Types of CRA Audits

The absolute last thing that any individual or business owner wants to face is a CRA audit! When most think of CRA audits they envision a CRA auditor coming out to their office and performing a complete review of the books. There are many different divisions within CRA that deal with audits. There are also many different types of audits – some more formal than others. 

There are many instances where taxpayers receive correspondence from CRA requesting additional information to support a tax return. If you get one of these letters, pay close attention to the title of the writer. If you see the word audit, examiner or compliance in the title, you are being looked at. How you handle the request will determine whether you are audited or have your return re-assessed without an audit (based simply on CRA’s determination/evaluation of the answers and documents that you provided at their request). 

Here are some of the different audit divisions within CRA and what they do: 

Office Exam – this audit division within CRA handles the most common form of audit reviews. Typically an ‘examiner’ will send out requests for documentation to support donation claims, moving expenses, child care and more. 

Office Audit – this audit division only handles audits of individuals, not corporations. The division is one step up from the Office Exam division and will request information to deal with issues like rental or business losses. These audits can be performed through requesting information by mail or in-person. 

Audit – this is the division that performs full-on audits of both individuals and corporations. Audits are categorized by income ranges. Generally speaking, the higher your income or sales the more senior the auditor will be that is assigned to your file. 

Aggressive Tax Planning (ATP) – formerly known as Tax Avoidance, this is an audit division within CRA that deals with individuals and corporations where it appears that the individual or business is following the Income Tax Act but it is suspected that their tax activities are more than likely not meeting the “spirit” of what the Income Tax Act intended.  A good example of this which has made many news stories over the past few years, are donation tax shelter schemes.  These reviews are done exclusively by ATP.  If you are contacted by an auditor from this area, you are also more likely at risk of being assessed gross negligence penalties (these are higher penalties than regular CRA penalties). 

International Tax – this division of CRA deals with companies and individuals with foreign assets and/or who are doing business abroad. 

It is important to note that if you are contacted by an auditor from CRA you should immediately seek professional advice.  Do not assume that you have nothing to hide and if you are open it will work out well. CRA auditors are out to find something and their interpretation of what you provide and say can lead them to a wrong conclusion – and then you are in a fight to reverse the assessment.  An audit can result in regular penalties, interest, gross negligence penalties and even criminal prosecution. If you have been audited and CRA has determined that you owe them money and/or has even assessed a penalty there is a process to object to the outcome or the audit. This process begins with an objection and if rejected can even be pursued in tax court. Where objections are concerned time is of the essence and any request from an auditor or re-assessment of your tax return should be tended to right away. 

For more information about types of CRA tax audits or if you have been or are being audited and need advice please contact Tax Solutions Canada by visiting www.taxsolutionscanada.ca or call 1-888-868-1400.

Could You Be Next? 6 Ontario Residents Charged in Connection with Tax Shelters

Here is some vindication for those who have unwittingly found themselves caught up in a tax scheme or tax shelter on poor advice from an aggressive accountant, tax professional or promoter.

On March 26^th, The Globe and Mail reported that the RCMP announced that they had charged 6 Ontario residents with crimes related to a scheme where those accused had convinced thousands of Canadians to participate in a fraudulent investment scheme.

 

Here is how it worked:

It is alleged that all the way back to 2004, investors thought that they were legally purchasing business losses that could later be used to reduce their taxable income.

Well, not only were investors defrauded of millions – CRA was too because they issued millions of dollars in tax refunds illegitimately.

What is interesting about this article is that in this instance the RCMP have gone after the companies who advised their clients essentially to commit fraud.

What about the folks who cashed refunds issued by CRA as a result of these transactions?

Here is what we see take place when individuals have received refunds they were not entitled to:

1.      CRA re-assessed the past return

2.      Penalties are assessed – if CRA believes that there has been gross negligence (which is often the case with tax and investment schemes/shelters) these penalties could be up to 50% of the tax debt

3.      Interest is assessed retroactively to the date that the refund was issued on both the tax debt and the penalties – compounded daily

4.      You could be prosecuted depending on how you manage your problem

5.      CRA will proceed to collect the money from you

What can you do if this has happened or you anticipate something like this happening in the future?

Time is not on your side. The more time that passes, the larger the penalties and interest grow.  Resolving the problem before CRA does (or worse the Department of Justice sends the RCMP to come after you) has major advantages. Here are two things that you may be able to do:

·        Get to them before they get to you – if CRA has not yet re-assessed you and you are certain that you have been involved in a charity/tax scheme, speak to a tax professional about making a Voluntary Disclosure application. This is not something you should try to do yourself – it is an official process that only works if done right the first time. If you qualify and are accepted, CRA will allow you to refile your return and at the minimum avoid penalties and prosecution. 

·        File an objection – if CRA has already assessed you and even if you agree that you owe the tax you can still object to the penalties. Especially in the case of gross negligence penalties (that can add up to 50% of the taxes with interest accumulating on this as well). This is also a very time sensitive process because you must make your objection within 90 days of being re-assessed. If the 90 days has passed you may apply for an extension to file your objection up to 1 year after the 90 days. If your objection is accepted (even partly) you can potentially save thousands of dollars in penalties and the interest that would have been assessed on the penalties.

According to The Globe and Mail article, the 6 people facing charges are:

1.      Vincent (Vince) Villanti, 66, of Whitby

2.      Shane Davidson Smith, 46, of Peterborough

3.      David Prentice, 52, of Oakville

4.      Ravendra (Ravi) Chaudhary, 65, of Toronto

5.      Andrew Lloyd, 42, of Pickering

6.      Joe Loschiavo, 49, of Toronto.

Police allege the companies used by the accused to run the scheme included Integrated Business Concepts, Synergy Group 2000, Cason Global Wealth Association and IBCA 2009. Police say the investigation is ongoing and further arrests and charges are possible. Click here for the full article.

If you have been caught up in a tax scheme and need help dealing with CRA you can also find out more information by visiting www.taxsolutionscanada.ca or by calling 1-888-868-1400.

First Quarter of 2014 and Over 30 Prosecuted for Income Tax Evasion and Other Tax Infractions

It is common knowledge that CRA is aggressive in their attempts to prosecute taxpayers they feel have, in some way or another, not complied with tax legislation. Where there is tax evasion (not reporting all income, fictitious expense deductions), average individuals being hit with major fines and/or a prison sentence is common; from average to a criminal record in one tax mistake.  

From January to March, there have been over 30 convictions for income tax evasion and other tax infractions. You don’t have to be Al Capone to be charged with tax evasion. As far as CRA is concerned, small business owners and individuals seem to be as fair a target as any major corrupt business or crime boss. Average Canadians continue to be prosecuted. Here are just a few examples of Canadians who have been caught in the crossfire.  

January 2014: 

-        B.C resident Reginald Reid Jefferd was found guilty in Duncan Provincial Court of failing to file his 2001 to 2010 personal income tax returns. He was fined $10,000, the entirety of which must be paid by July 14, 2014.

-        Ontario resident Jacob Macedo pleaded guilty to eight counts of failing to file personal and GST/HST returns. As a result, he was fined a total of $8,000 and given one year to pay the fine in full.  

February 2014: 

-        Marco-Pierre Caza, of Quebec, was found guilty of tax evasion after claiming inadmissible expenses on his 2006 to 2008 income tax returns. 

-        Nova Scotia resident Steve Fakolujo was fined over $87,000 after incorrectly claiming expenses on his 2011 tax return, as well as given a conditional sentence of twelve months to be served in the community.  The entire amount must be paid within one year.  

March 2014:

-        Mitchell Rygiel of Manitoba pleaded guilty to tax evasion and was fined over $48,000 after failing to accurately report his income. He was given 12 months to pay the fine in total.

-        Ontario resident Perry Tohn was charged with 10 counts of failing to file GST/HST returns, to the tune of $1,000 per count. The total ($10,000) must be paid in full within six months. 

Do not wait until you are being prosecuted.  Working with a professional who has detailed knowledge of CRA processes and procedures can help you avoid the ugliness of criminal court. The right professional firm can steer you through other CRA programs that help to both avoid criminal prosecution and obtain payment terms on the taxes. The tax, interest and penalties are difficult enough to pay (even over time) so do not risk getting a criminal fine (or jail time) to make that worse. If you are at all worried about incorrect or missed tax filings and payments see a professional immediately. 

Remember, letting things go too far, thereby resulting in a criminal record, can have dire consequences. If a potential employer asks (as many do) whether you have a criminal record, the result could be the loss of a potential position. Also, the ability to travel can be severely circumscribed once that black mark is on your record. Once CRA has secured a conviction, your life can change in the blink of an eye.

For more about how to protect yourself from CRA prosecutions for tax evasion, please contact Tax Solutions Canada today by calling 1-888-868-1400.

Find Out if There is a CRA Property Lien on Your Home Before Your Bank Does

Canada Revenue Agency (CRA) has a very powerful collection tool.  If CRA believes you owe them money they can register a lien against your home (or other property) without even a hearing or discussion.  This enforcement remedy has become a very common tool for CRA because they know it is hugely problematic for the taxpayer. In many cases CRA will register the lien first and then tell you later. They have no obligation to notify you.

While CRA often may not notify you – they will attempt to notify your mortgage company (they find this on the public record).  When your mortgage comes up for renewal your bank may be spooked and refuse to renew – leaving you to scramble to get a new mortgage which is impossible without dealing with the CRA lien.

Some homeowners who become aware of a lien will try to ‘do the right thing’ and approach their bank to refinance their mortgage to pay the lien. This too can have very negative consequences because, to some banks, owing back taxes is equivalent to having bad credit, and even if you have home equity your bank can decide they may not want to deal with you anymore.

So how can you find out if there is a CRA property lien on your property? Here are some dos and don’ts:

Don’ts

·        Asking CRA is never the best plan because if they have not filed a property lien, you will flag the fact that you own a home and a property lien may be soon so follow.

·        Avoid asking mortgage brokers – they will most certainly pitch you on refinancing your home to pay off CRA and the problem is that most mortgage brokers do not specialize in helping people who have tax problems. Many will claim they can help but the end result may be a bigger problem.

Dos

·        Go to the land registry office – they can tell you if there is a lien on your home.  There may be a nominal fee.

·        Your real estate lawyer can also perform a search in the POLARIS land registry database to see if a lien has been registered.

If you find there is a lien registered see a tax problems professional.  You need to obtain a full understanding of the tax problem and the possible solutions.

Doing nothing is usually the worst possible approach.  Every dollar you pay down on your mortgage principle and every dollar that your home increases in value will go to CRA.  You need to both minimize and crystalize the amount that CRA is entitled to – ensuring you can get a fair resolution that will not impact your mortgage renewal or ability to sell your home. 

Whether there is a CRA lien registered on your property or not – if you have a tax problem, you will need to come up with a solution to fix it. If no CRA lien is registered, time is of the essence because you weaken your ability to negotiate once CRA has secured their interest on your home. You will also have more financing options if you do want to use your home equity to pay off the CRA lien. If there is a CRA lien on your property – there are still options and they need to be considered long before your mortgage comes up for renewal to avoid negatively impacting your relationship with your bank.

For more information about CRA property liens or to find out if a CRA property lien has been registered on your home call 1-888-868-1400 or visit www.taxsolutionscanada.com.

Can I File an Objection with the CRA to Penalties if I Agree That I Owe the Tax Debt?

Tax returns for the average individual or small business owner can seem overwhelming and complicated. All too often taxpayers and their preparers err on their tax returns by claiming deductions that they truly believe they were entitled to but perhaps were not, misplacing receipts in some instances, etc… All will seem well until CRA comes knocking.  

Sometimes CRA will disagree with the information on your initial tax filing. Other times they will disagree later when taking a second look at a return. Both of these cases may result in a re-assessment. When this happens, CRA may elect to levy a penalty against you. For example, CRA has the power to impose massive penalties for what they call gross negligence just because they believe you were willfully negligent. So what happens if you agree to the assessment or re-assessment in terms of the amount of taxes owed – but simply disagree with a penalty that has been levied? You have the right to object to their assessment or re-assessment.

You can make a CRA objection to penalties even if you agree with that amount.  

Objecting is a formal process and cannot be addressed simply through a phone call or letter.  The exact steps and forms must be used within the timelines set out.  Your objection can be rejected on a simple technicality.   

·        Filing an objection is time sensitive. In most cases, the objection must be filed within 90 days following the date of the (re)assessment.

·        If you fail to file your objection within 90 days you may apply for an extension of up to one year. It is at CRA’s discretion to grant an extension and you must explain why you are deserving of the extra time.

·        If CRA rejects your application for an extension your only choice is to abandon your claim or take the matter up to the Tax Court of Canada.

·        Once 90 days and 12 months have passed, under the Income Tax Act, you are out of options and no longer have the ability to file an objection.

So how do you object?

Firstly, you must fill out the appropriate form for an objection and submit it with all relevant supporting documentation that explains why you disagree with the assessment.  The more professionally the argument is made (recommended in similar format to that used for the Tax Court of Canada including quoting relevant decisions already made by the Court) the greater the likelihood of success. Depending on the complexity of the objection you may want to use the services of a professional experienced in these matters to manage this process.

An example of this is the many taxpayers who have found themselves, unwittingly, caught up in charity schemes. There have been many instances where gross negligence penalties were assessed and then withdrawn on objection – both by CRA and through orders made by judges in Tax Court.

After your objection has been submitted, a formal review process will commence and you will be notified of the decision. This can take several months or even years. During this time CRA will pause enforcement action pending the outcome of your objection, with one exception, collection action is not stayed for assessments under the E.T.A. such as HST. This is a double-edged sword because while the CRA agent will not be pursuing you, if the objection fails to succeed, penalties and interest will be assessed against you, retroactively! In the case of charity schemes we have seen objections take upwards of 8 years to have a decision rendered.  The effect of daily compounded interest on the tax and penalties often making the final tax bill unmanageable.

What happens if your CRA objection to penalties is rejected? Are you out of options? No, if your objection is not accepted you have three options: Go to Tax Court, apply for Taxpayer Relief, or bite the bullet and pay what was assessed. 

To find out more about objecting to a Notice of Assessment or to apply for Taxpayer Relief please contact Tax Solutions Canada by calling 1-888-868-1400 or visit www.taxsolutionscanada.com.

Sole Proprietors – The 2014 Tax Deadline for Businesses is Right Around the Corner

If you operate a sole proprietorship or partnership, the 2014 tax deadline for businesses is June 15, and that is right around the corner. This can pose a challenge to small business owners because keeping your books and records organized often falls lower on your list of priorities in the demanding world of running a small business. This causes many small business owners to miss the tax deadline or take shortcuts that can result in an audit. 

Here are some tips to avoid missing the tax deadline if your books are in bad order:

 

·        If you are overwhelmed by your record keeping and accounting – get a good bookkeeper. They usually cost far less than accountants and will ensure that you are organized. 

·        Consider an accounting platform such as QuickBooks – this is a great resource but you need to be somewhat computer savvy or you may need a course to understand how to use it properly. 

·        If you have lost receipts, request bank and credit card statements – this will help you guestimate your expenses and is better than having nothing at all.

 

Here are some things that could cause you to be flagged for an audit:

 

·        Filing your tax returns late or in a batch for multiple tax years – make sure you file before the tax deadline.

·        Significant changes in an income or expense category.  CRA’s systems are set to detect significant changes.

·        Businesses where the margins or other ratios are out of line with the industry standard.  For example, CRA does use the Industry Canada website to check various financial ratios broken down by business line.  So if you are Joe the Plumber, CRA will look at a table that can be found at this link:  http://www.ic.gc.ca/app/sme-pme/bnchmrkngtl/rprt-flw.pub?execution=e2s4    

·        Large ongoing loans owing to the company by a shareholder.

·        Businesses who deal in a lot of cash transactions, such as restaurants.

·        Businesses who are showing losses one year after another.

·        Questionable meals and entertainment expenses.

·        The sale of any business asset or property. 

If you know that your books are not properly put together and all the supporting documentation is readily available, do not make the same mistake many others have made and miss the tax deadline. Some do this out of fear, thinking that later, once they are organized, they can clean everything up. This is the worst thing you could do. Doing so will result in huge penalties. Wondering how much? The 2014 late filing penalty is 5% of the amount that you owe, plus 1% per month for up to 12 months. If you filed late in any of the 3 preceding tax years the penalty can increase to 10% of the amount of your tax debt plus 2% per month for up to 20 months. Add to this the compound interest that will be applied retroactively to the date you should have filed, as well as potential prosecution for tax evasion and you are looking at a tax nightmare.

If you think you are in over your head, reach out and consult a professional who specializes in helping businesses with tax problems.  Preparing returns (even with missing records) can be done.  That is the first level of skill you need on your side.  What is vital to a successful outcome is an affordable professional who has deep experience in utilizing the various CRA and other Federal Government programs that can allow you to address past mistakes in a fair way – fair to you and fair to the CRA. 

For more information about the 2014 tax deadline or if you have a tax problem and need help please call 1-888-868-1400 or visit www.taxsolutionscanada.com

International Tax Evasion - CRA Invests Millions to Find Your Offshore Nest Egg

A press release was issued last year highlighting a $30 million “investment” by Canada Revenue Agency (CRA) aimed at combatting those that CRA alleges have committed ‘international tax evasion’ and ‘aggressive tax avoidance.’

This does not mean that CRA is only chasing rich people with offshore companies and shady business dealings.  They are chasing many average Canadians. As a nation which is home to many immigrants with ties to other countries, these good citizens have (in some cases completely innocently and unaware of all the tax laws) built up savings accounts, bought retirement homes or invested in businesses in their home country or retained an inheritance there. 

In the announcement made by the Honourable Gail Shea, Minister of National Revenue and Minister for the Atlantic Canada Opportunities Agency, and the Honourable Maxime Bernier, Minister of State (Small Business and Tourism), it was made clear that this would be a top priority and CRA would have an unprecedented ability to crack-down on those that they believe fall under this category.  

Since this announcement, we have seen an increase in clients seeking help after CRA has begun aggressively pursuing them under this new mandate. 

Here is how the investment was distributed:

·        $15 million was allocated to put systems in place with the banks and financial institutions so that in the event of electronic fund transfers greater than $10,000, CRA will be promptly notified.

·        $15 million was allocated to establish new audit and compliance measures.

CRA established a dedicated team of CRA agents and investigators to implement the program with increased powers to audit, investigate, and pursue individuals and businesses that they believe are hiding money offshore. 

These include, but are not limited to:

·        A new program – the Offshore Tax Informant Program - that allows CRA to pay for intelligence. CRA will now be able to compensate those who are aware of individuals guilty of international tax non-compliance.  Ex-spouses and former business associates are snitching.

·        Requirement that financial institutions report any electronic fund transfers in excess of $10,000 to CRA.

·        Introduce new and additional requirements for taxpayers with foreign income or properties to provide more information.

·        Increase the amount of time CRA has to re-assess individuals who failed to properly report income. 

You can read the full press release here http://www.cra-arc.gc.ca/nwsrm/rlss/2013/m05/nr130508-eng.html  

If you believe that you may be impacted by this new program it is vital that you get to CRA before they get to you. The Voluntary Disclosure Program can help you avoid aggressive penalties or prosecution as a result of offshore income, assets or investments. 

For more information about international tax evasion, or if you have a tax problem and need help – please visit www.taxsolutionscanada.com or call 1-888-868-1400.