How can you avoid scrutiny from the CRA?
Today’s theme is inspired by a recent article in the Moncton Times. The source of the material is Doug Northrup – a master tax specialist with H & R Block, based in Moncton, New Brunswick.
“Many Canadians have a healthy fear of the Canada Revenue Agency (CRA). The brown envelopes from the CRA have struck fear in the heart of many. But every year people make decisions that lead them to a little more attention from the CRA than they really want.
One sure way to get re-assessed is to forget to include a T slip. T slips report income and all of them are filed with the CRA. Whether you forget, misplace or hide a T slip, it is going to come back to haunt you. The CRA has a matching program so the T slip you didn’t include will eventually find its way to your return via your SIN. If you do forget a T slip, you should file an adjustment as soon as possible to correct the problem.
If you forget or hide income twice in a four-year period, you will be looking at substantial penalties. Once is a mistake but more than once is considered an evasion.
Becoming self-employed can be hugely rewarding, but if you think you can just use your business to create losses for years so you can avoid paying tax, this is not a good business plan. The CRA doesn’t expect every business venture to generate profits or revenues in their early stages but there must be some reasonable expectation of profit in future years. Years of losses will probably lead to a conversation about your business plan with a CRA auditor.
Tax forms can be a bit misleading and it is easy to make an error. As I discussed in other columns, Line 229 – Other Employment Expenses – is tempting, and we all incur expenses for our jobs. But you can only make a claim under specific conditions. Last year I had to explain to a gentleman that even though Line 220 says Support Payments, his money transfers back home to his wife did not qualify.
You can only claim support payments for your spouse if the court order or agreement is registered with the CRA. He was still married so he couldn’t figure out why the CRA asked for his divorce papers. Again, there are specific conditions when you can claim support payments. If you are not sure, make sure you investigate before you insert a number in a box.
Even once you complete your return correctly, it may be reviewed as part of the CRA’s verification program. It is not a comment on how your return was prepared but is usually tied to the credits you have claimed. Moving expenses are commonly reviewed so you need to make sure you keep receipts handy.
For parents claiming the tuition transfer, they need to supply a signed T2202A form from the student or this credit will be disallowed. As long as you respond to the CRA within the timeframe requested and have the proper documents, having your return reviewed should not be a problem.
If you have out of the ordinary expenses, this can also trigger a review. The CRA does not publicize the actual amounts that will lead to a review but if you claim your vehicle as 95 per cent for business use, you are probably going to get a request to see your logbook. As long as you have the documentation and your claim is accurate, you should have nothing to worry about.
For people who are living large on a little income, you might be reviewed thanks to the CRA’s snitch line.
The CRA can conduct a net-worth assessment and you will have to explain any discrepancy. You may have a good reason for your new lifestyle, like an inheritance or lottery win. But the CRA will want to make sure you aren’t doing work under the table. If you are hiding income, you may want to consider the Voluntary Disclosure Program.
The best way to stay off the CRA’s radar is keeping a good compliance history. If the CRA finds you have cheated once, you can rest assured that this is not the last you will hear from them.
But if you are part of a random review and you respond in time with the proper documents, you are less likely to hear from them in the future. They are more interested in people who are avoiding their tax obligations.”
* Tax Talk is a weekly column prepared by Doug Northrup, a master tax professional, small business and corporate specialist and tax advisory member for H&R Block in Moncton. He can be reached by email at email@example.com