Notionally Assessed? You Still Need to File Voluntarily

Many people who decide to delay filing a tax return think that as long as they have not filed they do not owe and so CRA will not come after them. This is one of the most dangerous misconceptions that lead so many people into a world of pain with CRA.

First and foremost – not filing your tax returns is tax evasion and CRA does prosecute people. So far there have been over 100 prosecutions in 2014 alone! Here are just two examples:

• From 2007 to 2010, Mitchell Rygiel of Winnipeg, failed to accurately report his income as a photographer. This resulted in $47,411 of federal tax being evaded. In addition, $17,547 of goods and services tax (GST) was not submitted for the tax years 2007 to 2010. The fine represents 75% of the total federal and excise taxes that were evaded. The court gave Mr. Rygiel 12 months to pay his fine which adds up to almost $50,000.  Remember he also had to pay the almost $65,000 in arrear taxes plus interest and penalties!
• Peter McCallion of Mississauga, Ontario, pleaded guilty to five counts of failing to file corporate tax returns, six counts of failing to file GST/HST returns and four counts of failing to file personal income tax returns. McCallion was fined $1,000 per count, for a total of $15,000 and has 27 months to pay the fine.  

CRA uses another weapon even more frequently than criminal court: the dreaded notional (sometimes called arbitrary) assessments. This is when CRA estimates your income by making an arbitrary decision as to what you earned, and therefore what you owe.  They assess you for this highly exaggerated, dreamed up amount that usually takes no deductions into account and tacks on large amounts of interest and penalties retroactively.

How to they do this? A very common example with contractors is when the companies who contract work to them file their copies of the contractor’s T4A, triggering an arbitrary assessment of the contractor if the return has not already been voluntarily filed. CRA just assess that income. They do not allow for the materials used, trucks driven and the labour costs paid.

Another common example is when CRA audits one of your suppliers or one of your customers, which can bring the heat to you. Prior to that you may have been behind filing returns and CRA may not have even known you had income – but now they are on to you and there is no turning back.

When this happens you have many options, including:

• Prior to CRA contacting you for your late returns, and only prior to, you can file an application under the Voluntary Disclosure Program, and if accepted, you can avoid interest, penalties and prosecution. The challenge here is that once CRA contacts you, this option disappears.
• If you are notionally or arbitrarily assessed you can refile your returns voluntarily (claiming all valid deductions) and object to penalties and interest. While your objection is under review CRA cannot take enforcement action which should buy you a small window of time to come up with a plan to deal with your tax debt.
• Leveraging other CRA programs to eliminate penalties and interest like the Taxpayer Relief Program. 

Do not end up like the hundreds of Canadians who are prosecuted annually for tax evasion and kick off 2015 with a solid plan to deal with your back taxes.

If you have a tax problem and need help please contact Tax Solutions Canada today by calling 1.888.868.1400.