The Tax Snowball Effect – Clearing Up Many Years of Returns With No Receipts

We could almost liken it to a disease: the tax snowball effect.

You miss one year of income tax filing (busy with income generating work, flood in the office, procrastination…and lots of other reasons CRA will not really care about).  Then the next year you are worried that you do not have the money to pay the previous year, so you miss another year and so on. It just gets bigger and bigger.

Some people procrastinate, others are worried they will not be able to pay the tax, while still others just do not have good records or receipts and feel like they simply do not have what they need to get filed.  Some feel they cannot afford an accountant and are overwhelmed by the complexity of taxes and small business. Payroll taxes, GST/HST, income taxes – different reporting periods for each and forms, forms, forms. All of these things can contribute to late or missed filing.

One of the easiest of these problems to fix is not letting a lack of proper records be the reason you do not file. From your bank and credit card statements the financial information can be rebuilt. In a case where there are no statements (some businesses are all cash income and expenses with no records) you can have an indirect determination of income performed to estimate your income and expenses. Fancy words used by accountants and CRA for a formal method of estimating your taxable income by making assumptions based on lifestyle and business volume. There are always options – and these far outweigh the negatives that will accompany the choice to continue failing to file.

The worst thing that you can do is keep repeating the error of avoiding the responsibility.   

That will create even larger financial problems!! Ignoring it will not make it go away!

Consequences:

Penalties:

Here is what CRA states regarding penalties:

“Late-filing penalty: If you owe tax for 2013 and do not file your return for 2013 on time, we will charge you a late-filing penalty. The penalty is 5% of your 2013 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months.

If we charged a late-filing penalty on your return for 2010, 2011, or 2012 your late-filing penalty for 2013 may be 10% of your 2013 balance owing, plus 2% of your 2013 balance owing for each full month your return is late, to a maximum of 20 months.”

Most of the late filers are unfortunately in the category of multiple years. Assume the taxes owing for 2013 were $20,000 and the filing was 3 years late.  The penalties would be 10% of the taxes ($2,000) PLUS 2% ($440 because you owe the 2% on top of the 10%) for 20 months maximum.  Total is $9,000 in penalties.

Interest:

Here is what CRA states regarding interest:

“If you have a balance owing for 2013, we charge compound daily interest starting May 1, 2014, on any unpaid amounts owing for 2013. This includes any balance owing if we reassess your return. In addition, we will charge you interest on the penalties starting the day after your return is due. The rate of interest we charge can change every three months.

If you have amounts owing from previous years, we will continue to charge compound daily interest on those amounts. Payments you make are first applied to amounts owing from previous years.

Interest on unpaid taxes may be waived or cancelled under certain circumstances. See Taxpayer relief provisions.”

Putting our example back into dollar terms this will compound your total bill to $33,693.09.

So by waiting 3 years to deal with the tax issues you turned a $20,000 debt into a $33,693.09 debt.  Almost 70% more to pay with interest and penalties.  But please read on – we do offer you some real relief options later on - but first it unfortunately gets worse.

Prosecution:

There were over 100 prosecutions for 2014 alone – and many of these included not only heavy fines but also jail time. Check out the CRA Prosecution website for more examples: http://www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng.html.

Do not get caught in an avalanche. See a tax consultancy firm that specializes in reducing interest and penalties – sometimes close to zero can be achieved based on your facts – and who knows how far CRA can be made to go in getting reasonable repayment terms. Before you contact CRA or file your late returns you need advice on how to file late returns so that you can qualify for a reduction in interest and penalties. This is not part of the tax return - these are special CRA programs that are set up to encourage people who have made mistakes to get on track with the tax system.  

For more tax help please contact Tax Solutions Canada today at 1.888.868.1400.

Why, When your Tax Lawyer Says Bankruptcy, You Should Run: The Difference Between a Legal Problem and a Financial One

Listening to all the attack style ads being run by some local tax lawyers can become nauseating - particularly to the trained ear of a tax professional listening to imaginary fear mongering. CRA does have wide reaching powers and it is not difficult to find yourself in hot water with them – and then to shoot holes in your own case trying to deal with it without professional help.

Yes, CRA danger is real, so fear associated to consequences is totally legitimate. But sometimes we have to learn to tune in when fear is being used to sell.

For example - be wary of those lawyers who say that you cannot use a professional tax advisory practice or an accountant to resolve your tax problem, implying that because they are not lawyers they are somehow incompetent or do not have the so-called lawyer powers to protect your best interests. This is simply a fear tactic. The truth of it is, in all fields, you have specialists. Most accountants specialize in tax return preparation, while others specialize in bank audits. Yes, other accountants specialize in helping people with tax problems, but as with anything, with a solid history and good recommendations there are many accountants capable of addressing tax problems.

Another profession that this small group of lawyers likes to attack are trustees in bankruptcy. A trustee is a court appointed officer who administers proposals and bankruptcies. They are neutral, unbiased professionals and are obliged to serve the interests of all parties to the bankruptcy – creditors and the individual. Sometimes people simply cannot pay their debt. The existence of trustees is a threat to tax lawyers because, at the end of the day, if you cannot pay your debt there is no need to fight the CRA.  You can simply take up your right under Federal law to protection from your creditors and enjoy that protection (no garnishments, no frozen bank accounts, no liens on your house, no collection calls).  Creditors (including CRA) cannot say “no” – in fact the trustee’s powers to protect you (without bankruptcy) is higher than CRA’s power to attack you. Not to mention the fact that behind closed doors, many of these very same lawyers refer their clients to the same trustees being attacked in their ads.

Accountants are highly educated professionals. Trustees are highly educated professionals. Lawyers are highly educated professionals. All work in industries with high ethical standards. Any lawyer or professional who tries to use fear to sell their services and therefore begins denigrating another professional, should be a cause for concern.

In the past, we have seen the emergence of many tax consultancies that work with lawyers, accountants and trustees to serve the individual needs of all of their clients on an as needed basis - making dealing with a tax problem that much more affordable. Among the best of the consultancies are those with a strong work history at CRA.  After all, who knows the opponent’s game better than their former coach or players?  Just make sure that their experience is not from 10 years ago or more because CRA policies and procedures have changed an awful lot in that time.

The first step before going to an accountant or a lawyer is to sit down with a tax consultancy - one that can review the tax and financial aspects related to your tax problem. You will then be positioned to know what resources will need to be deployed in the process and also potentially save yourself thousands of dollars in the process.

For more assistance please contact Tax Solutions Canada today at 1.888.868.1400.

Time is Ticking: 6 weeks Until the 2014 Income Tax Deadline

6 weeks and counting!!! The CRA income tax deadline is only 6 short weeks away… are you ready?

In the spirit of this often stressful season, we thought it might be the perfect time to take a break. Check out these 4 pics – can you spot the significance?

For tax help, whether to deal with late filing or to file for Taxpayer Relief, please contact Tax Solutions Canada today by calling 1.888.868.1400.

Avoiding Aggressive Canadian Tax Planning Professionals and How to Identify Them

Far too often, people come to us upset about a CRA problem that they feel their accountant either caused or contributed to. These taxpayers are experiencing a multitude of emotions – fear of what may happen, anger, frustration and confusion as to what they can do.  Some accountants are much more aggressive than others, so it is important to be on your ‘A’ game to spot an aggressive accountant.

Firstly, some disclosure. This writer is not an accountant - his company does not do any accounting. He knows first-hand about these matters because he spends a lot of time cleaning up the mess that aggressive accountants create.

When you meet with your accountant and they review your business income and expenses they should be getting facts from you to establish, for example, what percentage of your vehicle use is business related. A common abuse is when an accountant suggests that a taxpayer can claim a higher percentage of use of the home office, vehicle expenses, entertainment, etc., based on what they “get through for other clients”.  If an accountant is suggesting anything like this, our only suggestion is to run!

The best three ways to spot an over-aggressive accountant:

1. Research them and check for online reviews.
2. Listen to them and the advice they give – if there is anything questionable, they start talking about how you over-leverage expenses or tax shelters for example, this is a big red flag.
3. Pay attention – at the end of the day, you have to sign off on your returns – review them until you understand them. If you do not understand, make sure that every section is explained to you in a manner you can understand before you sign. If your accountant cannot take the time to explain it to you (or is incapable of that) you should question if you have the right answer.

The issue is that when you file your returns, you are responsible for whatever is in (or left off) the return. Sometimes we see individuals and businesses who want CRA to go after their accountant. It just does not work like that. They will come after you and then if enough people complain about the accountant, they may independently prosecute the accountant later.

A common flat out tax scam is accountants who will advise you to declare fictitious self-employed income to be able to write-off business expenses. This practice is illegal and there are actual examples of individuals and accountants who have been prosecuted for this on CRA’s website: http://www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng.html.

Be vigilant. If you think there is a problem in a past tax return, fix it. If CRA is unaware of it you can declare the mistake under the VDP program and avoid interest and penalties.

It is like a domino effect. It only takes one of these accountant’s clients to get on CRA’s radar and CRA will start auditing all that accountant’s clients.

If you are concerned about questionable tax practices on behalf of your accountant, remember – it is your responsibility to be tax compliant, so take the necessary steps to ensure you are protected!

For more assistance please contact Tax Solutions Canada today at 1.888.868.1400.