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CRA Tax Audit

What is a tax audit?

A tax audit is an examination by the CRA to ensure that taxpayers meet their tax-filing obligations.

What happens during a tax audit?

During a tax audit, the Canada Revenue Agency (CRA) review taxpayers' records along with other evidence and compare this to their returns. Straightforward issues may be resolved via a "review", where the CRA requests receipts or other proof-of-payment for expenses and credits claimed. Some full audits are "desk audits", where the CRA's employees review records, answers, and responses without visiting the taxpayer. Complex and large-dollar-value issues typically involve visits to the taxpayers premises involve visits to premises, interviews, and unfold over the course of months.

How do I know if the CRA is auditing me?

CRA informs taxpayers that they intend to audit them or review claims via letter--often called an "audit letter" or "notice of audit". The notice will usually outline the preliminary information that they require from you. The start of an audit is the best time to discuss these circumstances with a lawyer, as working with a lawyer can held avoid the need to file an objection or appeal.

What is a trust examination ?

A trust examination is a type of business audit that involves only taxes paid by or on behalf of other people and then held in trust for the government-payroll and HST. These generally occur where businesses miss filing deadlines, and in that case trust examiners will review the business' records and assess the taxpayer and assess failure-to-file penalties without their filing a return. Most are very straightforward and do not involve contentious issues; however, some may involve the CRA making significant changes, such as by re-characterizing independant contractors as employees.

What is a tax review?

Reviews could be described as "mini-audits", in which the CRA will review claims in a tax return. These often occur where individuals claim genrously-treated expenses and credits, such as employment expenses and foreign tax credits. They may take place before or after an initial assessment, which may result in delays to refunds. Reviews involve relatively junior employees, who have little discretion and take a highly restrictive view of the evidence that can substantiate an expense.

Is it best to have a lawyer assist with your tax audit?

Yes. Particularly in the course of formal audits, representation via a tax lawyer can help you explain your position, speak the CRA's language, . A tax lawyer will also know how to prepare the necessary legal submissions that include extensive legal arguments required to resolve the issues relating to your audit. Tax lawyers are trained both in substantive tax law and also in persuasive argumentation. The best time to obtain legal representation is when you first receive notice from the CRA that they intend to conduct an audit.

Voluntary Disclosure Program

What is the Voluntary Disclosure Program?

You may be able to come forward voluntary through the Voluntary Disclosure Program (VDP). This allows the taxpayer to file or correct a return before the CRA discovers the error or conducts an audit. Following a valid disclosure, the CRA agrees to forego criminal prosecution and will waive some or all of the penalties and may waive some interest if you are eligible for the program. For more about the VDP, click here (link to blog). https://www.kalfalaw.com/tax/voluntary-disclosure.

What are the circumstances in which the VDP is recommended?

The VDP is recommended where taxpayers have failed to file tax returns or made errors or omissions on your tax return and where the CRA has yet to undertake any . Many individuals are not up to date with their returns or their GST remittances, or fail to file disclosure forms, particularly as it relates to the ownership of foreign property, having foreign income, or holding shares in a foreign corporation.

How do I qualify for the Voluntary Disclosure Program?

To qualify for relief through the Voluntary Disclosure program, the application must be "voluntary", "complete", involve the potential application of a penalty, and involve information that is at least a year past due. Under the new VDP rules effective March 1, 2018, the disclosure must also accompany payment of the estimated tax owing.

I just received a phone call from the CRA about my tax return. Can I still apply for the Voluntary Disclosure Program?

No, you cannot. By “voluntary,” the CRA must not have contacted you regarding the improper filing or failure to disclose. The moment you receive a letter or call from the CRA regarding your failure to file correctly, you are disqualified from the program. It may be possible to recieve some interest or penalty relief via a taxpayer relief request, or you may be able to mitigate the situation by responding to an audit or arbitrary return effectively.

Do I need a tax lawyer to apply for the Voluntary Disclosure Program?

We strongly recommend that you consider working with a lawyer. A lawyer can first determine if you are eligible for the program, fill out the application indicating that the client is eligible for the program, coordinatae past returns and information disclosures, and coordinate payments for outstanding payments, if any. Lawyers can also assist by responding to CRA decisions that provide limited relief, and discussion with lawyers attract enhanhced confidentiality via solicitor-client privilege

Claiming Benefits and Credits

What form do I use for my personal taxes and benefits?

Individuals use form T1 to report their income, calculate taxes owing, and claim a number of benefits & credits.

What are some benefits that I can claim?

Canadian law offers a number of benefits that are claimed via the tax system. The most common include the Canada Child Benefit (CCB), a monthly payment made to families to help them with the cost of raising children under 18 years of age and the Ontario Trillium Benefit, a refundable tax credit to assist low-income families. For a full listing of tax benefits that you may be eligible for, please click here: https://www.canada.ca/en/services/taxes/child-and-family-benefits.html

What are some credits that I can claim?

The GST/HST tax credit is a tax-free quarterly payment that helps individuals and families with low and modest incomes offset all or part of the GST or HST that they pay.

What is the difference between a tax credit and tax benefit?

A "tax benefit" is a non-taxable amount paid to eligible taxpayers regardless if they do or don't have a tax liability.

A "tax credit" is the amount credited toward the tax liability that reduces the tax liability for eligible taxpayers. These may or may not be "refundable", meaning that if they reduce one's tax owing to less than 0, the government will pay this amount to the taxpayer.

What is the difference between a tax deduction and a tax credit?

Tax deductions reduce taxable income, which in turn reduces the tax owing. The amount that it reduces tax owing by will depend on one's tax bracket, which depends on one's income. In contrast, tax credits are applied directly against tax dollar-for-dollar, and so are not dependant on tax brackets.

What should I do if I have been denied tax benefits or credits?

You should contact a qualified tax lawyer as being denied benefits and credits can result in a large tax bill that you may not be able to pay. Where the CRA denis benefits, this may take effect retroactively, requiring you to repay that the CRA considers to have been overpayments.

Reducing Penalties and Interest

What happens to my tax bill if I pay late?

Where a taxpayer has not paid the full amount of an assessment or reassessment by the day it was due, the CRA will add interest to the principal amount. The interest rate varies; as of writing, it is 6% per annum, compounded daily, for most matters. These substantil rates have a punitive effect, and the government raised them to replace penalties for under-paying taxes.

Where will the CRA assess penalties?

In some cases, the CRA will also assess penalites, which almost always relate to either the failure to file returns or where the CRA considers taxpayers to have filed returns that include inaccuracies. This typically occurs where taxpayers file late, failure to file "information returns" such as foreign reporting forms or T4s, or after the CRA audits and considers the taxpayer to have intentionally misrepresented their circumstances to reduce their tax bill. This can substantially inflat

If you owe tax to the CRA, a collection officer will be assigned to your case. The officer may garnish your wages and bank account, place a lien on your home, seize physical property, deny you other government benefits by redirecting funds through a Requirement to Pay (RTP) or right of set-off, or hold a third party liable (such as a family member) to whom you have transferred money.

What can I do about penalties and interest?

The CRA has the discretion to waive (not charge in the first place) or cancel (remove retroactively) penalties and interest. It does not have the discretion to reduce the principal tax owing, except via the truly exceptional Remission Order. These remedies will not, however, remove the principal tax debt. In typically situations, if a taxpapyer cannot remove a tax balance via an objection or appeal, the only legal mechanism to reduce the principal debt is via a consumer or commercial proposal or a bankruptcy.

One program that the CRA administers under which it waive and cancels penalties and interest is the taxpayer relief program; the other primary avenue is the voluntary disclosure. Essentially, by filing a taxpayer relief request, the taxpayer explains that it is unfair for the government to pursue the penalties and interest owing in their circumstances. These may be requests for relief directly, or they may be requested via an appeals officer adjudicating a notice of objection. CRA may even waive interest and penalties themselves if an audit or objection takes an excessive amount of time to resolve. CRA's guidelines for providing relief specify the following grounds:

  1. CRA action or inaction (for instance, an unduly long audit process or adjournment request by the CRA's lawyers in tax court)
  2. Inability to Pay or Financial Hardship
  3. Extraordinary Circumstances (such as fire, flood, illness, or a death in the family)

For more about the Taxpayer Relief Program, click here (link to blog)

If you do not qualify for the taxpayer relief program or, if you do qualify, but cannot pay the principal tax amount, the only recourse may be to file for bankruptcy or file a consumer proposal.

Leaving and Returning to Canada

I am planning to leave Canada. What do I need to do so that I do not have to continue to pay taxes to the CRA.

If you are leaving Canada permanently, you will likely cease to be a Canadian resident for tax purposes. Before leaving, it is often sensible to complete and file a "residency determination request" using form NR73 to confirm with the CRA that they will not consider you a Canadian resident and ensure that you will not need to pay Canadian income taxes on your worldwide income. This is not always as simple as it sounds; where you retain Canadian ties, or if you spend a substantial amount of time in Canada, you may continue to be a Canadian tax resident, particularly where you retain a Canadian residence or family members. In a close case, it is sensible to work with a Canadian Tax Lawyer to navigate this process and ensure that you get the result you are looking for.

I am planning to return to Canada. Do I need to ensure Canadian residency for tax purposes?

If you are returning to Canada, you will want to be deemed a Canadian resident for tax purposes. This may have tax advantages for you as the Canadian tax rate may be lower than what you were paying previously. It is also possible that the country that you lived in will not require that you pay any tax if you are paying taxes in Canada. In doing so, you gain a considerable tax advantage.

I am a dual citizen. Will I have to pay dual taxes to two governments?

Yes, you may need to pay tax to two governments , depending on which countries you are refering to. The vast majority of countries assess tax on the basis of residency but not citizenship, with the United States being a very important exception. If you are in fact a tax resident of two countries, it is entirely possible that you will need to pay tax to both on your worldside income, with the caveart that in many cases offsetting foreign tax credits will be available. However, many copuntries have a tax treaty with Canada that fundamentally alters how tax residency works because of the presence of tie breaker rules.

Late or Unfiled Returns

What are the consequences of an unfiled return?

Where a taxpayer, HST registrant, or payroll employer misses a filing deadline, CRA will assess non-filing penalties on tax returns. These vary depending on the issue. If you have several years of outstanding returns, particularly if you do not respond to requests to file, the CRA may issue "arbitrary" Notice of Assessments that roughlu estimate income in a year, often include penalties, and allow the CRA to collect on the balance. These estimates tend to significantly overstate taxes owing, because the CRA assesses very few expenses, credits, or Input Tax Credits that offset HST.

What is a notice of assessement?

A Notice of Assessment is a statement sent by the CRA to taxpayers which details the amount of income tax that they owe. Most often, notices of assessment follow filed returns. However, where a taxpayer has not filed a return, the CRA may assess the year or period unilaterally, in which cases they will take a very limited view of the taxpayer's entitlement to expenses, benefits, and credits. The CRA cannot apply any of their collections powers without first sending a Notice of Assessment. Where a taxpayer files a return, the CRA generally takes the return as filed; however, they may make smaller changes without consulting the Taxpayer and may conduct a review of the claims prior to assessing (see above)

what is a notice of re-assessement?

A Notice of Ressessment is a second statement sent by the CRA that alters the results of the initial assessment. These typically follow either an audit/review or request from the taxpayer themselves to adjust the return.

Is there anything I can do to get ahead of the problem before I receive a notice of assessment?

Yes. You may be able to file a Voluntary Disclosure-see the discussion below.

Corporate Tax Deductions and Compliance

As a business owner, what form do I fill out so that my employees can claim employment expenses?

Employers fill out Form T2200 that confirms to the CRA that the employee satisfies the restrictive statutory conditions for claiming employment expenses. While this does not guarantee that the CRA will agree, CRA can and will deny any employment expenses where the Taxpayer does not provide form T2200 upon request.

As a business owner and sole proprietor, what form do I fill out to report my income and expenses?

Self-employed taxpayers use Form T2125 is to report business or professional income and expenses

As a business owner of a corporation, what form do I fill out to report my income and expenses?

Corporations report income using a T2 Income Tax Return. These returns are substantially more complex than individual return, and should almost always be prepared by a professional.

What form do my employees use to report their business expenses?

Employees claim employment expenses using form T2200, which they include in their income tax return.

What form do I need to prepare so that my employees can report their income?

Employers prepare and issue T4s to employees and the government, which is a statement setting out what salaried employees have earned before deductions, as well as an what has been deducted in CPP, EI, etc.

What form do I need to prepare so that my independent contractors can report their income?

Many business that pay certain independent contractors on a regular basis need to issue T4As, which are similar to T4s but because contractors run their own businesses, they assume many of the tax-witholding and -remittance obligations.

Resolving Tax Disputes

Why might a tax dispute with the CRA occur?

Tax disputes with the CRA occur where the CRA challenges, or considers challenging, a statement or omission in a person's taxes. That person may then contest the CRA's conclusion. The dispute typically begin with an audit, review, arbitrary assessment, or reassessment, and may continue under the CRA's internal procedure or into the courts.

What is a notice of assessement?

A Notice of Assessment is a statement sent by the CRA to taxpayers explaining tax owing for a certain period, and may be issued whether or not an individual has filed a return.

What is a notice of re-assessment?

A Notice of Reassessment is a second statement sent by the CRA which changes the CRA’s initial assessment. This may be as a result of an individual amending their return or as a result of an audit and may increase or reduce the tax owing.

When is a Notice of Assessment Issued?

The CRA will issue notices of assessment after people file their tax returns for a period. Typically, the CRA will accept the claims in returns when sending the initial assessment, but they may change some matters unilaterally or refrain from assessing until they conduct a review.

CRA may issue an assessment "arbitrarily", that is, without the filing of a return, typically when a taxpayer has failed to file taxes in a number of years.

When is a notice of re-assessment issued?

A Notice of Reassessment can be issued in a variety of circumstances. Reassessments typically follow the conclusion of an audit, particularly where taxpayers are not represented. The CRA may even issue Reassessment without a formal audit or even contacting you, although this is somewhat rare. Where taxpayers amend their own returns to reduce the balance owing, CRA will typically send a reassessment.

What is a third party assessment for director's liability?

A third party assessment for director's liability can occur when the director of a corporation is assessed together with the corporation for amounts owing that relate to amounts held in trust for the government. The most common issues are HST and employees' payroll deductions, along with related interest and penalties.

What is a "derivative assessment"?

Section 160 of the Income Tax and Section 325 of the Excise Tax Act allow the government to "chase" taxes owing between taxpayers where those taxpayers transfer property to others within arm's length of themselves, such as to businesses they operate or family members.

What should I do if disagree with the the CRA's notice of assessment or re-assessment?

If you dispute the CRA's decision in the Notice of Assessment or Reassessment, you can file a Notice of Objection. Notices of Objection formally contest an assessment and initiate the government's internal appeals procedure. For most issues, taxpayers have 90 days to object to an assessment, although there are some exceptions (notably for payroll issues). In most instances, taxpayers can request an extension within one-year after the expiry of the 90-day objection period. Along with audits, Notices of Objection are the bread-and-butter of tax disputes, and are necessary preconditions of appeals to the Courts. Tax dispute lawyers prepare notices of objection as a matter of course, and will combine supporting documents, your explanations, and legal submissions to convince the CRA's officer that the initial reassessment was incorrect. After 90 days, if the CRA has sent you a decision, you may be able to appeal directly to the tax court of Canada.

What if I disagree with the CRA's decision to my Notice of Objection?

If, after you send a notice of objection, the CRA either confirms the reassessment or sends an additional reassessment, you have a right to appeal to the Tax Court of Canada within 90 days. After this, you may still be able to appeal by including with your appeal an Application for an Extension of Time within up to one year from the expiry of this 90-day period. This modestly increases the cost of drafting an appeal and involves some risk, depending on the circumstances, of the CRA and their lawyers contesting the application to extend, which increases the cost substantially and may prevent you from appealing.

A Notice of Appeal to the Tax Court of Canada must be filed within 90 days from the date of the issuance of the decision of the internal CRA appeal (also called an objection). If you miss this deadline, there are mechanisms to file an Application for an Extension of Time to allow an additional 12 months to file the Tax Court Appeal. For more information about filing an appeal to the Tax Court of Canada, click here (https://www.kalfalaw.com/tax/tax-litigation/tax-court-of-canada/)

CRA Compliance/Tax Litigation

I believe that the CRA acted unreasonably in applying the rules of the Income Tax Act. Is there anything I can do?

Typically, the conduct of the CRA has little impact on Canadians' tax payable. If, say, an auditor overestimated a taxpayers' income, the Courts and appeals expect taxpayers to respond by demonstrating that they earned less income in the year, not merely that the auditor's process was flawed. However, in limited circumstances, CRA procedures may be subject to judicial review, whereby unfair procedures or unreasonable decisions can be overturned in the Federal Court. This primarily applies to discretionary decision involving interest relief and similar programs, but can extend to collections action and some unusual circumstances where an appeal to the Tax Court of Canada is not available. For minor issues and disputes for CRA personnel, one can file a "service-related complaint", formally notifying the CRA of improper conduct.

What is a judicial review?

Judicial Review is a broad legal remedy whereby Canadian superior courts review the conduct or decisions of government officials to determine whether they have acted within the directionary mandate prescribed by legislation. In the tax context, reviewable discretion is somewhat unusual. Judicial Review of most decisions consists of a review of the "reasonableness" of a discretionary decision, but can also extend to whether it was conducted fairly or sufficiently quickly.

What are some examples of judicially-reviewable actions of the CRA?

In the tax context, relief may be able via judicial review where the government refuses to assess a tax return, denies a request to waive interest without regard to the record or in a discriminatory fashion, or where the government allows its agents to improperly treat administrative guidelines as binding. It is not available where a taxpayer disagrees with the result of an audit or objection.

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