Unreported Income and the CRA
Canada’s tax system is built on the premise that those filing their taxes are being honest with the Canada Revenue Agency (CRA). You are expected to report the proper amount of income, and expenses. Of course, this is not always the case. Taxpayers forget, miss documents, and sometimes, purposefully do not report all of their income.
If the CRA thinks you have unreported income, you are very likely to receive an audit letter where the CRA invades every aspect of your life looking for unreported income. It is also possible for the CRA to simply issues Notices of Reassessment changing your income numbers creating an amount owing without any notification to the taxpayer and without giving the taxpayer any time to respond.
What if I want to Come Clean with the CRA?
The Voluntary Disclosures Program is a way of coming forward and attempting to fix any past tax issues before the CRA catches on. The program has gone through a radical change as of March 1, 2018, and a tax lawyer should be consulted if you are planning on submitting a voluntary disclosure.
How does the CRA find out about Unreported Income?
Many taxpayers think that there is no way the CRA can find out about their unreported income. However, the CRA has a large toolbox when it comes to reviewing taxpayer’s situations to determine whether or not there is unreported income. If your lifestyle does not match your income level, a CRA audit is likely. If you own assets with title, the CRA knows what you own. If your income is not high enough to be able to purchase these assets, the CRA will come calling.
The CRA also requests, and receives information and documentation from hundreds of third parties looking for unreported income. Recently, the CRA received records for tens of thousands of Canadians with PayPal accounts. The records are being reviewed and matched up to tax returns to ensure proper income and expenses are being reported. The CRA has also made agreements with tax agencies in other countries to trade information looking for unreported income, and unreported offshore holdings.
If someone you work with, or work for gets audited, and a lot of issues are discovered, the CRA can and will audit everyone down the chain from the original taxpayer looking for unreported income.
Even if you think there is no way for the CRA to discover what you are doing, you cannot control other people, and unfortunately, this is normally how unreported income is discovered.
How to Fight Assessments of Unreported Income
If you are looked into by the CRA, and unreported income is discovered, you will be responsible for proving that the funds being looked at do not represent unreported income and are something else. In the Canadian tax system, you are guilty until you prove yourself innocent. The reason for this is because you are able to structure your affairs in a way that could make it impossible for the CRA to prove that you earned unreported income.
Because of this, the CRA only has to assume you have unreported income. It then becomes your responsibility to rebut the assumptions and prove them wrong. This must be done at the audit, objection, and even Tax Court stage if you are going to be successful in fighting their allegations of unreported income.
If you have unreported income, and you want to fix the situation before you receive an audit letter, contact a lawyer at Rosen Kirshen Tax Law. If you are already being audited for unreported income, or have been reassessed we can help! Contact us today to learn more.
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.