Frequently Asked Questions

Here are answers to some of the most common questions asked by our clients.

Top questions of the past week

General Tax Questions

What is the Canada Revenue Agency (CRA)?

The Canada Revenue Agency (CRA) administers tax laws for the Government of Canada and for most provinces and territories. It also administers various social and economic benefit and incentive programs delivered through the tax system.

Led by the Minister of National Revenue, the CRA is one of the largest federal government departments, with 51 tax services offices and tax centers across the country, 43,000 employees nationally, and a $4.3 billion budget.

Those who experience tax problems quickly learn how powerful the CRA is and what they are capable of. The CRA has an array of legal powers to collect revenue on behalf of the Canadian government. Powers include:

Set-off: the CRA applies money owed to you by the government towards your tax debt.

Garnishment: the CRA intercepts funds payable to you by a third party such as an employer, or other sources of income.

Bank freeze: the CRA freezes your bank account, preventing you from accessing it and applies the balance towards your tax debt.

Certifying tax debt in the Federal Court of Canada: the CRA legally registers your debt with the Federal Court of Canada and gets a certificate confirming the amounts you owe to the Crown. Once registered, the certificate has the same force and effect as a judgment obtained in a court and makes your debt a matter of public record.

Seizing and selling your assets: the CRA obtains a writ and seizes your assets and property such as your home, car, boat, art, cottage, or rental property. Seized assets are then advertised and sold by a court enforcement officer.

Holding another party jointly responsible for your debt: the CRA holds a third party such as a spouse, business partner or related corporation jointly responsible for your tax debt.

Criminal prosecution: the CRA pursues criminal charges against you for tax evasion.

Taxpayers facing tax problems should not underestimate the power of the CRA. No matter what your tax problem is, the Farber Tax Law team can represent you with the CRA. Our team includes ex-CRA advisors* and legal professionals, who work for you to resolve your tax problem quickly and efficiently.

Don’t hesitate to contact us today to set up a confidential consultation.

What tax problems and risks do you need to be aware of?

A tax problem can quickly become a tax emergency.

Unresolved tax issues with the CRA pose significant risks to taxpayers. The CRA has sufficient powers to collect tax debt under the various tax acts. Taxpayers facing problems such as past due tax returns, undeclared income, or outstanding tax debt could face harsh consequences including:

  1. Interest: Unpaid taxes can accrue significant interest, often increasing the tax debt many times higher than the original amount. Interest charged by the CRA is compounded daily and is set at a rate much higher than that offered by financial institutions. In most cases, interest accrual cannot be stopped until the entire debt is paid in full.
  2. Penalties: The CRA often levies financial penalties on filing errors and/or omissions, including late filing penalties, repeated failure to report penalties, and gross negligence penalties which can be as high as 50% of the understated tax. Penalties are meant to be punitive.
  3. Prosecution: In cases of significant tax evasion, the CRA can pursue criminal prosecution and routinely publishes information on successful criminal convictions. Under the Income Tax Act and the Excise Tax Act, persons convicted of tax evasion can face fines ranging from 50% to 200% of the taxes evaded and up to two years imprisonment. Upon conviction on an indictment, a fine ranging from 100% to 200% of evaded taxes and up to five years in imprisonment can be imposed.
  4. Enforcement Action: The CRA has a variety of legal powers to collect an outstanding tax debt. These powers include:
  • wage garnishments,
  • bank account seizures,
  • liens on your home, vehicle and other property,
  • RRSP, RESP seizures,
  • garnish company receivables, and
  • pursue directors of corporations for corporate tax debts.

It is never beneficial to ignore outstanding tax debts. Farber Tax Law can help resolve your tax problems before it turns into a tax emergency. Our expert staff work with you to create a personalized solution that ends your tax problem considering your personal, professional and financial interests.

Don’t hesitate to contact us today to set up a confidential consultation.

What are the consequences of filing your taxes late?

Canada has a self-reporting tax system. This means that it is up to you to file your income tax returns on time, allowing the CRA to assess them for accuracy. For most individual taxpayers, there is a standard deadline of April 30. Self-employed taxpayers have an extended filing deadline of June 15.  Regardless of your deadline, failure to file your taxes on time can be a costly error. In addition to paying your tax debt, the CRA will assess penalties and interest on your account.

Under subsection 162(1) of the Income Tax Act, the late filing penalty starts at 5% of your unpaid tax due, and an extra 1% is added for each month that the return is late, up to 1 year. This means that the penalty can go up to 17% of your tax debt. If you were a late filer in any of the three previous years, you will be assessed as a repeated late filer. Under subsection 161(2), the penalty starts at 10%, and an extra 2% is added for each month, up to 20 months. This means that the penalty can be up to 50% of your original tax debt.

Under section 161 of the Income Tax Act, the CRA can charge interest on your unpaid tax debt owing. In addition, interest is also charged on any penalties you owe, including late filing penalties. Interest compounds daily and adds up quickly. In many cases, the penalties and interest can end up being greater than the amount you originally owed.

If you are overdue on your tax returns, there are two ways to seek relief from penalties and interest. If the CRA has not pursued enforcement action or issued an arbitrary assessment against you, you may be able to file your tax returns under the Voluntary Disclosure Program. Should you qualify, the CRA will waive the related penalties and significantly reduce the interest charged in relation to those tax amounts.

Alternatively, if you don’t qualify for relief under the Voluntary Disclosures program, and certain extraordinary circumstances have impacted your ability to file your returns on time, or you are struggling to pay the penalties and interest on your account, you may qualify to have the penalties and/or interest reduced under the Taxpayer Relief Program.

Qualifying for either program requires that certain conditions be met, and your case be presented in the most compelling way possible.

If you’re considering relief, don’t hesitate to contact us today to set up a confidential consultation.

Will my CRA collector negotiate a reduction to the principal portion of my tax balance?

The CRA collector cannot reduce the amount of the principal portion of your tax arrears.  The collector can be engaged to negotiate payment terms and the removal or prevention of enforcement action.  However, the collector will not take less than 100% of the amount owing.  Like any other debt (i.e. credit card balance, mortgage, etc.), your tax arrears will continue to accumulate interest until it is paid in full.

Don’t hesitate to contact us today to set up a confidential consultation.

Will CRA remove penalties and interest?

The CRA has a few programs which can provide relief from interest and penalties, subject to a taxpayer’s eligibility. The Voluntary Disclosures Program allows taxpayers to come forward voluntarily on unfiled tax returns and/or correct errors or omissions on previously filed tax returns. A successful outcome to your voluntary disclosure would result in the CRA waiving all the applicable penalties and significantly reducing the arrears interest.

The Taxpayer Relief Program can provide relief from penalties and interest for taxpayers who have significant financial hardship, are facing extraordinary circumstances or have suffered due to actions of the CRA.

Don’t hesitate to contact us today to set up a confidential consultation.

What is the difference between capital gains and business income?

If you have sold real estate, stocks or any other investments, the CRA can classify your profits or losses as either capital or business income.

 Capital Gains:

The taxation of capital gains is considered under section 38 of the Income Tax Act. If you have made a capital gain, only half of that is taxable. Similarly, a capital loss is also calculated at 50%. Moreover, capital losses can only be deducted in your tax returns against other capital gains. They can be deducted from capital gains 3 years back, or for any future capital gains.

Business Income:

If your sale is treated as business income or loss, it is subject to the full extent of regular tax rates. Unlike capital gains, business income is taxed in full at the marginal tax rate. Business losses are fully deductible, even against other forms of income, including employment or office.

To determine which category the transaction belongs to, the CRA will have to prove that the property is either capital property or business inventory. This is primarily based on the original intention behind acquiring the property. If you bought the property for investment purposes and for long-term growth, it is most likely capital property. However, if you bought the property with the intention of selling immediately, or flipping it in the case of real estate, it will likely be considered as inventory.

If you are selling your house, having it categorized as a capital property can be very advantageous. Under paragraph 40(1)(a) of the Income Tax Act, if the property qualifies as a principal residence, the whole gain is exempt from tax. For this reason, the CRA will scrutinize every relevant factor, including:

  • the original purpose of purchasing the home
  • how long the home was held for
  • facts regarding the sale of the house
  • whether anything may suggest you are in the industry of flipping houses such as your profession or trade

Similarly, if you are selling stocks or other investments, but frequently engage in day trading or work in the finance industry, the CRA may categorize the sale profits as business income rather than capital gains.

 The CRA will likely take an aggressive position when auditing you, especially when dealing with categorizations like capital versus business income. Our team can help represent you to the CRA and help you win.

Don’t hesitate to contact us today to set up a confidential consultation.

CRA Reassessment

How far back can the CRA reassess a taxpayer?

Under most circumstances, the CRA can only reassess a taxpayer going back three years. This is to ensure there is a certain level of certainty when you file taxes and to ensure that the CRA acts quickly if they detect an irregularity.

The three-year time limit begins the day the notice of assessment is issued to the taxpayer. After three years have passed from that date, the CRA can no longer reassess the taxpayer. However, if the CRA believes that the taxpayer has committed fraud, or misrepresented information on their tax return, the CRA can override the three-year limitation period.

In addition, if the taxpayer signs a specific document requested by the CRA (a “waiver”), this can allow the CRA to ignore the reassessment period.

If you are a business owner, be aware that some types of corporations have a longer, four-year reassessment period.

Want to find out how we can help, don’t hesitate to contact us today to set up a confidential consultation.

Arbitrary Assessment

What is an arbitrary assessment?

Many people think that if they do not file their tax returns, they will not have to pay taxes. They’re often shocked to find a Notice of Assessment from the CRA for a taxation year where they forgot to file, often with a large tax debt owing as well. What has happened in this case is an arbitrary, or a notional assessment has been issued against them.

Canada has a self-reporting tax system. This means that the taxpayer will file their returns, disclosing their income, expenses, and claiming any deductions. The filing deadline for individuals is usually April 30. Upon receiving your tax return, the CRA reviews the amounts reported and claimed, may verify for accuracy, and will make any adjustments they feel are necessary. If there are any concerns, a taxpayer might be asked to send more supporting documentation or may get audited. Generally, the CRA will accept the returns, and issue the taxpayer a Notice of Assessment telling them how much they owe in tax.

However, if a taxpayer has not submitted their return by the filing deadline, the CRA can take assessment action. Under subsection 152(7) of the Income Tax Act or subsection 299(1) of the Excise Tax Act, the CRA can issue an arbitrary assessment. This means that the CRA will guesstimate your income and expenses based on their own estimates and records.

With an arbitrary assessment, your tax debt as calculated by the CRA will include significant penalties and interest in addition to the principal amount of the debt.  As such, the debt will likely end up being significantly larger than the actual debt you would have owed if you had filed on time.  Once the CRA issues an arbitrary assessment, the related tax debt is subject to all of the normal collection policies of the CRA. 

Want to find out how we can help, don’t hesitate to contact us today to set up a confidential consultation.

How do I respond to an arbitrary assessment?

There are two main things that can be done to reverse an arbitrary assessment.

If you are within 90 days plus one calendar year of the Notice of Assessment, you can file a Notice of Objection against the arbitrary assessment and submit your factual return in support of your objection.  If it is an income tax issue, a Notice of Objection prevents the CRA from taking any enforcement or collection actions on your account until the dispute is resolved.  This is the preferred option to deal with an arbitrary assessment.

The second option is to just file your tax returns. Because the CRA will assess your returns with extra scrutiny, it is best to have the return prepared by an accountant. The CRA will then adjust your tax debt owing based on your tax return, and issue you a Notice of Reassessment.  The potential issue that may arise with this option is that it will likely take many months before the CRA replaces their arbitrary figures with your factual figures.  Therefore, without the Notice of Objection in place, the CRA can still act against you to enforce payment of the arbitrarily assessed amount.

If you have been arbitrarily assessed by the CRA and owe a large tax debt, we can assist you in resolving that situation in an efficient and effective manner. 

Want to find out how we can help, don’t hesitate to contact us today to set up a confidential consultation.

Dispute a Notice of Assessment (NOA) or Notice of Reassessment (NOR)

How can you dispute a Notice of Assessment (NOA) or Notice of Reassessment (NOR)?

After you file your tax returns, the CRA will send you a Notice of Assessment to inform you of how much you owe in taxes. Sometimes, the Notice of Assessment will have amounts that differ from what you originally reported. Alternatively, the CRA may even go back to a previously filed tax return and make changes, such as increasing the income or disallowing your expenses. You will then receive a Notice of Reassessment informing you that your tax owed has increased.

If you disagree with these Notices, you can dispute the CRA’s decision.

Notice of Objection:

The first step in the formal dispute resolution process is a Notice of Objection to the CRA. The Notice of Objection should describe:

  1. which Notice of Assessment or Reassessment you are objecting to,
  2. what you believe the issue to be, and
  3. how you believe you should have been assessed.

The Notice of Objection can be filed using a T400A Objection form and can be filed online through the CRA’s My Account platform, regular mail, or via fax.

The Notice of Objection must be generally filed within 90 days of receiving the Notice of Assessment or Reassessment. It is possible to extend the deadline by up to one year. However, this will require further explanation on your part as to why you did not object during the regular time frame. For this reason, we generally recommend obtaining the assistance of an experienced tax professional when objecting.

 

CRA Appeals Officer:

After receiving your Notice of Objection, your file will be assigned to an Appeals Officer within the CRA. This process can take several months. During this time, you will have the opportunity to make submissions, and discuss the file with the Officer to provide details and supporting documentation.

Supporting Documentation:

If the CRA does not agree with the amounts that you originally reported, chances are that they lack the evidence to back up your claims. If you wish to dispute your Notice of Assessment or Reassessment, it is essential to have the invoices, receipts and bank statements to support your objection.

If you think the CRA got it wrong on their Notice of Assessment or Reassessment, contact us today. We can help with filing an objection and remedying your tax situation.

Don’t hesitate to contact us today to set up a confidential consultation.

Notice of Objection

What is a CRA Notice of Objection?

A notice of objection is a dispute mechanism that a taxpayer can use to contest an assessment, reassessment, determination, or redetermination.

There are three important points to understand when filing a notice of objection:

  • How long do you have to file a Notice of Objection?

You have 90 days from the date on the assessment or reassessment notice received from the CRA to file a notice of objection. However, if you miss this window, you are still able to request an extension of time to file. This extension must be filed within one year of missing the 90-day window, or else you are no longer able to file a notice of objection.

If you file an extension, you must include the reasons why you failed to file your notice of objection on time.

  • How do you file a Notice of Objection?

If you are within the 90-day window to file your notice of objection, you can file your objection online through CRA’s My Account, or My Business Account. If you have an authorized representative, like an accountant or a tax lawyer, they can file the objection on your behalf. However, if you miss the 90-day window, you, or your authorized representative, must file your objection by mail.

  • What should you include in your Notice of Objection?

It is important to lay out as much relevant information as possible when filing a Notice of Objection. This can include why the assessment is wrong, and any argument you have to support your belief. Because every tax dispute is different, it is recommended that you seek the advice of an experienced professional before dealing with the CRA.

Want to find out how we can help, don’t hesitate to contact us today to set up a confidential consultation.

What is the CRA Appeals Division?

The Appeals Division provides for an impartial review of disputes brought to its attention through the filing of a Notice of Objection by the taxpayer.  The Appeals Division has the authority to either confirm, vary or vacate the auditor’s adjustments.  They are not there to uphold or defend the auditor’s work, rather they will gather and weigh the information on both sides of the dispute and arrive at a fair and equitable decision based on the established facts.

How long do I have to file a CRA Notice of Objection?

It is important to note that a Notice of Objection must be filed within 90 days of the date of the reassessment. When your Notice of Objection is filed, it will list and describe each issue requiring a decision, along with the reasons why your position is correct (or rather why the auditor is wrong), and the desired outcome.  If the 90-day NOO filing window has passed, taxpayers can request an extension of time to file their objection; however, is it preferable to file on time in order to avoid this additional administrative process.

What information is included in a CRA Notice of Objection?

As mentioned, your objection must clearly state each issue, what relief is being sought, and why the appeals officer should vacate the reassessment.  The more information and evidence that you can provide to support your case, the better. You may wish to include copies of invoices, receipts, letters, and other documents that support your case.

It’s critical to take the time to not only present detailed information, but package it within a properly argued and articulate defense.  Having the facts on your side is obviously important but presenting them in the most compelling and definitive way possible is the key to a successful outcome.

How do I win a Tax Dispute?

In the months following the submission of the objection, the CRA will likely ask you for additional information and documentation and conduct a comprehensive review of the issues in question. Due to the length and complexity of the process, many taxpayers find it difficult and cumbersome to manage alone.

The advice and assistance of experienced professionals is a crucial advantage that taxpayers should leverage to improve their chances of success when objecting to a CRA reassessment. Knowing how to properly analyze the audit report and working papers will uncover weaknesses to be attacked in the CRA’s position.  These are the skills and abilities that an accomplished and experienced tax professional will bring to the table when building a winning case for their client.

Want to find out how we can help, don’t hesitate to contact us today to set up a confidential consultation.

How long does it take to resolve an Objection?

The time required to resolve an objection is impacted by several variables.  The largest driver of turnaround time is the size of the CRA’s backlog of objections at any particular point in time. Within a few weeks of filing the objection, the CRA will send an acknowledgement letter to you confirming receipt of the objection and they will also indicate approximately how long it will take for your file to be assigned.  In general, it takes at least 6 to 9 months for the CRA to assign the objection to an appeals officer and then another 2 to 4 months to complete the process.

Can a collection action be paused?

Objections filed against a reassessment under the Income Tax Act will pause CRA collection action for the duration of the dispute, allowing taxpayers a reprieve from aggressive actions by the collector to enforce payment of the debt. However, interest continues to accumulate on the account throughout the course of the dispute.  Of course if your objection is fully successful, the tax plus any accrued interest will be reversed.  Please note that objections filed against HST reassessments, which are under the Excise Tax Act, will not have the same preventive impact on the ability of the CRA to collect the debt.  As such, HST related objections will also involve having to deal simultaneously with the collector while your dispute is outstanding. In that event, we also have former CRA collectors on staff who are experts in negotiating on your behalf to ensure that no legal action is taken against you while your objection is being resolved.

Tax Audit

What can trigger a CRA Audit?

CRA will be looking for certain indicators that will point to the likelihood that mistakes, omissions, or false statements may have been made on a return.

The CRA conducts thousands of audits each year. When selecting taxpayers for audit, the CRA will be looking for certain indicators that will point to the likelihood that mistakes, omissions, or false statements may have been made on a return. These indicators could include:

  • abnormally large or newly claimed business expenses;
  • losses being claimed in multiple tax years;
  • profit margins that are inconsistent with industry standards;
  • mistakes caught in any of your prior audits;
  • claiming expenses that are not consistent with your line of business;
  • reporting income that appears to be insufficient for your cost of living;

Taxpayers should be mindful of their responsibility to keep all books and records pertaining to at least the most recent six tax years, as this is the only way to substantiate the claims made on a return. If the CRA is requesting documentation to support the figures indicated on your returns, a failure to provide this information will likely lead to the denial of your claims.

What can I expect from a CRA Audit?

Typically, audits can be classified into three main stages: the initial information gathering stage, the analysis stage, and the proposal stage.

Information Gathering Stage

The CRA regularly audits individuals and businesses for potential errors on tax returns. Taxpayers undergoing an audit can expect the CRA to examine all relevant records and documents. These include your personal records, those of your spouse or family members, and business records such as ledgers, journals, invoices, contracts, and bank records. They may also interview you, your employees, or any individual who may have knowledge about the operations of your business. Quite often, the CRA can take advantage of inexperienced taxpayers by fishing for information unrelated to the audit in an attempt to expand its scope. Involving an experienced tax advisor at the onset of an audit can help provide important insight and guidance during the preliminary audit information gathering process.

Analysis Stage

Following the information gathering stage, the CRA auditor will take all books and records back to analyze and follow-up as needed with additional questions and requests. This analysis by the CRA typically takes several weeks and often extends to several months depending on the complexity of the audit issues.   Follow-ups are quite common and can be problematic for taxpayers who are unprepared for the nuances of tax law and dealing with the CRA. Trusted tax advisors who are familiar with CRA audits are very useful in navigating this potential minefield.

Proposal Letter Stage

Following the analysis stage of an audit, the CRA issues a proposal letter outlining their findings and adjustments. Taxpayers typically have 30 days to rebut the proposal letter, following which the audit is finalized and concluded. This is a critically important stage for taxpayers looking to resolve the matter quickly and easily. Matters unresolved at this stage will need to be disputed through formal objections which can delay resolution. Engaging an experienced tax advisor to respond to the proposal letter is crucial for taxpayers seeking a speedy and favourable resolution.

Want to find out how we can help, don’t hesitate to contact us today to set up a  confidential consultation.

Who can get audited by the Canada Revenue Agency?

Technically, the CRA can audit everyone. In practice, however, taxpayers are chosen based on a risk assessment. This means that you are more likely to be audited if there are indications of errors in your tax returns or non-compliance with tax obligations. For example, if you consistently report significant changes in your income, report large business losses or have not filed tax returns for several years, you may be more likely to get audited.

How does the CRA conduct an audit?

The audit process starts with a letter or a phone call advising you of the date, time and location of the audit and the years under examination. The audit is typically conducted at your home or at your place of business. However, some aspects of it may also be conducted at your representative’s office or at a CRA’s office.

The auditor has the right to review your records, borrow them and make copies. Records that are subject to examination by the auditor include the following:

  • information already available to the CRA such as filed tax returns,
  • business records such as ledgers, invoices, contracts,
  • personal records such as bank statements,
  • personal or business records of other individuals, and
  • adjustments made by your bookkeeper or accountant for tax purposes.

If the auditor examines your records and finds that your previous assessment was correct, the process ends there. Alternatively, if the auditor finds that you owe more tax or are entitled to a refund, you will receive a reassessment.

What should you do if you are being audited?

Taxpayers should cooperate with the CRA by supplying all the necessary information without volunteering information that is not required. If you have the documentation to support the amount that you have claimed, your accountant should be able to help you. However, if there are any inconsistencies in your returns, if you are missing supporting documentation or have other complications, you should hire a tax professional with experience in handling audits to help you navigate the audit process.

Want to find out how we can help, don’t hesitate to contact us today to set up a confidential consultation.

What common mistakes do taxpayers make during a CRA tax audit?

An audit by the CRA is a review of a taxpayer’s books and records to ensure that tax returns accurately reflect the taxes owed and all filing and payment obligations are being met. The following is a list of common mistakes made by taxpayers when dealing with a CRA audit.

  1. Ignoring the CRA: taxpayers sometimes believe that ignoring the CRA will make an audit disappear. This is an ill-advised tactic that only serves to harm the taxpayer. Ignoring the CRA does not make them go away. Instead, by ignoring their problems, taxpayers end up missing important deadlines, and forcing the CRA to audit based on assumptions. These assumptions often lead to grossly inaccurate reassessments that are never in the taxpayer’s favor.
  2. Providing unnecessary information: taxpayers often provide too much or unnecessary information during a CRA audit in an attempt to be cooperative and forthcoming. Unfortunately, they end up making admissions or disclosures that can complicate matters unnecessarily. It is important to be aware that CRA auditors are hunting for inconsistencies. Providing unnecessary information creates additional opportunities for the CRA to find errors and discrepancies. Taxpayers should strongly consider professional representation before corresponding with the CRA.
  3. Giving up: a CRA audit is a stressful and time-consuming process that can quickly become overwhelming. In order to end their frustration, taxpayers concede to the CRA and accept their reassessments at face value, even when they know the CRA is wrong. Giving up out of frustration should never be an option. Our tax system has an independent objections and appeals process that taxpayers should take advantage of with a professional representative. Having an independent review of the audit can often lead to reductions in the amount of taxes owed. In addition, the CRA frequently makes errors in audits that taxpayers never even realize. By giving up, taxpayers accept the CRA’s work – errors included. Hiring a professional to review the CRA’s work is a smart move that can save taxpayers thousands of dollars.

Taxpayers should seek professional representation immediately upon receiving any correspondence from the CRA. The professionals at Farber Tax Law can help provide guidance throughout the audit process and yield significant tax savings. Our team includes former CRA professionals and legal professionals, who work with you at every stage of the audit to resolve your tax problem quickly and efficiently.

Don’t hesitate to contact us today to set up a confidential consultation.

How far back can the CRA Audit?

Generally, the CRA can audit your tax return within three years from the date of your original notice of assessment.  After the 3 year time frame has passed, this is referred to as the “statute-barred” period whereby the CRA is “barred” from auditing that particular tax year. However, this period can be extended if the CRA believes that there is a misrepresentation due to negligence, carelessness or fraud/tax evasion.

What happens after the Audit?

Once an audit has concluded, the CRA will issue reassessments to reflect the adjustments previously discussed with the auditor.  In the case of adjustments related to unreported income – as just one example – the auditor may also assess a gross negligence penalty if he believes that fraud or negligence took place.  Penalties will add an additional 50% to the tax assessment.  In addition, interest charges will apply on any adjustments resulting from the reassessment and will be calculated back to the date that your return was originally assessed.

Taxpayers who disagree with the results of their audit can send a “Notice of Objection” to the Appeals Division of the CRA within 90 days of the reassessments in question.  Please contact us to learn more about how our team can assist with a notice of objection.

Don’t hesitate to contact us today to set up a confidential consultation.

CRA Penalties and Interest

What are CRA’s penalties?

There are a variety of penalties the CRA can impose on a taxpayer’s account. Some of the more common ones include:

  • Late filing penalty – this is a penalty for filing late tax returns. The penalty is 5% of your balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months.
  • Repeated failure to report income penalty – this is a penalty for repeatedly failing to report income within the past four years. The penalty is the lesser of 10% of the amount that you failed to report on your return or 50% of the difference between: the understated tax or overstated credits of the amount you failed to report, and the tax withheld from the amount you failed to report

False statements or omissions penalty – this is a discretionary penalty that may be levied against you if you, knowingly or under circumstances amounting to gross negligence, have made a false statement or omission on your tax return. The penalty is the greater of $100 or 50% of the understated tax and/or the overstated credits related to the false statement or omission.

What are gross negligence penalties?

Also known as the “false statements or omissions penalty”, this is a discretionary penalty that may be levied against you if you, knowingly or under circumstances amounting to gross negligence, have made a false statement or omission on your tax return. The penalty is the greater of $100 or 50% of the understated tax and/or the overstated credits related to the false statement or omission.

What are the different CRA’s interest rates?

There are various types of interest rates that varies depending on the matter at hand:

  • The interest rate charged on overdue taxes, Canada Pension Plan contributions, and employment insurance premiums will be 5%.
  • The interest rate to be paid on corporate taxpayer overpayments will be 1%.
  • The interest rate to be paid on non-corporate taxpayer overpayments will be 3%.
  • The interest rate used to calculate taxable benefits for employees and shareholders from interest free and low-interest loans will be 1%.
  • The interest rate for corporate taxpayers’ pertinent loans or indebtedness will be 4.52%.

CRA Collection and Enforcement Action

How can the CRA collect on my tax debt?

The CRA has extensive powers that enable them to collect on debts owed to them by taxpayers. The CRA must provide a taxpayer with legal warning, and an opportunity to pay the tax debt. However, if an acceptable arrangement cannot be made for payment, there are three primary tools the CRA will use to ensure that a taxpayer’s debts are paid:

  • Liens,
  • garnishments, and
  • bank accounts freeze.

A lien is a legal claim against a piece of property, usually real estate. After placing a lien on property, it is possible for the CRA to seize and sell the property. Any amounts gained from the sale of the property are then placed against the tax debt. If the earnings from the sale exceed the tax debt, the remainder is paid to the taxpayer. The existence of a lien will be communicated to a taxpayer in writing. It is usually used as a tool of last resort, after the CRA has attempted to contact the taxpayer numerous times.

Garnishments are tools used by the CRA to take funds directly from sources paid to the taxpayer. For example, the CRA can require that a portion of your wages be paid directly to them, bypassing the taxpayer entirely. The CRA can garnish wages, pensions, support payments, accounts receivable, and many other forms of payment to the taxpayer. This is a very common tool used by the CRA to reclaim tax debts.

A bank account freeze is an order by the CRA to a bank to freeze an account held by a taxpayer. The taxpayer will be unable to withdraw funds, or take any action using this account until the freeze is lifted. The bank is also required to seize all funds in a frozen account and remit them to the CRA to be applied as arrears payments to the associated tax debt. This tool is used to place pressure on a taxpayer, as the taxpayer will have no access to funds from a frozen bank account.

Does the CRA need a court order to garnish me?

The CRA does not need a court order to legally garnish wages. They have the power to notify your employer directly and require wage garnishments to begin immediately.

If the CRA has a lien on my house, can they take it away?

Typically, CRA’s internal policy is that it will not seize and sell a taxpayer’s home, if it will result in the taxpayer having no place to live. The CRA can, however, seize and sell any property that is not the Taxpayer’s primary residence including vacation property and/or investment property.

The CRA Taxpayer Relief Program (TPR)

What is the Taxpayer Relief Program (TPR)?

If you are struggling to pay your tax debt, you may have a remedy with the CRA’s Taxpayer Relief Provisions. Under subsection 220(3.1) of the Income Tax Act, the CRA can grant relief on penalties and interest on tax debt that arose from the past 10 years. In their Information Circular, the CRA has identified three situations where they are willing to grant relief.

Extraordinary Circumstances

First, the CRA may be willing to reduce your tax debt if “extraordinary circumstances” have occurred. The CRA has considered factors including postal strikes, natural disasters, serious illnesses, or deaths in your immediate family.

CRA Errors

Second, if actions of the CRA influenced your tax debt, you may qualify for taxpayer relief. For example, if you were misled by a CRA publication or the CRA delayed your file and you were assessed as a late filer, these are errors that are on the CRA, not you.

Financial Hardship

Third, if you can demonstrate an inability to pay or financial hardship, the CRA may grant you relief. The threshold for this condition is a severe one. You must demonstrate that the tax debt, primarily the interest, has accrued to such a point where it is impossible to pay off the debt, and still be able to provide basic necessities for yourself.

In special circumstances, the CRA has been willing to grant taxpayer relief even when it falls outside of these three general categories. These situations are very rare, and you should consider seeking legal advice before you decide to proceed with the request.

In any request, you must prove that the circumstance was beyond your control. You have to prove that it specifically interfered with your ability to comply with your tax obligations, such as filing your taxes or paying off your debts.

Personal trauma, medical conditions, natural disaster, or extreme financial hardship can be considered “extraordinary circumstances” for which the CRA can grant relief, by waiving or cancelling interest and penalties. Although not everyone qualifies, our team are experts and offer your best chance for success. We guide you through the process by giving you initial advice on strategy, submitting your formal application, and handling all subsequent correspondence with the CRA until you receive a decision.

If one of these extraordinary circumstances has occurred to you, your tax debt may be the last thing that you want to consider. Please contact us today and we can assist you with submitting a request to the CRA for taxpayer relief.

Don’t hesitate to contact us today to set up a confidential consultation.

Voluntary Disclosure Program (VDP)

What is the Voluntary Disclosure Program (VDP)?

If you have forgotten to file your tax returns for a previous year, or just recently found out that you made an error on a previous return, you may have a remedy with the Voluntary Disclosure Program.

Under subsection 220(3.1) of the Income Tax Act, you can bring the error to the CRA’s attention under the Voluntary Disclosure Program. In return, the CRA may decide to grant you relief on penalties and interest that would have otherwise been assessed against you.

In order to qualify for the program, you must meet five requirements:

First, the disclosure must be voluntary. If the CRA has already arbitrarily assessed you for a year where you did not file your taxes, or applied a penalty against an error you made, you will not qualify for the program. Likewise, if the CRA has already pursued action on the issue against you or a related party, like a business partner or your corporation, you may not qualify.

Second, the disclosure must be complete. The information you give to the CRA must be accurate, and you must identify and correct all the errors you made previously.

Third, you may only qualify for voluntary disclosure if there is a penalty involved, such as a late filing penalty or a gross negligence penalty. If you have not filed your taxes for a previous year, or you made an error on a previous return, you likely qualify for the program.

Fourth, the disclosure must contain information that is at least one year past due. For example, you cannot use voluntary disclosure to file a return alone for the previous year. However, if you were to use voluntary disclosure to file returns for multiple years, the CRA would consider waiving penalties and interest for all of the years you filed.

Finally, you must include payment of the estimated tax owing upon filing of the disclosure.  Preferably the payment would be made in full however the CRA will consider payment arrangements under certain circumstances.

The Voluntary Disclosure Program can be a great opportunity to correct previous errors without having penalties assessed against you. However, it is important to make sure that you qualify for the program and to be careful about what information you submit to CRA. If you believe that you could qualify or would like to submit a request to the CRA, please contact us today and we can assist you with that process.

Don’t hesitate to contact us today to set up a confidential consultation.

Why file a Voluntary Disclosure?

You may be asking yourself why should I file a voluntary disclosure? Simply put:  The VDP allows taxpayers to correct their tax returns without punitive consequences. Subsection 220(3.1) of the Income Tax Act and subsection 281.1(2) of the Excise Tax Act allows the CRA to grant relief from interest, penalties and criminal prosecution. This is the most effective and efficient way to address these types of tax issues.

 In order to be eligible for relief, the following five conditions must be satisfied:

  • The disclosure must be voluntary: taxpayers must have wholly initiated the disclosure before enforcement action has been initiated. Enforcement action is broadly defined by the CRA to include audits, requests, demands or requirements for information, or direct contact by CRA employees in respect of non-compliance. A disclosure will not be considered voluntary where a taxpayer was aware of enforcement action set to be commenced by the CRA.
  • The disclosure must be complete: the taxpayer’s disclosure must provide full and accurate facts and documentation for all tax years where they previously reported inaccurate or incomplete information. Accordingly, taxpayers cannot limit their disclosure to select errors or omissions or to specific tax years.
  • Your failure to properly report income is subject to a penalty: a taxpayer’s disclosure must involve the application of a penalty or the potential application of a penalty.
  • The information you will be disclosing is more than one year past due: a voluntary disclosure must include information that is at least one year past due. For example, an application involving only information from the 2019 taxation year will not be considered, however, an application involving information from 2017 through 2019 would be eligible.
  • The application must include payment of the estimated taxes owing: a voluntary disclosure must be submitted with payment of the estimated amounts owing. If the taxpayer cannot make payment of the estimated tax owing at the time of the VDP application, a payment arrangement may be requested subject to approval from the CRA.

How do I apply for the Voluntary Disclosure Program?

Once it is established that you are unaware of any audit or pending investigation into your tax returns, we will help you to make a formal voluntary disclosure. This requires that you be able to provide the accurate facts and accompanying documentation from all of your tax accounts for every year where there were previous errors or omissions.

Who is eligible for the Voluntary Disclosure Program?

It’s a common question that many people come to us with. Fortunately, any individual that can benefit from the VDP will usually be eligible.

In general, as long as you aren’t currently aware of an audit or other investigation that might uncover the inaccuracies in your filings, you can take advantage of the program.

What errors and omissions does the Voluntary Disclosure Program cover?

The VDP lets you escape penalties and prosecution for many types of tax omissions and errors. Some of the most common are the failure to file a tax return at all, not fully reporting your taxable income, or claiming a deduction based on ineligible expenses. However, there are also other violations eligible for relief such as penalties for not paying payroll taxes, or not reporting income earned abroad that is taxable in Canada.

Overall, the VDP allows you the opportunity to avoid all of the penalties and most of the interest related to late filings, non-filing or misrepresented information on your tax returns.

How long does the Voluntary Disclosure process take?

The process of completing a voluntary disclosure, from beginning to end, will typically take at least 1 year.  However, the crucial point is that your provisional protection under the program begins as soon as we file the initial application and will remain in place regardless of the ultimate length of the process.  This initial step can be completed shortly after the start of our engagement.

Tax Shelter

What is a Tax Shelter?

A tax shelter is an arrangement where the tax benefit received from paying into it is greater than the amount paid. The CRA has taken an aggressive stance against tax shelters, and they will rarely if ever, stand up to the scrutiny of the CRA or the courts.

An example of a tax shelter is what is known as a ‘gifting arrangement.’ A gifting arrangement will frequently promise to write a charitable receipt in excess of the amounts given to the organization.

These organizations will frequently hold themselves out as legitimate. It is possible that they will present letterhead from the CRA claiming to be certified by the government, and they have even been known to go so far as to provide letters allegedly signed by the Prime Minister. These are known as ‘mass market’ tax shelters, and they have never been found to comply with the Income Tax Act.

If a taxpayer attempts to take advantage of a tax shelter, the consequences can be very serious. The CRA will reassess anyone who claimed the benefit of this kind of arrangement and imposes retroactive interest and possibly penalties.

The CRA has the following to say as words of caution for anyone who may become involved with a tax shelter arrangement:

“Anyone considering entering into a tax shelter arrangement should obtain independent professional advice from a tax advisor before signing any documents. In addition, they should:

  • know who they are dealing with, and request the prospectus or offering memorandum and any other documents available in respect of the investment and carefully read them,
  • pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. Often, these opinions will tell the investor about the problems that can be expected and suggest that the investor obtain independent legal advice,
  • not rely on verbal assurances from the promoter or others get them in writing, and
  • ask the promoter for a copy of any advance income tax ruling provided by the CRA in respect of the investment. Read the ruling given and any exceptions in it.”

It is very important to be on the lookout for predatory arrangements like the gifting arrangements mentioned earlier. They can frequently appear legitimate and will even write charitable receipts. However, these arrangements are universally non-compliant with the Income Tax Act, and the consequences of becoming involved in such an arrangement can be very serious.

Director’s Liability

What is a director's liability?

Many taxpayers believe that a corporation’s tax debt is its own, and they cannot be held liable for amounts owed. Unfortunately, the Income Tax Act and the Excise Tax Act both grant the CRA the power to assess directors of a corporation for the amounts owed by the corporation.

In cases where CRA is unable to recover debts owed by a corporation, individuals who are or were directors can be held personally liable. Under the Director Liability provisions of the Income Tax Act and Excise Tax Act, corporate tax liabilities can be transferred from a corporate debtor to its directors. From there, the CRA can pursue legal action against the director. If you have received an assessment and are being held liable for corporate tax debts as a director, contact us. Our ex-CRA, legal, and accounting experts have over 70 years of combined experience in this area and can help you prepare a defense.

Who can be held liable?

Anyone who acts in the capacity of a director of a corporation can be assessed for director’s liability. This includes individuals who are named as directors on the corporate registry and anyone who acts as what is known as a ‘de facto’ director, or a director-in-fact. A de facto director is an individual who is not officially listed as a director on the corporate registry but acts in the capacity of a director. They may sign cheques on the corporation’s behalf, appear on official letterhead, or hold themselves out to be a director. It is very important to understand what role you are taking on for a corporation and to be sure you are not acting as a de facto director if you do not intend to be treated as a director.

How can you defend against a director’s liability assessment?

There are several defenses to a director’s liability assessment.

These defenses include:

  • due diligence,
  • showing that the individual was not a director, and
  • by having resigned two years before the assessment was issued.

If a director can show that they were duly diligent, then they can avoid liability. This defense includes showing that the director took steps to ensure that the tax arrears of the corporation would be paid on time and that they did everything a reasonable person would do to ensure that the corporation would not accrue tax arrears. This defense is very broad and captures a wide range of potential actions a director could take to ensure that the corporation they oversee will not accrue tax arrears.

In addition, if the individual can show they were not a director at the time the tax arrears arose, they can avoid liability, as a director’s liability assessment requires that the individual being assessed was a director at the time.

Finally, the CRA is incapable of levying a director’s liability assessment against any individual who ceased to be a director more than two years before the CRA assessed them. This is an important step to take if the individual is intending to leave the corporation for which they are a director.

Tax Litigation

Does Litigation mean going to court?

Very few tax appeals go to trial if the Appellant (i.e., you) is represented by skilled counsel. While some appeals involve all or nothing issues which require a decision from a Tax Court judge, the vast majority of tax appeals end in a compromise solution after each side has had the chance to build and communicate their cases through the various pre-trial steps. If it is clear from the evidence what the Tax Court would decide, the CRA and DOJ are generally willing to concede, as we would advise our clients to do as well. If it is genuinely uncertain, both sides usually benefit from a compromise settlement rather than rolling the dice.

What is a Notice of Appeal?

A Notice of Appeal is a formal document which must be filed with the Tax Court of Canada to start a tax appeal. You must file a notice of appeal within 90 days from the date of a ‘notice of reassessment’ or ‘notice of confirmation’ issues after dealing with the CRA Appeals Division. If you miss that deadline, you can seek an extension of up to one year.

The Notice of Appeal is incredibly important to your tax dispute, and you should not file one yourself without legal advice. A well-structured Notice of Appeal followed by a reasonable settlement offer supported by documents and legal analysis can often favourably resolve a Tax Court appeal without ever setting foot in a courtroom. By contrast, a poorly drafted Notice of Appeal can undermine your position from the beginning and increase your litigation costs substantially.

What is the difference between the Tax Court and the Federal Court?

Generally, if the disagreement with the CRA is over the amount of tax and penalties they have assessed, you should file a notice of appeal to the Tax Court of Canada. If the issue is a choice the CRA made, for example how it pursues collections or whether or not it should grant you relief from interest or penalties, then you should file for judicial review in the Federal Court. The key difference is that the Tax Court of Canada makes decisions based on ‘correctness’—if the CRA has the tax or penalties wrong it will order them to make adjustments. The Federal Court generally makes decisions based on ‘reasonableness’—was the CRA’s decision reasonable in the circumstances. If not, usually the Federal Court would order the CRA to reconsider its decision in light of its comments. The Federal Court will not usually order the CRA to make a different decision.

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