The 20% CRA Penalty for Missing T-Slip Information - Two Solutions to Minimize the Issue

On Monday, I discussed the 20% penalty that thousands of Canadians are assessed each year for not reporting income that the CRA already has on hand from the country’s employers and financial institutions. I think I made it clear, I'm of the view the penalty is excessive in most cases.

The CRA’s matching program is designed to ensure taxpayers have reported all the income reflected on their T-slips. I have no issue with this objective. However, I do have an issue with taxpayers being penalized for failing to report this income. More specifically, I am perplexed as to how you can be deemed to not have reported income if it is already sitting in the CRA's database courtesy of your employer or financial institution? Should taxpayers be subject to 20% penalties for  failing to confirm income already reported?

Today, rather than continuing to rant about this issue, I offer two solutions.

1. The CRA should populate (with T-slip tax data) a draft online tax return for each and every Canadian. Taxpayers would access this draft return through their CRA “ My Account”. This tax return would reflect all T-slip information provided to the CRA for each individual by their employer and financial institutions. Initially, this return could be informational only. By this I mean, the return would only reflect your income information and would not calculate your income tax liability.

2. A more practical solution would be to provide full real-time access to all T-slips issued to each taxpayer. Currently your "My Account" only allows you to view T4 related slips such as T4's, T4A's, T4A(P), T4A(OAS) etc. However, it does not contain any other T3, T5 or T5013 information.

These solutions would ensure Canadians are aware of any and all income they earned in any given year that was reportable to the CRA (obviously this would exclude capital gains, rental income, self-employment income etc. that relies on taxpayer self-reporting). This solution would avoid any issues with lost mail or slips addressed to old addresses.

As I am not a software developer, I have no idea how difficult it would be to develop a simple return for each individual that is updated for any T-slip data on a real-time basis? However, it would not seem to require a large technological advancement.

If I ignore the potential lost revenue I would have as a personal tax preparer (which I could easily live without since each tax season takes a month or two off my life) and think long-term; if the CRA created an online informational only tax return, this return could eventually be enhanced such that it could become each Canadian’s actual online personal tax return.

Maybe I am missing the complexities of creating an online tax return? On the other hand, maybe this is not such a far-fetched solution.

P.S. Yesterday a reader sent me a copy of an email they sent to their MP about the "unfairness" of the 20% penalty. Good for them. Who would have thought the BBC would be the catalyst for tax policy changes :)

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

The CRA's Matching Program - Mismatch and You May be Assessed a 20% Penalty

How can you be issued a 20% penalty for missing information the CRA has on hand? Read on and you will find out!

In the next month or two, the CRA’s matching program will begin kicking out notices of reassessment to Canadians whose reported income on their 2012 income tax returns does not match the CRA's records. Some of these income tax filers will be assessed penalties of 20% on income not reported. Yes, that is income not reported, not tax underpaid! This penalty applies to income tax information your employer or financial institution provided to the CRA which was not reported on your return. In most cases, the omission of income was purely unintentional.

What is wrong with this picture? How can one be considered to not have reported income that the CRA has in its database? Is this not a penalty for failing to confirm income, as oppossed to not reporting income?

In this two part blog, I am going to look at the penalty itself and why I think it is egregious, as well as how the CRA could easily remedy the situation. Long-time followers of this blog will be aware I have written about this penalty a couple of times. However, this week’s blogs look at the penalty from two new perspectives:

1. The matching aspect
2. How I think the CRA could easily address this issue.

So let’s start from the beginning.

The Matching Program

 

The CRA’s matching program catches the non-reporting of income every fall. Each year the CRA checks the T-slip information in its database against Canadian taxpayer’s income tax returns to ensure the T-slip income reported matches. Where the income filed by a taxpayer does not match the CRA's database records, an income tax reassessment is mailed to the taxpayer asking for the income tax due. If the taxpayer is a first time offender, they are just assessed the actual income tax owing and possibly some interest. If this is the second occurrence in the last four years, a 20% penalty of the unreported income is assessed.

The Penalty Provision

Under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, he/she 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. 

 

Ouch! Is this Fair?

I find this penalty unfair for the following reasons:

1. It is excessive. I can accept a penalty of 5%, maybe 10%, but 20%?

2. The penalty can be levied even if you owe no income tax. I.e.: If someone in Ontario fails to report a T4 slip with $5,000 of employment income and the slip also reported $2,325 of income tax deducted, they would owe no income tax, as the maximum marginal income tax rate of 46.41% was applied (ignoring Ontario supertax). However, if you had failed to report income in any of the three prior years, the penalty under subsection 163(1) would be $1,000 (20% x $5,000), even though you owed no income tax and the CRA was provided this information by your employer. 

3. The penalty can vary wildly on the exact same total of non-reported income. If you fail to report $2,000 two years ago and fail to report $100 this year, your penalty is $20. However, if you failed to report $100 two years ago and failed to report $2,000 this year, the penalty is $400! That is a huge difference in penalties for the exact same total of unreported income.

4. Most penalties relate to T-slips taxpayers did not knowingly ignore or evade. In most cases, the missing income relates to T-slips lost in the mail or sent to the wrong address. Also, as a reader notes below in the comment section, many T-slips are now issued online and easy to miss.

According to an article by Tom McFeat of CBC News, the number of Canadians penalized for this repeated failure to report income totaled over 81,000 in 2011 with an income tax cost of slightly over $78,000,000.

To be clear, my issue with this penalty is that taxpayers in most cases are being penalized where there is no intent to hide income and the CRA receives that information. However, I am not as forgiving with the non-reporting of rental income, capital gains or self-employment which relies on taxpayer honesty.

Tax Tip for T-slips Received after You Filed Your Return?

I think most people will agree that this penalty is excessive. Wednesday I suggest a simple solution to the issue. However, here is a quick tip before you leave. If you received a T-slip after filing your tax return and ignored the slip since it was a small amount, dig it out tonight and file a T1 adjustment as soon as possible before the matching program gets you. Even a small $10 missed slip will start your clock ticking for a potentially larger penalty if you miss reporting income again in the subsequent three 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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Confessions of a Tax Accountant -2013- Week 1

In March of 2011, a rare idea pulsed through my brain - the brainwave? To create a series of posts called Confessions of a Tax Accountant, which would highlight contentious and/or interesting personal income tax issues that arise in my practice during income tax season. Now in my third year of confessions, I must confess, I have little to confess to. I have received so few income tax returns to date, that I have little to discuss. Ironically, the lack of returns provides one of my topics for today. Another is actually somewhat of an unusual issue, yet it is an issue everyone will most likely encounter at least once in their lifetime and has already arisen twice this year. The third issue is essentially a warning I have shared numerous times in this blog, but I think it worth repeating.

Tax Slip Deadlines

 

As of today, I have received 34% of the tax returns I will file this tax season, of which 11% came in the last 3 days and have not even been started. My reality is I still have to file 85-90% of my most complicated returns in the next 4 weeks. This year we are experimenting with using a portal for personal tax clients; while this makes things easier and quicker for our clients, we have had to develop and learn a whole new process. I know, you are thinking: Mark, stop whining, it's just April 1st. However, I am making these comments in the context of why have the CRA and professional accounting bodies not addressed the annual tax filing crunch?

Although many people do not gather their tax information until after the Easter weekend (no matter the date), many others cannot finish compiling their tax information as they are still waiting for their T3's for their mutual funds and income trusts and their T5013's if they have partnership income. Many of these forms have just arrived or are still in the mail.

The preparation of T3's and T5013's are often dependent upon the receipt of T5 information (February 28th deadline) before they can be completed. So I ask, why not simply move the T4 and T5 filing deadlines to Feb 15th and the T3 and T5013's to a March 15th deadline? I would suggest 80-90% of the T5's issued are from financial institutions that just need to press a button and the T5 is ready for mailing. Even if I am oversimplifying the process, a February 15th deadline is very reasonable. Just saying, this crunch could easily be eliminated to accommodate taxpayers who wish to file early and at the same time, help ensure their accountants are alive and healthy to pay taxes to the CRA. A win-win for everyone. I guess it makes too much sense.

CPP Death Benefits

 

When someone passes away, their estate can apply for a CPP death benefit. The benefit is paid as a lump sum and can be as high as $2,500. This benefit is paid to the estate. Twice this year I have been asked whether the estate or beneficiary reports this income. It is actually a very good question.

The CRA states on this information page that, "If you received this amount and you are a beneficiary of the deceased person's estate, you can choose to include it on line 114 of your own return or on a T3 Trust Income Tax and Information Return for the estate. Do not report it on the deceased person's individual return. The taxes payable may be different, depending on which return you use."

Where an estate will be required to file a T3 return because it has various assets to distribute and will have income, in almost all cases it will make sense to include the death benefit on the T3 return, as a testamentary trust is taxed at marginal income tax rates (at least until the government changes this as per last weeks budget proposals). But if the deceased had few assets and/or the assets were in joint ownership and there will be no need to file an estate return, the beneficiary and executors have to determine if the hassle of filing a T3 return is worth the income tax savings of filing a T3 trust return. The answer in most cases is yes.

20% Penalty

 

I have written several blog posts about how if a taxpayer fails to report income twice within a four-year period then he/she will be subject to a 20% penalty on the income not reported.  I thus urge you to double check that you have received all your income tax slips. If you receive a slip after you file your return, file a T1 adjustment even if the amount is very small. If you ignore that slip and miss a large slip in the subsequent three years, you will incur the penalty.

BBC Tweet of the Week

I tweeted this after last week's budget.

Friday Funny - Latest CRA Job Listing: International Tax Snitch. No experience required. Pays up to 15% of tax collected on liabilities>$100k :)

Thanks to my Readers

Last month my blog had 28,700 page views and almost exactly 15,000 unique views. Considering I typically post once a week, I am quite pleased with the growth in readership of my blog and wanted to take the time to thank you for reading my posts and sharing them with others. 

Comments During April

During April, I will only be answering questions submitted in the comments section of my current blog posts. Questions related to any prior blog posts will have to be answered in May. Sorry, but as discussed above, I just don’t have much time in April.

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.