Tax Slips – The CRA Knows More Than You Think

Every time you receive a tax slip, the issuer sends a copy to Canada Revenue Agency (CRA).  So just because you don’t report your income, whether it was taxed or not, does not mean that the CRA is not aware of it. These tax slips are issued for employment income, contract income, an RRSP that you cashed in, investment income, etc.  This means that even if you moved and didn’t receive a tax slip and forgot to include it on your return the CRA has it. This can lead to a tax audit or investigation.

Sometimes misreporting or failure to report income is intentional; more often it is not. For example, many individuals are unaware that they must report any withdrawn RRSPs for a given tax year. Since this is income, you are required by law to report it – specifically because you are taxed on this withdrawn money. If the CRA finds out that you failed to report withdrawn RRSPs, not only will you be assessed to pay the tax debt but you will also be assessed penalties and interest.

Even that income that you think will never be reported might have been. If you own your own business or work as a contractor, and tax you extract from others has to be reported. For example, a contractor is hired for home renovations. He charges the property owner HST. The property owner will claim the HST as an input tax credit – meaning that even if the contractor did not remit the tax HST to the CRA, his client triggered the connection back when the client made the claim. This means that the CRA, thanks to this claim, is well aware that you have income and an HST debt, even if you have not reported it.

Tax slips are not the only way for the CRA to find out about your earnings, regardless of whether you report them or not. Another common tax audit trigger is when someone else, having paid you in the past, is being audited. If a supplier or client is being audited, a thorough investigation of their tax filings, income and expenses will be conducted. This means that they can uncover payments for invoices or invoices issued to you and if they have questions it could lead to you being audited.  CRA auditors are usually well trained and follow the trail – from your client’s/supplier’s books to you. 

Some contractors don’t realize that if they earn more than $30,000 in a year that they have to collect and remit HST. When attempting to file on-time many are stunned to learn that they have a large HST liability.

The CRA Snitch Line is also another important factor in the CRA’s arsenal of discovery. Anyone can call the CRA Snitch Line and report an individual’s or business’s behaviour as it relates to non-compliance and their taxes, so even if no tax slips have been filed, or no one else is being audited, it doesn’t mean that your past tax mistakes are going to remain a secret from CRA.  Ex-spouses, ex-tenants (say you rented the basement), ex-business partners and any other disgruntled person you had business dealings with can turn on you via the Snitch Line.

Protect yourself from being audited as a result of submitted tax slips, the audit of other people or the Snitch Line. Fix your tax problems before it gets to this point because once CRA catch you your opportunity to resolve fairly goes way down.

For more information about protecting yourself from unknown tax slips and being audited, please contact Tax Solutions Canada today by calling 1.888.868.1400 or visiting us online at www.taxsolutionscanada.com.

 

How a Single Business Tax Audit Causes a Chain Reaction

Tax audits are very common in Canada and many wonder how they get triggered. Well, the CBC looked into it last year and reported some very interesting information. 

According to Canada’s top auditor, Michael Ferguson, the CRA tends to investigate those files which have a higher probability of a return for the government (that is, tax recovery + interest + penalties). “In the two fiscal years the auditor general examined, the sleuthing of those 700 employees uncovered $2.8 billion in additional taxes, interest and penalties each year.” That's an average of $4 million in tax revenue for each CRA auditor every year. 

The CRA has a department with 700 auditors charged with the task of finding you, forcing you to file and then either forcing you to pay or go bankrupt. However, there is one thing this CBC article left out and that is that the Auditor General for Canada measures the CRA’s success based on files closed - not dollars collected. For the $2.8 billion in additional taxes the CRA collection team uncovered, probably close to as much was lost because of the CRA demanding payment in full on tax debts and deploying heavy handed tactics to get the money or force you into bankruptcy. Bad things happen to good people. Many taxpayers want to pay their tax debt and could honour a monthly repayment plan based on all or some of their tax debt – if the CRA would be fair. If you have a professional familiar with CRA negotiation tactics, policies and procedures working on your side, it becomes even easier. Sadly, your good intentions and naivety will likely get overrun by the CRA giant bureaucracy. 

The tax audit chain re-action can occur if one of your suppliers or clients was audited. If the CRA sees something in their books that causes the CRA to question you or to follow the money trail through your company– they can decide to take a look at your company’s books next. The same is true if the CRA audits you and sees something in your books as it relates to another company that may not be tax compliant - the CRA may take a look at them.

The CBC article revealed that filing late and filing improperly can trigger a tax audit. A tax audit is a detailed investigation into your tax returns. If they find any discrepancies between your return and the information they review during the audit then can penalize you severely! Penalties for late filing for first time offenders is 5% of the amount of the tax debt, plus 1% per month for each month that the return remains unfiled to a maximum of 60%, plus daily compound interest. Penalties for failing to declare income or not being able to support expenses the way CRA likes (which generally occurs during a tax audit) will usually involve even larger penalties.

In addition, if a tax audit results in a tax debt that you don’t pay, the article re-iterates what we tell our clients all the time – there are consequences. Consequences of a tax debt can include: 

·         Criminal convictions for tax offences are posted online which can have devastating effects to your business and reputation.

·         You can have your receivables garnisheed – again very embarrassing.

·         You can have your bank account frozen which is extremely disruptive to cash flow and may cause your bank to panic.

·         If successfully prosecuted for tax evasion you could face jail time. A tax audit can lead to a charge of tax evasion. http://www.cra-arc.gc.ca/nwsrm/cnvctns/bc/bc121017-eng.html  

According to a Toronto law firm, during the 2008/2009 tax year, 164 cases were sent to the Public Prosecution Service of Canada and 58 GST audits to the Ministere de la Justice du Quebec for criminal prosecution. A total of 257 cases resulted in criminal convictions for tax evasion or tax fraud, as a result of previous years. 

The smart approach to avoiding a CRA audit is, if you think that there is something wrong in your books or the CRA has started asking you questions or for information about a particular tax year – do not stick your head in the sand. Have a professional review of your books performed and tackle the problem head-on because with the CRA the best offence is a good defense.

For more information about tax audits, or if you think that you are about to be audited or have been notified of an upcoming tax audit, contact Tax Solutions Canada for help. Call 888-868-1400 or visit www.taxsolutionscanada.com.