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.

Get Started Now

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

Or contact us for a free, no-obligation consultation:

1-877-800-9343

info@taxwatchcanada.com

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

Will your ABIL Claim be Successful?

Eight Common Situations for Successful Allowable Business Investment Loss (ABIL) Claims:

  1. If you bought shares in or loaned money to a CCPC (Canadian Controlled Private Corporation) and the corporation became insolvent and did not pay you back or you sold the shares for less than you paid for them.

 

  1. You invested directly in another person’s small business corporation (either as a shareholder, lender, partner, or joint venture participant) that failed outright or probably cannot repay the investment or loan in full when it becomes due.

 

  1. You own or co-own a company (corporation) that is struggling financially or has become inactive and there is a low probability of ever recovering personal funds of yours or others who have invested or loaned funds to it. Remember that an inactive company can potentially be eligible for a loss claim because it has become insolvent; it is not necessary for it to enter in official bankruptcy or dissolution proceedings.

 

  1. You were the victim of a scam or fraudulent business activity involving either real or phony business activities of a corporation resident in Canada. The business must have been active for one year.

 

  1. You guaranteed a loan to a small business and were compelled to pay the company creditors personally. It has been settled by case law that it is helpful, but not necessary, to charge a guarantee fee to maintain eligibility for such a loss. Chares A. Brown v. The Queen, FCTD, No T-2712-91(96 DTC 6091); Byram v. The Queen, 95 DTC 5069 Subsection 39(12) of the Act, deems amounts owing by the corporation to the taxpayer honouring the guarantee to be debt owing to the taxpayer by a small business corporation.

 

  1. You invested in an investment club and the club lost investments related to a Canadian Corporation.

 

  1. Your corporation is in the business of trading in speculative securities in large volumes. In Robert G. Crompton and Lenora Crompton v. The Queen, 96 DTC 1703, it was found that “the fact the gains and losses had been reported on capital account was not sufficient to justify the conclusion that its transactions were on capital account or that there was no active business. E Ltd., was therefore, a small business corporation…and the taxpayer was entitled to the allowable business investment loss”.

 

  1. You were personally assessed by CRA for the company’s withholding taxes (payroll taxes, GST/HST) you paid and your company was unable to pay you back for its tax obligations.

 

Note: You can also be assessed by CRA for unpaid corporate income taxes if you withdrew corporate funds personally (such as loans or dividends) that could have been used to pay the corporate tax debt.

Critical Factors

  • Is the Loss Acceptable to CRA?
    It is the current circumstance of default (the lack of likelihood of recovery) that is a crucial determining factor in whether a loss occurred or not. Convincing CRA that you indeed did not recover the amount you are claiming, is important. Items that will be reviewed by CRA include corporate tax filings, documentation available to prove the original investment, tax treatment of other co-owners or lenders, and so on. This is standard procedure.

 

  • The CCPC Must Take the Loss into Income
    The claiming of a personal loss related to a corporation usually requires the corporation to take the loss claim into income (debt forgiveness rules). However, there are usually unused losses in the corporation which are applied to this deemed corporate income. TaxWatch reviews the personal loss claim effect on the insolvent corporation’s tax position as well.

 

  • Timing is Crucial
    The precise year(s) that the loss is claimed is important. The higher your tax rate the higher your refund will be. Step one is to claim the loss and get it approved, then determine what years the loss will be applied (you can tell CRA which years to apply the loss to). The loss claim years must bring the taxable income to zero; you basically lose the value of personal exemptions that would normally be available.

 

  • Fees are Deductible
    Fees paid to a professional firm such as TaxWatch are tax deductible if the service involves tax appeals – which TaxWatch provides.

 

  • The 150% Difference
    Each tax dollar retrieved or saved is the same as having to earn at least 150% of any tax refund produced. For example – to end up with $100 after tax, you must earn $150 and then usually pay at least 33% tax. That is why retrieving tax is so worthwhile.

 

  • ABIL Claims Can Fail
    Loss claims submitted to CRA without proper representation fail because of lack of tax law knowledge and insight into the importance of proper procedures and documents required by CRA. Like everything else, you have to know the system.

How do I Claim an ABIL?

If your situation met the four qualifiers and any of the previous situations seem even remotely applicable, you have a good chance at a successful ABIL claim.

You have several choices for filing the claim:

  • On your own
  • Through your current accountant
  • Through TaxWatch Canada’s specialized ABIL Tax Refund Service. We are very experienced in this area and our service is quite affordable.

ABIL Tax Refund Service

Here is what our turnkey service offers:

  • Working with you to get the information and documentation needed.
  • Engaging with or communicating with CRA on your behalf starting with the initial loss claim submission and documenting your loss claim for response to CRA inquiries or questionnaires.
  • Evaluating the best filing position based on types, levels and timing of income that produces the best outcome (refund) for you.

We believe that valuing professional services based on billable hours expended on a client’s file does not provide the best value to clients in these loss claim situations. TaxWatch charges a flat fee for its services ranging from preparing the initial loss claim, to the notice of objection if the loss is initially denied. In fact, for these types of services involving CRA, a ‘billable hours’ process usually becomes too costly in several ways, most notably:

 

  • It reduces the client’s control and predictability over professional fees. Unanticipated challenges from any quarter may complicate your file and render your budgeted professional fees meaningless. Sooner or later, the client will face the difficult decision to either continue (and incur even higher fees with no increased certainty of intended outcome) or abandon the work because costs incurred to complete the task may outweigh or reduce the intended benefits.

 

  • It discourages clients (because of the billable hours potential cost) who otherwise want to claim losses because of the costs.

 

  • Clients understand that we have a practice that is motivated based on successful outcomes for clients; the manner in which we believe every business should be conducted.

 

  • We do not enter into engagements that we do not think have potential for succeeding, as discussed with our clients.

 

Read our previous post:

Learn more about our ABIL Service

Get Started Now

Contact us for a free evaluation:

info@taxwatchcanada.com

or

1-877-800-9343

What is an ABIL and do you Qualify for an ABIL?

If you lost money investing or loaning money to a Small Business Corporation (including your own business) you may be able to recover some of that loss as a tax refund.

Canadian tax laws are purposefully designed to reduce the risk of loss of investments or loans to small business corporations. This type of loss is called an Allowable Business Investment Loss (ABIL) which is a special type of capital loss.

It is important to note that ABILs are deductible against all other incomes in certain applicable tax years. Provided Canada Revenue Agency (CRA) has the proper proof and documentation of your loss and proper filing procedures are followed, the actual cash or tax saved could be 18% to 23% of the unrecovered amount invested or loaned depending on your marginal income tax rates. Occasionally, claims have already been made for a portion of losses by others.

Important Note:

A Small Business Corporation = a Canadian Controlled Private Corporation that uses all or substantially all of its assets in operating an active business in Canada. Usually the business has to have been active for a year but alternative compliance procedures may apply.

 WHAT IS AN ABIL?

An Allowable Business Investment Loss is a claim (deduction from income) on your personal tax return that allows an investor or lender in a Canadian Controlled Private Corporation (CCPC) to claim 50% of a “business investment loss”. If a CCPC is essentially insolvent, not carrying on business, or is expected to close down, then the taxpayer can be deemed to have suffered a loss, i.e. unrecovered investment or loan if elections are filed.

HOW DOES AN ABIL WORK?

Half of the actual losses (including certain personal costs forced on shareholders such as paying for GST/HST or payroll deductions and guarantees) are deductible against all other incomes in certain applicable tax years. Although most claims will be in the immediate preceding year or may possibly be established for the current year, many claims can apply up to three years back and forward 10 years. Insufficient documentation, if you do not make an effort to get the money back, loans to a family member’s company (you need to prove there was a business purpose in mind), will encourage CRA to deny a claim. In other words, where proper documentation is in place and qualifying factors are met, a successful result is more likely. The final piece is evaluating the best outcome (refund) based on types and levels of income.

New Development:

If you are not a shareholder and did not charge interest on the loan (not necessarily receive it), it will be difficult to prove that you had intention to earn income from the loan. The loss claim could be denied for this reason. However, if you are a shareholder, loans to the company do not have to bear interest because your expectation of income is from dividends. This argument to CRA has to be carefully crafted based on the supporting documentation available.

In order to qualify for an ABIL and a potential tax refund, several factors are involved. Follow the checklist below; ensuring each of the following criteria applies to your situation.

 

THE 4 QUALIFIERS

  1. Your loss was an investment or loan (shares or debt) to a private Canadian Corporation i.e. not listed on any publicly traded market;
  2. The private Canadian Corporation must be majority owned by Canadian residents;
  3. The business conducted by the small business corporation must be from a location in Canada and must be so called ‘active income’ (real estate rentals or portfolio investment firm is not active income). Holding companies may be eligible in certain circumstances; and
  4. Unless you are a shareholder in the company that you loaned funds to, interest has to be charged (not necessarily paid) on the loan.

All four qualifiers above must apply in order to claim the ABIL.

 

For more information about qualifying for the allowable business investment loss, read our next blog post:

Will your ABIL Claim be Successful?

Get Started

Find out about our ABIL claims service  here & contact us for a free consultation.

info@taxwatchcanada.com

or 1-877-800-9343

How to File Back Taxes in Canada

Haven’t filed personal or small business (T1), corporate income tax (T2), or GST/HST returns in several years or more?

Have you been contacted by or acted upon Canada Revenue Agency (CRA) including a Request to File or a Notional Assessment (of exaggerated estimated amounts owing just to get your attention)? Or do you want or need to become up to date with tax filings for various personal reasons?

You may feel a sense of urgency or despair to catch up on unfiled previous years’ taxes. That’s ok, it taxes the mind too.

You may be tempted or receive advice to just file on your own online or visit a tax-preparer not specialized in late-filed returns and CRA encounters. However, there are many factors to consider when filing multiple years’ tax returns. It’s not just about catching up; you want to carefully consider your options and likely encounters with CRA. You will want to reduce your tax liability as much as possible as well. An experienced firm specializing in late filing, such as TaxWatch Canada, can help you achieve the best possible outcome for you. We suggest the following steps:

Step 1: Gain more insight.

Contact us for a free, no-obligation consultation to discuss the severity of your situation and receive vital insight regarding how the tax system really works. For example – how far back do you need to file? What about your spouse or live-in partner? What is considered tax evasion? How does CRA collect amounts due? How much time does CRA take? Should you consider and/or do you qualify for Voluntary Disclosure (tax amnesty)?

Step 2: Gather your documents.

For personal returns, you will need any and all T-slips (such as T4s and T5s). If you are missing any slips or are unsure if you have them all, you can get them online using CRA’s ‘My account’ or you can call CRA to have copies sent to you. (For more info about missing tax information you can read our other blog post: How do I get my previous years T4 and/or other tax slips?) There are severe penalties charged for missing more than one tax slip. If you have any credits to claim such as tuition, medical and/or donations, you will need those records as well.

For self-employed or corporate taxes you will need a more elaborate gathering of income, expenses and related transactions. Some sort of bookkeeping program or use of spreadsheets can solve many documentation issues. We can also help determine if the use of estimates is appropriate in cases of missing records.

Do not spend a great deal of effort summarizing your transactions until you talk to us (or the firm you want to use). This is a time and cost saver because you need to know how to use what data you have, what else is needed and who (you or the firm) is going to do what.

TaxWatch can assist with bookkeeping and review financial records and transactions to complete returns and provide the backup if CRA questions the returns. Note: the probability of a CRA audit (even for multiple years) is low.

Step 3: Get the big picture.

Have draft returns prepared for all unfiled years. This provides perspective and helps in choosing options that are relevant. Consider in advance how to best approach CRA regarding the tax debt outcome before you file. Attention has to be paid to possible late filing penalties and accumulated interest. If there will be a considerable amount of tax debt, consider how the debt can be managed and how it may affect you in other aspects of your life, for example, tax debt can impact lenders or other creditors and/or those who depend on you, it may also affect your receipt of CPP, OAS, pensions or employment income.

Step 4: Finalize returns and submit to CRA.

Give yourself credit for getting it done and await receipt of your Notice(s) of Assessment.

Step 5: Review your assessments.

Your assessments should be matched to what was filed and reviewed for penalties and interest inclusions. Note that the liability for multiple years is accumulated on the assessment. Sometimes CRA does not assess all years at once. The most recent year will have the cumulative total owing; do not add all the years together – heart attacks will be reduced.

If there are any discrepancies on the assessments address them. (TaxWatch will review and contact CRA is necessary on your behalf if you have engaged us to file your returns).

Step 6: Handle the debt.

Payment arrangements with CRA can be made. However, you should not make promises to them that you know you can’t keep just to temporarily appease them.  CRA collections have rather rigid payment guidelines but must be addressed. Do not avoid CRA or misrepresent things and you will prevail.  If needed, TaxWatch can review the merits and consequences of alternative solutions to tax reduction, including bringing more certainty to outcomes, even if it means entering the world of insolvency professionals for debt consolidation or bankruptcy.

Find out the potential consequences of not filing returns in our blog post here

Get Started

 We realize you may be in a sensitive situation and need someone trustworthy to contact about your late filing situation. If you are serious about moving forward in some way we would be happy to hear from you and will be straightforward and transparent in helping you in the way you that suits your situation the best.

Call or e-mail (1-877-800-9343 / info@taxwatchcanada.com) for a free consultation with experienced and understanding professionals. In that time we are usually able to define your realistic options and CRA considerations that will lead to the best possible outcome for you. It is always manageable and much can be done.

All information is kept in the strictest confidence.

More information about our Late Tax Filing Service can be found here.