The Dynamics of the Investment Advisor/Accountant Relationship

I have several clients in common with Pat O’Keeffe, First Vice-President and Investment Advisor at CIBC Wood Gundy. Pat and I have often discussed the dynamics of the relationship between the investment advisor (“IA”) and the accountant (“CPA”), and why our relationship works while other IA/CPA

relationships fail. One of Pat’s responsibilities with Wood Gundy is continuing education, in which he is charged with the responsibility of improving the quality of service the IAs offer and to increase their knowledge on all aspects of being a leading edge advisor to higher net worth clients. Pat thought it would be instructive for me to speak to his advisor group in downtown Toronto (which I did a few weeks ago) to provide an accountant’s perspective on the dynamics of this relationship. I summarize my talk in today's post. [Note: I use CPA above because that is my designation. I am not purposely slighting other accounting designations, so please do not send me nasty emails].

I understand some aspects of this post may come off as arrogant, as I am telling IAs what to do and how to act. However, I know I don’t have all the answers. Please also understand I was asked to speak to the CIBC Wood Gundy advisors from a CPAs perspective and this is my interpretation of the relationship and I am blunt (and some would say a bit arrogant :).

You may be asking yourself, why the heck should you care about the IA/CPA relationship? I suggest that my expectations of an IA should become the minimum expectations you have of your IA.

Although I do not discuss this today, if you have a team of advisors, you need to ensure your IA, CPA, lawyer, insurance agent and banker all integrate their advice into one efficient coordinated plan. If your advisors operate at cross purposes, while trying to protect their own fiefdom and fees, you are the ultimate loser in this battle of professional egos.

How the Ideal IA/CPA Relationship Should Work

During my presentation, I suggested and it was agreed upon by the CIBC advisors present, that the ideal IA/CPA relationship should be as follows:

• Client centric – The best interests of the client should always be the first priority

• No turf battles – Many financial issues have an investment and tax component. It is important the IA does not overstep their expertise and provide tax advice to cut out the CPA, while the CPA needs to stay within their tax and advisory expertise and not attempt to provide investment advice. I know I have a good relationship with an IA when they call me for tax or financial advice on clients I have no vested interest in; because they know I will help them with their client. This also works the other way where I can call an IA for an opinion on what another IA is doing or for an explanation of an insurance product, etc.

• Proactive – Whether the IA has a new insurance idea or the CPA thinks a prescribed rate loan is appropriate, the IA and CPA should work together to ensure they are providing proactive advice before the client hears it at a cocktail party or seminar put on by another IA or CPA.

• Financial Hero’s – In a strong IA and CPA relationship, the synergies of the relationship should result in both parties becoming hero’s in the client’s eye. For example, an IA recently referred me a client that was not a good fit for the firm she was using. By working together with the IA and because of my knowledge and experience in working with owner-managers, we were able to not only lower the client’s fees, but provide more practical and proactive income tax advice. The client was very pleased with both of us.

The Accountant is the Trusted Advisor

During my presentation, I suggested to the IAs that some studies have concluded that the CPA is the client’s most trusted advisor. I further suggested that whether they agreed or not with that assertion, they needed to understand and acknowledge that dynamic. Although, I work very well with many IAs, over the years I have had reason to suggest to a few clients that their IAs were weak and should be replaced. In most cases they have replaced their IAs. My point here; if you are an IA, you should try and work with your client’s CPA, as it is in your own interest to have them as an ally as opposed to an enemy.

The Grey Areas of the Relationship

The following issues are often contentious and can cause a fracture in the IA/CPA relationship:

1. Who is responsible for determining the adjusted cost base of a personal tax client’s investments?

Most CPAs feel it is the IAs responsibility in all cases for personal clients. During my presentation, there was full agreement by the CIBC advisors on this point. The reason for this is unless an CPA is specifically engaged to track a client’s stock investments, they have no idea what stocks and bonds their clients are buying throughout the year and they have no reason to track such.

2. Who is responsible for determining the adjusted cost base of a corporate client’s investments?

The IAs again felt this was their responsibility. I surprised them by stating that in this case I felt we had a joint responsibility, since for corporate clients, CPAs track the ACB of the client’s investments when we prepare their financial statements.

3. Who is responsible for providing information to complete the T1135 Foreign Income Verification Form?

As I have discussed several times on this blog, the new reporting requirements that force taxpayers to report individual stocks held in Canadian Institutions that do not pay dividends (postponed until 2014 as per the recent transitional announcement) will be a massive issue next year. IAs told me they consider the determination of the fair market value of foreign stocks held during the year, their responsibility. However, they noted that should the rules not change for 2014; the systems of all Canadian Financial Institutions will need to be tweaked to provide reporting on the dividend exception issue.

4. Who is responsible for Income Tax Attributes?

I suggested it was the CPAs responsibility to provide the IA any capital loss carryforward information and RRSP and TFSA contribution limits. However, I told them I thought it was the IAs responsibility to contact the CPA to confirm this information before making any of these contributions.

How to Lose the Accountant as Your Advocate

During my presentation I suggested to the IAs that the following actions or inaction could alienate their client’s accountant:

1. Give the CPA a hard time when they ask for duplicate tax slips. We are only asking because the client did not receive the slip or has misplaced the slip.

2. Don’t provide the CPA adjusted cost base information or realized capital gain/loss reports. As noted above, in my opinion, this is clearly the IAs responsibility.

3. Don’t assist with flow-through information. Flow-through limited partnerships are a strange animal. They start under one entity and are converted into a mutual fund typically a couple years later. CPAs often have a hard time following the conversion process because (a) the share conversions are never one to one, so it is hard to know which flow-through was converted to which mutual fund and (b) it is very time intensive work sorting this out and CPAs do not have time to waste on this during tax season.

4. Practice income tax. In prior years I have had a couple clients' IA transfer stocks with huge unrealized capital

losses to their RRSPs. The result, the tax-loss is denied and lost forever. I have also had IAs suggest to clients that they purchase very large quantities of flow-through shares without discussing their suggestion with me. Clients can become very upset with their IA when I prepare their income tax return and tell them they owe substantial minimum tax because of the excessive flow-through purchase. I have also seen IAs make transfers for probate purposes without considering the income tax costs amongst many other transgressions.

How an IA can Lose a Client

I suggested to the group that the following acts may cause them to lose a client:

• Not taking into account the client’s area of business. For example, should your asset allocation be heavy in REITs if the client’s personal corporation holds significant rental properties?

• Cause a RRSP or TFSA over-contribution because you did not confirm the contribution limits with the CPA. I don’t think IAs understand how upset clients get when this happens and what a huge strike this is against them over such a small issue.

• Have client pay tax on capital gains when the client has large unrealized losses. In November, I touch base with many of my client’s IAs, or they call me, to discuss whether there is an opportunity to tax loss sell. Although it may make investment sense to not sell stocks with unrealized losses, IAs need to speak to their clients in November or December to explain their rationale for not selling; so the client is not upset in April when they incur a large income tax bill.

• Don’t review annual returns with clients. Most IAs are very good about this, but if you ignore your client and don’t have at minimum a yearly meeting, know that I am asking my client if they have reviewed their returns for the year with you. If  they say no, I will usually figure it out myself and then compare the returns to index returns. 

Finally, if you're an IA, the reality is I like many other CPAs; prefer to work with other quality advisors, whether they are IAs, lawyers, valuators, bankers etc. For both yours and your clients benefit, you should strive to be one of those quality advisors.

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.

Suggestions and Strategies to Facilitate the Tax Preparation Process for You and Your Accountant

The Blunt Bean Counter

Last year I wrote a tongue-in-cheek post “The Top Ten Accountant Pet Peeves about Personal Income Tax Season”. One of my long-time readers, who uses the pseudonym Pursuit 99, made the following comment on that blog post: “Thanks for the heads up on what not to do. It really is helpful. Now, how about a list of ten specific solutions or strategies that really benefit the process of personal tax completion for both you and the client.”

Pursuit 99, your wish is my command. Today, I will provide an accountants dream list of actions, forms and summaries that will benefit the tax preparation process for both the client and his/her accountant. Please excuse the overlap between todays post and the Pet Peeves post.

The list below requires the client to do extensive summarizing and organizing. I have a feeling some people after reading the list are going to be saying to themselves, “Pursuit 99 said what can be done to benefit the client and their accountant, not just their accountant.” However, there is an art to preparing a tax return as certain items require subjective decisions. You want your accountant to be spending his/her time making these decisions, not adding up your telephone bills. 

How to Become your Accountants Favourite Client

1. Provide your accountant a summary page of what forms and slips you have included in your tax package. You would be surprised how often there are disagreements as to what was received from a client. This summary keeps both sides accountable for information flow and retention.

2. Do not send a shoe box. Many accountants will not accept shoebox clients. I personally would be concerned about any accountant that does, since they are not spending time on what is important. In my opinion, any accountant who lets their clients bring in a shoe box every year is clearly not concerned with ensuring an efficient tax preparation process.

3. Open any envelope containing an income tax slip at home and do not send your accountant unopened envelopes. Do you really want to be paying your accountant to open envelopes? Also, if you have a cranky accountant like me, you have started off on the wrong foot.

4. Don’t send junk. Separate real tax slips from things like RRSP & TFSA application forms, monthly investment account statements for RRSP and RRIFs, last year's Efile form and last years actual return. If you are unsure, send the form, but don't send everything just because you are too lazy to sort through your tax papers. By the way, your accountant does not need a copy of last year's return, it is on their computer.

5. Advise your accountant upfront about any changes in your personal situation. The birth of children, address change, marital changes, extramarital affairs (just kidding, although this may explain why you have less investment income this year).

6. Summarize and total donation and medical expenses. Your accountant will review all donations slips to ensure they are deductible and all medical expenses to ensure they qualify and are deductible and have not been double counted (when there is an insurance plan in place). However, having a summarized total lets your accountant reconcile their totals with yours quickly.

7. Summarize capital gains/losses (if not provided by your financial advisor). This is a huge issue. Accountants do not have the time to figure out your gains and losses on 50 trades in the middle of tax season, let alone try and figure out the adjusted cost base for stocks you owned 10 years ago when you were not even their client. You either need to do this yourself, or engage your accountant to do this throughout the year so all your capital gains/losses are summarized before March. This is not to say you may not have specific questions regarding a cost base determination to discuss with your accountant. However, if you don't do the majority of the work, you will be charged an arm and a leg by your accountant for undertaking this task during tax season.

8. Make a copy of your 2011 T776 rental schedule and write the comparable 2012 numbers, excluding depreciation, beside the 2011 totals (or summarize your rental expenses on an excel spreadsheet). By undertaking this task, you will note any obvious discrepancies between the two years, which you should review before providing the information to your accountant. This exercise benefits your tax return process as instead of adding up rental expenses, your accountant can now concentrate on contentious issues such as whether a large rental repair is an expense or capital addition.

9. The same holds true for the T2125 or T2032 business and self-employment statements. Provide your accountant a summary of the income and expenses and a list of any questions you had in putting the numbers together. Your accountant can then spend time reviewing the numbers and asking questions rather than adding up a bunch of receipts.

10. If you do not keep an automobile log and are claiming car expenses for employment or business, at minimum, provide your accountant with your odometer reading at January 1st and December 31st. This quantifies your mileage driven during the year and will assist in the discussion as to what percentage of your automobile expenses were deductible in the year.

11. If you are claiming employment expenses, ensure you have obtained the T2200 Form from your employer and summarize your employment expenses for the year. The T2200 allows your accountant to review what expenses your employer says you incurred or were required to incur.

12. If you purchased a rental property during the year, provide your accountant with the purchase and sale agreement, statement of adjustments, legal fees and appraisal fees. This will save significant time on your file and ensure you get full benefit for all the initial costs incurred.

13. If your children are in University or College, ensure they download their T2202A tuition forms, since students can transfer up to $5,000 of tuition credits to their parents, but your accountant cannot make that determination without the T2202A form and your child's tax slips.

14. Don’t just tell your accountant your kids exceed the minimum $500 fitness amount. Obtain invoices and statements from the sports club, dance studio, etc. There is a good chance the CRA will request these forms to substantiate your claim, so ensure you have the correct numbers from the start.

15. If you are claiming child care, provide a copy of your Nanny’s T4. If you use daycare, provide a receipt that reflects payment for the year.

The above is a substantial list that requires significant time and effort on your behalf. However, if you provide most of these items, your fee should be lower and your accountant will have more time to spend minimizing your tax liability.

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.

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.

Avoid a 20% Penalty-Ensure you report every income tax slip, no matter the amount

This year, several of my clients received their T3 and T5013 income tax slips well into April. A troubling offshoot of the late receipt of these income tax slips is that many people either file their income tax returns assuming they have all their income tax slips, or run out of patience and file with the slips they have on hand. The two filing scenarios noted above are not problematic; as long as you file a T1 adjustment form upon the receipt of these late income tax slips to report the missing income. 

However, in some cases, people do not receive their missing slips because they have moved during the year or the slips are lost in the mail or mixed in with the junk mail that is thrown out. Since people either forget about these missing slips or are oblivious to the fact they are missing [It should be noted that the Canada Revenue Agency ("CRA") uses a matching program to ensure you have reported all your income tax slips] an insidious penalty provision registers strike one in an abbreviated two strike at bat.

You see, 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.

One would think that the taxpayer relief provisions (“fairness provisions”) would address the potential absurd outcome that results, but this is not always the case as Ian Spence learned. Mr. Spence omitted a small amount of income in 2004 (I am not sure why, but it could have been the tax slip was lost in the mail or any number of reasons). This omission was strike one. Strike two was more costly. Mr. Spence had H&R Block prepare his 2007 return and for whatever reason $36,219 in employment income and the related income taxes were not included in his return. The CRA reassessed his return for the $36,219 in income not reported. It also reassessed Mr. Spence for another $124 in tax, the net amount of income tax owing after including the $36,219 and giving Mr. Spence credit for the $9,000 or so of income tax withheld on the missing slip. As this was strike two, the CRA also assessed a penalty of $7,243, a seemingly unfair result.

Two things must be noted at this point. (1) If Mr. Spence had omitted the $36,219 of income in 2004 and then omitted the small amount in 2007, the penalty would have been minimal. (2) The actual amount of income tax owing due to the second omission was only $124, while the penalty was $7,243.

Mr. Spence applied for relief under the fairness provisions. He was not granted any relief. He then applied to the court seeking a secondary review by the CRA and the court granted such. However, the CRA once again turned down Mr. Spence’s request under the fairness provisions. Finally, Mr. Spence went back again to the Federal court seeking another review. This time the Federal court dismissed the application.

The moral of this story is: ensure you file a T1 adjustment for any slip you receive late and if you are missing a slip, follow up with the issuer, as the CRA will most likely not be sympathetic to your case.

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.