Are you Really, Really, Behind on your taxes?

JUST ASKING... JUST ANSWERING... Your questions answered

Can They Assess Me Without a Tax Return?
Dear Neel,

I haven’t filed my returns for over five years, and the other day I got assessments in the mail for three years that I know are wrong. They are trying to tell me that I earned more in my business than I did . What’s my next step? Can they really do this even though it’s inaccurate? I refuse to believe CRA has this much power.  — Paula C.

Dear Paula,
Elsewhere in your letter you indicated that you are self-employed and therefore entitled to certain deductions, but that legitimate deductions like donations and alimony support were not considered. Unfortunately, CRA does indeed have the right to “arbitrarily” assess you based on the information they have, and the assessment becomes enforceable if you do not file a dispute notice. The law changes from year to year, and you should consult with a tax professional if you are unsure how to resolve the outstanding balance with CRA. Since you have your own small business, our Small Business Tax Booklet with Corporate Checklist will help you compile your information. You did not mention why you were behind. If it’s more than just procrastination, you should consider making an application for relief of penalties and interest under the Fairness Act. However, if you still have a balance owing, the Taxpayer Bill of Rights does not exempt you from paying, and arrangements must be made accordingly. Good luck!

Are You Really Being Picked On By the Taxman?
Dear Neel,

I have never filed a tax return in my life. I’m self-employed, so I can’t even begin to imagine how much I owe. I want to retire next year, and I just found out that my Canada Pension benefits depend on my tax returns being filed from day one. I want to get this all cleared up, but CRA has informed me that I can file back only up to ten years. I'm not sure if this is a good thing, because I’d like to get as much pension as possible. Your help is much needed!  — Terry B.

Dear Terry,
CRA passed a law a few years ago that unfiled returns that are not under enforcement will be considered “status barred,” which pretty much confirms your conversation with CRA that they won’t accept older returns. Because you will owe money, you can see if they will reconsider accepting these returns under the Voluntary Disclosure Program, which allows a taxpayer to request that all penalties and interest be waived if their application is successful. This would mean several thousands of dollars in tax-free relief for you, but it does not exempt you from the actual taxes owed. Under the program, you can remit CPP premiums, which will boost your pension entitlement. You are still entitled to claim all legitimate deductions in the operation of your business, so download our Small Business Tax Booklet to help you collect your information—and consider getting a professional to assist in the whole process.

Late Filers — How Far Back Do You Go?
Dear Neel,

I’m so disillusioned with the whole Canadian tax system. I work with a bunch of guys who haven’t filed in years, and they laugh about it! Meanwhile, if I’m even two months behind, I get a “demand to file” notice without fail every year. Can I do something about this? How is it some people can get away with this while others can’t? It’s seems so unfair, and I can’t help thinking someone is calling the snitch line on me!  — Yan H.

Dear Yan,
I’m a little confused but also empathetic to your situation. While I don’t know how the system works to track down late filers, you have to realize that CRA is doing the right thing by requesting that you file on time, especially if you owe them money. If your facts are correct, your colleagues should know that CRA is getting tougher by the year on late filers. It’s also possible that CRA owes them money but they are not worth pursuing for the time being. Whatever the case, my understanding is that CRA does not have a 100% foolproof method for finding every delinquent taxpayer. This is especially true for the self-employed, those who have stopped working or moved out of the country, and the deceased. The enforcement division will eventually catch up to almost all of them. If there’s money owing, the penalties and interest can be massive, not to mention the possibility of imprisonment, etc. Many Canadians do in fact contact the investigations office because they are just as disheartened as you are about others not complying. My suggestion is, don’t follow your friends’ example. File your return so you can relax. If you need help, look up a professional online or check out our booklet, 10 Reasons Taxpayers Hire a Professional. The cost will be nominal compared to what you will save. All the best!

Severance, RRSPs, and Career Transitions
Dear Neel,

After many years at one of the “Big Three” car makers, I’ve decided to take a buyout of six months’ pay and leave Windsor, Ontario, for the West. My wife and I are very nervous because we are in our early fifties, but we don’t feel there’s much hope left here, given the state of the auto industry and economy in general. We’ll be lucky to get $50,000 cash out of our house because the market is so depressed, and wonder if we should roll the severance into an RRSP to save taxes in 2010. I’m sure we’ll find work in Alberta, but what and how much is still to be determined. Your input is much appreciated, as many here are in the same situation!  — Bill G.

Dear Bill,
I commend you and your wife for having the courage to do something about your situation. Many experts agree that if the auto industry does survive, it will not be like its prosperous past, and therefore communities like Windsor will not thrive for years as they once did. Rolling your severance into an RRSP does in fact save tax dollars, but given that you and your wife are entering uncertain territory, your first priority should be your cash flow while you search for work, housing, etc. You should retain the services of a good financial planner who is familiar with the tax rules and can help you with the transition. Alberta has an overall lower tax burden, which is good, but a big move like this is quite an adjustment, and that usually eats up cash. I would suggest making a very small RRSP rollover to start, as conservative planners always look to the “worst case scenario” to make sure you’re not strapped. Deregistering RRSPs down the road costs tax dollars and defeats the purpose of contributing in the first place. Also, in your new place, you should consult a career counselor and decide what you want to do. While Alberta remains an employer-leader, keep in mind that this can change. A good coach will weigh the pros and cons of a new venture over the long haul. I wish you only the best!

Behind and Can’t Pay?
Dear Neel,

I’m having too many nightmares each tax season because I haven’t filed in three years. I’m a self-employed lawyer, and I’m sure I owe at least $100,000 in overdue taxes. I’m too embarrassed to deal with this, and although CRA hasn’t contacted me, I’m sure one day the inevitable will happen and I don’t think I can pay. Am I as alone as I feel? How would you handle this?  — Arnold P.

Dear Arnold,
You are by no means alone, as thousands of Canadians face a similar situation, check out our handout 10 Reasons People Don’t File a Tax Return. CRA has a structure set up to deal with this called the Voluntary Disclosures Program. Basically, a taxpayer can apply to have all penalties and interest waived if their application is successful, which would mean several thousand dollars in tax relief for you. While the system does not exempt you from the actual taxes owed, you are still entitled to claim all legitimate deductions to earn your living. Our Small Business Tax Booklet will help you put your information together. Even so, you should consider getting a professional to do this for you, because it can be quite an involved process and the CRA can disqualify your request at any time if they don’t feel you have complied. Take a look at our handout 10 Reasons Taxpayers Hire a Professional.

“I Owe, I Owe, So Off to Work I Go”— Or Not!
Dear Neel,

I’m totally paralyzed that CRA says I owe them over half a million dollars because I have not filed my personal and corporate returns in over seven years. Some people I’ve talked to say I should declare bankruptcy, while others recommend that I file and try to pay them off. I’d appreciate your commentary as I have no idea what to do and have even become terrified of answering the phone!  — Conner D.

Dear Conner,
Bankruptcy is not always the answer, and while some people choose it when they’re at the end of their rope, very few of my clients have had to use it because there are lots of options. The first thing you definitely have to do is get your records in order and file the returns. You can do this yourself, but with the potential of half a million owing I would definitely recommend a tax professional. The fees you will pay will not even compare to what the pro is likely to save you. Also, a pro will be able to prepare your returns in your interest while conforming to the rules for each year, and that’s important given that there is a good chance CRA will audit you. Arbitrary assessments are usually high in favour of the CRA, so once you receive the correct notice of assessments, the assessed balances are still due with appropriate penalties/interest until settled. At this point you can accept them and pay or, if you disagree, consider the appeals process within 90 days of the assessments. If you had health or other personal problems preventing you from filing on time, you may qualify for interest/penalty relief under the fairness rules. The recent Taxpayer’s Bill of Rights does in fact give the taxpayer broader rights, but it in no way exempts the taxpayer from their legal obligation after the dust settles. If your debt is sizable at the end of the day, speak to a credit councilor, as they know best how to avoid bankruptcy. They can even recommend a few mortgage brokers if you own your home. There are some brokers who specialize in this field, and if your credit score is good outside of your taxes owing, you stand a good chance of obtaining financing to pay CRA off/down. If you still have a balance owing after that, a councilor is the best to guide you and can arrange a payment plan. I wish you the very best!

“Dormant Debt” Does Not Equal “Written Off” Tax Balance with CRA
Dear Neel,

I recently filed several years’ tax returns because I was afraid of an outstanding tax balance of $1,200 with CRA that I could not pay five years ago. When I enquired about this debt, the agent said that it had gone “dormant,” which I assumed meant they had given up and written it off. I was expecting about $3,000 back but, to my surprise, got only a couple of hundred. The rest was applied to the debt and penalties/interest owing for over five years. Can they do this if the account is “dormant”? I have thought about appealing but have heard different stories.  — Jan D.

Dear Jan,
Perhaps a few definitions are in order here. The average person may understand “dormant” to mean “given up and written off,” but unfortunately they would only be half right. The word “dormant” means “inactive,” and the collection department may in fact suspend collection activities if you have gone missing in action. However, the Tax Act is clear that assessed balances are still due with appropriate penalties/ interest until settled. Also, the appeals process is only applicable if you are disputing the amount you legitimately owe, and you must begin the process within 90 days of the assessment. Elsewhere in your letter, you indicated you had several health and personal problems. These may qualify you for interest/ penalty relief under the fairness provisions. The recent Taxpayer’s Bill of Rights gives the taxpayer a broader scope of rights from unfair or unprofessional service from the CRA, but it in no way exempts the taxpayer from their legal obligation after the dust has settled. Your tax professional should be able to steer you the right way to avoid further misunderstandings. Good luck!

Surveillance — How Far Do You Go?
Dear Neel,

I have had your articles on my desk for five years and am finally contacting you hoping you can help. In 2006, I signed up for the CRA epass as per your suggestion and authorized my accountant so that he could look after my tax affairs online. Then in 2007 I moved and have used a different accountant ever since. I never gave the first accountant another thought until I decided to check my account online. To my shock, it turns out that the first accountant has been monitoring my taxes, as the system allows you to track who has been watching you. Naturally I removed him as my representative, but my question is, how could I have prevented this? I honestly don’t know everything I’m signing when the job’s done and trust the professional’s opinion, but I felt my privacy was invaded!   — John C.

Dear John,
I get many inquiries about confidentiality, especially about the taxpayer’s privacy and their tax professional, and I will do my best to give you practical insight. It sure seems that the four walls of today are closing in more than at any other time in history. I remind my clients to be astute about who has access to their information (not just in taxes). It’s possible that your first accountant was doing a routine quality check of his accounts after the tax season, as many of us do internal audits for compliance purposes. If that was the case, it’s understandable why he went online—this is usually part of the standard engagement process. The CRA sends confirmation letters once a T1013-Authorization form is signed by the client, but after that it’s your responsibility whether you want to keep the accountant on. The professional in the meantime can legally see and even change your file at any time for any reason. You should get your own e-pass and see who has access at least once a year. The bottom line is, it’s your responsibility to see who is probing!

Stung by a scam! Now what?
Dear Neel,

I am furious and frustrated with CRA for reassessing me for donations I made to an organization that was a registered charity. This organization promised me large returns on my donations. This seemed odd, so I asked my accountant about it three years ago. She said that anything with a registered charity number qualifies for a tax deduction, but CRA is now saying it doesn’t. Isn’t this unfair? I’m on the hook for well over $10,000 and can’t imagine I’m the only one!  — Terry B

Dear Terry,
Elsewhere in your letter, you mentioned that this particular organization has since been busted and is out of business, so you would likely have no recourse against them. CRA announced last summer that they were investigating these organizations, and it turned out a lot of them were scams and the donors/taxpayers ended up in the same situation as you. You are entitled to appeal your reassessments within 90 days through the new Taxpayer Bill of Rights and Taxpayers’ Ombudsman. However, the Income Tax Act says that all filed returns are the responsibility of the individual, no matter what. That being the case, I am not surprised that there have been no successful appeals. CRA is estimating that they will recover over $1 billion, which is a strong incentive for them to keep going. In our earlier newsletters and bulletins, I have repeatedly warned all to stay away from these deals, because “if it sounds too good to be true, it probably is!” I wish I had better news for you, but it turns out to be a lost cause. Be prepared to pay them back. Good luck!

Reducing the Annual Tax Bill
Dear Neel,

I make over $120,000 per year as a distribution manager and am getting married next year. My return is not complicated and I do some RRSPs, but I pay as much as $8,000 extra each year and my accountant can’t do anything more for me. He suggested having more tax taken off at source and getting a financial planner. I am open to anything, as I need to somehow stop the bleeding!  — Ken S.

Dear Ken,
Ouch, that’s quite a bit to swallow each year. I agree with your accountant on both points. Our handout 10 Ways to Cut Your Tax Bill will give you a few more tips, but also check out Derek Foster’s book The Lazy Investor, which explains tax-friendly investments such as dividends. Your financial planner should have a list of mutual funds that offer this product. Also, if your employer is not taking more off, CRA will usually put you on an installment plan to reduce such a high balance owing. I trust this will help!

Investments Outside Canada
Dear Neel,

I buy and sell stocks in the U.S. and am wondering how I report this, as I had a slight profit. Am I going to get double taxed? I appreciate any help!  — Kelly C.

Dear Kelly,
Great question, and one that I’m sure many readers wonder about. Canada has several tax treaties that try to prevent exactly what you’re talking about. I am glad to report that with the U.S., you simply have to fill out a non-resident U.S. return and whatever taxes you paid there will be credited on your Canadian return, which more or less eliminates double taxing. Elsewhere in your letter, you mentioned you had other overseas investments. I am by no means an expert on this, and you should consult a specialist with overseas tax experience. Unfortunately, the Government of Canada does not have agreements with every country, and you may in fact be double taxed in some cases. You can always contact the international tax office at 1-800- 267-5177. Good luck!

Gains and Losses in an RRSP
Dear Neel,

I’ve had an RRSP for many years now and recently took a large loss with the stock market meltdown, especially in the trust funds. Is there any way I can write off some of those losses on my taxes? I realize gains are tax-free, but I wonder if there is some loophole on the way down?  — Will E.

Dear Will,
Unfortunately, whatever is in the RRSP will be treated using all the rules of the RRSP until it is deemed or cashed. You can check out CRA’s RRSP web page, but to answer your question, there is no tax relief for a qualified investment within the RRSP that loses money. For other investment strategies that do meet the criteria for tax relief, check out our Investment Tax Booklet. Hope this clarifies things!

Missing Property
Dear Neel,

I am in the home renovation business, and recently over $1,000 worth of tools went missing out of my backyard. I can’t prove it, but I think they were stolen. Can I still write this off? I heard in the U.S. you can actually do this?  — Pete L.

Dear Pete,
You heard correctly that in the U.S. the IRS actually allows a deduction for stolen property, both personal and business. However, this is not the case in Canada. You can look up details for a business on the CRA business web site, but I suggest you get a proper police report with the estimated value of loss. Your tax pro should be able to claim a "Terminal Loss" of the assets less any insurance reimbursement and claimed depreciation. Unfortunately, there is no tax relief for personal losses like this. Hope this helps!

Using Business Losses
Dear Neel,

This was my first year in business full-time, and I actually showed a net loss for income tax purposes. In the previous year, I also showed a loss, but because I was working full-time my accountant used it to offset the income/taxes from my job. What options do I have this year, if any? Can I carry them forward?  — Pat S.

Dear Pat,
Great question because, when it comes to situations like this, I believe it is not explained very well. Business losses, or technically “Non-Capital Losses,” are currently allowed to be carried forward 7 years from the tax year in which they were filed. However, you can also go back 3 years and adjust previously filed returns using form T1A. Also, you can defer forwarding your losses if you’d rather use other deductions/non- refundable tax credits such as daycare/spousal claim, which are usable only in the year they occur. Many of the off-the-shelf tax programs have a good feel for this, but let your tax pro help you balance this to your best advantage.

Entertainment Boundaries
Dear Neel,

I have had my own computer consulting company for years, and my clients take me on fishing trips that they say are tax deductible on their end (what they spend on me). I’d like to reciprocate by getting a boat and taking them out once in a while. Granted, I’d use some of it for myself, but would this be claimable under “Entertainment Expenses”?  — Glenn T.

Dear Glenn,
The “Meals & Entertainment” deduction always seems to be stretched to the limit, given all the possibilities available. Like all claims, it is still subject to what CRA feels is reasonable for the business. See the CRA Small Business Guide for details. Because your boat purchase would be a capital asset, it would not qualify as an expense anyway and would have to be capitalized. I do not know the details of your business relationship, but if you did claim it as an expense, I believe an auditor would only allow at best a very small portion of it, given that it’s quite unrelated to the mainstream of your dealings. I trust this makes sense!

Claiming In-home Expenses on the Job
Dear Neel,

I work as a client-service representative and have an office provided by my employer. However, I don’t stay in the office much, as job requirements need me on-site more and it’s just better to work out of my home. Many of my co-workers are in a similar position, and they claim a portion of their home as an office on their tax returns. Should I be doing the same thing?  — June R.

Dear June,
It sounds like your employer provides the office merely as an address, but practically it is not as well suited to your job as your home office. If this is the case, then yes, you should have your employer fill out the T2200-Declaration of Conditions of Employment and check off the appropriate boxes. The CRA Employment Expenses Guide will help you determine write-offs for this and possibly more. You did not mention if you were a commission based employee, which determines if you can write off additional items, such as home insurance and property taxes. A tax professional can clarify this if you don’t understand the guide. All the best!

Finding Unclaimed Deductions
Dear Neel,

I have been with the same employer for over five years now, and I’ve used my car quite often to go between work assignments and not just for commuting back and forth to work. Recently, I started using an accountant rather than doing my own returns, and she mentioned that not only should I start claiming this, but I can also go back and adjust my filed returns for expenses related to this. Is this true?  — Dale J.

Dear Dale,
I’m glad you wrote because not only is this true, but I have also handled many cases where taxpayers missed deductions and their rightful entitlement went into the hands of the government. CRA has accumulated billions of dollars over the years in unspoken-for refunds, benefits, and missed deductions, which quietly fall into their coffers like an unclaimed insurance policy. I don’t know how much your accountant has charged you, but she has done you a great favour by not only showing you an extra deduction from here on but also finding a previous bonus that you are entitled to. Our handout 10 Ways to Find a Tax Windfall explains this procedure in detail. I also suggest you check out our Employment and Commission Booklet to see if there is anything else you might have missed, such as office expenses, cell phone, etc. Congratulations on taking that extra step and reaping the rewards!

Jumping to Conclusions Too Fast
Dear Neel,

I think I’m about to drop dead of panic attacks. I haven’t filed my return in over five years, and CRA doesn’t even know about it. I’ve heard horror stories of how they can come and take your house away, even putting you in jail. I don’t have loads of money in the bank but do need to get this taken care of. How do I get started without raising flags?  — Luis G

Dear Luis,
Having been in this specialty (late filers) for over 10 years, I never cease to be amazed at how people in your situation come up with such imaginative ideas. I don’t doubt that you heard that someone lost their house and/or landed in jail. I almost believe that actually happened once, and now every paranoid late-filer has magically heard of it! The first step is to find a tax professional who does this type of work and is willing to hear your case. I rarely recommend doing it yourself, unless you are confident about handling it from start to finish. Second, once you find someone, call CRA at 1-800- 959-8281 and have them send any missing T-slips, copy of last filed assessment, carry-forwards, and any outstanding balances, issues, etc. Third, while you’re waiting for these to arrive, start gathering other things, like donations, etc. Use our checklist to help with this. Lastly, if you do end up owing a lot, there are a variety of programs such as Voluntary Disclosure, most recently two new initiatives, Taxpayer Bill of Rights with a Taxpayers’ Ombudsman, to ensure CRA gives people in your situation a fair shake. I have had very good luck bringing my clients’ worse nightmares to a successful conclusion, provided they were co-operative and not deliberately trying to be deceitful. A good attitude will help you more than you can imagine. I hope things work out for the best!

Selling My Multi-Lot Property
Dear Neel,

I have owned my own home for years, and it has three other lots with it that don’t have anything built on them. Technically speaking, there are four titles, but three were never used for anything except vacant land. Now, in ten years my home has more than doubled, and I realize it is not subject to capital gains if I sell. But, how does this work with four separate titles? Are the other three subject to capital gains? I never collected rent or anything else commercially, and for all intents and purposes, it was just an extended back yard, but I’ve heard many stories and hope you can settle this!  — John K.

Dear John,
I can understand why you have heard many stories, because it can go different ways depending on your usage, zoning, how it was bought/sold, etc. It is not possible for me to cover every situation, so I will leave you with two, including yours for now. First, from what you have described, I would think your property would be all considered personal, as long as it is sold in one deal. Many older homes (say, from the earlier part of the last century) traditionally had big lots, and as zoning laws changed over the years, people discovered they had two or more lots with one title. Provided the owner carried on as a “principal residence” only, with no rental income, lot splitting, or commercial activity, CRA generally had no problem treating the sale as capital-gains-free, even though some owners capitalized from the bonus or extra land, deeds, etc. However, on the other side of the coin, if an owner decided to develop the other title into a separate entity, then capital gains would apply on the commercial side of it. A classic example is an owner who wants to tear down an older home and build two in-fills. The capital gains rule would now apply to the “non-principal” unit. You can check the Capital Gains Guide for details on calculating base cost, etc. All the best either way.

Pleasant Surprise
Dear Neel,

My husband and I bought a small farm a few years ago, and to be honest with you, we’ve been hush-hush about this because we don’t know if there are any tax consequences, so here goes. The vendor was a widow in a nursing home, and she basically signed the deal stating everything on the property was ours, including a few “junker” cars. I don’t believe this place had been tended to for at least 15 years, but to make a long story short, my husband, to his amazement, discovered one of those “junkers” was a very worn out ’67 Mustang Shelby under a stack of hay. We cashed in at $50,000 without hesitation, but we now wonder if this is taxable. Asking around, we got different answers, and we are by no means car buyers/sellers! — Lindsay J.

Dear Lindsay,
As a long-time acreage owner and car collector, I can personally relate to your story and congratulate you on a rare find! This is a classic case of found money, and while it’s a nice bonus, it should be considered personal because the vendor threw it into the deal, like appliances. The sale of personal effects (yes, including your car) is not considered taxable. This is more like a hobby as you’re not in the business. Check out the Business Guide for details, and happy windfall!

Trashed Property—Now What?
Dear Neel,

I am fuming with anger as I write this. When my husband passed away a few years ago, I decided to move south and live in our Florida winter home while I rented my acreage (which is my principal residence). I hired a management company and trusted them with everything, as I’m 82 and have no clue how all that works. To make a long story short, the tenants somehow broke the septic pipe, and all the sewage poured into the basement for weeks before the tenants had to be removed by the social services department. My house is now absolutely worthless, given the sewage permeated the walls, and the health department declared it unfit for human habitation. I just want to sell it, and although it breaks my heart after living there 55 years and raising my family, I wonder what effect this has on taxes? We only paid $21,000 in the early 50’s, and before this happened it was worth over $500,000 on the market, but I doubt I will get half of that now. Please help! — Ann P.

Dear Ann,
Talk about some people’s kids! As a former landlord, finding a trashed residence was certainly one of my worst nightmares! There are two tax situations here. First are the rents you received, and unfortunately any net rent will be taxable in that calendar year. You can check out the Rental Guide for details. Second are the capital gains, which I don’t think will be an issue. You will have to find out how much the property was worth before you converted it to a rental. If it sells for less than that (which I suspect it will), then there is no capital gains tax, as the profits before that were considered personal. Given you may have incurred legal/ professional fees, etc., with having your tenants removed and house cleaned, I would think you are likely in a negative cash flow, so overall I can’t see a tax liability. I hope things work out for the best!

To Do or Not to Do My Own Tax Return
Dear Neel,

I am a single parent with one child, and my friend told me to try doing my own tax return this year. I have always taken my return to a place in my neighbourhood, and he seems to do a good job for $150. I only have a few T4s, childcare, donations, and RRSPs, so I don’t think it’s too difficult. But I’ve always had a bit of doubt in my mind. What would you recommend, as I would like to save the money? I’m not an accountant or even close to it! — Linda H.

Dear Linda,
There are two schools of thought on this, and I will explain as best I can to help you make a decision. First of all, technology and customer support from software companies and CRA have really come a long way, especially in the last five years. Because your return sounds basic, as long as you have a working knowledge of English (or French), understand basic math, and are comfortable using a computer, you should consider doing it yourself as your friend recommended. Check out our handout, 10 Ways to Get Free Help at Tax Time. If you are unsure of yourself the first few times, many tax pros will review your return for you, sometimes even for free. On the other hand, it’s not everybody’s bag, or it can be too intricate. That’s when it’s best to hire a professional because the fees are well worth it. Believe it or not, the demand for tax preparation has been on the rise for years because new laws keep getting added or changed, and the average person may find it overwhelming. All the best either way!

Pre-assessment Reviews
Dear Neel,

My accountant e-files my return each year, and I always get asked for my donation receipts, because I suppose $6,500 contribution on $50,000 income is considered high. With the exception of one year when I lost a receipt for $300 (which I found later), I have always received the refund claimed. I really don’t feel like going through this again as it adds weeks (sometimes months) to my refund. I was wondering if there is a way around it? — Bobby J.

Dear Bobby,
I am glad you asked this because I was in a meeting with CRA when this exact question came up. The representative told us the taxpayer can request that a pre-assessment be waived if the taxpayer has an acceptable compliancy rate (that means all their claims have been provable in the past) from earlier pre assessments. Now, please understand that this does not grant the taxpayer a receipt holiday, and it’s not audit amnesty from this point on. It is a privilege granted to those who have proved their high claims are trustworthy; they are still subject to audits at any time. I commend you for maintaining good records while being generous to others. Keep up the good work!

Getting the Right Pro and Reporting the Wrong
Dear Neel,

I seem to have the worst luck in finding the right accountant. I left the one I was using because every time I called him, he sent me a bill for $800 for the wrong answer. I thought he was totally useless, considering I could ask my six-year-old and get a better answer, but the next guy I hired made him look like a saint. He not only took all my records but a $2,000 retainer as well and then disappeared. I run a small business and would appreciate your insight! — Terry P.

Dear Terry,
It’s tragic when these things happen, as most I know in the business have a good standard of ethics and work hard for their clients’ money. So, please don’t get the impression that the industry is run this way. I cannot give you too much insight into the first case, as I would need more details on what information was exchanged to cause the wrong answer. On the invoicing side, the industry is not regulated regarding fees, and accountants are free to charge what they want.
I have a handout called 10 Ways to Assess a Tax Consultant’s Fees, but it is only a guide and not written in stone. Regarding the second case, it is unacceptable for the accountant to take your property without your permission, and you should report him to the police. Also, CRA recently started an initiative to report unscrupulous tax preparers. Really, people like this don’t do anybody a favour, and the sooner they are brought to justice, the better for all. Hope this clarifies things!

Buying RRSPs
Dear Neel,

I just turned 30 and started my own beauty salon last year after being an employee for many years, and have $50,000 in RRSP room. Should I buy some to offset my taxes? I’ve heard different stories that they can be good and bad, but I’m confused. I’m a single parent with my own home, and other than opening the business and raising my son, my life is not overly complicated. — Leah M.

Dear Leah,
You certainly have your plate full raising a family in your own home while running a new business, and I commend you for that. There may be an array of arguments for or against RRSPs, but I believe everybody MUST have a savings plan that works. In other words, you should have funds left over in an account which keeps growing and never gets touched. Check out Kelley Keehn’s Free Book Exercises for details. Since CRA gives you a tax deferred write-off, why not take advantage of it? Keep in mind you can use your RRSP to buy a home and to further your education tax free (provided you pay it back!). As a bonus, RRSPs are considered an asset on your net worth statement, and all profits stay in the RRSP tax free until cashed. Sure, there may be other ideas that have better returns, but what I like about the RRSP is that it works and is simple enough to understand for most taxpayers. I trust this will help!

Moving Investments into an RRSP
Dear Neel,

I made a good profit in my investment account and was thinking of rolling this into my RRSP account to offset the capital gains. Is this a good move? — Rob N.

Dear Rob,
Yes, this is not only a good tax-saving strategy, but you don’t have to come up with the money to buy your RRSP. As long as it is a qualified investment and done in that tax year (the 60-day grace period into the new year is considered for that year end), it’s a tidy approach, and in fact most banks allow you to do it online if you invest with the same institution. Use our Investment Tax Booklet to help you gather your information for your tax pro. Hope this clarifies things!

Plugging a Leaky Pocket
Dear Neel,

My 22-year-old son makes good money in the oil patch and still lives at home, so he has minimal expenses. However, he spends his money like his pocket is on fire and never saves any of it. I’ve tried endlessly to get him to start an RRSP, but it’s like talking to the wall. My wife and I own quite a bit of property, and he will inherit the bulk of it, which will set him well, but I feel it’s his responsibility to learn how to save money. I appreciate any help! — Ken T.

Dear Ken,
The discussion of finances among family members can be a very frustrating experience, especially when times are rosy and the possibility of bad times seems far away. However, I totally agree with your view of individual responsibility, as sometimes a big inheritance can be the last thing that will help our kids. As parents, it is natural for us to want the best for our children, but sometimes the reason things fall on deaf ears, especially around the teen years, is that they are still into the peer scene. Check out Lesley Scorgie’s web site, Rich by Thirty. She is about his age and is amazing when it comes to the subject of building a savings plan. After that, you should choose a financial planner that will work with your son, not for the commissions but to make his program work. Don’t feel bad if you’re not successful in the beginning, as the problem lies with him and not you. I laud your diligence and urge you to hang in there. Good Luck!

Getting into The Rental Business
Dear Neel,

My husband and I took the plunge this year and bought our first duplex income property. We’re a little nervous because we just started a family and only make about 60K per year, so we want to make sure we are doing everything right with respect to taxes and running it. I liked your web site and welcome any suggestions. — Jody & John H.

Dear Jody & John,
Congratulations on taking the first step. It is always a trial moving out of your comfort zone; however you are well ahead of the majority who never take the plunge. You can check out the official CRA Rental Income Guide for the latest tax rules regarding rental income. However, you can download our free Rental Property Tax Booklet and our Excel record keeping worksheet to better answer your question regarding operating the property. The booklet includes over 20 tips to help you run the duplex. One thing I recommend when building your contacts is to ask them if they either own their own rental properties or service clients who do. I believe if you do business with those who do, you will get better service from those who understand he business than those who don’t. I wish you the very best!

Keeping Your Records Straight
Dear Neel,

Our family owns about 4 rental properties in Calgary and they have really appreciated in the last year. We want to take some money out though refinancing to buy another rental property and pay off some personal debt. Is this refinancing taxable and are there any tax strategies to watch for? — Sonny D.

Dear Sonny,
It is important to understand that there are two distinct issues here. First, taxes on your refinancing and second is using rental capital to pay off personal debt. From an auditor’s point of view, it is critical you keep your personal affairs separate from rental, business, etc. with a clear paper trail. Your records must be able to prove all your expenses and if you use your rental equity to pay off your personal debts, they will disallow the interest portion allocated towards that. CRA has no restriction on how creative your financing, but do check with your financier and tax pro to make sure your okay before signing. With regards to refinancing, it is not a capital gain until you sell, so refinancing is great strategy and secret of the rich to save taxes. I trust this will help!

Now That’s One Crooked Politician!
Dear Neel,

I am still hemorrhaging from my court case which I lost trying to sue my tenant for unpaid rent. To make a long story short, I rented my place to someone whom is not only well known, but he’s an elected official, whose name I can’t mention for obvious reasons. I have sued tenants for non-payment in the past without much problem, but when this guy came in to court, he simply told the judge who he was and that elected officials in this district have amnesty from lawsuits, so the judge agreed threw it out! Not only am I out thousands of dollars, I wondering how much this exemption extends. I will have big write offs on my rental property this year, but are these exempt from the tax rules also? To make matters worse, this guy has made a career of this with other landlords and seems endless. Please help! — Danielle R.

Dear Danielle,
I have never heard of any situation even as remote as this, but I am not aware of any exemption The Income Tax Act has towards this type of extortion. You will have to contact a tax lawyer for better clarity, as it is a legal issue first before taxes. On another note, this type fraud is completely unethical and should be reported to the party’s ethics commissioner. Also, get together with the other landlords and contact the media. They may do you a big favour buy publishing his name and not only stop him but also get him ousted! Hope this clarifies things!

Checking your Notice of Assessment
Dear Neel,

My wife and I filed our 2005 returns two weeks ago and got our notice of assessments last week. We noticed the result was different than what our accountant originally E-filed. We forgot a T5 from interest earned and CRA automatically included this. Should we do anything? How does this affect our record with them when we’ve had no problems in the past? — Dale & Donna S.

Dear Dale & Donna,
This is a very common thing at tax time, to miss a slip that either didn’t show up or was missed during the data entry process. If CRA has already adjusted the return and it is correct, there is no further action needed on your part. CRA is quite generous with forgotten slips, so unless you have a large rap sheet of missing slips, your record should still be good with them. If you discover that the assessment was not adjusted when it should be to reflect the T-slip, then have your accountant file a T1-ADJ (adjustment) return. You can easily do this over the internet by going to the CRA web site and getting an epass, or calling them during business hours at 1-800-959-8281 and letting them know you will be changing it. As of this year, if you and your representative are registered for an epass, he can now do this very quickly. Hope this clarifies things!

April 30th Deadline in Stone?
Dear Neel,

I am a self-employed consultant in the oil industry and work overseas for several months at a time. Sometimes I’m gone from February until the mid-summer and end up filing late because by the time my accountant of 20 years gets back from holidays; it’s around September when I finally file my return. Can I apply for an extension? I make about $600,000/yr and pay about $200,000 in taxes. The late penalties/interest amounts to over $10,000 which is stinging and would be nice if there is a way to avoid this! — Len O.

Dear Len,
Ouch, that’s a lot to pay for filing one late return! There are ways to apply for extensions and even waived penalties/interest under extenuating circumstances such as illness, natural disasters, etc., but not for the reasons you have listed. The Fairness Act lists the details but I would think that after dealing with an accountant that long, they would be motivated to help you solve this. Faxes, email and couriers allow you to send all your information to the pro so they can process it on your behalf. Over 60% of my business has been conducted this way for the last 5 years simply because people are busy and need more convenient ways of doing their taxes. If your long term accountant can’t help you with this, it’s time to start shopping around. I trust this will help!

Late Taxes-What Now?
Dear Neel,

My husband is totally ridiculous when it comes to filing our taxes on time. Once we waited 4 years, then got caught up and some how ended up falling 2 years behind again this time around. I’m a bit embarrassed to face our accountant who worked hard to get us caught up last time, but I’m stuck, as we have to file together for our business. I noticed by your ad and web site you seem to deal a lot with this so I would like your opinion! — Michelle P.

Dear Michelle,
I am sorry to hear that you are being dragged into your husband’s tardiness but in all my years of handling late filers, there’s only one real solution to stop procrastination. Have him look in the mirror! Real results demand (notice how this is not an option) real desire. I can’t tell you how many people I have had to turn away because they simply lack any genuine interest in helping themselves. But the reality of the situation is no one can help them unless they show sufficient interest. Now if he wants someone to handle everything from the bookkeeping up, no problem at all, as that is a service most pros can arrange. However, there’s no magic formula for those who give into laziness all the time. I wish you the very best!

Employment Versus Self-Employment
Dear Neel,

I have been working as a base salaried and commission employee for a few years. Recently my employer approached me about becoming self-employed. Can you tell me the pros and cons of this? I understand the tax rules change, amongst other things. — Lyle R.

Dear Lyle,
Yes, the tax rules do change from employment to self employment. In your situation, you have to be careful that you don’t fall into a pseudo self-employment trap for tax purposes. Specifically, an employer and employee may agree to turn a job into a sub-contract position to save the employer money and paperwork and to allow the employee to deduct items such as in-home expenses, car, meals, etc. CRA may review it and deem the work to be employment, not self-employment, thus disallowing deductions and fining the employer for missed source deductions. On the other hand, if the company decides to subcontract a particular function like cleaning the office and you successfully win the contract, that’s more like a true business. Have a look at a CRA publication called Employee or Self-employed? for details. One of the main criteria they look at is who is exercising control over the duties performed. Our feature guest article in our October 06 Newsletter by Evelyn Jacks, on page 7, looks at a case study to explain it better. I hope this sheds light on your situation!

The Early Years of Business
Dear Neel,

It’s my second year in business, and I wasn’t prepared to be suddenly laid off from my salaried job of 10 years in 2004. I’m 46 and I have always done equipment repairs on the side, more like a hobby. Now it’s my full-time pursuit, which I’m trying to grow to the point of sustaining myself and getting back to my salary level of 2004. I’m fortunate my wife works and we’ve always been careful with our money, but are there specific tax strategies I can look at in the growing years of a business? I’d say my cash flow is a priority with sales growth and learning how to hurdle the growing pains, if that makes sense. — Lloyd E.

Dear Lloyd,
Your concerns are very common for a newer business, but you actually have a few things going for you which give you a bit of a head start over the masses. Having a business already running, another income, etc. are wonderful pluses in a situation like this compared to those who have nothing. First, don’t feel alone about being forced into self-employment, as that is becoming more widespread; lots of people are getting the golden handshake at middle age. Second, it’s a great time to recruit a few professionals to guide you along the way. Our Small Business Tax Booklet gives many tax related tips, but you should arrange to meet with others such as a marketing expert, lawyer and business coach. What they will show you in a consultation is well worth the money paid. One way to reduce the learning curve is to find a role model, someone who has been through your experience who can be a mentor. I have yet to meet anyone who said they got too much good help in the early days of a business, but I could write a book about those who never got enough. I hope this sheds light on your situation!

Commissions versus Bonuses Earned on the Job
Dear Neel,

I have worked for an investment company for years. At the end of the year, our boss gives the assistants a Christmas bonus (usually around 10%) based on our and the department’s performance. On our T4’s, this amount shows up in Box 42 as commissions. I understand you can claim expenses against this. I work in an office where everything is provided. Once in a while, I work at home, but I don’t have any hard expenses like our full-time commission staff. — Sue M.

Dear Sue,
Sometimes the payroll department may accidentally record regular income bonuses as commissions, causing an employee to think they can deduct expenses. According to the Employment Expense Guide, you have to directly sell goods or negotiate contracts to be eligible for expense deductions, and yours seem a bit too indirect to qualify. On the other hand, if you are working out of your home, ask your employer if they will sign a Declaration of Conditions of Employment to that effect. Then you can use our Employment and Commission Expense Tax Booklet to find out what all is deductible with tax tips, etc.

To Incorporate or Not to Incorporate?
Dear Neel,

I’ve been an interior designer for many years now, and lately I have been doing very well. My tax adviser said I should consider incorporating as my profits in the business seem to keep rising. He said there are more options from the tax and legal point of view. Do you agree? — Mickey S.

Dear Mickey,
Yes, assuming he knows his stuff and has your interests at heart, I’d likely vote with him. Check out the handout on our web site, The Road to Incorporation by Doug MacLeod (C.A.), for more insight on this. Incorporation opens up a variety of options, including dividend payments, income splitting for all active employees, etc. I cannot give you legal advice—a corporate lawyer is more the person to speak to about that—but sometimes one-person corporate owners can be mislead on the question of lawsuit protection. A plaintiff can name the corporation and the owner(s) and director(s) personally, making the corporate umbrella a little leaky. If you do decide to incorporate, make sure you have drafted a plan with both your tax advisor and lawyer so that you, as the business owner, are clear on the direction to take for tax advantages and in case the worse happens legally.

Working People Need More Tax Breaks!
Dear Neel,

I was self-employed for quite some time, but a couple of years ago I went back to a salaried job, no commissions, and seem to be paying more tax due to lack of deductions. My returns are fairly simple now. I have heard that the new Employment Tax Credit promised in the latest budget may be available to most employees. Will this reduce my overall taxes, all else being equal? — Alex P.

Dear Alex,
Yes, this seems to be the case, and I made a comment about this at the beginning of this newsletter. As the draft of the 2006 tax software is not out until a little later in the year, a tax pro may not be able to give you an actual dollar amount right now. Off hand, it looks like most employees will net up to a few hundred dollars with no strings attached, so that is welcome news. When you go from self-employed to straight salary, one of the things the taxpayer notices is more tax paid right off the top. Keep in mind that the theory behind employment is that the employer covers all work-related expenses unless otherwise specified in the employment contract, causing a higher tax liability. If you do incur expenses, discuss with your employer whether they will reimburse you or make the expenses deductible.

Cash Under the Table
Dear Neel,

I work in the construction industry and am confused about getting paid in cash. Some people I know report this as business income, and others just don’t bother and never seem to get caught. I don’t make that much (under $20,000 a year), and I’m not sure what to do but feel compelled to report it as business income. — Craig A.

Dear Craig,
I’m delighted to hear your conscience is directing you to do the right thing. Your friends who are doing the opposite are not only wrong but guilty of evading taxes, which clearly is a criminal offence. Did you know CRA actually publishes the names of all convicted parties? It’s interesting to note that all who got caught had two things in common: First, they didn’t think they would ever be found out, and, second, it was not worth the grief that followed. Ask yourself this: “What future do I have with a criminal record that’s published for millions to view?” Most reputable tax pros will have nothing to do with you, for good reason. Some people facetiously say, “Well, my friends and family will still love me,” but it’s never really the same. On a brighter note, I have met several self-employed people who came to me with a similar situation. Through a series of programs like normal deductions, the Voluntary Disclosures Program, and Fairness Act, most of the cases were resolved with great success and the client got back on track as a bonus. No one can make you do this, but, unfortunately, once a person gets caught, there’s no end to what you will be forced to do on your own at their command. Hope this clarifies things! trust this helps!