Tax

by Jeff Kirshen

Real Estate Agents and Incorporating a Company

For years, professions have been lobbying the province of Ontario to be permitted to incorporate. After doctors were given the right to incorporate over a decade ago, legislation has been introduced and tabled that would grant the same rights to real estate agents. To date, nothing has passed. However, it appears that Bill 104, the Tax Fairness for Realtors Act, is picking up steam, and soon may finally grant real estate agents the right to incorporate their business.

 

Tax Benefits for Real Estate Agents who Incorporate

Passing Bill 104 would carry significant tax benefits for real estate agents who decide to incorporate. In the province of Ontario, the highest income tax bracket is 53.53%, for every dollar earned over $220,000. As real estate agents are sole proprietors, their businesses have been subject to the same marginal tax rates as Ontario incomes.

However, as a Personal Real Estate Corporation, real estate agents will be able to enjoy the Ontario small business tax rate, which is 13.5% on the first $500,000 of income earned. Furthermore, as long as the corporation is owned, controlled, and operated in Canada, it can enjoy the Canadian Controlled Private Corporations tax rate of 26.5% on income that exceeds $500,000. The incorporation route promises huge tax savings for real estate agents.

There are also valuable income splitting opportunities with corporations’ income, which would be accessible to real estate agents. Income splitting allows corporations to separate its income among family members, which can be done strategically to stay in lower tax brackets. Corporations can do this by either paying them a “fair salary”, or issuing dividends.

There are also large tax deferral opportunities. Individuals are required to report income to the CRA that they earned during the year. Corporations only have to pay tax on income that is withdrawn. Therefore, they can delay the payment on a share of income by just leaving it in the corporation. This gives corporations significant tax planning advantages, as they can control the amount of income leaving their corporation in a specific tax year to lower their tax obligations.

 

Reporting Requirements for Real Estate Corporations

Of course, with incorporation comes new challenges. Requirements for filing and record keeping for corporations are far more onerous than for individuals. There are also indirect taxes like employer health tax, WSIB, taxes for payroll and GST/HST on commissions that can add expenses. In essence, while the power to incorporate would give real estate agents far more power to file their income strategically and enjoy small business tax rates, it also requires a far more complicated tax filing process with more costly obligations.

 

If you are a real estate agent and would like to discuss the implications of incorporating your business in the near future, contact our firm for a free consultation. We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Home Depot and the CRA

In July of 2019, the Canada Revenue Agency used the “unnamed person requirement” to obtain a Federal Court order compelling Home Depot to disclose customer information to the CRA.

The CRA started its application for the information in 2016, but the application was put on hold while Rona disputed a similar application. Rona fought the CRA all the way to the Federal Court of Appeal, where it lost. It attempted to appeal the case to the Supreme Court of Canada, but leave to appeal was denied.

At that point, Home Depot informed the CRA that they would not challenge the application.

In September of 2019, Home Depot sent out letters to the customers affected, notifying them that their information would be provided to the CRA.

 

Who is Involved in this Request?

This involves customers who used Home Depot’s commercial credit card program between January 1, 2013 and December 31, 2016.

 

What Information and Documentation is being sent to the CRA?

Home Depot was compelled to disclose the identity, address, and the total annual amount spent by each customer.

 

What is the “Unnamed Person Requirement”?

The “unnamed person requirement” (UPR) found in the Income Tax Act is often utilized by the CRA to obtain information related to taxpayers from third parties.

As long as there is reasonable evidence that tax evasion is occurring, the CRA will likely succeed in obtaining the information requested.

UPR is often used by the audit division within the CRA in order to obtain information on taxpayers. The CRA has multiple options on how to obtain information during audit.

 

Why is the CRA doing this?

This is an example of the CRA’s latest attack on the underground economy. The CRA is targeting cash industries to discover businesses engaged in tax evasion. A Statistics Canada report released in 2018 found the underground economy accounted for $51.6 billion in 2016, or 2.5% of gross domestic product. Residential construction accounted for 26.6% of that.

The CRA has previously obtained a list of municipal building permits in order to discover unregistered building subcontractors. Their review of 8,396 building permits yielded 2,751 unregistered building contracts.

 

What Happens Now?

The CRA will use this information to attempt to find Home Depot commercial customers who have avoided filing accurate returns due to the fact that they work in a cash industry.

The CRA will look at the amounts that businesses spent at Home Depot and assess whether the revenue reported to the CRA on tax returns was reasonable in comparison. For example, if a business purchased $100,000 worth of items from Home Depot, but only declared $20,000 in revenue, this would likely be flagged to further review by the CRA audit division.

This will likely result in many businesses involved in construction being audited.

 

What if I am Affected?

If you are audited by the CRA, you should follow our guide on how to survive an audit.

Businesses or individuals who believe themselves to be at risk from the disclosure of third-party information to the CRA should consider applying to the CRA’s voluntary disclosure program in order to avoid prosecution and gross negligence penalties.

 

If you are worried about being audited or are considering applying for the voluntary disclosure program, contact our firm for a free consultation. We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

The Power and Limits of CRA Collections

The Income Tax Act grants extensive powers to the Canada Revenue Agency (CRA). The CRA is not your average creditor; they have a variety of tools for collections and their powers are broader. Therefore, if you owe the CRA money, it is important to know the limits of the CRA’s power so you can deal with collections in the most effective way.

 

90 Day Window

The CRA typically grants a taxpayer a period of 90 days to make good on any debt stemming from an assessment before forwarding the case to a collections officer. This 90-day grace period is enshrined in the Income Tax Act. However, this only applies to debts under the Income Tax Act. If a taxpayer owes GST/HST or source deductions, the 90 days does not apply.

 

Initial Collections Activity

At this stage, the CRA will initiate phone calls to the taxpayer in an attempt to collect on money owed. These phone calls can often be intimidating as collection officers will often threaten legal action. Further, if the phone calls become ineffective, collections may escalate their efforts by making in-person visits to taxpayer’s homes or registered offices. It is essential for taxpayers to know that they are not required to speak to the CRA directly. According to section 15 of the Taxpayer’s Bill of Rights, taxpayers “have the right to be represented by a person of your choice.” In these types of cases, taxpayers should seek advice from experienced tax experts.

 

CRA Payment Arrangements

Taxpayers may attempt to get themselves on payment arrangements by negotiating with their collections officers. However, communicating with the CRA can create undue stress. This is just one of the many reasons it is useful to have experienced tax professionals negotiate with the CRA collections officers of your behalf. Tax professionals have a deep understanding of the Income Tax Act and can advocate for a payment arrangement between the CRA and the taxpayer to avoid undue hardship to the taxpayer. While the CRA would rather get paid on time, its ultimate goal is to collect the amount owed. A payment arrangement allows the taxpayer to pay smaller payments, that are affordable based on your financial situation, overtime, until the entire debt is paid off.

 

CRA Legal Action

If initial collections efforts are ineffective, the CRA has the authority to take legal action against a taxpayer. The CRA does not need to sue the delinquent taxpayer in order to obtain a judgement to garnish wages. This means that the CRA can issue a Requirement to Pay (RTP) to garnish your wages. At this stage, you still have the ability to communicate with your collections officer to attempt to arrange a payment plan that may reduce or remove the garnishment. Your employer is required to pay or will be held liable for amounts not remitted.

The Income Tax Act also gives CRA collections officers the ability to seize bank accounts, RRSP accounts, accounts receivables, put a lien on a taxpayer’s property, including motor vehicles, and forcing the sale of your home. Seizure and lien action can derail the life of the taxpayer and cause undue hardship. If you are currently dealing with a debt that is being enforced, we can help you better understand the various solutions.

 

Dealing with the CRA collections department can be overwhelming and stressful. If you are having trouble with the CRA, give our team a call to ensure you have the right advice and effective representation. We’re here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Offshore Bank Accounts and the Voluntary Disclosure Program

If you have an offshore bank account that holds more than $100,000 CDN, or many bank accounts that total $100,000 CDN, the Canada Revenue Agency wants to know.

Choosing to disclose this to the CRA is always hard, especially when you lack understanding of why you’re doing so. This is commonly the case with Taxpayer’s who posses offshore assets and property and need to file the T1135 form. However, even with this confusion on filing, the time to come forward is still as pressing as ever. This is because, the start of action against the Taxpayer with undisclosed offshore accounts and assets invalidates their ability to qualify under the Voluntary Disclosures Program.

As a result of this, Canadian Taxpayers with offshore accounts and assets have a small window of opportunity to start the disclosure process. This disclosure allows the Taxpayer to avoid the risk of gross negligence penalties, and the interest that will accrue on those penalties.

 

T1135 Offshore Reporting Form

The T1135 is required to be submitted by Taxpayers with foreign property which exceeded either the fair market value of $100,000 in a given taxation year, or the cost base exceeds the same number. Where a taxpayer has failed to file the form previously but was required to do so, it must be filed in conjunction with the above Voluntary Disclosure Program to properly avoid interest and penalties for gross negligence.

The objectives of this reporting requirement are:

1. To enhance compliance with tax laws that require reporting of foreign-source income;
2. To increase Taxpayers’ awareness of these laws;
3. To provide information to the CRA for the purpose of verifying Taxpayers’ compliance with these laws; and
4. To better target international tax evasion and aggressive tax avoidance.

 

T1135 – What Property Must be Reported?

The Taxpayer must report all “specified foreign property”. As well, the main criteria for reporting such property is $100,000 worth of such property in total. However, it should be noted that the $100,000 threshold is based on the cost of the property to the Taxpayer, not the current fair market value. Also, the form was updated as of May 16^th, 2016 to incorporate a two-tiered information reporting structure.

The new tier, or “simplified reporting method” will apply to Taxpayers who held specified foreign property with a total cost amount of less than $250,000, throughout the year. This method will allow those individuals to report faster as less detail for each such specified foreign property is required. As well, individuals who want to disclose under this method can take advantage of E-filing their T1135 for the 2014 and subsequent taxation years.

Subsequently individuals who have more than $250,000 worth of specified foreign property must use the original, more detailed approach, and paper file the T1135. Thus, you must either attach it to your paper-filed tax return (or partnership information return), or submit it separately, and send it by the filing-due date.

 

T1135 – Deadline

For individuals the T1135 is due on the same date as the income tax return. Also, if you require additional space you may attach a schedule to your form. Please note that the schedule must be in the identical format as the tables on Form T1135.

 

T1135 – What is Specified Property?

In order to avoid penalties, whether in the simplified method or the more detailed reporting approach, the Taxpayer must disclose Specified foreign property. Specified foreign property is defined in subsection 233.3(1) of the Income Tax Act and includes:

1. Funds or intangible property (patents, copyrights, etc.) situated, deposited or held outside Canada;
2. Tangible property situated outside Canada;
3. A share of the capital stock of a non-resident corporation;
4. Shares of corporation’s resident in Canada held outside Canada;
5. An interest in a non-resident trust that was acquired for consideration;
6. An interest in a partnership that holds a specified foreign property unless the partnership is required to file Form T1135;
7. A property that is convertible into, exchangeable for, or confers a right to acquire a property that is specified foreign property;
8. A debt owed by a non-resident, including government and corporate bonds, debentures, mortgages, and notes receivable;
9. An interest in a foreign insurance policy; or
10. Precious metals, gold certificates, and futures contracts held outside Canada.

 

There are significant penalties that may be applicable for failure to file Form T1135 by the reporting deadline, or for making a false statement or omission with respect to the required information. If you are interested in using the Canada Revenue Agency’s Voluntary Disclosures Program to correct past errors or omissions for foreign property in your Canadian tax filings, please contact Rosen Kirsten Tax Law to ensure your privileged disclosure is handled correctly. We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

What is the Statute of Limitations on CRA Debt?

The statute of limitations or limitation period on Canada Revenue Agency debt is anywhere between 6 to 10 years and it depends on the type of debt that is owing.

 

What is a Collections Limitation Period?

A collections limitation period is the time in which the Canada Revenue Agency (CRA) can begin actions to collect a tax debt. According to subsection 221(3) of the Income Tax Act, the CRA may not commence or continue to collect a tax debt after the end of the limitations period.

 

What is the Length of the Collections Limitation Period?

Different types of debt are treated different by the CRA. The length of the limitation period depends on the type of debt and is as follows:

• Individual – 10 years;
• Corporation – 10 years;
• Payroll- 6 years; or
• GST/ HST – 6 years.

 

When does the Limitation Period Start?

The date that the limitation period starts also depends on the type of debt:

• Individual – 91 days after a Notice of Assessment or Notice of Reassessment is issued;
• Corporation – 91 days after a Notice of Assessment or Notice of Reassessment is issued;
• Payroll – the day after a Notice of Assessment is issued; or
• GST/ HST – the day after a Notice of Assessment is issued.

 

Restarting the Collections Limitation Period

The limitation period is restarted when either you or the CRA takes certain actions. The following is a non-exhaustive list of actions that will restart the collections limitation period:

The collections limitation period will restart when you:

• Make a voluntary payment;
• Write a letter to the CRA proposing a payment arrangement;
• Offer to provide security instead of paying the amount owed;
• Make a written request for a reassessment of an amount assessed;
• File a Notice of Objection with the CRA;
• File an appeal with the Tax Court of Canada; or
• Ask the CRA if you can make pre-authorized debt payments.

The CRA takes various actions to collect tax debts when taxpayers don’t make voluntary payments. The collections limitation period will restart when the CRA:

• Issues a garnishment or statutory set-off to collect an outstanding tax debt;
• Applies a refundable credit to your tax debt and notifies you by sending you a letter or statement of account;
• Issues a Notice of Assessment or Reassessment against a third party for amounts you owe;
• Certifies your tax debt in the Federal Court of Canada; or
• Initiates seizure and sale action to collect your outstanding tax debt

 

Extension of the Collections Limitation Period

There are events that can extend the limitation period. When these events happens, the clock stops running on the date that the event begins and it will not run during the event. When the event is completed, the collections limitation period resumes where it left off.

The following events can extend the collections limitation period:

• You file an assignment (bankruptcy or proposal) under the Bankruptcy and Insolvency Act, Farm Debt Mediation Act, or Companies’ Creditors Arrangement Act;
• The CRA accepts security instead of payment of a tax debt;
• You become a non-resident of Canada after the CRA issues a Notice of Assessment or Reassessment;
• The CRA postpones collection action without accepting security for an objected or appealed GST/HST debt. This applies only to GST/HST tax debts assessed under the Excise Tax Act;
• You file a Notice of Objection with the CRA. This will not apply to payroll or GST/HST debts; or
• You file an appeal with the Tax Court of Canada.

 

Whether or not the collections limitation period has expired can mean the difference between having to pay back a debt in full, and not having to pay it back at all. If you have a very old tax debt, or if you have a tax debt at all and need assistance with it, contact our firm today for a free consultation. We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

What is a Clearance Certificate for an Estate?

A Clearance Certificate is a certificate that is issued by the Canada Revenue Agency (CRA) and confirms that all amounts owing to the CRA by a deceased and/ deceased’s estate have been paid. A clearance certificate ensures that the CRA cannot hold the executor of the estate personally liable for any unpaid taxes from the estate. 

The certificate covers a period up to a specified date, and it includes the following debts:

1. Income tax of the deceased and/ or the deceased’s estate;
2. Penalties and Interest payable by the deceased and/ or the deceased’s estate;
3. GST/HST Credits; and
4. Canada Pension Plan contributions and Employment Insurance premiums.

 

Do I need a Clearance Certificate?

A clearance certificate is not mandatory. However, not getting one could have severe risks for the executor of an estate.

Without a clearance certificate, if an executor of an estate distributes part of the estate and it then turns out that there was a tax debt owed, the CRA can hold the executor personally liable for any outstanding amount that should have gone to the CRA but was instead distributed. 

If the executor of the estate is the sole beneficiary and is confident that there are no potential tax issues, he or she may decide not to get a clearance certificate.

Before applying for a certificate, you need to determine if it is necessary. The following are scenarios where the certificate is not necessary:

1. The estate of trust continues to exist to pay income to the beneficiaries;
2. The corporation’s assets and liabilities are being rolled over into another corporation and there is no other tax liability; and
3. Enough funds remain in the estate or corporate account to pay amounts owing to the CRA.

 

How to Apply for a Clearance Certificate?

Before applying for a certificate you need to do all of the following:

1. Notify the CRA of the death (individual);
2. File the final tax return(s);
3. Get the notice(s) of assessment and notice(s) of reassessment that apply; and
4. Pay or secure all amounts owed.

Once you have completed the above steps, fill out Form TX19 Asking for a Clearance Certificate, and send it, along with the appropriate documentation, to your local tax service office. 

 

Clearance Certificate Deadlines

The clearance certificate covers the period up to the designated tax wind-up date (the date of the final T3 Trust Income Tax and Information Return form). A certificate can be requested when an estate is ready for final distribution and all tax returns for the deceased and the deceased’s estate have been filed, (re)assessed, and all balances owing paid in full. 

If T3 estate tax returns were not required, you can request a date of death certificate. This covers the period up to the date of death. If the final distribution of the estate assets will not occur for several years, it could be beneficial to obtain a date of death certificate or an interim certificate.

If the CRA does not request an audit, you should receive your certificate within 120 days of applying. Once you receive the certificate, then you are cleared to make distributions from the estate.

 

Who Must Apply for a Clearance Certificate?

An executor, trustee, or administrator of the estate can request a clearance certificate. An executor or a trustee is named in the deceased’s will or trust document. An administrator is appointed by the court if the deceased dies intestate (without a valid will) An authorized representative can also request the certificate on behalf of the executor, trustee, or administrator. To authorize a representative, the executor, trustee, or administrator will need to sign a T1013 Authorizing or Cancelling a Representative form. One form should be completed for the deceased using their Social Insurance Number and a separate form should be completed for the estate using the Trust Account Number.

 

If you are an Executor of an Estate and need assistance obtaining a Clearance Certificate, contact our firm for a free consultation. We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Filing a Taxpayer Relief Application with RC4288

Have you been charged penalties or interest on an outstanding debt owing to the Canada Revenue Agency (CRA)? Many people find that themselves in this situation and they may apply to the Taxpayer Relief Program to request relief in the form of waiving interest and penalties. 

 

What is Taxpayer Relief?

The Income Tax Act, through a taxpayer relief request, empowers the Minister of National Revenue to waive a taxpayer’s penalties and interest, accept late-filed, amended or revoked income tax elections. Importantly, subsection 220(3.1) states that the taxpayer request for relief must be requested within 10 years. The CRA is unable to waive an amount that arose more than 10 years before the request is made. 

According to the CRA’s Information Circular IC07-1, which contain the Guidelines for the Cancelation or Waiver of Penalties and Interest (“Guidelines“), the Minister is given broad, open ended discretion to grant penalties and interest relief as per the Income Tax Act. However, the CRA is careful to state that  “these are only guidelines. They are not intended to be exhaustive and are not meant to restrict the spirit or intent of the legislation.” These Guidelines are meant to enhance the CRA’s consistency and accountability to the public and are not binding law.

While the program may reduce the penalties and interest charged, it is important to note that it is unable to reduce the original amount of tax debt owed to the CRA. 

 

What Qualifies for Taxpayer Relief?

The taxpayer relief provisions are set up to allow the Minister to grant relief from penalty or interest in the following types of situations: 

1. Extraordinary circumstances beyond the applicant’s control; 
2. Actions of the Canada Revenue Agency (CRA); or 
3. Inability to pay or financial hardship. 

Penalties and interest may be waived or cancelled in whole or in part where they result from circumstances beyond a taxpayer’s control. 

The Minister may also take into consideration the following factors:

1. Whether or not the taxpayer has a history of compliance with tax obligations;
2. Whether or not the taxpayer has knowingly allowed a balance to exist on which arrears interest has accrued;
3. Whether or not the taxpayer has exercised a reasonable amount of care and has not been negligent or careless in conducting their affairs under the self-assessment system; and
4. Whether or not the Taxpayer has acted quickly to remedy any delay or omission. 

The CRA may also grant relief if a taxpayer’s circumstances do not fall within the situations described above.

To make application under the taxpayer relief provisions, taxpayers can complete form RC4288 – Request for Taxpayer Relief and submit it to their local tax services office.

While the CRA does provide this avenue for relief, relief is often denied to uniformed applicants who fail to meet the confusing CRA policies for relief. Therefore, it may be useful to contact a professional who is familiar with the CRA’s administrative policies and procedures to give you the best chance for relief. 

Each taxpayer relief application is considered on a case by case basis, by different individuals working out of different offices, and as such, there is often a lack of transparency and consistency by the CRA when considering taxpayer relief applications. Therefore, it can be difficult to predict the result of an application. 

 

Details are significant for this kind of application. A generic taxpayer relief application is unlikely to yield the relief requested. At Rosen Kirshen Tax Law, each taxpayer relief application is prepared to cater to the unique circumstances and facts of the specific client. Call us now for a free consultation!  

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

What is Specified Foreign Property?

Specified Foreign Property are assets held outside of Canada. The threshold for reporting to the CRA on a T1135 form is if the property that you have held during the relevant tax year costs over $100,000 CAD. The $100,000 threshold is based on the cost paid for the property, not the fair market value today. Canadians are required to report income that they have earned both from Canadian and foreign sources.

According to the Canada Revenue Agency, specified foreign property includes:

• Bank accounts held abroad
• Shares of foreign corporations and debt securities
• Real Estate
• A life insurance policy issued by a foreign issuer
• Other tangible and intangible properties located outside of Canada.

 

Personal Use Property and a T1135 Form

Some types of foreign property, despite their high value, are not classified as specified foreign property. For instance, it does not include property acquired mainly for personal use, such as cottages, jewelry, automobiles, and valuable collections, such as rare books, stamps, coins, etc. It also does not include property held or used exclusively in the course of carrying on an active business. Furthermore, specified foreign property held in registered plans, such as registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs), do not have to be reported on a T1135, even if their cost is higher than the threshold.

 

T1135 Form Requirement

If you have a specified foreign property, you have to file a T1135 form for each year that you held the property for any amount of time. Even if you sold the property in the middle of a year, you still have to file a T1135 for that year.

In 2015, the form was redesigned to include a two-tier information reporting structure for specified foreign policy. The first part is for taxpayers reporting specified foreign policy with a total cost of less than $250,000 throughout the year. It involves a simpler reporting method. The second part applies to taxpayers who, at any time in the year, held specified foreign property with a total cost of $250,000 or more. This part requires the taxpayer to report far more details regarding each property.

The specified foreign property thresholds do not apply to income that is earned from the property. Canadians must report all income that is generated from property abroad, no matter the property’s cost. The $100,000 threshold only means that some Canadians do not need to report the ownership of foreign property on a T1135.

 

Voluntary Disclosure

If you have specified foreign property that you have not reported to the CRA, you may correct the situation through a voluntary disclosure.

 

If you have any questions about how to fill out Form T1135, “Foreign Income Verification Statement”, or you have not reported your specified foreign property to the CRA, call us today! We can help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

How to Survive an Audit

The thought of being audited is dreaded by most taxpayers. This fear stems from being unprepared. Often, tax returns are mismanaged, receipts are lost, and bank statements are unorganized. Audits are a central Canada Revenue Agency enforcement method. As such, it is in your best interest to protect yourself from an audit by being proactive and organized.

 

Why Me?

An audit can be random, but generally, the CRA chooses a file for an audit based on a risk assessment. The assessment looks at several factors, such as the likelihood or frequency of errors in tax returns or whether there are indications of non-compliance with tax obligations. For instance, certain heavy-cash based industries, such as construction and retail are singled out as a high risk for tax evasion. When considering an audit, the CRA also looks at the information it has on file for the taxpayer in question and compares that information to similar taxpayers or other audits. If you are being audited, the safest route course of action is to hire a professional, but in many cases that is not an option. If you are navigating an audit without professional help, here are a few tips to be prepared.

 

Know Your Rights

The first step in protecting your interests in an audit is knowing your rights. The relationship between the taxpayer and the CRA is governed by the Taxpayer Bill of Rights. These 16 express rights mandate the CRA’s commitment to serve you with a high degree of accuracy, professionalism, courtesy, and fairness.

If you feel mistreated or are conflicting with an auditor, you’re well within your rights to ask to speak to a supervisor or even request a new auditor. The Taxpayer Bill of Rights also provides the taxpayer with the right to file a complaint if they are not satisfied with their interactions with the CRA. For more information, see complaints and disputes.

However, while the Taxpayer Bill of Rights provides that each taxpayer is entitled to have the law applied uniformly, in practice the tax rules can often be applied inconsistently, thereby denying some what they are entitled to. In these kinds of situations we recommend a professional consultation from the early stages to avoid any arbitrary assessments and / or denial of deductions. Further, under the Access to Information Act, Canadian citizens, permanent residents, and any person present in Canada, is provided the right to access information contained in government records. This access to private governmental information is a way for individuals to hold the CRA accountable to their mandate of accuracy, professionalism, courtesy, and fairness.

 

Organize your Records

The Government of Canada recommends that you keep your books and records for a minimum of seven years. When dealing with the CRA, it is always important to have organized supporting documentation.  Many people fail to keep complete records detailing every expense and deduction claimed in a tax return.

This daunting task can be made much easier by keeping tax returns in a basic accordion file, separated by year and divided into main categories, including expenses, deductions, and investments. This basic organization makes it easier for both yourself and the auditor should you be audited. It is also a good idea to keep original copies of your receipts.

 

Only Provide What You’re Asked For

It is important to be cooperative, but do not give up information that is not explicitly requested. An audit is not an open-ended hunt. When supplying information to the CRA carefully ensure you are complying with their requests, but do not over disclose information.

If you volunteer more information than requested by the CRA. For instance, providing tax returns for years that do not pertain to the audit could unnecessarily open the door to a reassessment of those years.

Always be careful to protect documents and information that would be subject to privilege. Communications between a lawyer and a client are privileged, meaning the CRA will not be able to use this information against you should you choose to retain a lawyer. Unfortunately, the same cannot be said about communications between accountants and their clients.

It is also recommended to keep track of all CRA communications, and preferably have all communications in writing.

 

Be Concise and On Point

When you are answering the auditor’s questions, answer as many questions with a yes or no response, and if you must provide more details, keep it brief and to the point. Find a balance between being courteous and focused. If you are uncertain about how to respond to a complicated question, do not lie; but seek the advice of an experienced tax professional.

 

Audits can be extremely stressful, often taking a toll on your physical and mental health. If you are concerned about handling an audit on your own, contact our firm for a free consultation so that we can help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

What is a T2125 Statement of Business or Professional Activities?

A T2125 form is a schedule that goes along with a tax return, and it lists income, and expenses where taxpayers operate certain types of businesses. The Canada Revenue Agency (CRA) requires all resident taxpayers who generate business income or losses in a given calendar year to complete and submit a separate T2125 for each respective source of business income. The T2125 form is a filing requirement for many Canadians each year—whether they know it or not!

 

What is a T2125 Statement of Business or Professional Activities?

The T2125 form is a versatile reporting tool that allows taxpayers to disclose many facets of their enterprise to the CRA including, but not limited to their business income, their purported capital cost allowances, and elections with respect to losses and work in-progress.

 

Who Needs to File a T2125 Form?

Anyone who has business income of any kind is required to fill out a T2125. This includes sole proprietors, members of a partnership, and even unincorporated individuals who have non-registered business income.

Even someone who partakes in an adventure or concern in the nature of trade must complete a Form T2125. For example, if a taxpayer starts making jewellery and selling it casually, that taxpayer must file a T2125 to record and report the income earned from “business”, even though the “business” may be somewhat disorganized and an inconsistent source of income. As another example, if you are an artist such as a painter, the non-registered income should be recorded and filed on a Form T2125.

Taxpayers who did not earn any Canadian income as a part of their business income still have to record and report their foreign income on their Form T2125. This income may subsequently be eligible for foreign tax credits.

Even if you did not accept financial consideration in exchange for the goods or services that you rendered, the value of what you received in return for your goods or services must be recorded on the T2125.

 

What if I have Different Sources of Income?

For each source of business income earned in a given taxation year, the taxpayer must fill out a separate T2125 form. Even if you operate in the same field or have the same type of revenue, if there are different business entities earning the income, there must be a separate Form T2125 filled out for each.

 

Why does the CRA require a T2125 Form?

The CRA primarily references T2125s when assessing the aggregate value of business income earned by the taxpayer in a given taxation year and the available losses for carry-forward or carry-back. The CRA also uses these forms to discern the allowable capital cost deductions for capital outlays incurred to produce income for the taxpayer’s taxation year.

Many businesses incur expenses that do not fall under the “Current Expense” category, and consequently cannot be deducted from the income of the taxpayer. Capital cost deductions are not just for businesses, many taxpayers who generate income from other sources, such as rental properties, may also be eligible for capital cost deductions in a given year. These taxpayers would have to record this information on their Form T2125.

 

If have questions about the T2125 form, if the CRA doesn’t agree with your income / expenses, or if you are being audited for failing to complete the form, call us today, we can help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.