The Canada Revenue Agency (CRA) Knows Who Cheats on their Taxes!

Are you on the Canada Revenue Agencies radar?  How about on the CRA’s Audit Radar?  Have you been “flagged”?

Have you ever wondered how the Canada Revenue Agency (CRA) decides who to audit?  Are there red flags?  Or does the CRA know how you operate your business which makes you more or less likely to be audited?

Here is the answer that you might be looking for;

The CRA knows who Cheats on their Taxes!

Do you fit their profile?

Are you at risk?

First, some background.

While I was still working at the Canada Revenue Agency (CRA), we released the results of a study that was put together to profile what kind of person poses the most risk for the CRA’s collections and audit groups.

The CRA spent a lot of time going through the main accounts; personal tax, payroll, GST/HST, and Corporate Tax, and we looked at who filed on time, who filed late (and how late they filed), and who was regularly compliant, and who needed a follow up verification audit, and what the result of those audits were.

This study focused on Tax Compliance, specifically;

  • Percentage of Taxpayers who accurately reported income and expenses (95%)
  • Percentage of Taxpayers who file on time (93%)
  • Percentage of Taxpayers who made payments on time with their filing (91%).

When it comes to reporting compliance or honestly reporting all your income and/or expenses, this study found that males are more likely to underreport their tax owing than females.

The study also found that underreporting is highest among taxpayers aged 35 to 54 and lowest among taxpayers under 35.

Underreporting of tax was also lowest for taxpayers who are married and highest for those who are separated, with single taxpayers somewhere in between.

Not surprisingly, underreporting of tax is higher among taxpayers whose main source of income is either capital gains or self-employment income versus taxpayers whose main source of income is wages, where most of the tax is withheld at source by the employer.

So who is on the CRA’s radar?

The prime candidates for the CRA to audit, or perform a desk review of expenses, are the separated or divorced males between the ages of 35-54 years old.

Do you fall into that category?

If so, know that the CRA is keeping one eye on you and the other on what you report and when it is reported.

Contact us at inTAXicating, and let us help you ensure that you remain compliant, and ensure that you have the knowledge necessary to organize your records so that you can quickly and easily get through a CRA audit.

EXAMPLE:

Here is an example of a case where the CRA used the criteria identified earlier to quickly descend on a taxpayer who fell behind in his filing and remitting duties.

Case: Tax Cheat?  Or Disorganized Business Owner?

I was approached by a business owner who ran very loosely with his books and records.  He kept a box of receipts and while most of the business receipts made the box, many got lost along the way.  Additionally, this business owner charged business expenses on his personal credit card, and personal expenses on his business card.  He travelled quite a lot for work, and he posted a lot of content on social media, but he failed to keep a thorough and accurate log documenting his personal versus business travel.

Additionally, because he was always on the go, had no time to review the details of the tax side of his business.  He had money in his business bank account, then he knew he was earning money.  At year-end, he would bring his half-completed records and his shoebox to his accountant for the preparation of his returns.

In June he would receive a refund.

A series of events, however, changed his life forever.

  1. His accountant began to get busy
  2. As a result, he was late getting payroll figures, and was late making the payroll remittance
  3. Then the GST/HST numbers were delayed, so that filing was late
  4. His personal tax filings were delayed
  5. His business tax filing was delayed.
  6. His business made money.
  7. While all of this was going on – he continued to send his info to the CA, and pay the CA’s invoices.  He would get the odd notice from the CRA and send it to his accountant to “take care of”.

This is very typical and a common occurence.

What he didn’t know was that everything was not okay.

One day a CRA field officer showed up to discuss his non-compliance and to arrange a payroll audit because the company was 6-months behind on remittances.  There was also a balance owing to the CRA of over $35,000.

Shocked, he contacted his CA who said that she would look into it, that it was going to take some time and she felt the CRA was completely wrong.

Convinced that the accountant was right, the business owner went back to work, and the accountant was going to find the error and fix the problem.

Only problem that he didn’t know was that there was no “error”.  The balance owing to the CRA was legitimate.  By filing late over that 6-month period, the accountant had amassed a significant balance due to late filing penalties and the balance was jumping by leaps and bounds as a result of the 10% interest the CRA charges on outstanding balances (compounding daily).

Then one day he received a call from one of his main suppliers who was concenred because not only did he cheque bounce, but there was a CRA officer there earlier in the day asking questions.

He contacted his accountant.

She appeared stunned and said that she would call the CRA and fix it.

She was just buying time.

A week later, the garnishment was still on the account, interest was accruing, and the accountant was telling stories of the CRA being unfair, and mean, and not listening or returning calls.

Frustrated and panicked that he might have to close his business without a bank account, he contacted his CA and asked for his books and records.

She refused.  Realizing that this was the end of the relationship with her client, she told him that she had done a lot of work with the CRA and she demanded payment before she would give up his information.

He refused to pay – how could he?  He had no access to his bank account and the CRA had taken all of his funds.

In fact, it took him 8-months and a small claims court date for this process to resolve itself.  She took him to court for unpaid work, and thankfully, the judge was wise to this CA and her practices and awarded the client his books and records in return for payment of the work actually completed, not the entire invoice.

The damage was done.  The business was also close to being done.

The CRA doesn’t care about the reasons why someone becomes non-compliant – they look at the business, the owner, and then set their course to fix it.

The fact that this business owner fit the category did not help him at all, as the CRA quickly and aggressively went after every asset that he had, raised assessments for the missing payroll and GST/HST figures, and sent Requirements to Pay to his business bank account, contacted his receivables (clients) and quickly moved to raise director’s liability so they could go after his personal assets.

Conclusion

Running a business is difficult.

Running a business without a business bank account is also difficult.

Running a business without a bank account, after the CRA notified your clients that you owe considerable amounts of tax money is next to impossible.

What killed this business was a combination of bad accounting, bad advice, lies, deception and some really bad luck.

The reality is that many, many businesses and individuals have this experience on a daily basis.  It is next to impossible for the CRA to determine if the information being told to them is legitimate or a made up story – but when the owner of the business is a perfect fit for commiting tax fraud – the CRA takes notice.

Could this have been fixed?  Of course.

If you owe money to the CRA, or if you have fallen behind on compliance, or if you suspect that your tax advisor is giving you bad advice, contact us now.  At inTAXicating, we’ll look at the facts, and help you run your business while we work on solving the problem.

Visit our website @ www.intaxicating.ca.

Send us an email to: Info@intaxicating.ca

 

 

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Tax season in Canada… When can you expect to see your slips, receipts and returns?

Ah, tax time in Canada.  April 30th.

So much fun… Really.  Organizations who issue tax slips, tax returns or contribution receipts have been working hard perfecting their processes since the end of the last tax reporting season and have been working through the summer putting any necessary changes in place and gearing up for the next tax season – which all begins next month in November for many top organizations.

Since issuing organizations are gearing up, so should you, the investor, start getting ready to file your income tax returns and to do that, it really helps if you have an idea as to which slips your investment(s) will generate and when you can expect them.

Of course, even if you do get all your slips, as expected, there could always be amended returns sent to you as well resulting from an error or late directional change from the company / fund.  Even the CRA likes make changes to their tax forms, or to the calculations contained therein and there is nothing you, nor your tax preparer can do, let alone the poor folks issuing your tax slips.  You have a slip, assume it to be correct and file to the CRA with it only to find out it’s incorrect when another version comes, with a letter, to be used instead.

Take 2010, for example… The CRA changed the dividend tax rate by something like 0.0007% and they did that 5 days before they expected T5 slips to have been received by holders and in actual fact, most of the T5’s were already issued with the incorrect rate before the CRA realized what they had done.

Since the CRA determined that the rate change would be adjusted internally, there was a communication fired out industry-wide notifying those who received T5’s that no further actions would be taken on the holder side and that they should not need to go back to their bank, financial institution or transfer agent to have it amended.  I remember a few individuals demanding their slips being amended for a total change of $7.00.  But this is what you do – with a smile when you’re in that industry.

Back to the topic.

One of the most common frustrations during tax preparation time comes from those holders who are eager to file but are unsure of what they are getting and when, roughly, it should arrive.

Keeping tabs on due dates can be quite difficult, especially if you’re getting them from an organization which has not fully embraced social media and are unable to provide you with a timeline, or expected dates per slip depending on what you should be receiving.

For example, T4 and T5 tax slips must be mailed out by February 28th whereas, tax slips for mutual funds, flow-through shares, limited partnerships and income trusts are not due until March 31st.

When there are late deadlines, like March 31st, a lot of pressure is then placed on your accountant as it creates a heavy backlog in April, when accountants must rush through the preparation of personal tax returns for their clients – sadly unable to give each return the care and oversight that they deserve.

I just don’t understand why all slips are not made available on the web or by email all by say March 10th in order to allow time for issuing organizations to prepare better their processes to allow for additional oversight and for time to correct errors.  This way organizations preparing the slips will have to begin auditing the slips traditionally due in February for errors and get the March ones completed – have them all merged together in the same file and made available sooner rather than later for the holder.  In addition, with a fixed deadline, the CRA or MRQ would then know when they can or cannot change slips or information on slips. 

Let’s look a little closer at some issues and potential solutions;

Year-end trading summaries

Banks and brokerages use year-end trade summaries to report proceeds and commissions on each sale. However, the proceeds reported are sometimes net of commissions, which can lead investors to erroneously deduct the reported commission number a second time.  In addition, many banks issue multiple slips for each investment account, but send a consolidated summary of the slips to the CRA, which causes havoc when there is a missing slip or a question regarding one of them.  

By keeping track of the totals or having them all come in March would allow the issuing organization time to audit and compare the slips to the summary before issuing to ensure they balance.

Another solution is for the issuing organization to make the slips available on their investor website and then holders can wait for the year-end summary to post – which of course would balance – and then before a holder does anything with their slips they can be comfortable that they balance.

An additional bonus would be for the issuing organization to also provide the calculations behind the slips on the website so that if there is a discrepancy, the holder can look to see how the slips were calculated and they can also learn more about how taxes are calculated.  It’s a win-win situation.  Accurate reporting and teaching the holder more about taxes. 

Gain and loss reports

Many privately managed bank funds prepare gain and loss reports for clients. However, where there are US stock sales, often the cost reflects the US dollar purchase amount at the current year’s exchange rate, rather than at the time of purchase. 

Traditionally, the onus is on the holder to figure out the historic exchange rate and the issuing organizations can and should assist by making this information available on their website for ease of balancing.  They should also make sure that there is accurate and complete documentation on their website and on all reports indicating the rate used and the rate needed for reporting.

T3 and T5013 tax slips

These are the two main slips which have a mailing deadline of March 31st because the trust/partnership has to finalize their books and prepare their tax returns in order to know the breakdown of the distributions so that the individual holders can then have their tax returns rushed to them – a high risk process indeed.  So once the T5’s have been received and accounted for, issuing organizations like transfer agents have only a month or less to then prepare the T3 and T5013 slips.

Let’s be honest here, it’s more like 2-3 days, due to the complexity of the partnership returns and one way around this is to ensure that any issuing organization is capable to preparing T5013’s by themselves, or that they have an organization capable of preparing them in an expedited manner.  In addition, the partnership should be contacted to let them know that the quicker they get their books in order, the quicker the rest of the slips can be prepared.  If enough people come forward, I guarantee it will get done faster.

Final Review:

When reviewing your slips before filing your tax return, keep in mind a few small differences;

T4’s vs. T4A’s – A T4 is issued by your employer and reflects the income you earned during the year, as well as showing the amount of deductions you had removed from your pay, such as; CPP, Employment Insurance (EI) and tax.  A T4A, on the other hand, is issued by a pension plan administrator and reflects the pension income you received from a pension source. T4As will not have figures listed for CPP or EI contributions since these are not deducted from pension income.

The T5 investment income slip – identifies the various types of investment income that residents of Canada have to report on their income tax and benefit returns.  T5’s are NOT issued to report income paid to non-residents of Canada, however, if you earned US interest on your investments, it will show up on your T5, with a note at the bottom saying that the interest is in US dollars.

It’s not always clear to the holder that this figure needs to be converted at the average exchange rate for the year, as set out by the CRA.   T5 slips also have both eligible and ineligible dividend boxes, which holders can accidentally reverse on their returns.

Investment loan interest

Most banks do not issue receipts for interest on investment loans unless specifically requested, resulting in a missed deduction for the client.  Borrowers should request receipts well in advance of the tax-filing deadline to ensure they arrive in time.

All in all, it’s best to keep track of investments you have and to check off when they are expected and when they are received in order to ensure you can file at your earliest convenience or reach out and ask your issuing organization / bank / transfer agency to step up and find a solution.

It’s never to early.

Even in October.