Confessions of a Tax Accountant -2012- Week 3 - My T3's Near Death Experience

I typically base my confession posts on client comments or client related income tax issues that arise during tax season (subject to my usual caveat that I embellish or slightly change the facts to protect the innocent); however, this week's confession is based upon my own personal experience.

Last week when my wife and I separated the junk mail from the "real" mail we had received that day, we made our usual junk mail pile on the counter for me to recycle. The next morning my wife was about to hand me the junk mail pile to place in the blue bin; but as she often does, she took a quick second look to ensure no "real" mail was included in the junk mail pile. To my surprise, my wife pulled an envelope from the junk mail pile that had an investment company logo stamped on it and she then asked if I was sure this was junk mail. I did not recall seeing that envelope the day before (it must have been stuck in between some of the junk mail) so I opened the envelope and found a T3 inside. This T3 slip was just seconds away from becoming recycled paper and potentially putting me at risk for a 20% income tax penalty in the future, even though the T3 was for less than $100.

In honour of my T3 surviving its near recycling death experience, today I am going to recycle a blog post  I wrote last year on an insidious 20% penalty you will be charged if you fail to report income twice within a four year period.

To quickly re-iterate my blog post from last year, under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, she/he will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. It is important to note that the amount of income that was unreported the first time is not relevant in the calculation. If you failed to report $100 the first time and $10,000 the second time, the penalty will be $2,000, a somewhat ludicrous result considering if the slips were missed in the reverse order the penalty would only be $20.

So besides my own experience, why am I recycling this topic again?  Two reasons. Firstly, a couple colleagues told me that they had clients who were charged the penalty in 2011 and secondly, our firm had a couple clients reassessed in the fall for slips they did not report on their tax return. These clients are now at risk of having to pay a penalty if they fail to report income again in any of the next three years. 

For those who are unaware, missing T-slips are an issue because the Canada Revenue Agency ("CRA") undertakes a matching program in the late summer or early fall, that cross-checks T-slip data it received from the financial institutions with the social insurance number of the T-slip recipient. If the T-slip has not been reported, the CRA issues a reassessment and the clock starts ticking for three more years.

You may be asking yourself how can this happen? Between the accountant and the client, shouldn’t someone be tracking all the tax slips? If you have a few slips, the answer is yes. But many people have multiple slips and actively trade or move money around. In addition, although you would expect that your investment institution would issue all the T-slips for your account, for some investments, such as money market funds, the money market company themselves may issue the T-slip, so you are not even expecting to receive such.

Income trusts are also often problematic. You would assume all your income trusts would form part of one all encompassing T3 slip from your broker. However, the same brokerage will often issue multiple T3 slips for the various income trusts you hold, even though they are all held in the same account; so often you have no idea how many T3 slips you should be receiving (to be fair, some of the major institutions provide a listing of slips that are outstanding).

Finally, people move, slips get stuck in junk mail as I experienced or the T-slip is lost in the mail.

An offshoot of this issue are accounts held jointly with parents and "In-Trust" accounts for children. Many parents open joint accounts with their adult children. The CRA when matching tax slips will look at the social insurance number ("SIN#") on the T-slip. Whether technically correct or not (a true joint account would require a 50/50 split of the income reported) the parent often reports 100% of the income. If for some reason the child's SIN# appears first, the CRA will often reassess the child for the missing income.

Similarly, where a parent opens an "In-Trust" account or even an account in their child's name, with the parents SIN#; even if the income belongs to the child (i.e. the child had a summer job) and should be reported on the child's tax return, the CRA will assume the income belongs to the SIN number on the T-slip and reassess the parent.

In both the above cases, you typically can convince the CRA the income belongs on your parents or child’s return and thus, the income was properly reported or at minimum, reported, just on the wrong income tax return. 

Finally, if you miss a slip, but receive it after you file, you can avoid this issue by filing what is known as a T1 adjustment request before the CRA finds the missing slip on its own.

Be aware, an innocuous missing tax slip in year one, could result in a costly 20% penalty in the future, if you somehow miss a more substantial slip in the three subsequent years.

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.