November 8, 2016
My simplified study of the Canada Income Tax "Jungle"
To the readers, as a blogger, I am likely not well-known to you , since this is an early foray into the online community! However it may seem, I have logged many hours as a tax practitioner in Mississauga Ontario, and believe I may inform you, or provide you new insights, and attune you to the subject, of Canada income taxes, as we go-forward. I have often thought of writing an article, a story or a volume on the subject, which I know very well, having accumulated experiences in this place, during many years of business life. In doing this article, I trust I may enrich you, the readers. I hope to create interest through extending knowledge or creating interest in the particular topics. I have known authors who have written a novel, a history book, or who have chosen to write about varied serious matters that reaches the front pages of newspapers.
However, I come from a different bent, as a bit of an authority on income tax matters, the result of a career in the “space” serving to interact as a “go-between” for clients from a broad spectrum, and the Canada Revenue Agency. This role is one of satisfying the folks who set the income tax rules and various other CRA departments, and laying to rest clients’ fears, doubts, acrimony, and for many, assisting in setting debts to the Receiver General. (I do not know his/her name, but the person is obviously top-dog!).
One might say, generally, in my clients’ lives, I play the small, but not inconsequential, role of keeping the Canada Revenue Agency (CRA) at bay for another year or so. I am not making a guarantee that this “paper” will answer “everything” that needs be said about CRA! However, I do believe I comment, herein, upon a substantial number of worthwhile, interesting, income tax experiences. I trust these will give readers interesting and insightful matters and comments, that I truly think have value! Should interest warrant it, I will present additional, similar data.
We have become seasoned players in the annual rituals with, and reporting to, CRA, throughout the years of our practice. The alternative would have been to drown in the mass of data, and be less than dependable to our clients.
Of course, we are all Taxpayers (as CRA cares to identify us!), whether we are individuals, corporations, small businesses, or trusts in many forms, such as the Estates trust.
CRA and the Receiver General are very sizable organizations, comprising a milieu of civil servants, supported by an ever-growing system of laws, networks and communication to manage their mandate. We should be proud to work within this structure, which requires Canadians as well as other residents and certain non-residents, reporting their earnings to CRA and collecting the various taxes due. For the moment, I will paint the landscape as it affects the income taxes that I know, of Individuals and corporations, many of whom are small or large businesses, and for the trusts.
As with many of us, but on a very large scale, the CRA utilizes big computers to manage data on millions of “taxpayers” each with their many individual facets. These facets, uniquely tor each of us, encompass many years of History and many identifying income or deductions. This is could be called Big Data managed by a Big team.
Accountants, solicitors and tax preparers are the intermediaries in the tax process, the “go- between parties”, with CRA on the one hand, and taxpayers, on the other hand. That would suggest that relatively few of us directly and individually communicate with the CRA, with many big corporate businesses the other exception.
How does this affect the majority of us? The following are my thoughts, for your consideration:
- CRA audits will be increasingly sweeping, pin-pointed, and quicker off-the-mark;
- CRA audit correspondence by letter, email, or telephone will be more comprehensive, will dig deeper, and will require equally capable response on behalf of the Taxpayer;
- The income tax law and CRA instructions will continue to expand, and potentially, become more complex. Many reasons will cause this, such as population increase, wealth, more off-shore activity or investments for citizens of Canada and other countries;
- Increasingly, CRA mandates access of online data dependency, and use of computer, and cell phones to communicate by all parties. Specifically, CRA is making substantial improvements in MY Account, in that increasing types of T1 (personal) tax slips are available for Online Download. In addition, these additional online improvements are recently put in place; and
- One can now permit your accountant to access your My Account data, by proving a signed T183.
If you have a business with a CRA Business Number, you may authorize CRA to permit your accountant to access your electronic business statement, via My Business Account. Otherwise, form RC59, when prepared manually and submitted, also allows your representative access to CRA T2 or T2125 data;
- In respect of confidentiality, CRA is obliged to be sure the intermediaries , such as the writer, is fully approved by itself and by the individual taxpayers, and that the intermediary has documented, organized, support for that authorization, which includes E-filing and Representation, etc.;
- However, the writer believes from reports that there is continued growth in tax cheating, as the population of the country grows. I doubt that CRA can eradicate all cheaters, however.
Needless to say, that although life can be complex enough, when CRA determines it will audited a person or entity, both the taxpayer and the tax preparer have a challenge on their hands! Here are some recent experiences with CRA:
- I knew of a taxpayer who incurred 10 different CRA audits over a span of 3 tax-years. However, ultimately, CRA accepted all positions the taxpayer had taken! One audit attempted to deny significant expenses. The taxpayer filed an Appeal with Ottawa, and after a delay of 14 months, the denial was reversed;
- Frequently, on audit, the numbers of pages to prove the taxpayers deduction taken, and which required uploading to CRA Audit team, was 60-70 pages.
- The volume of paper need not be directly comparable to the substantive amount involved. For example, we recently responded to CRA respecting two audits that took the same amount of time to master, more or less: these were i)proof of a foreign tax credit of $21,000, relating to foreign income; and ii)$2,550 of medical claims by a senior citizen; CRA replied after an interval of approximately 8-10 weeks;
- I trust that there are guidelines within CRA that set out audit frequency sampling and are proportionate to the risk, or are used to test check the various intermediaries, in particular the tax preparers;
- A small corporation long shut-down, due to the death of the owner, was audited because of a large legal expense it incurred. The company incurred the outlay to beat back a lawsuit by a major competitor. CRA sent in an auditor to validate the legal expense, and while in place, the auditor apparently checked over many additional accounts of the corporation. After a period which seemed to be 6 weeks or more, the auditor left and gave a clearance letter respecting the audit;
- Sometimes, individuals or corporations formed, lack the minimal records necessary to file a tax return and be subjected to Audit. The reasons are varied, but essentially, the taxpayer does not understand his/her obligations to the tax department, or he/she fails to keep receipts etc. If audited, in these situations, CRA will enforce the law, and the ultimate cost to the taxpayer will be substantially more, than if done correctly from the start! I conclude from experience that taxpayers the need to carefully manage affairs, and of course, hire a good accountant, from the get-go!
The above is not meant to deny that many CRA audits are very necessary to maintain integrity of the tax system.
One’s obligation as a taxpayer is to maintain complete records, including supporting documents (think receipts, statements) at your place of business, sufficient to calculate tax owed. If one uses software, be sure back-ups are available. If your business uses the Internet, be sure to maintain the online transactions and print hard copies frequently.
As part of our particular tax practice, in the normal course, we need to focus, somwhat, on the risk/reward equation of preparing a tax return, an appeal or responding to an audit. We have built a matrix for estimating fees, by matching time, difficulty and risk. We rank situations on a scale based upon difficulty of 1 to 15, which assists us in quoting a fee we need bill. Many tax situations are time consuming, time-sensitive, as well as challenging to get it right. A potentail client needs to consider these matters:
-the state of his/her affairs and the amount of paperwork being submitted;
-the amount of time the tax professional needs to absorb your data, organize it, double check it, make copies, meet with the taxpayer for signature, and the overheads involves in office, software, billing and several other matters;
-Finally, the likelihood of CRA audit. Professional accountants understand both the risk and seriousness of audit, and the risk of error, in its many variations;
A view, a rough guestimate, of the TAX Preparer Map is:
- Major CPA companies have the majority of the talent in the field of paid Tax preparers and I would hazard a guess these earn 50% of the resultant revenue;
- The second category are the small CPA firms, of which there are likely thousands of high quality firms; 15% of the business;
- The third category are independent preparers, or tax shops including companies like H&R Block, Nationwide etc. These may account for 20% of dollar volume, but many of the smaller shops charge minimalist fees;
- The remaining 15% of fees are likely earned by stealth tax preparers, or insurance agents, brokerages etc., for whom the latter may offer nominal fees or free tax returns for their clients. Some of these preparers may not fit the normal risk/reward profile.
The interested party to all of A-D above is CRA. In theory, CRA casts a broad net and catches ”both small or big fish”, using tests for possible improprieties, and hopefully “all fish” before the net is lifted. The next later step, post assessment date, is a look back phase.
It is obvious that should a tax preparer get over his/her head so far as tax filing, he/she will be in trouble with CRA as well the taxpayer, and both suffer penalties and more. This implies error. More serious problems exists may well exist in any tax year. There are elements of cheating out there and the tax preparers who are party to these cheats are dealt with severely. But not every cheater is caught, by far. Think of underworld types, and new strategies to beat the law. Several points should be made in this regard:
- People caught cheating taxes are prosecuted and the guilty are fined substantially or jailed. These individuals are identified on CRA press releases;
- Sometimes the complexity of failed accounting and lack of tax returns causes illness, death, or even suicide. Sometimes people need go into bankruptcy, whether personal or corporate;
- CRA collections policy is very severe and justifiably so! Many people are unable to manage the burden of paying the tax owed, and CRA needs run its course, regrettably.
- Many people have are undeclared 10 years, 15 tax years, or more. CRA has a VDP (voluntary disclosure policy) which accepts 10 years of past filings without penalty, but does not speak to it’s position on how it proceeds beyond 10 years, The Statute of Limitations may apply;
- CRA doesn’t win all Court Cases. Lots of people fight and win, but the court would need good reasons;
- If a person fails to meet his/her tax reporting, CRA has other alternates, such as the net worth assessment. This formally alleges the assets found required certain (undisclosed) levels of income were the cause, and CRA assesses accordingly.
Cheating on taxes by some is a reality in Canada! From CRA literature and from other resources, we understand the breadth of various situations, which I hazard to guess are “as varied as there are sea shells in the ocean”. Large numbers of these tax cheats are reported by the CRA annually, such as the following:
- Unreported offshore assets;
- Unreported multiple income earning rental properties;
- Failure to disclose cash income, or report only part of income;
- Wrong income splitting with family members;
- Failure to report capital gains on properties, or to declare recapture on depreciated property;
That we may have a nation of many cheats leads to the following possible synopsis. CRA may get bogged down in the cases it investigates as likely tax-cheaters, leaving the vast ocean of others who don’t get caught, perhaps “never”. I am told by others that, in reality, the process of prosecuting tax cheats through the legal system is so onerous and time-staking that CRA resources can only go so far in a given year. This leads to an ultimate backlog, perpetuated by new leads each year.
I am told by experienced parties that tax cheats get emboldened to continue their evading tactics, in the knowledge they can afford high priced help to pay to defend themselves;, if necessary they are able to afford the advice of others who are, in any event, perhaps, steering them wrongly. As an example, the offshore assets issue (which we read about in the news), is, on its own, a highly complex subject. It is possible that the Minister of Revenue may not be able to invoke broad enough legislation to trap all the possible structures set up to “hide” income from Canada. It follows that advisors and errant taxpayers will take their chances until the loop-holes are firmly cut!
The offshore topic is just one of so many wrinkles in the system. It seems that there are enough tax cheats to fill any void in the CRA’s system.
CRA has a program which presently is called ILP, “Informant Leads Program” to help it locate tax cheats, aka tax evaders! In 2014, CRA also created a program called Offshore Tax Informant Program, (OTIP)
These programs permit anyone to report tax cheats by internet, fax mail or phone. The OTIP provides financial rewards. Otherwise there are no other “perks”.
Evasion, apparently or potentially, includes any falsified data on a tax return such as marital status or children falsely reported. CRA implies evasion also exists in cases of failure to remit source deductions.
As taxpayers, we will only learn the success of these programs, by chance, or on CRA and Legal websites, such as CCH. Regardless, the informer is protected. Additionally, an informer needs to be comfortable with the process, as inherently, he or she could be at risk.
The CRA also says the Informant Leads Program can be used to disclose to CRA persons not reporting Real Estate transactions. It sheds light on this initiative, summed as follows:
- Reasons include exploding real estate market in popular parts of the Country;
- Property Flipping, without capital gains reporting;
- Unreported world-wide income of a Canadian used to invest in Canada real estate;
- Purchase of real estate by a low-income person, hiding a wealthy buyer;
- Speculators, Professional renovators or contractors, as well as middle investors shadow investing. This covers entities which own the home for a short time, renovate and flip;
A false statement on a tax return re-assessed by CRA will result in a 50% surcharge on the additional tax CRA demands.
It is no wonder that recently CRA announced that, from 2016, all sales of property need be reported, as a disposition on Schedule 3, inclusive of sale of the principal residences.
To be clear, tax minimizing is a different matter from cheating on taxes, and is a keystone in a democratic country. To many, it may appear that the domain of minimizing and cheating each tend to overlap. This may be factual, sometimes, since there are so many into the game. The tax law needs always to be keeping up with our ever changing economy. The tax professionals mandate is to figure the least taxes that need be paid on behalf of their clients. Thus, tax minimization is always a very large business for the professionals. Getting tax minimizing right and getting CRA to accept a new tax position is often a battle. Tax litigation is a large part of the legal gambit, to wring a correct assessment notice for a particular tax filing which initially is not accepted by CRA. Alternately, CRA may reach-back up to a fixed period, and Re-assess a taxpayer based on its believe the taxpayer erred. Again tax litigation ensues.
Needless to say, CRA does not limit its look-back rule when there is a suggestion of gross negligence or fraud.
The Canada Income Tax system is substantial and complex, and to use it properly, unless for a very basic need, one needs professional help to walk through the "mine fields or searchlights" of CRA auditors. The tools and software provided by CRA and your accountant, makes for greater efficiency of CRA and yourself, but the tax preparer maintains a substantial middle-man role, however, and justifiably.
If you are interested in the content of this blog, please let me know and I will continue to increase the content!
Charles Russell CPA