TAKING TAX FILING POSITIONS (TFP)
PERSONAL AND BUSINESS
For those that have tax burdens and circumstances that are impacting them personally – with special attention to small business operators – in a good way.
PART ONE (OF FIFTEEN)
OPENING SALVO
These tax commentaries are best taken as you would any medication – only when necessary. Unfortunately, circumstances these days have evolved into a familiar quest for more financial and tax therapy – measures that require various continuing efforts of facilitating intervention and self-preservation tactics and strategies – with an attitude. That is why TaxWatch Canada has created these scripts for your absolute informative financial amusement.
The Canadian tax system is systemic in our lives and quite problematic. If you think business is competitive - that environment pales like a mid-day shadow in comparison with the competing institutional, federal, provincial, municipal, and special interest organizations who have blatantly empowered themselves to squeeze (it’s not a hug) our financial wherewithal to despair. It is time we become more chatty with our financial souls that are being overwhelmed with competing interests - mostly in the form of some kind of taxes - and less forgiving to those that pay us no never mind.
What Are Tax Filing Positions (TFP)?
A TFP is a culmination of the decisions made to prepare, file and support your tax returns (and for small business - their related financial statements and reports and contracts). You are taking a position about what, how and when to file tax returns and deciding what that outcome means to you financially – in many ways.
These decisions that produce filing positions can be made alone at random or together with those that are affected (if you care) such as family and business partners, lenders, and assorted hangers-on - you know who they are. These issues of financial reporting (a tax return is a financial report many will be asking for), compliance, short and long term strategy, and risk assessments combine many elements as you will see in the next parts of this TFP proclamation of tax reduction. You will quickly discover that the insider tax information results in an attitude adjustment accompanied by marvelous (to your pocketbook) insight. The outcome derived from your now enhanced decision-making process ranks right up there with (re) choosing a life partner, a pet, a career, health care, and mindfulness providers. You get it or it will get you.
The ideal tax filing position considers not only the tax returns themselves but also consequences that will endure themselves to you for potentially many years to come. TFP’s are not just about the tax debt reduction – they are also about present and future qualifications for entitlements, ability to finance lifestyles, working together with personal and business partners (or not), consequences of risk-taking in an uncertain world, obtaining assistance from those who are looking out for you, and becoming tax situation intelligent - all part of life’s equations that need solutions. Getting an upper hand against those that would grasp your income and assets so curtly is the Canadian way. Believe this - your adversaries expect you to arrange your financial affairs and tax filing positions in your favour just as they are doing what they think they have to do.
Specific elements of the many tax filing positions will be evident in the upcoming other 14 parts (and counting) to this series. But why wait - here is a brief list of what tax filing positions will eventually influence:
Your ability to finance lines of credit, obtain mortgages, reduce debt, acquire new possessions and lifestyle choices, provide health maintenance (that includes mental stress levels which influences it all), assist others and finance your own battles.
Reducing the consequences of risky actions (that you may not even know are risky).
Keeping from harm those financial involvements that are blended with yours.
Providing a more stable future (happy tax positions = a happy life; because the opposite is certainly true).
What Is Not a Tax Filing Position
Here we go. This may not be an easy read. Tax filing positions are not:
Listening to any acquaintance that is providing advice off-the-cuff without insight or diligence.
Lacking in insight about what goes on between tax departments and financial institutions, tax preparers and their clients – the unforgiving real world.
Singular or combinations of misrepresentation, fraud, falsifying documents, lack of documents, doing what one assumes others are doing, un-defensible positions of not declaring income or claiming strictly personal items as business expenses, or being unaware of the many consequences that prevail regarding your TFP.
Ignoring the tax departments or creditors.
Ignoring routine best practices for your own asset protection and creditor proofing.
QUICK TAX TAKES
Discussions with your tax preparer:
This is a sensitive arena of professional engagement. Your tax filing positions are yours because it is your tax return. However, most of the time your tax preparer has to make these decisions for you. Candid discussions are needed with your tax preparer or accountant. Off tax season is the best time to discuss your risk tolerance (supporting tax filing positions that may be questioned or disagreeable to CRA but are just arguments vs what is likely to be offensive to CRA - whatever that involves).
Many tax professionals need your guidance and the facts to file what CRA considers aggressive tax filing positions (e.g. capital gain vs. income treatment, expenses vs. capitalization of expenditures, % of business use, % sharing of profits and losses with co-owners, common-law relationships - it’s a long list). If you do not have these “pleasantries” with the tax professional they will default to risk-averse (to them) filing decisions with potentially fewer tax savings – and yes, you will have to sign off and not hold the tax preparer responsible for CRA disputes – no firm will agree to that. Certainty is always the first sacrifice.
Remember that CRA is adept at assessing penalties against tax preparers for being ‘involved’ in tax filing positions CRA assumes are easier to attack. Refer to the new tax legislation regarding disclosure requirements that are effective April 2021 (targeted at larger businesses but still apply to all taxpayers).
Avoid late filing:
Catch up (if feasible) and keep current with your tax filings. The closest thing to the proverbial red flag is being late. The bells are released from their slumber as CRA starts thinking the worst. They know nothing of your current (mis)fortunes and will eventually assume you are a tax delinquent. Once they reach out they will reach in to make you pay for their troubles.
Tax payment arrangement necessities:
If you cannot afford to pay the tax debt right away – before a collection officer is assigned (usually more than 90 days from the tax assessment date - except for trust funds that do not enjoy this time delay) - make formal verbal payment arrangements followed up by a fax from you detailing the timing and amount and methods of payment with your new friend the tax collection officer before you pay anyone anything. You will not appease a tax collector with confusion of your intentions and a payment arrangement that is honoured and can be modified, for the most part. Pay GST/HST or payroll withholding accounts first above all or you will have dueling tax collectors from CRA after the same shallow pot.
TAX NIGHTMARE
A prominent legal firm specializing in tax disputes with CRA suffered onto itself recently. One of the lawyers just disappeared with no notice to anyone and no known reason. Many client retainers were lost and even worse, missed hard deadlines for notices of objection, tax court appeals and other filings resulted in astonishing damage to the clients because CRA did not give them a break on the missed deadlines. Yes, the CRA officials admitted they knew of this problem but they said they can do nothing to provide relief. The old if we were to do it for you, we have to do it for everyone else excuse (which they would not have done anyway). Tax reassessments were upheld and clients’ tax and GST/HST liabilities were payable. Scores of clients. Monitor your professional engagements, please.
Conclusion
Actually, the effort you are taking to learn about and instigate favourable tax filing positions is not as great as you might expect and the positive influence on cash, retained assets, and borrowing abilities will be substantial in the long term. Why? Because there are many ways to achieve better outcomes by choosing better tax filing positions and of course the clincher is that tax costs have risen to the point where gravity does not even seem to help keep them down – meaning tax savings realized are meaningful because taxes are so high in dollar terms.
Any fear, anxiety, indecision, or procrastination that goes hand in empty pocket with not providing adequate resources and attention to mitigating your tax burden is just going to satisfy your tax adversaries even more.
Upcoming TFP Content
Remember this content comes from a place soaked with inside information from experiences of astonishment, wonder, devoted thinking, and hard-won knife fights for clients. Reduce the financial violence in your life. Here is the future content that you can depend on to lookout for you. This publication respects everyone’s choice to take what positions they feel are correct for them - tax adversaries included.
What we are against is the profiling and punitive actions taken by authorities who do not even bother engaging in a real dialogue with those they perpetrate upon, with no personal consequences to them. They confront from a distance. That’s why you need a formal TFP – to defend yourself as well as save tax. 2 for 1. We are happy.
1 - Opening salvo
2 - Detailed positive and negative implications of TFP’s
3.1 to 3.5 - Tax legislation explained and CRA commentary from candid CRA officials
4 - Tax policy and administration - trying to explain a punitive, complex, frustrating system that has trust issues
5 - Income declarations and treatments that vary with the territory
6.1 to 6.6 - Expense claims generally plus detailed useful and supported positions for sensitive tax deductions – and some avoidance issues
7 - Lack of tax sensibilities and work-arounds
8 - Documentation and the facts that rule
9 - Time crunches, deadlines, favourable delay tactics
10 - Assessments, reassessments, objections, tax court appeals – the tax twilight zone
11 - Tax collection policies and internal practices, surviving the onslaught or not. Ignore at your peril
12 - Asset protection in its many forms, insolvency insight, force de majeure options
13 - Ownership means everything
14 - Tax professionals
15.1 and beyond – The TFP mission continues. Insights galore.
All parts of this series will be sprinkled with tax stories, quick tax takes, future planning options and yes there is such a beast called tax humour.
KL