My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Tuesday, May 17, 2011

Dealing with the Canada Revenue Agency

I discuss below, the six typical circumstances by which an individual may end up dealing with the Canada Revenue Agency (“CRA”) during the year. 

The least worrisome of the six situations is where you initiate contact with the CRA to report a late income tax slip (such as a T3 or T5 slip), or you realize you missed a deduction or credit (such as a donation slip, medical expense or RRSP receipt). These situations are very straight forward and relatively painless. You or your accountant file a T1 adjustment request using form T1-ADJ E to report the additional income or claim the additional expense or credit. You would typically attach the receipt to the form and most of these requests are processed without further query from the CRA.

The second circumstance is where you receive an information request from the CRA. These requests often strike fear into my client's hearts, but are typically harmless. In this situation, the CRA usually sends a letter asking for back up relating to a deduction or credit claimed on the return. Generally these requests by the CRA are to provide support for items such as a donation tax credit, medical expense claim, a child care expense claim, a children's fitness tax credit claim or an interest expense claim. These requests are fairly common and more often than not, relate to personal income tax returns that are efiled. You have 30 days to respond to these requests, however, time extensions are typically granted if you call the CRA and request such.

The third situation, and a step up on the anxiety meter, is the receipt of a Notice of Reassessment (“NOR”) from the CRA. A NOR may be issued for numerous reasons such as; not responding to an information request, the receipt by CRA of a T3/T4/T5 slip that was not reported in your return, or a reassessment based on an audit or review of your return as discussed below.

The fourth circumstance is typically not pleasant. Under this scenario, the CRA has selected you for an audit, either randomly or because you have come to their attention for some reason. An audit can take the form of a desk audit which is less intrusive or a full-blown field audit. Desk audits are typically undertaken to review a specific item that the CRA finds unusual in nature and you have 30 days to respond.

A full-blown audit could encompass a review of self-employment expenses, significant expense or deduction claims, or a full review of your personal or corporate income tax filings for a specific year or multiple years. In this situation, you will be sent a letter requesting certain information and you will be required to provide such to a CRA auditor. This process could take months, and if the CRA auditor is not satisfied by your documentation, or reasons for claiming certain expenses or deductions, they will issue a revised NOR.

Upon the receipt of the reassessment, you will have to determine, likely in conjunction with your accountant, whether the CRA’s assessment is justified. If you don’t feel it is justified, you need to consider if the amount of reassessed tax is significant enough to warrant the time and energy to fight the reassessment. If you decide to "fight" the reassessment, you and/or your accountant would file a Form T400A Notice of Objection. In this fifth situation, the Notice of Objection would state the facts of your situation and the reasons that you object to the CRA’s reassessment. The objection will then be reviewed (probably months later) by a CRA representative and you can make and support your case as to why the CRA has incorrectly assessed or reassessed you.

It is very important to make sure that you file a Notice of Objection on a timely basis. For an individual (other than a trust) the time limit for filing an objection is whichever of the following two dates is later: one year after the date of the returns filing deadline; or 90 days after the day the CRA mailed the reassessment. For corporations, the time limit is 90 days.

Finally, the sixth and final situation, and last resort, is to go to tax court because your Notice of Objection was not successful. There is an informal tax court procedure if your income tax owing is less than $12,000. Where the income tax owing exceeds $12,000, the process becomes formal and is costly and time consuming.

The above summarizes the various circumstances and situations under which you may deal with the CRA in any given year. Hopefully if you have any contact with the CRA it is only in connection to situation #1 or #2.

Next week I will discuss two other ways you may deal with CRA, but these are the relief provisions and not assessment or audit related.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

13 comments:

  1. It was helpful to see this all laid out in detail. Making the calculation about whether it is worth it to fight a CRA decision in tax court seems like an easy one for most individuals.

    Do you know if there are any reliable statistics out there (perhaps issued in CRA reports) regarding audits and other investigations? For example, I have heard that some industries (e.g. construction) have a much higher than average chance of being audited. I'm curious to know if there is some comparable information for individuals.

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  2. Hi Tom

    There are no stats. that I know of, I did a quick search and still could not find any.

    The CRA always seems to have a flavor of the year, contractors, pharmacists etc. However, by far, the most audited individuals are those with self employment income or commission expenses. No one else comes close.

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  3. Hi Mark, I am currently being audited by the CRA regarding work in a remote location. the company I worked for did not issue t-slip indicating work in a remote location, which a number of employees (myself included) have claimed on our income tax forms. the company is still not agreeing to issuance of the apropriate t-slip even though all other contract companies in the same location have. What kind of fight can I expect? will the CRA compel the company to issue proper tax forms?

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    1. Hi Anon:

      Unfortunately, living in Toronto, I have no experience with the remote location claim, so I cannot provide any guidance.

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  4. Hello Mr. Bean Counter,
    Do you have any idea why self employed individuals are required to keep records of all vehicle expenses in order to claim costs and not allowed to just use the CRA vehicle allowance against mileage used for the employment? It seems an incredible amount of work for what it's worth. In my case, I'm dealing with a few thousand dollars "gross" earned as an in-home tutor, for which I have kept detailed records of the mileage to/from, assuming I could use the mileage rate. I also used my cell phone & laptop but was not going to claim that since the work did not increase my usage costs, and there were other minor printing & reward expenses that I hadn't planned to include. The challenge for me is that although I kept track of the mileage driven for tutoring, I have no idea of the mileage used for other purposes. Also, I was borrowing my parent's car, and paying gas and some contribution to insurance, but I don't have the records of all the costs for maintenance and repairs even though I did create more wear & tear on the car. Is there a rationale? Do you have any recommendation of how to deduct expenses in this case??

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    1. Hi Anon

      Keeping a log is the best evidence as far as the CRA is concerned (although few people actually do so). I have seen some self employed people just claim mileage based on the CRA vehicle allowance. Some auditors are ok with it and just take a reasonability approach, others give them a hard time and want them to recreate a log.

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  5. Hi Mark,

    This July I was informed via letter from CRA that they were auditing my charitable donations on my 2013 T1 (3rd time lucky). As per usual I gathered my receipts, put them together in a neat package, and faxed them to Big Brother. Today I get a Notice of Reassessment in the mail. Long story short, I inadvertently forgot to include a single receipt for $3K in the original submission to CRA. My question is - would not CRA normally send a proposal letter or communicate in some manner prior to issuing a reassessment. This particular issue could have been easily resolved had I realized that I had forgotten the single receipt. Now I will have to send a check and file a Notice of Objection, then wait for a check to be sent back from CRA. Long way around the mountain.

    Thank much.

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    Replies
    1. Hi Anon

      What a waste of time, i have had many similar issues. Unfortunately, unlike an audit where there are proposal letters, info requests do not have a similar process. You would think they may call or write to say you seem to be missing the one donation. I had the same issue recently with a document that took months to look at then got rejected because they were missing a few pages, when they could have called and we would have faxed. I know they are swamped, but seems like more waste of time for them and us and would be easier to contact the taxpayer. Sigh !!

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  6. Thanks for your input. Bit of a surprise to me that this is process but good to know that this is their normal shtick. If I am on the receiving end of another request I will do what I can to make sure I am complete on my end. Better get my check book out...

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  7. I was late filing my taxes (understatement) from 2008-2013. They were all filed together in 2015. 2008 there was no income and a loss. There is a long story attached as to why it was so late, but not needed I'm sure.

    The CRA assigned a lady to handle my file. I had completely all the T1 Generals and faxed her (at her request) showing that I had completed the taxes. At that point before I mailed the returns in, I realized I missed significant deductions.

    Should I send the T1 General in as is with an adjustment request for each year OR should I adjust the T1 General before sending back?

    Please advise - Thanks

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    1. Hi Anon

      Assuming the faxed returns were not considered as filed returns by the CRA representative, then I would adjust the actual returns before filing.

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  8. Hi there,

    The CRA has sent me a reassessment for filing a T4 type return late a couple of years ago. The problem is, that, the corporation is no longer in operation and therefore not in a position to make any payments. What should I do? Thanks.

    Distressed

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    Replies
    1. Hi Anon

      It is a question of personal legal liability, quantum of the penalty and a moral issue. You need to answer and consider all these issues first, thus I cannot help you.

      Delete