Tax Survival for Canadians: Stand up to the CRA

Introduction xvii 1 Introducing the Canada Revenue Agency (CRA) 1 1. Your Relationship with the CRA 2 1.1 Your rights 2 1.2 Your obligations 2 2. What the CRA Knows about You 3 2.1 Information slips 4 2.2 Information arising from “requests” for information 6 2.3 Information from other countries 6 2.4 Information from financial institutions 6 2.5 Information from tax returns of third parties 7 2.6 Information gathered from third parties about unnamed taxpayers 7 2.7 Information gathered from the taxpayer 8 3. Confidentiality 8 CONTENTS iv Tax Survival for Canadians: Stand up to the CRA 2 Record Keeping: What to Keep and for How Long 13 1. The Importance of Maintaining Complete and Organized Records 15 2. Why the CRA Is Not Fond of the Self-Employed 16 2.1 Employee versus self-employed 17 2.1a Level of control the company has over the worker 18 2.1b Source of tools and equipment required to perform the work 18 2.1c Ability of worker to hire assistance or subcontract the work to third parties 19 2.1d Degree of financial risk taken by the worker 19 3 Filing Tax Returns 21 1. The Filing Mechanics 21 2. Personal Income Tax Returns (T1 Return) 22 3. Corporate Returns (T2) and Other Business Returns 24 4. Filing Deadlines 24 4.1 Individual income tax return 24 4.2 Partnership information return 25 4.3 T4 and T4A information returns 25 4.4 T5 information return 25 5. Consequences of Not Filing 25 5.1 Interest accrual 26 5.2 Penalty imposition 26 5.3 Fines or imprisonment 26 6. Tax Preparation 26 6.1 Tax software 27 6.2 Using an accountant or a tax return preparer 27 7. Things to Consider When Preparing Your Return 28 7.1 Amended tax returns 28 7.2 Waiver in respect of the normal reassessment period or extended reassessment period 28 7.3 If you have not filed your return 28 Contents v 4 Business Taxation in Canada 29 1. Business Structures 29 1.1 Sole proprietorship 30 1.1a Tax forms for sole proprietorships 30 1.2 Partnerships 31 1.2a General partnership 31 1.2b Limited partnership 32 1.2c Tax and filing requirements for partnerships 32 1.3 Corporations 33 2. Goods and Services Tax (GST) and Harmonized Sales Tax (HST) 34 3. Payroll Taxes 35 4. Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) 37 5. Employment Insurance (EI) 37 6. Trusts 37 6.1 Testamentary trust 37 6.2 Inter vivos trust 38 5 Tax Audits and Reviews 39 1. Risk Factors That Increase the Odds of Being Audited 41 1.1 Excessive expenses and deductions 42 1.2 Major changes in income or expenses from year-to-year 43 1.3 A business that has repeated losses 43 1.4 Expenses that are not similar to others in your industry 43 1.5 Underreported earnings 44 1.6 Lifestyle analysis 44 1.7 Large charitable donations 45 1.8 Tax shelters and gifting programs 45 1.9 Child-care costs 46 1.10 Home office deductions 46 1.11 Evidence of Criminal Activity 46 1.12 Informant tips 47 vi Tax Survival for Canadians: Stand up to the CRA 1.13 Prior audits 47 1.14 Being self-employed or running a business 47 1.15 Discrepancies between GST or HST returns and income tax returns 48 1.16 Rental income 48 1.17 Shareholder loans 48 1.18 Errors and missing information 48 1.19 Employment expenses 49 1.20 Investment gains and losses 49 2. How the CRA Reviews Your Tax Return 49 2.1 Pre-assessment review program 49 2.2 Processing review program 49 2.3 Matching program 49 2.4 RRSP excess contribution review program 49 3. CRA Special Projects 50 6 What to Expect If You Are Audited 51 1. The Audit Process 51 1.1 Step 1: The audit letter 52 1.2 Step 2: The audit — information gathering and analysis 52 1.3 Step 3: The proposal letter 54 1.4 Step 4: The reassessment 54 2. What the CRA Can Do During an Audit 55 2.1 Requirement for information 55 3. Types of Audits 56 3.1 Correspondence audit 56 3.2 Office audit 56 3.3 Field audit 56 3.4 Lifestyle (net worth) audit 57 4. Preparing for an Audit 59 4.1 Business use of a vehicle 59 4.2 Meals and entertainment 60 Contents vii 4.3 Business use of the home 61 4.4 Lost or missing records 61 7 How to Achieve the Best Results from an Audit 63 1. Know Your Rights 64 2. Don’t Withhold Requested Documents 64 3. Don’t Provide Too Many Documents 64 4. Keep Informed by Reading Materials Published by the CRA 65 5. Audit Tips 65 8 Business Audits 69 1. Being Selected for a Business Audit 69 1.1 Computer-generated lists 69 1.2 Audit projects 69 1.3 Leads 70 1.4 Secondary files 70 2. Types of Business Audits 70 2.1 Corporate tax audit 70 2.2 GST and HST audits 70 2.3 Payroll audit 71 3. Avoiding Delays in a Business Audit 71 9 Notices of Assessment, Penalties, and Interest 73 1. CRA Notices 74 2. Objecting to the Assessment or Reassessment 74 2.1 The objection process 76 3. Collections Action 78 4. Penalties 79 4.1 Late filing penalties of income tax returns 79 4.2 Late filing of GST or HST 79 4.3 Repeat failure to report income penalty 80 4.4 Gross negligence penalties 80 viii Tax Survival for Canadians: Stand up to the CRA 4.5 Penalty for late or insufficient installment payments 81 4.6 Third-party civil penalties 81 4.6a Planner penalty 82 4.6b Preparer penalty 82 5. Interest 82 10 Interest and Penalty Relief 83 1. Taxpayer Relief Program 83 1.1 Extraordinary circumstances 85 1.2 Financial grounds 85 1.3 Actions by the CRA 86 1.4 Ten-year limitation 86 2. Voluntary Disclosures Program (VDP) 86 3. Administrative Appeals 87 4. Remission Orders 91 11 CRA Collections 93 1. Collection Call from the Call Centre 93 2. The Collections Officer 94 3. National Collections Centres 96 4. When the Debt Becomes Collectable 97 5. Trust Debts versus Income Tax Debts 97 6. Objections, Tax Court Appeals, and Collections 97 6.1 Frivolity penalty of 10 percent 99 6.2 Diary promises and good faith 99 6.3 Payment plans 100 6.4 The essentials of life 100 6.5 Creators of high-quality employment 100 7. CRA Collection Powers 100 7.1 Requirement to pay 100 7.1a Bank account seizures 100 Contents ix 7.1b Seizure of trade receivables 101 7.1c Payroll garnishment 101 7.2 Certificates of debt and liens 101 7.3 Asset seizures 102 7.4 Jeopardy orders 102 7.5 Section 227: Director’s liability assessments 102 7.6 Section 160: Assessments for non-arm’s length capital transfer 103 7.7 Notional assessments: GST and payroll 103 7.8 Arbitrary assessment office memo: T1 and T2 103 12 Bankruptcy and Your Taxes 105 1. Discharge of Taxes in Bankruptcy 106 2. Advantages and Disadvantages of Bankruptcy 106 13 Criminal Investigations 109 1. CRA Criminal Investigation Procedures 110 1.1 The start of an investigation 110 1.2 Search warrants 111 1.3 Informants 112 2. Charges Resulting from Criminal Investigations 112 3. Taxpayer Rights during the Criminal Investigation 113 14 Fight the CRA in Court 115 1. The Tax Court of Canada 115 1.1 Informal procedure 118 1.1a Filing a Notice of Appeal 118 1.1b After the Notice of Appeal is filed 120 1.1c Important preparation for the self-represented 120 1.2 General procedure 121 1.2a Filing a Notice of Appeal 121 1.2b After the Notice of Appeal is filed 121 x Tax Survival for Canadians: Stand up to the CRA 2. Federal Court and Federal Court of Appeal 123 2.1 Judicial review 123 2.1a Process to file an application for judicial review 124 15 Tax Schemes 129 1. Tax Protesters 133 16 First Nations Taxation 135 1. Indian Act Exemption for Employment Income Guidelines 136 1.1 Guideline 1 136 1.2 Proration rule 136 1.3 Guideline 2 136 1.4 Guideline 3 136 1.5 Guideline 4 137 2. GST and HST 137 3. First Nations Self-Taxation 137 3.1 Property tax 137 3.2 First Nations sales tax 137 3.3 First Nations goods and services tax 138 3.4 First Nations personal income tax 138 3.5 Provincial-type taxes 138 17 When You Need a Little Help 139 1. Taxpayers’ Ombudsman 139 1.1 Complaint process 140 2. The Authorized Representative 141 2.1 Authorizing a business representative 141 Conclusion 147 Contents xi Samples 1 Notice of Objection 23 2 Request for Taxpayer Relief 88 3 Informal Procedure: Election Limiting Amounts in Issue 117 4 Informal Procedure: Notice of Appeal 119 5 General Procedure: Notice of Appeal 122 6 Judicial Review: Notice of Application 125 7 Judicial Review: Requisition for a Hearing 127 8 Authorizing or Cancelling a Representative 143 9 Business Consent Form 145 Tables 1 Informal Procedure vs. General Procedure 116