AMERICAN WRITER ELBERT HUBBARD once said: “To make mistakes is human, but to profit from them is divine.”
Unless, of course, that mistake is on your tax form. Then, you have some problems – especially if you profit from it. The good thing is that the Canada Revenue Agency (CRA) understands that mistakes happen.
“You can pretty well correct most things,” says Bruce Ball, chartered professional accountant and partner with BDO Dunwoody LLP in Toronto.
There are two basic categories of mistakes that Ball frequently encounters on tax filings. The first is forgetting to report something, such as income. The second is forgetting to claim something to which you are entitled, such as a child-care benefit.
“There are mistakes beneficial to the government,” Ball says, “and mistakes that are beneficial for you.”
To some extent, mistakes are inevitable in a complex process such as filing a tax return. “We see all kinds of mistakes,” says Ross Cammalleri, chartered professional accountant with Collins Barrow LLP in Vaughan, Ont. In fact, he says, financial advisors have much insight into one of the most common mistakes that taxpayers make: failing to tell their tax preparer about the disposition of capital property, whether investments or real estate.
“No slips are given for those, so [clients] have to be aware of that,” Cammalleri says. Advisors can help, he adds, by reminding their clients to report these sales. You also can remind your clients about the importance of keeping track of the adjusted cost base of their holdings.
Ball says another topic that is drawing added attention from the CRA is mistakes on reporting about foreign property and filling in the T1135 form. That form deals with either foreign investments or foreign real estate, for other than personal use, that has a purchase value of more than $100,000 at any time in the taxation year.
In recent years, the CRA has been requiring taxpayers to provide much more detailed information as part of the T1135 reporting process. As well, failure to file a T1135 can lead to onerous penalties.
“We often find that if people haven’t filed [a T1135] recently,” Ball says, “they likely haven’t been filing it for quite a while.”
Missed deductible expenses – the other half of Ball’s mistake equation – are all over the map, ranging from medical expenses to business expenses and child tax credits.
How your clients correct mistakes on their tax forms and the ramifications flowing from them can vary widely, depending upon what the mistake involves and how often the client slips up.
Take unreported income: if your client makes that mistake twice within a four-year period, he or she can be subject to a penalty that can be as high as 10% of the unreported income, or 50% of the tax owed if the amount of unreported income is greater than $500.
If a client has made a mistake, then he or she needs to correct it. That’s because CRA computers match official statements, such as T4 employment slips or T5 investment income slips, to each taxpayer’s filing. The CRA is likely to notice failure to report income such as dividends and interest payments. Ball says correcting mistakes can be as simple as filing an amended return, although Cammalleri warns that “the CRA does not have to accept it.” In that case, your client may have to live with the penalties that result.
If the mistake involves substantial unreported income or non-disclosure of foreign property, clients should consider using the Voluntary Disclosures Program. It allows taxpayers to come forward and correct significant mistakes that carry large penalties – usually without having to pay those penalties. The client would owe only the unpaid taxes and interest on those taxes.
So, what happens when your clients don’t like their notice of assessment, which arrives after filing a return and either confirms the filing or reassesses it?
David Thompson, tax lawyer in London, Ont., says clients who wish to have their filing reconsidered must file a notice of objection, which is the first step in appealing an assessment. “It’s simple,” he says, “which is good news.”
However, Thompson warns, clients must pay particular attention to the deadlines. They are tight, and failure to meet them could be fatal to your client’s challenge.
“You have 90 days from the date on that notice of reassessment to file a notice of objection,” Thompson says.
The CRA accepts few excuses and is reluctant to grant extensions of the deadline. Claiming you never received the notice of reassessment or that it went to the wrong address generally will not suffice.
Nicolas Simard, tax lawyer with Fasken Martineau DuMoulin LLP in Toronto, says filing an objection is important because it temporarily stops the CRA from collecting on the debt the agency claims is owed. However, interest and penalties will still apply on the contested amount.
“The objection is the way to say, ‘I disagree’,” Simard says. “If you don’t [file the notice], you will be stuck with the assessment.”
The process is simple and notices of objection are common. The CRA received 83,708 objections in 2013-14, the latest year for which figures are available.
How you client can say “I object”
There are two ways to initiate an objection to a tax assessment. Clients can file the appropriate government form, a T400A, online via their CRA account. Or they may write a letter to the chief of appeal in the local district tax office.
An objection should include the following information:
– name and address
– a daytime telephone number
– the date of the assessment notice
– the tax year in question
– social insurance or business number.
Your client must explain what he or she objects to – for example, the way the CRA reassessed your client’s dividends or rejected an expense. All relevant facts, dates and documentation that support the objection must be included in the T400A.
“[The CRA] wants to know what, in particular, you object to,” says David Thompson, tax lawyer in London, Ont. “Not just that ‘I don’t like my tax bill’.”
Nicolas Simard, tax Lawyer with Fasken Martineau DuMoulin LLP in Toronto, adds that for disputes stemming from a formal CRA audit, he likes to obtain the audit to see the basis for the ruling. “You need to understand the auditor’s reasons,” he says.
However, obtaining the audit can take time, Simard says, and meeting the objection filing deadline is important.
Once the objection is filed, the client will receive an acknowledgment of receipt from the CRA, usually within five weeks. After that, receiving a ruling on the objection can take nine to 12 months, as the CRA has backlog of almost 200,000 cases.
Bruce Ball, certified professional accountant and partner with BDO Dunwoody LLP in Toronto, says that if your client is objecting to what appears to be a simple computational error on the part of the CRA, you could try solving the matter over the phone. “They don’t like you objecting to something that’s more a … clerical error,” Ball says.
An objection can have one of three possible outcomes. The CRA can confirm the initial ruling, accept the taxpayer’s appeal or modify the reassessment. For the first outcome, Thompson says, your client’s recourse lies with the Federal Tax Court. Your client has 90 days from the date of the notice of confirmation or reassessment to file an appeal.
The entire objection process can take more than a year. But, Thompson says, objections are worth pursuing. “I wish [the process] was faster,” Thompson says, “but I am pretty satisfied with it.”
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