Filing Returns and Elections - Assessments, Reassessments and Penalties

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1 Filing Returns and Elections - and Penalties Joseph Devaney, CA, Video Tax News, CA, TaxClinic.ca Calgary, AB Introduction Large reference paper Covering issues in respect of the following topics: Electronically Filing Returns Elections and Related Issues What to Expect During the Audit Process Notice of Objections New and Recently Changed Forms Review of Common Penalties 2

2 Electronic Filing Commenced in 1991 For 2014 individual returns, 84% of the 25 million returns filed were done electronically. (56% by EFILE, 28% by NETFILE) Encouragement by the carrot (quick, easy, convenient) Encouragement by the stick (Preparer penalty $25 or $100, Corporate filer >$1mil in gross income penalty of $1,000, electronic slip penalties which vary based on quantity) Various forms and returns can be filed (incuding,t4, T5, T5013, T1135, and the electronic version of the RC59) 3 Electronic Filing T183 and T1013 to be signed prior to submission and kept on file. Failure can result in warning letters or suspension of EFILE privileges. Sone & Saber Used the T1013 to track down a child. Privileges suspended. Went without the ability for 14 months before it was referred back to CRA for reconsideration. 4

3 Electronic Filing/Communication Tips Don t efile the T1013 without original signed document. Disassociate the firm s business Represent a Client account with departed employees. Get Business Authorization through Represent a Client (similar to RC59) generally 1 day turn around. Communicate electronically when possible (EFILE everything, respond to information requests through Represent a Client, use the online Enquiry Service). Get written authorization before efiling t1135. When clients sign up for online mail, make sure they sign up for My Account using their security code as well. 5 Elections Two main categories: 1. Prescribed elections (See Appendix A of the paper) 2. Elections that can be made by reporting (or not) transactions with the tax return 6

4 Elections Dhaliwal v. The Queen Situation where return was efiled and an election that had no prescribed form, was required to be submitted in the return. The Court provided: It is frankly disappointing that the CRA needs the Court to resolve the issue of how elections should be made in e filed tax returns when there is no prescribed form required. The answer is surely only a matter of common sense and programming. [ ] If the CRA wants more, all it needs to do is program its electronic tax return differently. 7 Elections Tip: When Efiling a return that requires an election to be made, submit a paper copy of the election and supporting documents to the appropriate Tax Centre, on or before the filing due date of the return. 8

5 Elections Subsection 220(3.2) provides late, revoked or amended elections may be allowed under the Taxpayer Relief Provisions. In general, to amend, revoke or file an election late it must be prescribed in section 600 of the Regulations. By administrative concession, the CRA does accept some late filed elections that are not listed in the Regulation 600. Certain elections have specific provisions (ie. Section 85). 9 Assessments Subsection 152(1) provides the substance of an assessment stating: The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine the amount of refund, if any, to which the taxpayer may be entitled [ ] for the year; or the amount of tax, if any, [ ] to be paid on account of the taxpayer's tax payable under this Part for the year. 10

6 Assessments With all due dispatch? In Jolicoeur, the Court stated, the with all due dispatch time limit purports a discretion of the Minister to be exercised, for the good administration of the Act, with reason, justice and legal principles. In Imperial Oil an elastic standard that gives the Minister sufficient discretion to determine that a particular return should not be assessed until after a detailed review. As long as the necessary review proceeds at a pace that is reasonable in the circumstances, the Minister will not be in default. 11 Notice of Assessments Subsection 152(2) provides the form of the assessment. A notice shall be sent to the person by whom the return was filed, after the return has been examined. Paradoxically, the form of the notice does not matter and that the subsection 152(2) merely requires that the notice be expressed in terms that will clearly make the taxpayer aware of the assessment made by the Minister. The date the assessment is sent denotes the beginning of the normal reassessment period 12

7 Notice of Assessments The following documents will not constitute anotice of Assessment for purposes of subsection 152(2): A letter denying a requested adjustment being issued, Where there has been an appeal to the Federal Court of Appeal to discontinue; and Where a determination of interest on a Statement of Account. Subsection 152(2) also requires that the Minister shall send a notice of assessment to the person. This phrase implies an onus of delivery upon the CRA. 13 Normal Reassessment Period Generally, subsection 152(4) provides the normal reassessment period is the period that ends 3 or 4 years after the earlier of the day of sending of a notice of an original assessment and the day of sending of an original notification that no tax is payable by the taxpayer for the year. Subsections 152(2) and 152(4) work in conjunction establishing the timeline for a taxpayer s normal reassessment period. 14

8 Nil Assessment Subsection 152(4) gives reference to sending of an original notification that no tax is payable commonly referred to as a nil assessment. Accordingly, although a nil assessment does establish a timeline for the CRA to reassess, a taxpayer cannot object to a nil assessment or appeal it to the Tax Court, as it is not an assessment for purposes of subsection 152(1) or 152(4). 15 Nil Assessment Two ways of methods of dealing with nil assessments: Request the CRA to issue a notice of loss determination in accordance with subsection 152(1.1) and Reduce the capital or non capital loss claimed in the year, so that more than $2 of tax would be payable. 16

9 Reassessment Beyond Normal Reassessment Period any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under the Act ITA 152(4)(a) Burden of proof is on the Minister The bar is low, no intent to deceive CRA is required. Fraud or willful default is more clear cut than carelessness and neglect. How careless or neglectful can one be? 17 Reassessment Beyond Normal Reassessment Period What standard is to be met? [ ] the care exercised must be that of a wise and prudent person and that the report must be made in a manner that the taxpayer truly believes to be correct. a deliberate attempt to complete a review and inquiry with the knowledge they have 18

10 Reassessment Beyond Normal Reassessment Period Some recent actions that have been considered to be at least neglect or careless include: Did not provide relevant tax slips to a return preparer Significant unexplained income resulting from a net worth assessment. Reliance on a professional accountant without adequate review Several errors made as confirmed by amended returns Imprecise records and disclosure of expenses An arbitrary assessment was issued when no return was filed. Tip Don t ignore demands to file, may not ever be statutebarred. 19 Reassessment Beyond Normal Reassessment Period Some recent actions that were not considered neglect or carelessness include: There was an honest belief that amounts are not taxable where the accountant had given incorrect advice. There was neither a far fetched nor unreasonable understanding of a tax concept even where a net worth assessment was issued. Reasonable reliance on professional advice. A best estimate was used. 20

11 Budget 2015 Assessments Under Objection To allow the CRA and the Courts to increase or adjust an amount in an Assessment that is under Objection or Appeal at any time, provided the total amount of the Assessment does not increase A recent court decision held that each source of income is to be considered in isolation. To eliminate the partitioning of income and allows an item to increase as long as the assessment as a whole does not increase 21 Statute-Barred Refunds S129(1) Refund relating to RDTOH disallowed where return not filed within 3 years of year end. Several Recent cases indicated that RDTOH should not be decreased by disallowed amount. SS164(1) prevents tax refund in same scenario. However, amounts may be re appropriated to an account that is or may become payable via RC431. At Minister s discretion. Form uses taxpayer relief criteria. 22

12 Arbitrary Assessment An arbitrary assessment is a CRA administrative term for an assessment made under subsection 152(7). Generally allows the CRA to make an assessment of taxes or penalties, where no return or other information has been filed. The Courts provided that the CRA may make an arbitrary assessments using any method appropriate in the circumstances. 23 Arbitrary Assessment Two common methods the CRA uses to make the assessment under subsection 152(7): Collection of tax slips Net worth assessments 24

13 What to Expect during the Audit Process Generally, subsection the auditor to inspect, audit or examine the following: books and records of a taxpayer including any documents of the taxpayer or any other person connected to the taxpayer or to any amount payable by the taxpayer and examine property in the inventory of a taxpayer and any property or process of, or matter relating to, the which may assist the auditor in determining the accuracy of the inventory or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer. 25 What to Expect during the Audit Process Tips Prior to undergoing the audit process, ensure that taxpayer is aware of The Taxpayer s Bill of Rights. These rights include that the taxpayer has the right to a formal review of their file subsequent to the completion of the audit. Although the general rule is a taxpayer is required to maintain books and records for a minimum of six years from the end of the last taxation year they relate to, where the return is late filed, the information should be kept for the later of the general requirement timing, and 6 years from the filing date unless previous condition. 26

14 Are you next? The CRA uses a Risk based approach when selecting persons for audit. In January of 2015, the CRA updated its website to list the following three items as ways that a file may be selected for review: random selection; comparison of information on returns to information received from third party sources, such as T4 information slips (including GIFI and NAICS Codes); types of deductions or credits claimed and an individual's review history. 27 Notice of Objections How do you file an NOO? 1) By written notice and addressed to the Chief of Appeals in a District Office or a Taxation Centre of the CRA, setting out the reason or reasons for the objection and all the relevant facts; 2) For individuals, online through My Account from the CRA Web site; select the option "Register my formal dispute. 3) For businesses, online through My Business Account from the CRA Web site. Under "Corporation", select "Register a formal dispute (Notice of Objection)" 28

15 Notice of Objections Is there a limitation period to file an NOO? If the taxpayer is an individual (other than a trust) or a graduated rate estate for the year, the taxpayer must serve the NOO to the CRA on or before either the day that is one year after the taxpayer's filing due date for the year or the day that is 90 days after the day of sending of the notice of assessment, whichever is later. For all other taxpayers, the deadline is on or before the day that is 90 days after the day of sending of the notice of assessment. Extension may be available by CRA or by Tax Court 29 Notice of Objections In order for the CRA to grant the extension, the taxpayer must demonstrate the following: i. the application was made within one year of the expiration of the objection period; ii. the taxpayer was unable to act or to instruct another to act on his or her behalf or had a bona fide intention to object to the assessment; iii. given the reasons set out in the application and the circumstances of the case, it would be just and equitable to allow the extension; and iv. the application was made as soon as the circumstances permitted.. 30

16 New Form T1135 (Foreign Income Verification Statement) 2013 major revisions, extra detail required February transitional relief 2014 July revised again Account with Reg securities dealer or Canadian trust company: Can aggregate date on a country basis in Section 7. FMV rather than costs used in this case. T3/T5 exception eliminated. T1135 Session CPA Canada (8,000 participants, over 143 questions endeavored to be answered by CRA) T1135 Session CTF (Cost base comment, EFILE comments). 31 New Form T1135 (Foreign Income Verification Statement) Available for EFILE on individual returns as of February Corporate version on the way. Tip: Get written authorization from client to Efile this form before doing so. Budget 2015 Simplified reporting where specified foreign property is below $250,

17 New Form RC 4614 (Election or Revocation of an Election for Closely Related Corporations and/or Canadian Partnerships to Treat Certain Taxable Supplies as Having Been Made for Nil Consideration ) Replaces GST 25 elections now in CRA s hands. Are we sure we did it right in the first place? (Sister corporations?) Deadline for new elections the earliest of due date of either the vendor or purchaser s GST/HST return based on the effective date of the election. Deadline where an election was in place prior to 2015 before January 1, Selected Penalties 26 Penalties covered in the paper for reference purposes. Detailed by: Penalty Amount Applies To Recent Developments/Notes: 34

18 Selected Penalties 162(1) Failure to File Annual Return of Income (5% + 1%/month) Nil return or substantive parts missing Due diligence on missing T1OVP for a new immigrant, reliance on professional. 162(5) Failure to Provide Info on a Form ($100) Could apply to foreign info forms like T1135 Applied on a form by form basis If affects the substance bigger penalty per ITA 162(7)(a) applies 35 Selected Penalties 162(7.01) Late Filing Penalty Prescribed Info Returns (slips etc.) Applies on a type by type basis Additional administrative policy for 51 or less slips. 163(1) Repeated Failure to Report Income (10% of underreported income + 10% provincial penalty) Budget 2015 The reporting failures must be for amounts greater than $500. The 10% federal penalty may be decreased to, in general, 50% of the additional tax liability (additional tax assessed less withholdings). The provincial component has not been adjusted. 36

19 Selected Penalties 163(2) Gross Negligence Penalty "Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. Where gross negligence applied but extended reassessment period (152(4)(a) didn t: An excessive and inexplicable reliance on the accountant, but the person did not intend to mislead the CRA. Imprecise expenses and records, however, the errors were not the result of dishonesty or deceit. Incomplete records and support, and understanding, however, there were language issues and the person was in the first few years of business. 37 Other Communication tips Electronic communications with the CRA Phone calls with the CRA Authorizations Sending elections Tax disputes Responding to information requests 38