Preparing a tax return can be a daunting task for clients. Although almost 70% of individuals engage tax preparers to help them wade through the complexities of preparing a tax return, the return produced and filed with the Canada Revenue Agency (CRA) is only as good as the information that went into it.
Statistics show that in recent years the CRA has assessed more than $1 billion in additional taxes — primarily by comparing information on taxpayer returns to information provided by employers, financial services institutions and other sources.
Making an error on a tax return can be a costly proposition for your clients because if, for example, income is not reported, the CRA will charge non-deductible arrears interest, which is currently at a rate of 5%, on any overdue taxes that are owed. As well, your clients’ failure to file tax returns on time or underreport income can also lead to significant penalties.
One of the easiest ways taxpayers get caught is by failing to report all their information from their tax slips on their returns. As advisors, you should ensure that you have a process in place to verify, perhaps annually, that you have the client’s current mailing address on file. This is important so that slips don’t get “lost in the mail” and we aren’t scrambling to track down missing or replacement T3 or T5 slips from mutual fund companies or other financial services institutions.
You may also wish to advise clients to compare the tax slips they received for the current year to slips they’ve received in the past to see if any might be missing. It’s generally good practice for clients to compare the income reported on their investment statements to the amounts from tax slips to see if there could be differences due to slips that have not been received.
By the time you are reading this, all tax slips should have been received. If a client contacts you because a tax slip is still missing, you should tell your client not to simply submit their tax return without the missing information and adjust it later because this can result in penalties.
Specifically, the tax rules state that if a taxpayer files his or her income tax return on time but fail to report income for the current year and one of the previous three taxation years, the taxpayer may face a penalty equal to 10% of the income that he or she did not report in the current year.
When a client is missing a slip, he or she should estimate the amount missing from other available information. For example, if one of your clients never received a T3 or T5 slip that reports investment income, information from monthly investment statements may be able to assist him or her to calculate the amount of the income.
Finally, keep in mind that some entities, such as income trusts or partnerships, make distributions throughout the year and will determine the actual components of the distribution after yearend. For example, publicly traded trusts and partnerships are required to disclose information concerning distributions and allocations of income and capital within 60 days after the end of the taxation year. CDS Innovations Inc. collects and reports this information on its website (www.cdsinnovations.ca). This can be a helpful resource to track down missing information come tax time.