Avoiding Tax Problems in Canada

A number of Canadians have problems with their income taxes, or corporate or other business returns, whether they haven’t paid them; haven’t filed; unknowingly (or knowingly) filed incorrect information; or have been notified of an audit.

These problems are common, and most can be avoided; if it’s too late for avoidance, they can usually be fixed or at least handled a bit easier with a bit of knowledge.

Note: If unsure of any aspect of your taxes, it is wise to consult professionals such as accountants and tax lawyers.

Unfiled or Unpaid Taxes

Not filing your taxes is illegal. Not paying them is not recommended, but it is not illegal, according to tax lawyer Dale Barrett, author of Tax Survival for Canadians: Stand up to the CRA.

If taxes are owed, but the taxpayer hasn’t filed, Canada Revenue Agency (CRA) will assume the taxpayer wants to evade payment. Tax evasion is a criminal offence, and the easiest way to avoid a criminal record, along with penalties, fines, or imprisonment, is simply to ensure taxes are filed on time and the numbers are correct.

If taxes have been filed but not paid, there are ways to schedule payment and/or request taxpayer relief under the Taxpayer Relief Program.

Incorrect Information

Some people intentionally fail to declare all their income as a way to avoid owing taxes on that income. Some people make unintentional mistakes. CRA makes a decision whether to accept the return as filed, correcting any obvious errors, and sending a Notice of Assessment back to the taxpayer. If the taxpayer agrees with the assessment, everything proceeds as normal. If not, further steps may be taken to appeal.

Audits

Some audits are conducted on people who are chosen at random, and some are conducted on people who meet certain risk criteria through a targeted selection process.

According to Barrett, these risk criteria are factors that increase a taxpayer’s chances of an audit:

• Professional income
• Audit of one’s spouse
• Audit of one’s business
• Audit of one’s business partner/associate
• Farming or fishing income
• Partnership income
• Investment income or tax credits
• Real estate purchase or sale
• Dividends from private corporations
• Support payments and alimony
• Moving expenses
• Clergy residence deduction
• Adoption expenses
• Medical expenses
• Disability support payments or disability tax credits
• Research and development expenses

Other criteria that may convince CRA to audit include self-employment income, child care deductions, home office deductions, any evidence of criminal activity, prior audits, discrepancies between GST/HST returns and income tax returns, rental income, shareholder loans, and of course, tips from informants.

There is a chance you will be audited if you meet any of the above criteria, so be ready by knowing your rights and obligations. Do not offer more information than the auditor asks for, and always ask why an auditor is asking for certain information or documents. If an auditor is looking for evidence to have you prosecuted, this is no longer a CRA issue and he or she may need a warrant; contact a tax lawyer immediately.

What to Do about Tax Problems

It is never a bad idea to avoid as many problems as possible up front by hiring professionals to do your taxes.

If you have a problem later on, there are processes that can be followed; for example, if a taxpayer disagrees with an assessment, he or she may file a Notice of Objection within 90 days to appeal the decision.

If ever in doubt, consult a tax lawyer.

For more information on tax problems in Canada and how to avoid them or legally deal with them, consult Canadian tax lawyer Dale Barrett’s book Tax Survival for Canadians: Stand up to the CRA.