Why You Need To File Your 2002 Personal Tax Return Now!

It is common practice for the Canada Revenue Agency to notionally assess you if you do not file your tax returns. This means that they come up with a balance of what they believe you owe if you had filed. However, in almost every situation the amount the CRA believes you owe is a lot higher than what you actually owe. This means that the penalties and interest calculated by them is also a lot higher.

I most recently had someone come in to my office with a letter from the government saying that he owed over $27,000,000 even though he would not owe anywhere close to it.

If you file your tax returns after the fact, the CRA will override their figures with your figures. But, it will take longer for the assessments to arrive in the mail because your filed returns are now considered reassessments and actually take longer to be processed by CRA. So if you are waiting for a refund, you are going to be waiting even longer.

The real danger of arbitrary assessments is that the government only allows a taxpayer ten years to file their own personal tax return. After that, the arbitrary balance stands.

For example, if you have not filed your 2002 tax return, it must be filed by December 31^st 2012 or else the CRA will no longer accept it. Now let’s say you worked for only part of the year and would not have owed anything. And the CRA arbitrary assesses you for $10,000. Once it is January 1, 2013 that $10,000 balance will remain on your account until you pay it off.

Our government can sometimes be lenient, but not forever. It is your responsibility to make sure you are filed. And if you have let your filings get out of hand, you need to get caught up as soon as possible so that your figures are on file and not the potentially inflated ones created by the Canada Revenue Agency.

Tax Returns Cannot Be Changed After Ten Years!

Taxpayers often think that it is possible to add in additional old receipts that have been uncovered in their basements, or to file personal tax returns going back decades. This is not the case. The Canada Revenue Agency will only accept changes and filings of tax returns within a ten year time frame.

This can be particularly dangerous when it comes to notional assessments. If you do not file a tax return and the CRA issues an arbitrary assessment, essentially filing the return on your behalf, you can only have the amounts adjusted to actual by filing your tax return during the ten year period. Once that period is exceeded, you are out of luck.

For example, the CRA notionally assessed a taxpayer for their 2002 personal tax return in 2012. The 2002 personal tax return will only be accepted until December 31, 2012. If the Canada Revenue Agency arbitrarily assesses you for taxes of $100,000and you do not file your own return within the ten year limit, that $100,000 of taxes owing will remain on your account. There will also be penalties and interest applied on top of the tax. You may need to use the equity in your home to pay it, or even result to a consumer proposal or bankruptcy just to remove this amount from your tax balance, even though you may have actually owed nothing for that year.

  Don’t let time pass you by. It’s time to get around to filing those outstanding tax returns, before it really is too late. 

Over-Payment of CPP and EI Are Only Refunded For Limited Time

If you work two jobs in a year, both of your employers are likely deducting CPP and EI from your pay cheques, which sometimes result in you, the employee, over-contributing to CPP and EI during the year. Typically, your accountant will calculate the overpayment and reduce your personal income tax owing by this amount.

This can be done in prior years BUT only to a maximum of four years for CPP and three years for EI. This means that if you are behind on filing your tax returns more than 3-4 years, it is possible that the Canada Revenue Agency will deny your over-payment and not reduce your taxes payable by this amount.

The amounts of overpayment are usually not large, but keep in mind that penalties and interest are charged on the overdue taxes. This means that the denial of the Canada Pension Plan and Employment Insurance amounts will result in more tax, more penalties and more interest. Over a number of years, the small overpayments that were denied have grown, essentially on a daily basis as the CRA computes compound interest daily.

So do yourself a favour and file those tax returns. Even if you think you have refunds, why take the risk of losing out on potential CPP and EI over-payments.

Feel free to contact our firm to help you get up to date with your tax filings.

Capital Gains on Principal Residence for Large Lots

Generally people seem to know that there is no capital gains tax on the sale of your principal residence. However, one interesting, not commonly known exception relates to properties exceeding .5 hectare (1.25 acres) of land. The CRA only considers land to be your primary residence up to these parameters. Any land exceeding the .5 hectares is not considered to be required for you own personal use and enjoyment of the property. The onus is then on the taxpayer to prove to the CRA that the additional land is necessary.

One factor considered by the CRA is if your property can be subdivided. If you are not legally allowed to sever part of the property, you are more likely for your claim that the entire property is principal residence to be accepted.

Another factor is if your municipality requires minimal lot sizes that would forbid you from reducing your property to remove the excess land beyond the .5 hectares. However, if there are applications that exist for you to be excluded from this, then you are no longer automatically considered 100% principal residence if you did not try to sever the excess land.

The CRA goes as far as explicitly stating that the extra land cannot be considered necessary for needing space for pets to run around or for general ‘country living.’ They clearly state that the excess land must be needed for the house to function as a residence and not simply be an added benefit of owning a larger lot. For example, the extra land is required for access to public roads due to the geography of the property.

As well, any area of your property used to earn income is not considered part of your use and personal enjoyment. Therefore if you rent out a portion of your home, you need to carefully consider how the rules are different for you upon disposition of your property and determine whether or not you are entirely exempt for the capital gains tax.

To determine the amount of the capital gain associated with the excess land, you do not simply calculate what the entire capital gain on the property would be and divide out accordingly. Instead, you need to obtain an appraisal for the excess property to determine the specific capital gain to be attributed to the area.

Claiming Personal Expenses

Sometimes when the piles of receipts begin to pile up and you’ve accumulated bags and shoe boxes of receipts you begin to think... if I throw in some personal expenses the government is never going to find them in this mess. This is not always the case, sometimes the government does find out what you’ve done when you are audited and they start sifting through your receipts. Then they rightfully make changes to your personal or corporation tax returns and the next thing you know you owe huge amounts of money in additional taxes and penalties and interest along with it!

The CRA compares businesses to prior years and other businesses in similar industries. They have a very good idea of what the ‘normal’ range of expenses are for your business. If you are well above this range, you can expect an audit to result eventually.

When you are audited, the auditor is going to want to see your documentation to support the expenses you’ve claimed. When they see pizza deliveries, lingerie purchases and children’s toys, they are not likely to allow you to keep these items as deductible expenses. It will also give them reason to look more in depth at your other expenses.

Filing false statements or omissions in both corporations and for individuals will result in penalties that are the greater of $100 or 50% of the amount of the understated tax.

If you have not yet been contacted by Canada Revenue Agency and you would like to correct your misfiled returns, there is a way to correct the returns under the Voluntary Disclosure Program that will waive the penalties associated with the omissions or overstatements. A Chartered Accountant will be able to help you through this process. Speak to one today before Revenue Canada contacts you. www.markfeldstein.net

Loans Deemed as Income

Lending and receiving loans can be essential to many businesses; but it must be done correctly to avoid severe allegations and consequences.

A loan agreement should be written up between the parties and detail everything from the dates, amount, interest rate, and the repayment arrangement. Both parties should sign and date this agreement and keep copies of it for future reference. The danger of not documenting the loan is that the CRA will see the money deposited into your bank account and deem it as income. And unless you have proof that it is a loan, you will be charged with undisclosed income and face penalties and interest and potentially criminal charges for tax evasion.

Another important lesson to be aware of is HOW you repay the loan. A recent example I encountered was a man who received a loan from a customer and then ‘repaid’ the loan with merchandise. Without a loan agreement in place, this transaction looked like any other sale transaction and not at all like a loan that was repaid with goods instead of cash.

The impact of the Canada Revenue Agency discovering these business practices can be detrimental on a business. If the loan is for over $10,000 the government will already be aware of the deposit into your bank account as the banks notify the CRA when deposits exceeding $10,000 are made.

Then when you cannot support that this money is a loan, the penalty for gross negligence is 50% of the understatement of tax! There is also the potential to spend up to five years in jail.

Be preventative and get your agreements done in writing and signed to make sure nothing like this can happens to you.

www.fightbacktoday.ca

Cash Transactions in an Audit

Sometimes cash is an unavoidable part of business. Customers choose to pay with it, vendors will only accept it. But how do you protect yourself in an audit when your sales or purchases occurred in cash? Create a paper trail. As detailed and as much as possible.

If you are a buy-and-sell type store it may not be enough to a government auditor that you documented the date and the item. How can the auditor trust that you did not skip recording some of these purchases and sales?

Issue receipts to every customer that pays you cash or that you pay cash to. If a receipt is not a possibility, at a minimum, write down all the details relating to the transaction and have the other person sign the paper and provide their contact information.

For example, if you picked up a large antique desk at a yard sale for use in your office, you likely paid in cash. An auditor will only see a cash withdrawal from your business bank account, assume it to be a personal withdrawal and deny the expense that may very well be a deductible capital asset. By having written confirmation from the seller acknowledging what, when, who and how much, it demonstrates to the auditor that the cash was legitimately used for a business purpose.

The best way to avoid the lack of evidence associated with cash is to use cheques, or other documented sources of payment. The cancelled cheques can be returned to you and will show to whom each cheque was made. Detail on each cheque the purpose of it so that the auditor can tie in your cheques to your reported expenses.

Another beneficial strategy is to obtain a ruling from the CRA asking them to confirm what evidence would be sufficient for your specific business.

If you must receive cash for your revenue, deposit it. If you do not deposit the amount and it goes directly into your pocket, the auditor will consider that both unreported income and shareholder appropriation. It is cleaner for the books to deposit it and not to use your cash sales as petty cash. By depositing all your cash sales it is far easier and more accurate to determine your actual sales.

As well, instead of withdrawal cash and using the cash for your business expenses, find out if the vendor will let you pay on interact so that the transaction will show up on your bank statement. Or try to find a vendor to do business with that will accept a method of payment that is not cash.

If cash is avoidable, it is always preferred to pick an alternative method of payment or receipt. Keep cash to a minimum and keep your audit that much smoother.