Need to Know for Small Business Taxes: TSC’s Director James Bell Weighs In

Small business owners: are you ready for the June 15^th deadline?

Last week, Tax Solutions Canada’s Director, James Bell, spoke with the Globe and Mail’s Kira Virmond and offered some advice to small business owners with the tax deadline right around the corner. Even if all receipts are in line and amounts line up, this can be a complicated and stressful time of year.

His advice? If you owe money, don’t think not filing is the answer. “‘Owing money to the CRA is not a criminal offence, but not filing a return is,’ he cautions. Not only will filing on time keep you on the right side of the law, but you’ll avoid onerous interest and late fees.”

Check out the full article here: http://www.theglobeandmail.com/report-on-business/small-business/sb-tools/tax-facts-you-really-need-to-know/article24366786/.

If you know that, after the paperwork has been filed, a refund is highly unlikely and instead you’ll be facing an amount owing at the bottom of that assessment, contact James and his team at Tax Solutions Canada today. They can help review your options and get things straightened out. Call 1.888.868.1400.

True or False: Many Years of Late Filing Tax Returns = Prison

True or false: many years of late filing tax returns = prison? The answer to this is true…

Tax evasion typically involves deliberately ignoring a specific part of the law. For example, those participating in tax evasion may under-report taxable receipts or claim expenses that are non-deductible or overstated. They might also attempt to evade taxes by willfully refusing to comply with legislated reporting requirements.

Tax evasion, unlike tax avoidance, has criminal consequences. Tax evaders face prosecution in criminal court.

How does CRA find out who is evading and what do they do if someone is suspected? A number of methods may be used, but one of the strongest is the CIP.

Someone you know could be ratting you out! CRA whistleblower CRA will pay for taxes uncovered exceeding $100,000 (program http://www.cra-arc.gc.ca/leads/).

CRA finds out about tax evasion when:

• They audit one taxpayer who is claiming a deduction for amounts paid to you and you have no tax return (or are not showing enough income).
•  They perform a net worth audit leading to an assessment. This means they look at houses in a particular area and where the average income is, say, $100,000 per year for that neighbourhood and yours has been much less for many years the CRA will audit. If the audit shows you have accumulated wealth that is far more than your earnings and you cannot show how then you will likely face a significant assessment + interest + penalties.
• Whistleblower program - think ex-spouses, business partners and unhappy suppliers/customers as well as disgruntled former sub-contractors and employees.
• They obtain disclosure of offshore assets (particularly bank accounts where the foreign financial institution is reporting to their tax agency who now shares with CRA for Canadian citizens).
• They audit your tax return and find that the income is repeatedly understated or the expenses are overstated.

The CRA's Criminal Investigations Program: While all evidence of tax evasion is pursued, the CRA's Criminal Investigations Program (CIP) is specifically dedicated to ensuring that significant cases of tax evasion are investigated and, where appropriate, referred to the Public Prosecution Service of Canada for criminal prosecution.

The Criminal Investigations Program focusses on the most egregious cases that meet one or more of the following priorities:

• Significant and/or material cases of tax evasion with an international element;
• Promoters of sophisticated tax schemes aimed at defrauding the government;
• Financial crime cases investigated jointly with the Royal Canadian Mounted Police and other domestic or international law enforcement partners; and
• Significant and/or material cases involving income tax and/or GST/HST tax evasion, including the underground economy.

Consequences if convicted: Under the Income Tax Act and the Excise Tax Act, persons convicted of tax evasion can face fines ranging from 50% to 200% of the taxes evaded and up to two years imprisonment. Furthermore, upon conviction, a fine ranging from 100% to 200% of evaded taxes and up to five years in imprisonment may be imposed. These are by no means just a simple slap on the wrist.

If convicted of fraud under Section 380 of the Criminal Code of Canada, an individual can face up to 14 years in jail.

Court convictions are publicized in local, regional and national media to communicate the consequences of fraud committed against the Canadian public and to maximize the deterrent effect of these convictions. The CRA may also seek publicity at different stages of an investigation, for example when information relating to the laying of criminal charges becomes available to the public through court records, to warn Canadians of potential fraud schemes.

Average people are prosecuted too - here are just a few examples:

• Hamilton resident fined for tax evasion http://www.cra-arc.gc.ca/nwsrm/cnvctns/on/on141119-eng.html.
• Toronto dentist fined more than $175,000 for tax evasion http://www.cra-arc.gc.ca/nwsrm/cnvctns/on/on140904-eng.html.

A criminal record has consequences well beyond paying the taxes and the interest + penalties.  There may be fines or prison time.  These other impacts include issues when:

• crossing international borders
• applying for mortgages or other forms of credit
•  facing a background check in business deals or even employment applications

Avoid prosecution.  Act before you get caught and with the help of a professional organization specializing in these matters reduce or eliminate the impact of the interest and penalties. Call Tax Solutions Canada today at 1-888-868-1400. 

Avoiding Aggressive Accountants: If It Sounded Too Good To Be True, It Probably Was

Accountants and tax preparers are human. Like all professionals, there are good accountants and bad accountants. This article is about bad accountants – not those who are sometimes careless, late, incompetent or not up to date. This is about aggressive accountants who think they will be heroes if they drive their client’s tax bill down more than anyone else.

Don’t get me wrong – I am like most taxpayers and want to pay as little tax as possible - but I do want to stay on the right side of the law. Canada Revenue Agency and our federal government recognize this.  The way they have set up the Income Tax Act and the Excise Tax Act (GST/HST) allows for fair tax planning, but heavily penalizes those who get involved in aggressive tax planning, tax evasion or fraud.

A fundamental problem is that we, the taxpayers, may be experts in our own fields, but most of us are not accounting and tax experts – hence we spend hard-earned money on accountants to handle our taxes. 

Yes, there are very fancy tax planning strategies that find some obscure loop holes – however most are strategies that CRA then shuts down. In reality, success (defined as strategies that can be successfully defended if CRA attacks) at this level of creative thinking is reserved for a handful of really smart tax lawyers and CPAs.  And even they blow up some times. Hopefully they have fully informed their clients of the risks and the clients can afford to fight CRA if attacked and pay if they lose in court.

For most taxpayers, we cannot afford the $1,000 ++ per hour that the really top tax planners rightfully charge. And these strategies are beyond nearly all regular accountants and tax preparers. This leads me to the topic for today: if it looks too good to be true, it probably is.

Regular accountants and tax preparers have no “secret recipe”. The honest ones know this and get the returns filed, following the tax rules everyone knows about.  I am not saying that knowing these rules is easy nor that following them is simple. The tax process is full of sneaky little tricks that can blow up on you.  That is why I use a very solid tax professional to do my annual return. 

Your problems begin when a new tax accountant promises that he can save you more tax than you have ever had saved before.  Many times taxpayers do not ask enough questions as to why and how and instead accept what seems to be a great windfall.

These individuals use some simple tricks that are flat out wrong, illegal and will blow up your credibility with CRA, if not land you with huge penalties and even jail time:

• Not disclosing all income
• Entering expenses as business deductions when they are personal expenses
• Claiming a home office when you are not eligible (e.g. is the space exclusively used for business?  Do you routinely meet clients in that space?)
• Creating false business expense invoices (the police call it fraud when they arrest you)
• Selling fake charity receipts (a common ruse for employees who have very few other tax deduction loopholes)
• Selling tax shelters (Global Learning and Gifting Initiative (GLGI), Canadian Humanitarian Trust (CHT), Canadian Organization for International Philanthropy (COIP). Did you know CRA has a special unit to investigate these and has closed down schemes left, right and centre with court approval?

Here are just 2 examples:

• Toronto tax preparer sentenced for fraud – forged expenses and books for 42 clients: http://www.cra-arc.gc.ca/nwsrm/cnvctns/on/on140917-eng.html.
• Tax preparer given an 18-month conditional sentence and a $377,024 fine for filing false tax returns: http://www.cra-arc.gc.ca/nwsrm/cnvctns/ab/ab141006-eng.html.

When CRA comes after you, your trust in your accountant is not a viable defence.  Even if CRA goes after them – it doesn’t take away your debt, penalties or the fact that CRA will be coming after you. If you have been a victim of a bad accountant or tax preparer you will likely need the help of a professional company experienced in reducing the damage (interest and penalties) as well as obtaining a fair repayment schedule for the proper taxes you would have owed.

If CRA has not yet come after you and you are now a little suspicious that it was too good and maybe not all that proper, you also need to see a professional tax solutions company. This is the best time to get it dealt with before CRA comes after you as there is a program that can eliminate all the penalties and usually most of the interest: the Voluntary Disclosure Program (VDP). Just remember, VDP is a one-off shot.  If you get it wrong you will lose this opportunity.

If you know or even think that your books have been cooked, please call Tax Solutions Canada right away. We can help get your problem sorted out: 1-888-868-1400. 

How to Combat Gross Negligence Penalties

Scenario: CRA has gathered information, through a tax audit or any other proper process, and issues you an assessment. The tax and interest (compounded daily) is bad enough, but then you really get the punch in the gut when you see they have assessed a gross negligence penalty. Now what?

Gross negligence is defined in the Income Tax Act in section 163 (2) as:

“Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty of the greater of $100 and 50% of the total of the additional tax debt incurred because of the gross negligence.”

You can read the full section at the following link: http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-163.html.

This 50% penalty hit (which also carries daily compounded interest) can be objected to and in many cases should. It is our experience that, when properly challenged, it is not easy for CRA to prove gross negligence. CRA carries the onus of proving your gross negligence – you do not have to prove you were not.

As just one example, in the Tax Court of Canada ruling Hine v. The Queen (2012 TCC 295), the court ruled that CRA had failed to prove there was no deliberate attempt to hide income, that the accused had kept detailed records and had cooperated with CRA. This is a common occurrence.

The conditions under which your objection (and subsequent appeal if necessary) to the gross negligence penalty can succeed are wider under these objection rules than if you delay and miss the deadlines for objecting.  Where the deadline to object (in most cases, 90 days after CRA sent the Notice of Assessment) has expired you can apply to CRA to extend this deadline (no guarantee of success) for up to one year. If the objection route is shut off then you can seek relief under a fairness application, but as noted, there are restrictions with these applications and they need to be approached carefully.

In summary, as soon as you see a Notice of Assessment you disagree with, you need to retain an expert immediately so they can advise you on how to proceed before your timelines expire. If the objection reflects on judgment by the tax preparer you may be better off seeking advice from an independent company that specializes in tax solutions.

For more about dealing with an assessment, especially one that has determined you may be guilty of gross negligence, please contact Tax Solutions Canada right away: 1-888-868-1400. 

How to Choose a Tax Lawyer, Tax Accountant or Other Tax Professional

When Canada Revenue Agency (CRA) has a question, it can come at the taxpayer in many different ways. For example:

• CRA can telephone and ask you questions (these calls may be recorded).
• CRA can write to you and request additional information, demand returns be filed, etc.
• CRA can arrive, with no warning, to do an audit.
• CRA can launch an investigation, with no warning (investigations can lead to criminal prosecution).
• Most commonly they will issue a notice of (re)assessment – which starts the clock ticking.
• CRA starts collection and enforcement action.

When this happens most people reach out to whoever prepared their tax return. Unfortunately this is not always the best answer.

The “World of Taxes” has four continents:

• Tax planning (how to legally minimize your taxes)
• Tax compliance (bookkeeping, financial statements and filling in tax forms)
• Handling disagreements with CRA
• Tax law – going to tax court against the CRA

In your parents’ day, things were more straightforward and one person could provide all of these services. Over the past generation however, dealing with taxes and CRA has gotten increasingly more complex. Thanks to this, there are now specialists who focus exceptionally well on just one of these areas.

The ophthalmologist does not do back surgery and the orthopedic surgeon does not operate on your eyes. They are both doctors, but their areas of expertise differ greatly. The same rules apply to those of us who specialize in taxes.  A good tax professional knows what they do not know and will always refer their client on to someone who deals with the client’s particular issue.

We all understand what the other professional does but we really do specialize in one area.

Area of Tax	Who Does it Best
Tax Planning	Tax and Estate Lawyers or Certified Public Accountants (Chartered Accountants).  This involves a detailed understanding of income taxes, often across different provinces and countries, as well as a creative mind.  Do not choose someone who does not specialize in planning (i.e. this is all they do).
Tax Compliance and Accounting	Generally you are safest with a licensed and regulated accountant who has earned the Certified Public Accountant designation. However, if your affairs are straightforward, a well-known bookkeeper may be the better answer.
CRA Disputes	This is both a science and an art. It is essential that your professional knows the ways that CRA works and how decisions and approvals are made inside CRA.  No amount of hanging around the outside will teach you this. Only experience gained by previously working, over several years, at the appropriate levels of management at CRA, means that you know the CRA playbook – how far they can actually go to treat the taxpayer client fairly.  Such specialty firms are still few and far between. Look at the details – experience as an Ontario Auditor or work at the Department of Justice as a CRA lawyer does not give you the necessary insight.
Tax Law	At tax court, any dispute involving tax and/or penalties beyond $25,000 requires a lawyer to represent you.  It is interesting to note that the Law Society of Upper Canada lists 15 different fields in which they recognize specialties, but tax law is not among them.  Nearly every case that requires the significant investment in a tax fight against CRA has probably been through the CRA dispute zone above. You can save a significant portion of your legal fees if your CRA disputes professional is highly competent in laying the groundwork for this next tax law level.

As we all know, not all lawyers and accountants are competent - some are far more adept than others. To find the best one, start by asking wise people you know for a referral. Check the internet by just typing in the professional’s name - you will be surprised by what you can learn about them.  For example, just recently a professional who built a strong profile in the world of tax law turned out to be in a whole world of hurt himself. I am certainly not in the judgement business, so read the Toronto Star article here http://www.thestar.com/news/gta/2015/02/04/tax-fighter-philippe-dioguardi-has-serious-battles-of-his-own.html and decide for yourself if this is someone you should trust.

If your accountant let you get into trouble, is he the one that you should trust to get you out of trouble?  If the financial planner, accountant or lawyer wrote the tax plan or sold you the product they said would save you tax (read my earlier blog on GLGI as an example), they are going to have at least one conflict of interest in being the professional to pull you out of the fire.

Do your research.  A CRA question can turn into a big problem. 

Don’t turn to just anyone to solve your tax problem. Call Tax Solutions Canada today for expert advice from tax specialists: 1-888-868-1400.