Be Aware of CRA Penalties & Interest

The proliferation of penalties that can and are now likely to be assessed by Canada Revenue Agency (CRA) without notice or discussion are severe and punishing. Below is just a small sample of common compliance issues and the resulting penalties as per the Canada Income Tax Act (ITA).

10 Common Reasons  & Likely Resulting Penalties
  1. Failure to provide information on a prescribed form, including SIN: $100 per failure
  2. Failure to file GST/HST return: Greater of $250 and 5% of the GST/HST outstanding
  3. Overstatement of non-refundable tax credits like the Child Tax Credit, Refundable Medical expenses and Investment Tax Credit: Liable to a penalty of the greater of $100 and 50% of tax payable
  4. Filing of initial late-filed income tax return: 5% on unpaid balance plus 1% each month late to a max.  of 12 months; can be imposed in addition to possible gross negligence penalties (below)
  5. Repeated failure to file (multiple years): 10% of the unpaid tax plus 2% for each complete month to a max. of 20 months; 50% per year, plus interest.
  6. ‘Gross Negligence Penalties’ (Apply when involved in making “a false statement or omission” “knowingly or under circumstances amounting to gross negligence”): Liable to a penalty of the greater of $100 and 50% of tax payable; can be imposed in addition to  late filing penalties
  7. Willful attempt to evade taxes: 50%-200% of taxes payable plus pay all taxes due
  8. Failure to file a tax return or to comply with a duty or obligation imposed by the ITA or the Regulations: $25 for each day of failure; min. $100; max. $2,500, $1,000 to $25,000 fine up to 12 months in jail!
  9. Repeated failure to report money required to be included in income: 20% of the income not reported comprising of 10% on the federal income tax and 10% of the provincial tax; where fraud suspected referral to the Enforcement Division
  10. Net worth assessment on unidentified deposits:Liable to a penalty of the greater of $100 and 50% of tax payable; can be imposed in addition to late filing penalties

Penalties are imposed not only for current alleged noncompliance but also to allow CRA to reach beyond the normal three-year reassessment of the prior year’s filed tax returns. There are specific and extremely narrow remedies that are available to dispute these arbitrary assessments.

Whatever your reasons are for late filing or omitted income you absolutely need to know:

  • What the tax liability actually is.
  • What the GST/HST issues are.
  • The likely application of penalties and interest.
  • Where the money is coming from to pay the tax debt.

With this information you can make better decisions as to what actions you will take to actually comply with filing tax returns. Your first move is to have someone experienced in late filing issues prepare draft returns for your review.

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Read about our Late Tax Filing Tax Service and/or Debt Relief Consulting

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7 Frequently Missed Opportunities for Claiming Expenses for Your Business

The exercise of claiming expenses is surprisingly subjective.  Here are some common occurrences that are frequently missed when claiming business expenses:

  1. Joint Ownership

Joint ownership (project, real estate) and partnerships can change the % of allocation of losses/gains among co-owners for any period at any time.  So, if the partners agree (more common in close relationships) and the partnership agreement allows (change the agreement if it does not), split the net income/losses as would benefit each partners’ tax position in line with their contribution of money and effort to the business or property.  This also affects each partner’s entitlements to profits/losses but in many instances the tax benefits make the argument a no-brainer.

  1. Employee Taxable Benefits

For corporations, watch for expenses paid by the company that create employee taxable benefits (especially to shareholders).  It is an exercise in itself to minimize tax on employee benefits.  Typical and costly taxable benefit items are standby charges and GST on standby charges for corporate owned vehicles, deemed interest and tax on ineligible loans, stock options, personal portion of reimbursement of expenses like travel or tuition fees, and club dues if 50% of activities are not business related.  There are many more benefits to review for tax consequences.

  1. Personal Expenses Incurred for Business

Deduct business expenses paid personally from net income of partnerships or co-mingled activities that don’t reimburse your additional business expenses.  Professional fees, dues, home office, travel, insurance, vehicle, promotion expenses come to mind.

  1. Corporate Vehicle

Instead of having a corporate vehicle resulting in CCA restrictions and standby charges, own the vehicle personally and have the company pay you a tax free (if allowance is reasonable) car allowance for business use.

  1. Computer Software

Deduct computer system software 100% (split the cost of hardware to capitalize and software to expense).

  1. Little Gems That Add Up

Some expenses don’t need to be prorated to comply with CRA regulations (e.g. parking for business use, minor expenses like coffee and donuts that are not meals etc…).

  1. Charges and Reimbursements

Review those charges to shareholder accounts or personal reimbursements to the company for expenses not allowed by company policy.  Some may be deductible.

Don’t think the expenses on CRA forms T2125 and T2032 are the only expenses allowed.

Talk with your tax professional

Many accountants can be rather hesitant to include on the tax return what they may consider to be inexact or obscure expenses. Professional liability, risk tolerance and civil penalties are serious concerns for your accountant. Be sure to clarify expenses with your accountant and they will be less reluctant to not include them.

There is no definition of a deductible expense; it depends on intention and circumstance. However, some types of expenditures are denied as tax deduction outright.

Discuss the risk of claiming expenses that may be disputed by CRA. Sometimes an argument with CRA is worth having. Just do not misrepresent the facts or claim obviously personal items.

Travel, vehicle, entertainment, home office, repairs vs. capital items – the grey areas of tax deductibility make the list very long.

TaxWatch Canada provides comprehensive tax reporting and tax planning services to :

  • Individuals
  • Sole-proprietors/Self – Employed
  • Partnerships
  • Small Business Corporations
  • Trusts
Contact us for more information