Ever wanted to know what the CRA is looking for these days?
In the 2016 budget, the government announced that it would invest $444.4 million in the CRA over the next five years, which includes: “hiring additional auditors and specialists; developing robust business intelligence infrastructure, and increasing verification activities…”. The expected return on their investment? $2.6 billion CRA Budget.
The bottom line is there is a significant increase in CRA activity, and we’ve taken notice. A quick survey at our office revealed some the following CRA “projects” and other investigations that have significantly increased in frequency and scope just over the past summer. For example:
Payroll, HST, and Net-Worth Examinations: Payroll investigations, including taxable benefits and HST examinations, are on the rise and we have now seen the CRA requesting personal bank statements of corporate shareholders-directors. We have seen HST examinations evolve to payroll examinations and ultimately the threat of personal net worth audits (see our past blog ‘Beware the net worth assessment‘ ). Payroll and HST rules are complex, but very easy for the CRA to flag because they are often a function of simple calculations, and can be matched with other tax compliance. They are also at the centre of the underground economy.
Professional Fees: These are being flagged and examined by the CRA. Personal legal fees and other professional fees are not deductible, but did you know that big-ticket items such as legal fees for corporate restructuring may be considered capital in nature, and cannot be deductible depending on the circumstances?
RRSP Over-contributions: Individuals that have over contributed to their RRSPs are must file information returns and are liable for a very punitive tax of 1% of the over-contributed amount per month plus interest and penalties on unfiled or late returns. These over-contributions are often “fixed” in subsequent years but the balance accumulated in the prior year is never paid and T1-OVP returns are not filed. The CRA is sending assessments for the unfiled information returns.
Interest and carrying charges: Expenses related to earning investment income, such as interest paid on loans, is deductible. However, many other expenses are not. To complicate matters, some taxpayers do not keep good records and don’t segregate investment and personal loans. The CRA does not accept estimates and the taxpayer is expected not only to show documentation of the amount paid but also a demonstration of how these fees are directly related to their investments.
US Tax Filers: Under tax treaty rules, Canadian taxpayers may get a tax credit for income taxes paid on their US tax return. The CRA has now been requesting a copy of the US tax return and the US tax assessment from the IRS. Due to the deadline and timing differences of filing US returns, the information is not readily available to the taxpayer and the CRA will often deny the foreign tax credit.
Other CRA Tidbits
Waiting for a CRA Responses? Continue waiting: The turn-around for correspondence from CRA has increased significantly, especially in cases of appeals, objections, and complicated technical issues. It has even gotten harder to access the CRA by telephone. We have been told by CRA agents that some of the departments are consolidating or relocating and paperwork has been moved around, so please continue waiting.
E-filing and post assessment reviews: For the most part income tax returns are electronically filed without supporting documentation. Back when personal tax returns were paper-filed with supporting documentation, the CRA rarely asked for more information. But now, CRA is asking for everything – medical, donation, childcare receipts, tuition forms, and even your children’s birth certificates. If you get a post-assessment review, don’t panic. It’s the new normal, just make sure you keep your tax information handy.
The items described above can be managed by your Sloan Partners tax professional but here are some tips to remember:
- Ask for tax advice.
- Don’t speak to the CRA without out help.
- Don’t estimate your tax deductions, keep accurate records.
- Be proactive, if you’re not sure, ask us.
Roman Belenky, CPA, CGA, BAS, is a supervisor at Sloan Partners focusing on tax planning and compliance. Feel free to contact Roman firstname.lastname@example.org or call 416-665-7735 (ext. 227) for all of your tax planning needs.
Disclaimer: This article is intended for educational and informational purposes only. It is not intended in any way whatsoever to provide tax advice. The reader should be aware that legislative changes have been proposed and are subject to change. None of the persons involved in the preparation of this article accepts any responsibility for its contents or the consequences that arise from its use.