It’s never wise to fib, fiddle, or fake on your tax return. The longer you get away with dodging tax, the worse it will be when you finally get caught.
But who doesn’t think about accepting cash and not declaring it, or exaggerating write-offs? Well, it’s not worth it if you are caught. Before you travel down that road, read the answers to these and other related questions.
What happens if I don’t report my income?
If your income is low, you could miss getting money from the government to raise children, or to help pay rent, food, sales taxes, etc. If you owe taxes, and fail to file a tax return, you will be charged interest plus a penalty equal to 5 to 17 per cent of taxes owed.
If you are convicted of evading taxes, you might get free room and board — in jail — like Daniel Frank Kobelt. The Burnaby, B.C., maker of marine products was sentenced to two years, less a day last October.
He had attempted to avoid taxes by claiming Canada’s constitution does not permit taxation of living, breathing persons; only corporations. Naturally, Canada Revenue Agency told him he was crazy. Even so, Kobelt did not disclose $1.77 million of personal income he earned in 2005 and 2006. Now he must also pay double the $512,867 in taxes he would have owed.
What are my chances of a tax audit?
That’s not something CRA discloses. But chances of an audit are far better than most lotteries, because targeting suspicious cases pulls in billions of extra dollars annually. CRA estimates 12.2 per cent of small businesses do not comply with tax law, and nearly half of those it targets for audits. Audits are almost a sure thing if a former spouse, employee, tenant, competitor, or customer calls the CRA’s informant lead centre (1-866-809-6841).
“People think they only have a three-year window when tax returns can be checked, but in case of fraud there is no statute-barred exemption,” says Katz.
What’s the worst that could happen?
In the year ended last March, there were 204 taxpayers convicted of tax evasion or fraud. Kobelt was sentenced to jail last October. In November, Brothers & Wright Electrical Services Inc. of Markham was fined $165,000, or double the tax evaded, by claiming that construction expenses for two directors’ cottages were company expenses.
Also in October, Michael Habash of London was fined $28,746 for evading as much in Goods and Services Tax when he operated Carey’s Bar and Grill.
I forgot to report income, but my employer will have told the CRA. Should I worry?
Yes, says Nancy Belo Gomes of KPMG LLP. “The CRA has started to get really tough on taxpayers who repeatedly forget or fail to report T-slip income.”
More often now the agency is imposing a 20 per cent penalty on top of federal and provincial income taxes, as prescribed by Subsection 163(1) of the Income Tax Act. So, it’s cheaper to file an amendment to your tax return than to wait for CRA’s computers to catch the oversight.
CRA says it was able to collect an additional $600 million in fiscal 2011 after comparing individual returns with the information slips supplied by employers and financial institutions.
I deliberately left out income. What should I do?
Use CRA’s voluntary disclosure program to negotiate a deal to pay the tax, without interest or penalties, says Gomes. A tax preparer may negotiate a binding settlement without identifying you.
Move smartly to volunteer and pay as soon as you have a deal. You won’t qualify if CRA starts an investigation first, she warns.
It’s not hard for the CRA to catch landlords who are not declaring rental income. Computers can match the tenant’s home address and claims for tax credits with the landlord’s address and income.
Is stuff I sell on eBay taxable?
Not if you’re just selling your old stuff. The CRA only looks for sellers who make it a business. Anyone who frequently buys and sells goods, or even homes, should report their profit, after expenses, as income.
Can the CRA track rent that our tenants pay in cash?
It sure could! The tenant is likely to file a tax return and give your property as the address. He or she may also report the amount of rent paid to claim Ontario’s property tax credit. CRA’s computers can easily cross-check tax returns.
Are travel rewards gained from work trips taxable?
Only in some circumstances: You are converting the points to cash; you are granted reward points as a form of remuneration or with the deliberate intent of avoiding tax.
I don’t declare income from a foreign source. Has the risk of getting caught increased?
“Yes it has,” says Gomes. Most of Canada’s major trading partners have already signed agreements. This year new agreements with Dominica and Netherlands Antilles came into force. Agreements with Aruba, Costa Rica and Saint Lucia will come into force later. Negotiations are under way with 14 other states including Antigua and Barbuda and the British Virgin Islands.
I was born in the U.S. Is it too late to file tax returns under their amnesty program?
No, it’s not too late says Steve Sherman of Cross Border Tax Services in Toronto.
Taxpayers will have a choice whether to file eight years of returns under the recently extended (January 9) Offshore Voluntary Disclosure Initiative or to file six if you can offer a “reasonable cause” for not knowing you had to file. The voluntary option was extended “until otherwise announced”. Each approach has its benefits and risks.
What is becoming evident, says Dean Smith of Cadesky and Associates LLP, is that taxpayers should become compliant before the Internal Revenue Service comes after them. U.S. citizens and Green Card holders living outside the U.S. are also expected to file a Foreign Bank and Financial Accounts Report (FBAR) if total foreign financial accounts in a tax year exceed $10,000 (U.S.).
A lawyer seems to endorse a risky tax strategy in a letter I’ve seen. Should I trust him?
The advice should be regarded with suspicion if the promoter of a tax shelter lawyer hired the lawyer. If you proceed, expect CRA to ask hard questions. So far, more than 150,000 taxpayers who have been denied $5 billion in charitable tax credit claims after participating in dodgy tax-avoidance schemes.
Now lawyers who provided advice are being targeted in the courts. In January, lawyers at Fraser Milner Casgrain LLP agreed — while denying any errors — that it would contribute to a partial, $11 million payment to 3,000 participants in the Banyan Tree Foundation tax-shelter scheme. Halifax tax lawyer Edwin C. Harris Q.C., also failed to escape a class action suit on behalf of 9,925 participants in the ParkLane Donations for Canada Charitable Gift Program.