not assess the effort and time they put into cleansing and making ready the property between leases, however moderately to find out whether or not it was cheap for the CRA officer, based mostly on the document earlier than him, to make the conclusion he did.

The choose stated that the place a “sure degree of companies (is) offered alongside merely renting a property, a portion of the revenue could also be enterprise revenue.” However this, nevertheless, the choose famous the CRA did think about the taxpayers’ place as to the cleansing companies, however selected as an alternative to be guided by the quantity indicated on quite a lot of the Airbnb invoices offered by the taxpayers, including that the taxpayers failed to supply any proof in any respect as to why a $150 cleansing cost per rental was a extra acceptable sum.

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The choose finally dismissed the taxpayers’ case, concluding that they had been “unable to level to a sufficiently critical shortcoming or flaw that may render the (CRA’s) choices unreasonable.”

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected].

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