Tax Survival for Canadians. Dale Barrett
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you use to pay your taxes.
The CRA also obtains information passively from a taxpayer’s employer. For example, whenever an employer provides a taxpayer with a T4 slip, the employer also sends that information to the CRA. So whether or not you have filed your tax return, the odds are that the CRA knows how much income you have earned.
Through information requests and periodic checks of taxpayer credit reports, the CRA can obtain a whole host of additional information about a taxpayer, his or her assets, and his or her financial transactions from employers, clients, financial institutions, accountants, and other third parties. All the information that the CRA has obtained, whether passively or actively, will be used to ensure that it has extracted the right amount of taxes from a taxpayer.
While the CRA is fairly diligent in its information collection and processing, in some cases, the CRA has incorrect information about a taxpayer, and in the course of an audit or an objection to a reassessment, the taxpayer may be put in the position where he or she has to use his or her own documentation to prove the CRA is wrong. When reassessments or assumptions of the CRA auditors are incorrect, a taxpayer’s ability to produce correct documentation can greatly impact his or her financial future, and in the case of a business, its success or failure. As such, it is imperative that both individuals and business owners are in the position to properly dispute incorrect reassessments by producing the necessary documentation.
According to item one of the Taxpayer Bill of Rights, taxpayers have the right to receive entitlements and pay no more and no less than required by law. However, if the CRA has the wrong information, and attempts to assess taxpayers for more than is required by law, taxpayers must be ready to challenge the CRA’s interpretation and application of the facts and law to ensure that they are not paying more than their fair share. This is the burden of the taxpayers, and once the CRA assesses taxes, they are assumed to be correct unless it is proven otherwise. If a taxpayer waits too long to make the challenge, the assessment is set in stone and is not subject to being changed — no matter how incorrect it is.
It must be kept in mind that irrespective of the fact that the CRA is assumed to be correct, notices of reassessment which appear to be incorrect are not necessarily an indication that the taxpayer, or his or her accounting professional, has done something wrong. Often the CRA makes a mistake, which stems from a faulty assumption or incorrect documentation about a taxpayer. In order to uphold a taxpayer’s right not to pay more than he or she is required to by law, it is crucial to understand the CRA’s system for maintaining information on taxpayers (see section 2.1).
In 2009 and 2010, the CRA audited approximately 380,000 small- and medium-sized businesses and issued notices of reassessment requiring these businesses to pay $2.1 billion in additional tax, interest, and penalties. In many cases, these reassessments could have been challenged, and the tax payable could have been reduced by providing the proper documentation.
While most returns are processed by the CRA without manual review, as to ensure the taxpayer’s timely receipt of notices of assessment, it must be kept in mind that every return is in fact screened by the CRA and is susceptible to later review. Amazingly, the processing time is usually between two to six weeks for the 25 million returns filed yearly in Canada.
Practically every tax lawyer who has dealt directly with the CRA will agree that unless dealing with the simplest of issues, resolution is never simple. There are factors that aggravate the complexity of dealing with the CRA, such as understanding the Income Tax Act (ITA), a very complex statute, as well as dealing with the CRA. The CRA is comprised of a massive administrative body, which can make it unreasonable for a self-represented taxpayer to expect a simple resolution to his or her tax problems — especially without proper record keeping.
The following sections discuss the types of information the CRA collects about the taxpayers.
2.1 Information slips
Information slips are issued and prepared by payers, employers, and administrators, and are required for Canadian income tax returns to report many types of income, including benefits that one has paid during a tax year. Typically, taxpayers receive three copies of each information slip — one copy must be submitted with their federal tax return, the second copy must be submitted with their provincial or territory tax return, and the third copy must be kept as a record by the taxpayer.
The following are the various types of information slips:
• T3 — Statement of Trust Income Allocations and Designations: This slip is issued by trustees and financial administrators to advise the CRA and the taxpayer about earned income for the year from business trusts, estates, and mutual funds in non-registered accounts.
• T4 — Statement of Remuneration Paid: This slip is issued by employers to employees to advise the CRA and the taxpayer of employment income the taxpayer earned during a tax year and the amount of income tax that was deducted at the source. Employment income includes bonuses, commissions, salary, tips, vacation pay, taxable allowances, value of taxable benefits, honorariums, and payment in lieu of notice.
• T4A — Statement of Pension, Retirement, Annuity, and Other Income: Employers issue this slip to employees to inform the CRA and the taxpayer of earned income from a given tax year, including the amount of income tax deducted. It may further be issued by corporate directors, pension administrators, trustees, or estate executors or liquidators
• T4A(OAS) — Statement of Old Age Security: This slip is issued by Service Canada to advise the CRA and the taxpayer of Old Age Security income earned by the taxpayer during a tax year, including the amount of income tax deducted.
• T4A(P) — Statement of Canada Pension Plan Benefits: This slip is issued by Service Canada to advise the CRA and the taxpayer of Canada Pension Plan (CPP) benefits received during a tax year, including the amount of income tax deducted. CPP benefits include child benefits, retirement benefits, death benefits, and survivor benefits.
• T4E — Statement of Employment Insurance and Other Benefits: Service Canada issues this slip to advise the CRA and the taxpayer of Employment Insurance benefits paid to the taxpayer for the previous tax year, including any income tax deducted, and any amount paid toward an overpayment.
• T4RIF — Statement of Income from a Registered Retirement Income Fund: This slip is issued by financial institutions to advise the CRA and the taxpayer of monies received out of one’s Registered Retirement Income Fund (RRIF) for a given tax year and how much tax was deducted.
• T4RSP — Statement of RRSP Income: This slip is issued by financial institutions to advise the CRA and the taxpayer of monies withdrawn or received from one’s Registered Retirement Savings Plan (RRSP) for a given tax year and how much tax was deducted.
• T5 — Statement of Investment Income: This slip is issued by organizations which pay royalties, dividends, or interest, in order to advise the CRA and the taxpayer of investment income earned for a given tax year. Investment income includes insurance policies, interest earned from bank accounts, annuities, bonds, and any account with a broker or investment dealer.
• T5007 — Statement of Benefits: Issued by agencies or bodies to report payments for workers’ compensation benefits or social assistance.
• RC210 — Statement of Advance Payments for Working Income Tax Benefit: This slip is issued by the CRA to advise the taxpayer of any working income tax benefit payments that were made to the taxpayer during the year.
• RC62 — Statement of Universal Child Care Benefit: Issued by Human Resources and Skills Development Canada, this slip outlines the total Universal Child Care Benefits paid to the taxpayer during a tax year and any repayment of benefits from a previous year.
2.2 Information arising from “requests” for information
In order to accomplish audit and enforcement activities,