The Costly TFSA Blunder & Playing With Matches - The 20% Matching Penalty

In general, I understand the policy reasoning behind many of the income tax legislative changes made by the Department of Finance (that does not mean I agree with all these policy changes). I also typically understand the rationale behind most of the CRA's administrative polices. However, there are four tax rules and administrative policies I cannot comprehend and are major pet peeves of mine. They are:

1. You can be penalized for re-contributing to your TFSA in the same year you withdrew funds. This rule may make administrative sense for the CRA, but when 75,000-100,000 people over-contribute/incur penalties each year, there is a problem with the rule in my opinion.
2. You can be penalized 20% of the income you did not report on a T-slip, even though the CRA has that information on hand.
3. The necessity to file a T1135 Foreign Income Verification Form to report specific foreign stocks that do not pay a dividend, even if they are held at a Canadian Institution (rule on hold for 2013, to be effective 2014, see last weeks post).
4. The fact the CRA has an April 30th personal filing deadline, yet many slips (T3, T5013) are not issued until the 2nd week of April (even though the deadline for those slips is March 31st). IMHO, the deadline to file all these tax slips should be moved up 15 days.

I was fortunate enough to be interviewed by Rob Carrick of the Globe and Mail on my first two pet peeves and was thus able to vent on a medium other than my BBC soap box.

The Costly TFSA Blunder 

Many Canadians continue to over-contribute to their TFSAs. Most of these over-contributions result because you take money out of your TFSA and then re-contribute those funds back in the same year. However, unless you have additional contribution room, you are not allowed to re-contribute those funds until January 1st of the next year.

As TFSAs have been promoted by the CRA and financial institutions as a savings account, where you can take money out and put money back in; the re-contribution rule is counter intuitive and a trap for many Canadians.

I discuss this issue and other TFSA related issues in this interview with Rob.

Playing With Matches- The 20% Matching Penalty

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 income you reported matches the CRA's database records. Where the income filed by a taxpayer does not match, 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.

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. This penalty can apply even if you owe no tax!

To avoid the chance of this penalty, I strongly suggest you make a checklist of any T-slips you expect to receive and follow-up with any missing slips. You may also want to call the CRA in June or July and confirm with them all the slips their system is showing. You can do this with your "My Account"; however, not all slips are reflected online.

I discuss this insidious penalty and other income matching issues in this interview with Rob. 

Tax Tips for Dividend Investors

 

Rob interviewed me on a third, less controversial topic, that being tax tips for dividend investors. Please keep in mind the three points I discussed in the interview. When you prepare your tax return, you should have dividend income from the same companies as you reported last year, unless:

1. The company stopped paying dividends;
2. You are missing a T3/T5 slip - if so, please follow-up or you may be subject to the 20% penalty discussed;
3. You sold the stock - if so, you must report a capital gain.

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.

Getting Organized to File Your 2013 Personal Tax Return

Following my six-part Retirement series, I have no energy left to put together any original thoughts. So, I am going to provide you a summary of the Twitter Tax Tips I posted last year to help you get organized for tax season. I will provide a similar summary for tax preparation tips in the next week or so.

Organizing Tips

1. Make a checklist of all the tax slips you expect to receive this year and follow-up any missing slips, no matter how small. This will help you avoid a 20% penalty when the CRA matches your tax slips next fall.

2. Medical expenses must evidence payment. Have the pharmacy, dentist, orthodontist, chiropractor, etc. provide you with a yearly summary receipt so you don't have to find the twenty different chiropractor receipts you had during 2013.

3. For each donation you made online, ensure you receive or request an official tax receipt. The online confirmations are not official receipts. To clarify; when you donate online, you receive a payment confirmation receipt (this confirmation receipt is not an official receipt) and often, a notice that the official receipt will be sent separately or must be downloaded. Many clients provide me the payment confirmation receipts and do not download the official receipt or request such.

4. If you incur expenses to earn employment income, request a signed Form T2200 from your employer.

5. University/College students must print their T2202a tuition forms issued by their school to claim or transfer tuition credits. Note: University students are notorious for not printing out their T2202a tuition forms and holding up the filing of their parent’s tax returns. These forms are sent by the Universities and Colleges to their student’s portals. Please remind, or in my case, harass your kids to print out the form and email it to you.

6. Ensure your children’s activity receipts are marked paid in full to claim fitness/arts credits.

7. Obtain capital loss, HBP, RRSP & TFSA limit info from your online CRA acct. or your 2012 tax assessment. Note: It is very important to ensure you have updated carry forward information for your capital losses. You want to ensure you claim the maximum amount of capital losses carryforward against any current year gains (it was a good year for the stock market, hopefully you had large gains, whether realized or not).

8. If you have self-employment or rental income, summarize the income & expenses now, so you’re not rushed and miss claiming expenses.

9. If you moved to a new work location in 2013 >40km away, gather & summarize your receipts to support the claim. Note: If you moved to a new job this year, it is very important to gather all your receipts for any expenses you incurred and summarize as required by the CRA. See form T1-M to understand what expenses are eligible and how the CRA wants these expenses aggregated.

10. If you use an accountant, send your information to them as early as possible, they will be very appreciative and have more time to review your return.

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.

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.