Feeling Down Because of Your Tax Problem? Even if You’re in the Wrong, it Pays to Take Action

Average people fall behind filing their tax returns. In fact, these regular Canadians make up a significant part of our practice as tax-distress solution professionals.

Some people are in this situation because they are afraid of the financial consequences once the tax debt, penalties and interest have been assessed. That is, they fear they will not be able to pay and have heard all sorts of horror stories about criminal prosecution, huge penalties and heavy-handed CRA collection action.

Under our self-reporting system, CRA has been given huge powers to ensure compliance and punish the non-compliant.

Those fears, unfortunately for taxpayers with unfiled tax returns, are not complete urban myths.  However, the bad news is not the whole story. What many are not aware of is that there are processes that can be leveraged to mitigate the financial penalties associated with late filing.

Sometimes, CRA does not wait for a taxpayer to come forward. CRA gets the taxpayer’s attention by raising an assessment (called a Notional Assessment) based on income CRA projects you may have had (while ignoring any reasonable deductions you would claim).  If you do not file your Notice of Objection in time (and follow up with other relevant filings and payments) you will incur the wrath of CRA collections enforcement on this notional tax bill (which is usually hugely inflated).

Lesson Number One: you gain nothing by failing to file your tax returns. You can end up with not only penalties and interest but also criminal prosecution for tax evasion.

As mentioned above, the primary reason for non-filing for many is the fear that money will be owed that simply is not there.

Lesson Number Two: While it is uncomfortable to owe money to CRA, it is not illegal.

• If you have not filed and CRA has not contacted you about your late filing, an application under the Voluntary Disclosure Program can enable you to avoid penalties and interest.
• If CRA has contacted you about late filing it is important to get late returns prepared. Even if you do not have all of your receipts, there are legitimate ways to estimate income and expenses to get tax compliant.

If you have been notionally assessed by CRA you have to get your returns re-filed voluntarily. You may not owe as much as CRA has estimated. If you are self-employed and collecting HST – timing is even more important because you will not be able to claim input tax credits 4 years after the tax year in question.

Once your returns are filed CRA will assess penalties and interest if you did not make an application under the Voluntary Disclosure Program.

Now, even though you have filed admitting to income, you should consider filing an Objection to the penalties assessed on your return. While your Objection is under review, CRA will not take enforcement action - BUT if the Objection does not go in your favour you will be subject to further interest that was accumulated on your tax debt and penalties during the period during which your 

Objection was under review.

If you have suffered some extraordinary circumstance that led to your late filing or inability to pay, such as a medical problem, a death in your immediate family, extreme financial hardship, a disaster has occurred or some other extraordinary circumstance that you can prove, you may qualify for Taxpayer Relief – a program where CRA may agree to grant relief of penalties and interest. If filing an Objection, your relief application can be filed concurrently so that once a decision is made they can immediately begin to look at your relief application.

If your Objection rights have been completely exhausted and you do not want to incur the costs of an appeal to the tax court, CRA will continue to collect from you while your relief application is under review.

These processes, when leveraged properly, can work in your favour, but they are complicated and the right applications have to be made at the right time.

If you have a tax problem and need help, or want more information about VDP or Taxpayer Relief, please contact Tax Solutions Canada today by calling 1.888.868.1400.

Is Having a Charitable Donation the Same as Participating in a Tax Shelter?

Is having a charitable donation the same as participating in a tax shelter? It’s a question that thousands of Canadians ask each year when they find their charitable donations called into question by CRA.

Having your charitable donations come into question can happen at the time that you file your return, especially if you have donated or participated in a program that is already on CRA’s radar, or worse, years after your refund is received and CRA decides to audit or reassess you and disallow all or part of your donations.

When CRA disallows charitable donations after they have already assessed and accepted a return they will also assess regular penalties plus interest retroactively to the tax year in question AND may also add gross negligence penalties of up to 50% of the amount of the tax debt plus interest retroactively on those penalties as well.

Some people who participate in charitable programs to help and give back end up not just owing the government taxes but seeing the amount of the tax debt balloon in size to double or triple the size of the principal tax debt.

You can donate to a charity in the cleanest and simplest form, which is to make a cash donation and receive a donation receipt for the amount of your cash donations, or with complex programs offered, such as the Global Learning and Gifting Initiative, which promises credit for donations that exceed the cash value of a direct cash donation.

CRA has called some of these programs into question. Where the GLGI is concerned, thousands have had their returns reassessed, charitable claims disallowed and are before the courts as we write this blog.

What can you do if your return is reassessed and charitable deductions are disallowed - deductions that you believe you were entitled to?

Get a tax professional – you are going to need to file a series of applications and if you do not have experience in this regard, you seriously risk weakening your position by disclosing information you ought not to disclose:

1.        Make an Objection – within 90 days of receiving your reassessment you can file an Objection explaining why you are entitled to the deductions and providing further evidence. If the 90 days has already passed you can still file an Objection for up to 1 year from the 90 days but you will first have to apply to CRA to have the Objection period extended. This extension is far from automatic and is one key reason why you need professional help. If you cannot prove contrary to the reason CRA provided for rejecting the actual donation, you can still file an Objection to penalties and interest and this is your first step towards trying to mitigate the financial consequences associated with getting onto CRA’s radar. CRA will not take enforcement action against you while you have an Objection in process.

2.        Make an application for Taxpayer Relief – this should be made concurrently with the above Objection. This is where you can explain why, if CRA decides to reject your Objection, they should grant you relief of interest and penalties. There is a 10 year limitation on relief applications so they should be filed as soon as possible.

3.        Get ready to fight! If your Objection is rejected by CRA your next step is to proceed to tax court or to await the outcome of your Taxpayer Relief application.

If you decide against tax court your Taxpayer Relief application will usually take more than a year to process (again far from an automatic “yes” but it can be appealed). Unlike the Objection, CRA will continue to collect from you while considering a Taxpayer Relief application.  Your tax professional will need to negotiate a fair and reasonable plan with CRA for you to pay the tax debt it is estimated you will owe if the application for relief succeeds.

If CRA thinks that you have made a charitable donation that they view as a tax shelter you could be in for a surprising amount of financial pain. Call Tax Solutions Canada today at 1.888.868.1400.

The 2014 Tax Deadlines Are Approaching – Are You Ready?

It’s that time again everyone. The 2014 income tax deadlines are quickly approaching.

• If you are not a sole proprietor then you have to get your returns filed before April 30^th, 2014.
• For corporations it is 6 months after their year-end.
• For unincorporated businesses (self-employed) it is June 15^th of the following year.

What are the consequences for late filing?

• If it is your first time filing late you will be assessed up to a 5% penalty based on your tax debt and then a 1% penalty monthly for up to 12 months.
• If you filed late in 2011, 2012 or 2013 your penalty could be up to 10% of the amount of the tax debt and then 2% per/month for up to 20 months.

Late filing penalties draw CRA’s attention and can lead to the application of Gross Negligence Penalties.  These are 50% of the taxes owing.

This can really add up! The need to get filing up to date has never been greater. CRA are detecting non-filers more easily than ever before by using increasingly sophisticated software to spot missing returns.  CRA is under great pressure from the Government to collect this missing revenue, so your chance of being caught is higher than ever. In addition to the above mentioned penalties, late filers may also be subject to prosecution.

Do not believe us? Ask CRA!

·         View Late Filing Penalties

·         View CRA Prosecutions

If you are behind filing, maybe you are missing documents or are concerned about how you will pay the tax debt you will owe – call us. We will work with you and your accountant to mitigate the consequences associated to late filing, negotiate with CRA on your behalf, help you safely access CRA programs for voluntary disclosure and interest relief.  We will help you get tax compliant. Call Tax Solutions Canada today: 1.888.868.1400. 

Does a Voluntary Disclosure Application Have to be Made by a Tax Lawyer?

You are probably getting confused by the different types of professionals blasting the radio airwaves with advertisements regarding why you should use them to make your Voluntary Disclosure Program (VDP) application.

Lawyers will say you have to use them because they can offer you increased protection, while some accountants say that VDP is an administrative process and you do not really need a lawyer and they are the ones to call… it can all be so confusing - and what is VDP anyway?

The VoluntaryDisclosure Program (VDP) is a program offered by CRA where you can come clean on undeclared income or get late returns filed without fear of penalties, interest or prosecution. Sound too good to be true? You have to qualify and comply with all the intricate steps of the program – but if you do then the result is absolutely worthwhile. This can save taxpayers significant sums of money and restore their credibility with CRA.

To qualify:

1. Disclosure must be voluntary – that means that if CRA has called you or sent you mail asking you to file late returns or requesting information from you, disclosure is not voluntary and you are not qualified for this program.
2. Disclosure must be complete – when you make a VDP application CRA expects you to come clean on everything. If you omit information they can reject your VDP application.
3. Disclosure must involve a penalty.
4. Disclosure involves a tax debt that is more than one year old.

Clearly the first 2 requirements are the most difficult to satisfy. A competent tax professional with experience making VDP applications will:

• Interview (in advance of asking you for a retainer) and ask you pre-qualifying questions.
• Validate – will ask you for paperwork to support your application once you have engaged them.
• Select whether you apply on a no-name basis for this program.
• Review – will review the VDP application with you before submitted to ensure that it is complete.

VDP is a sensitive process. Politically it looks like the CRA is trying to get everyone to come forward. They are – but with the usual tricks. If you make any mistakes (of which there are a significant number) you can disqualify yourself. That is scary – and the writer frequently sees situations where taxpayers are asking him what they can do because they did qualify - until their lawyer or accountant made a mistake and got them disqualified. Sadly, there is nothing that can be done to get the same level of relief once this avenue is closed to you.

A very common mistake we see is people getting themselves disqualified because the taxpayer (or their inexperienced professional) does not know what they are doing and calls CRA to gather documents. This call to CRA requesting documents tips CRA off that you will be making an application. Following this, they may request information from you and when that happens, disclosure is no longer voluntary and you will be dead in the water (also known as: disqualified).

Anyone can make a VDP application – a lawyer, an accountant, a tax firm, a tax advisory service or the taxpayer themselves. What is important is that the company has outstanding experience and an excellent reputation. You can learn this by Googling the company’s name: if it is a lawyer you can contact the Law Society to see if they have any outstanding complaints pending against them. If an accountant, you can do the same with their regulatory body.

Choosing the right representation can save you thousands and even 10s of thousands depending on the size of your tax problem - and save your reputation with CRA. 

If you have a tax problem and need help, or want more information about VDP, please contact Tax Solutions Canada today by calling 1.888.868.1400.