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2017 Tax Convictions by CRA Reap Big Penalties and Jail for Some

CRA has been busy announcing new convictions at the start of 2017, a great deterrent for potential tax evaders at the start of tax season. It’s always best to come forward to declare shortfalls in income reporting or overstatements of tax deductions or credits to avoid expensive interest, penalties and potential jail time. Here’s what happened to those who didn’t. . .

Here’s what happened to Canada’s most recent tax evaders, as per CRA’s news releases:

Vancouver, BC, February 28, 2017.   BC resident Michael Spencer Millar, was sentenced in the Supreme Court of British Columbia to 2.5 years in jail and fines of $24,000  as a result of being charged for income tax evasion, GST evasion, and counselling fraud for the 2004 to 2008 tax years as well as failure to collect and remit GST for the 2005 to 2008 tax years.  Mr. Millar was an “educator” with the Paradigm Education Group which counselled people across Canada to evade taxes. The Judge stated that Mr. Millar deliberately encouraged his students to file false income tax returns by not declaring their taxable income.

Edmonton, AB January 5, 2017.   A Grande Prairie Alberta couple who evaded taxes of $486,402 for 2007 and 2008 are spending time in jail.  Robert Dale Steinkey, age 60, was sentenced in the Provincial Court of Alberta to a fine of $322,278 and a conditional jail sentence of 22 months while his wife Terry, age 63, was sentenced to a fine of $164,124 and a conditional jail sentence of 18 months. In addition, both will have to repay the full amount of taxes owing plus interest.  The couple were introduced to the Paradigm Education Group and adopted Paradigm’s beliefs that, as “natural persons,” they were not subject to the Income Tax Act.

Newmarket, ON, January 23, 2017.  Wolfgang John Wilm of Whitby, Ontario was sentenced on January 20, 2017 to 20 months in jail for tax evasion and was fined a total of $552,976 for failing to file returns and pay taxes on over $2 million in income from self-employment from 2007 to 2010. In addition to the fine, he will also have to pay the full amount of tax owing, plus related interest and any penalties assessed by the CRA.

See your tax advisor if you have a guilty conscience.  Further information on convictions can also be found in the Media Room on the CRA website at www.cra.gc.ca/convictions.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning including Family Tax Essentials: How to Build a Wealth Purpose with a Tax Strategy.


CRA Starts Tracking Tax Cheats by Fingerprinting April 1, 2017

It’s no April Fool’s joke: fingerprints of convicted tax cheats will be recorded in the Canadian Police Information Database (CPID), and accessible by Canadian police and border guards as well as some foreign agencies including the US Homeland Security department starting April 1, 2017.

The mandatory fingerprinting policy was first reported by the CBC, which uncovered the directives under the Access to Information Act, and Moneysense Magazine. Both reports refer to an internal CRA memo on the matter as well as a July 7, 2016 directive, which authorizes the policy and begins tracking those tax cheats who want to leave the country on April 1, 2017. Changes were made to the CRA’s internal policy manuals last fall to accommodate the policy changes.

According to the CRA, persons charged with offenses under the Income Tax Act, Sections 239(1), 239.1 (which references definitions in Section 163.3(1) which will apply here) and 239(1.1) are to be fingerprinted. Those sections are worth the read; as they set out the circumstances in which taxpayers can get themselves into this kind of hot water, and the expensive penalties associated with the crimes:

ITA 239 (1) Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation,

(b) to evade payment of a tax imposed by this Act, destroyed, altered, mutilated, secreted or otherwise disposed of the records or books of account of a taxpayer,

(c) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular, in records or books of account of a taxpayer,

(d) willfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act, or

(e) conspired with any person to commit an offence described in paragraphs 239(1)(a) to 239(1)(d),

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax that was sought to be evaded, or

(g) both the fine described in paragraph 239(1)(f) and imprisonment for a term not exceeding 2 years.

Offenses re refunds and credits

(1.1) Every person who obtains or claims a refund or credit under this Act to which the person or any other person is not entitled or obtains or claims a refund or credit under this Act in an amount that is greater than the amount to which the person or other person is entitled

(a) by making, or participating in, assenting to or acquiescing in the making of, a false or deceptive statement in a return, certificate, statement or answer filed or made under this Act or a regulation,

(b) by destroying, altering, mutilating, hiding or otherwise disposing of a record or book of account of the person or other person,

(c) by making, or assenting to or acquiescing in the making of, a false or deceptive entry in a record or book of account of the person or other person,

(d) by omitting, or assenting to or acquiescing in an omission to enter a material particular in a record or book of account of the person or other person,

(e) willfully in any manner, or

(f) by conspiring with any person to commit any offence under this subsection,

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(g) a fine of not less than 50% and not more than 200% of the amount by which the amount of the refund or credit obtained or claimed exceeds the amount, if any, of the refund or credit to which the person or other person, as the case may be, is entitled, or

(h) both the fine described in paragraph 239(1.1)(g) and imprisonment for a term not exceeding 2 years.

In addition, those convicted under the Excise Tax Act – under Sections 327(1) and 327.1 (reference to definitions in ITA section 285.01(1) which will apply here) will be finger printed:

ETA 327 (1) Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false or deceptive statements in a return, application, certificate, statement, document or answer filed or made as required by or under this Part or the regulations made under this Part,

(b) for the purpose of evading payment or remittance of any tax or net tax payable under this Part, or obtaining a refund or rebate to which the person is not entitled under this Part,

  •   (i) destroyed, altered, mutilated, secreted or otherwise disposed of any documents of a person, or
  •   (ii) made, or assented to or acquiesced in the making of, false or deceptive entries, or omitted, or assented to or acquiesced in the omission, to enter a material particular in the documents of a person,

(c) willfully, in any manner, evaded or attempted to evade compliance with this Part or payment or remittance of tax or net tax imposed under this Part,

(d) willfully, in any manner, obtained or attempted to obtain a rebate or refund to which the person is not entitled under this Part, or

(e) conspired with any person to commit an offence described in any of paragraphs (a) to (c),

is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to

(f) a fine of not less than 50%, and not more than 200%, of the amount of the tax or net tax that was sought to be evaded, or of the rebate or refund sought, or, where the amount that was sought to be evaded cannot be ascertained, a fine of not less than $1,000 and not more than $25,000, or

(g) both a fine referred to in paragraph (f) and imprisonment for a term not exceeding two years.

Finally, those convicted under Sections 380 (Fraud), 462.31 (laundering the proceeds of crime) or other indictable offences under the Criminal code that are applicable to a tax evasion prosecution will be fingerprinted.

Tax and financial advisors should apprise their clients of the new developments and encourage voluntary compliance to avoid onerous consequences and expenses.

Additional Information about changes to the ITA and the ETA can be found in EverGreen Explanatory Notes.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Uber Drivers and Salespeople: Claiming Automobiles is Tricky

What do commissioned sales people and Uber drivers have in common? They each will want to know the difference between an automobile, a passenger vehicle and a motor vehicle, especially if they are keen on claiming all the deductions possible against their income this tax season. Especially when using a car for salaried work, commission sales or self-employment, it pays to file an audit-proof return, as these claims are often audited.

An automobile for tax purposes can be either a “motor vehicle” or a “passenger vehicle”. In general, neither will carry more than 8 passengers and a driver. However, a passenger vehicle is going to have restrictions on the amounts claimed for certain fixed expenses, specifically capital cost allowance (CCA), interest and leasing costs, while a motor vehicle will not.

A passenger vehicle, which for capital cost allowance purposes will be placed in Class 10.1 if its costs are more than $30,000 plus taxes, will not be an ambulance, taxi, bus, funeral vehicle or any other vehicle used primarily (50% of the time or more) for transporting passengers.

This means that “Uber” drivers will need to keep solid track of the use of their vehicles for personal and Uber purposes. It the auto’s use slips over into 51%, the motor vehicle classification can apply, even for autos valued at more than $30,000.

CRA itemized the differences for claiming passenger vehicles compared to motor vehicles on their website. It’s reproduced below, but with some additional clarifications, to enable tax specialists and their clients to have better conversations on what the tax forms mean in the height of tax season:

Claiming Autos on Your T1:  The Difference Between Motor Vehicles and Passenger Vehicles
Class 10Motor Vehicle Class 10.1Passenger Vehicle
CCA rate 30% 30%
Group all vehicles owned in one CCA class yes no
List each vehicle (rather than pooling all cars) in the class no yes
Maximum capital cost restricted to $30,000 plus tax no yes
Half year rule (50% of deduction) in first year of acquisition yes yes
Half-year rule on disposition of automobile no yes
Recapture of overclaimed CCA on disposition or trade-in yes no
Terminal loss on disposition or trade-in no no

It’s also important to have this conversation before an automobile is acquired or disposed of and often that’s at year end. Most important, keep those distance logs. Taxpayers must verify the distance they drive for personal and business purposes if the same vehicle is used for both purposes. See a DFA-Tax Services Specialist now to discuss these claims, which unfortunately are frequently audited.

Evelyn Jacks is President of Knowledge Bureau, a national educational institute for continuing professional development in the tax and financial services.


What Deductions Can Salaried Employees Claim?

Because employers are generally required to pay for the premises, assets and supplies used up by their employees in performing their duties, the employees themselves have few out-of-pocket costs to claim on the tax return. In some cases, the employee will have expenditures, but to claim them, very specific procedures must be followed.

For example, the employer, must verify in writing on Form T2200, Declaration of Conditions of Employment, that no expense reimbursement was provided to the employee and that the out-of-pocket payments were required as a condition of employment. Partial reimbursements must be declared before expenses are claimable.

Provided that step is met, examples of deductible expenses include supplies used up directly in the work (stationery, maps, etc.), salaries paid to an assistant (including spouses or children if Fair Market Value (FMV) is actually paid for work actually performed) and office rent or certain home office expenses. Form T777 Statement of Employment Expenses must be completed.

Certain specific profiles of employees may have special types of expenses, specific to their work, which can be claimed. For example, employed artists are allowed to claim the cost of supplies used up in their employment to a maximum of 20% of net income or $1,000, while and long distance truck drivers may claim the cost of board and lodging according to specific rules while en route – up to 80% of costs in most cases.

Commissioned salespeople may have promotions and entertainment costs as well as travel, auto or home office expenses.

In addition, certain tradespersons may claim the cost of tools purchased (in excess of a threshold amount) if required by their employer for use in their employment ($500 maximum claim). Loggers may claim certain power saw costs.

Employed teachers can claim a new refundable tax credit for the first time in 2016: the Teacher and Early Childhood Educator School Supply Tax Credit is worth a maximum of $150 (15% of $1000) and can include consumable items such as construction paper, art and science supplies, stationary and pens or pencils, containers, posters, games, puzzles, books, software and so on.

For more guidance on the deductible expenses of employees, consult a DFA-Tax Services Specialist™.


Pre-Budget Analysis: Finance Canada Priorities

A Federal budget date is expected soon after Prime Minister Trudeau and Finance Minister Morneau return from this week’s meetings with the new U.S. administration. Two important reports have been issued recently to provide insight into some of the thinking about risks and responses in our financial world: Finance Canada’s 2016-2017 Report on Plans and Priorities and the Bank of Canada’s January 18, 2017 Monetary Policy Report. Taken together, they provide a good crystal ball on the economic matters that may shape some of the government’s thinking as it delivers its second budget this year.

The Finance Department’s Report reflects on the recent stalling of growth in the Canadian economy and puts the blame largely on two factors: crude oil pricing and what it calls the “overall week and fragile global economic situation” in which we have lived and worked since 2014.

At the time this report was produced, Finance Canada particularly has its eye on the weakened economies in Europe, the politically-charged Middle East and slowing growth common to most other countries around the world.

Emerging markets, in particular, the report notes, will be impacted by the “normalization” of U. S. monetary policy. To that end it has outlined its top three risks meeting its priorities and it will be interesting to see if they come up in the US-Canada meetings and the budget:

  1. Strategic planning and policy recommendations will continue to be difficult. The uncertainty and volatility in the global economy will challenge the Department’s ability to provide accurate strategic advice and policy recommendations. It plans to manage those risks by monitoring global indicators, conducting private sector surveys of the Canadian economic outlook and meeting regularly with private sector economists.
  2. Challenges to the integrity and reputation of the Canadian financial system will require infrastructure and resources. This challenge is to be met by ongoing specialized staff training initiatives, monitoring of events and the need to develop new initiatives in response.
  3. Security. This is an ongoing issue for government. The finance department plans to collaborate with Shared Services Canada to implement new departmental approaches to increased security for networks, desktops and their applications.

More recently, however, the Bank of Canada is monitoring five risks that have evolved since October, 2016:

  1. Stronger real GDP growth in the U. S.
  2. The notable shift towards protectionist global trade policies
  3. Higher commodity prices
  4. Sluggish business investment in Canada
  5. Weaker household spending due to a rise in savings rates and a decline in national housing resale activity all the while that household debt continues to rise
  6. Higher global long-term interest rates

At the end of Budget Day, what’s important to taxpayers and their advisors is how Finance Canada will focus its priorities on changes to the tax system. Here the Finance Department’s Report notes its priorities will include the continued advice and analysis on ways to improve the tax system in four key ways: through fairness, neutrality, efficiency and simplicity. Expect the upcoming budget to take aim at “poorly targeted” tax expenditures and “inefficient measures” that erode the tax base.

Finance Canada, which is a department established in 1867 – 150 years ago – plays a critical role in executing on its mandate: helping government “develop and implement strong and sustainable economic, fiscal, tax, social, security, international and financial sector policies and programs. It plays an important central agency role, working with other departments to ensure that the government’s agenda is carried out and that ministers are supported with high-quality analysis and advice.”

Specifically, the report itemizes the Finance Department’s top seven responsibilities:

  1. Preparing the federal Budget and the fall Update of Economic and Fiscal Projections;
  2. Preparing the Annual Financial Report of the Government of Canada and, in cooperation with the Treasury Board of Canada Secretariat and the Receiver General for Canada, the Public Accounts of Canada;
  3. Developing tax and tariff policy and legislation;
  4. Managing federal borrowing on financial markets;
  5. Designing and administering major transfers of federal funds to the provinces and territories;
  6. Developing financial sector policy and legislation; and
  7. Representing Canada in various international financial institutions and organizations.

In an increasingly complex world, this is a tall order. The next crystal ball to the financial future is just around the corner. We’ll look forward to reporting on the Federal Budget measures and soliciting your thoughts on it.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

Additional Educational Resources: DAC Conference – for a strategic look at the issues that shape tax and economic policy in Canada and what they mean to professional advisors and their clients, please join us Nov 5 to 8 in Kelowna.


Interest Deductibility Varies on Investment Activities

When can you claim the interest on investment loans? It’s a common question but the answer depends on the investment for which you are borrowing money. In order to claim the interest when you borrow money to invest, your loan must meet three criteria.

First, the interest costs must be payable during the taxation year in question. Secondly, those costs must be reasonable. Finally, (and most importantly), the borrowed money must be invested to earn business income (considered to be “active” in nature) or income from property (considered to be “passive” in nature).

The deduction for interest expenses is possible even if the underlying asset has not produced profits yet. There simply needs to be the potential to earn qualifying income like interest, dividends, rents or royalties.

If you dispose of an investment that you borrowed money to invest in and it has lost significant value, you may continue to write off the interest on the loan as if the underlying asset still existed. But the original asset must be traceable to the loan. If you dispose of the asset at a loss, or the asset no longer exists, you may continue to write off the interest costs so long as the proceeds were used to pay down the loan amount.

What expenses can’t be claimed? The government won’t let you deduct the interest on loans used to fund registered investments. So, you’re out of luck if you borrow money to invest in your workplace pension plan, an RRSP (Registered Retirement Savings Plan), a PRPP (Pooled Retirement Pension Plan), an RESP (Registered Education Savings Plan), or a RDSP (Registered Disability Savings Plan).

An exception is interest paid on loans that are used to top up past service contributions to a registered pension plan, such as your workplace defined benefit or defined contribution pension plan. These costs may be deducted as part of the RPP contribution.

Another red flag: don’t deduct interest on loans you took to acquire assets that produce tax-exempt income, such as your TFSA (Tax Free Savings Account) or your principal residence.

Similarly, you generally cannot claim interest on a loan used to make life insurance premium payments. But an exception exists if the policy is used as collateral for a business loan and the beneficiary is the lender. Check this out with a tax services specialist.

Finally, remember this important principle: Investments in assets that produce only capital gains are excluded from the definition of qualifying income for the purpose of interest deductibility. For example, If you acquire common shares from a company that has stated it will not issue dividends, you may not be able to deduct interest on any money you borrow to purchase those shares. That’s a trap for many investors in an audit. If, however, there is a possibility that dividends may be paid in the future, deductibility of the interest costs on the loan is legitimate.

The Bottom Line. If you have borrowed to invest, or paid investment counsel fees, chances are you’ll have a deduction against all other income as a carrying charge on Line 221. But to make it real, you have to make the loan traceable to income-producing investments.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Investment Expense Claims Can Be Lucrative

Investors, be sure to claim your investment expenses on the 2016 tax return. If it’s done properly, you can save hundreds, maybe even thousands, of dollars over the years. But you have to do it correctly, or you could get into hot water.

What are investment expenses and how can you claim them? This can be a lucrative claim because all other income of the year is reduced by these charges. Because of its position on the tax return, this deduction reduces not only taxable income, but net income too, which means you may get more tax benefits from being eligible for more refundable and non-refundable tax credits.

There are two main types of investment expenses that can be claimed. The first is the most obvious: you can claim many of the direct costs associated with investing, such as the fees you pay your investment counsel or accountant for making the required tax calculations, although there are some tax pitfalls to be aware of here.

The second type of claim involves deducting interest paid on investment loans in order to reduce your net and taxable income. Here, too, there are some special rules. Let’s take a closer look at some of the tips and traps.

What kind of direct investing costs can you claim? You can deduct as a carrying charge the fees paid to a financial, investment or wealth advisor or advisory firm, for providing advice on buying or selling securities, custody of the assets, and the account record keeping and administration of those assets, as long as this is the principal business of this individual or firm. Transaction commissions, however, are specifically excluded; commissions on sales are recorded as outlays and expenses used to reduce your capital gains or increase losses on the disposition of your assets, while commissions on purchases are added to the cost base of the asset acquired. Also excluded are the costs of general financial planning services.

There are also specific rules around the claiming of tax preparation fees relating to investors. Only a portion of these fees may be deductible. That is, unless you are in the business of buying and selling securities (an active trader), or have a rental property, only the portion of the tax preparation fees relating to the investment earnings you have as a passive investor will be deductible. Therefore, it’s important to get a separate accounting for the costs of those calculations. However, if you pay your accountant to represent you in justifying your tax filings in a tax audit, those fees will be fully deductible.

Finally, you used to be able to claim the cost of a safety deposit box, but no longer. That deduction was eliminated in 2013. Also not deductible are fees paid for newspaper, newsletter or magazine subscriptions.

Next time: When can you claim interest on investment loans?

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


First Quarter Tax Filing Milestones

It’s time to take note of the tax filing requirements and investment opportunities that arise in the first quarter of 2017: January, February and March. Investors making TFSA and RRSP contributions, as well as interest payments on inter-spousal loans are affected. So are taxpayers who are making quarterly instalment tax remittances.

JANUARY – TFSAs: Additional TFSA Contribution Room. An additional $5,500 (indexed) in TFSA contribution room became available to Canadian adult residents on January 1, 2017, providing a total of $52,000 of available room since 2009. Contributions to a TFSA are not deductible, however income earned within a TFSA and withdrawals made from it are not subject to tax. TFSA activity does not affect eligibility for federal income tested benefits and tax credits, such as Old Age Security, the Guaranteed Income Supplement, the Canada Child Tax Benefit, the Working Income Tax Benefit and the Goods and Services Tax Credit.

TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. You do not have to set up a TFSA or file a tax return to earn contribution room. If, for example, an individual is 18 or older in 2009 but is not obligated to file a tax return until 2016, they would be considered to have accumulated TFSA contribution room for each year starting in 2009.

JANUARY 30: Interest Payment Due – Inter-Spousal Loans For Investment Purposes. Drawing up inter-spousal investment loans are a legitimate way for the higher-income spouse to transfer taxable investment income to their lower-income spouse to reduce the family tax bill. For several years now, the prescribed rate for spousal loans has been set at an advantageous 1%. This prescribed rate is locked in for the life of the loan, so a loan set up at 1% will continue to shield against income attribution for as long as the loan is outstanding and interest is paid annually before the January 30 of the following year. The terms of the loan should mirror commercial terms to be audit-proof.

FEBRUARY: Make RRSP Contributions; but avoid overcontributions. Here are the annual contribution limits you need to know, although it is possible for taxpayers to have higher contribution room available, depending on prior year contribution levels:

  •  For the 2016 tax year – 18% of earned income to a maximum of $25,370 (this occurs when the prior year earned income was $140,944). This contribution must be made by March 1, 2017.
  •  For the 2017 tax year – 18% of earned income to a maximum of $26,010 (this occurs when prior year earned income was $144,500). This contribution must be made by March 1, 2018.
  •  For the 2018 tax year – 18% of earned income to a maximum of $26,230. (this occurs when 2017 earned income is $145,722). This contribution must be made by March 1, 2019.

MARCH 15: Make First of 4 Instalment Payments For Tax Year 2017. The others due June 15, September 15 and December 15. Note that the remittance date is December 31 for farmers/fishers who are required to make only one instalment in the year). Instalments must be made if the estimated taxes payable (including CPP contributions and EI premiums on self-employment income) in the current and one of the two preceding tax years exceed $3,000 ($1,800 on the federal return for Quebec residents). Three remittance options are available to taxpayers:

  1. No-calculation Option. CRA will provide instalment amounts (first two based on one-quarter of taxes owing in second prior year and last two based on taxes owing in the prior year less first two instalments). Taxpayers who pay using this method will not be subject to interest on deficient instalments.
  2. Prior Year Option. Each instalment is one-quarter of the taxes payable in the prior year. If these are not sufficient to cover the current year taxes, interest on deficient instalments will be payable.
  3. Current Year Option. Each instalment is one-quarter of the estimated taxes for the current year. If these are not sufficient to cover the current year taxes, interest on deficient instalments will be payable.

MARCH 31: T1-OVP Reporting of Penalty On Tax RRSP Excess Contributions. For each month in which, at the end of the month, there is an excess amount in the taxpayer’s RRSP (i.e. more than $2,000 more than the taxpayer’s available contribution room for the year), a penalty tax of 1% of the excess amount is payable. Complete Form T1-OVP and pay the excess within 90 days of the end of the year in which there are unused contributions.

Check in with a DFA-Tax Services Specialist before the deadlines arrive if you are unsure about your filing rights or obligations.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Worried About Tax Troubles? Apply for Relief

New Year’s resolutions often involve the purging of winter weight, weighty closets or weights on the mind, including the guilt of understating income or overstating expenses or credits on the tax return. Personal trainers or friends can help with the first two goals, but when it comes to CRA, your most important ally is a tax specialist – an investment that can save you large amounts of time and money.

If you made an error or omission that the taxman can challenge, the penalties can be severe. Worse, they will mushroom with mach speed as the addition of interest (currently 5%), compounding daily and at four percentage points higher than the prescribed rate of interest, fertilizes the penalty.

Penalties can also be stacked one upon the other: two layers of late filing penalties for repeat offenders, gross negligence penalties of 50% of taxes owing, tax evasion penalties of up to 200% of taxes owing, as well as a series of monthly penalties for overcontributions to RRSPs, RRIFs or TFSAs are possible.

That’s where the investment in an experienced tax specialist comes in. He or she will explain that when taxpayers voluntarily comply with the Income Tax Act (ITA) to correct errors and omissions on previously filed returns or to file omitted returns, enormous savings can result—money that’s much better spent to keep you and your family smartly invested in the marketplace, or paying down post-holiday debt.

However, there is a specific process to be followed for voluntary disclosure. For example, CRA requires that before making such an application (using Form RC199), you must first be sure that relief from penalty provisions is possible. If so, interest relief is possible, too.

Remember, this process will work in your favor only if your request is voluntary. That is, you cannot make post-assessment requests for penalty and interest relief. In certain cases, there is an alternative: a request can be made under fairness provisions, for example, in the case of severe hardship.

In addition, a voluntary disclosure requires that the information is at least one year overdue, a penalty would indeed apply and the disclosure you make has to be complete, containing all relevant information. A voluntary disclosure will allow you to

  • report taxable Canadian or foreign income received
  • claim the right expenses or tax credits on the tax return
  • in the case of employers, or parents paying nannies, remit employees’ payroll deductions
  • report an amount of GST/HST, which may include net tax from a previous reporting period, rebates, unpaid tax, undisclosed liabilities, or improperly claimed refunds

No penalty relief is possible when filing returns with no taxes owing or with refunds expected, returns required in the case of bankruptcy, a claim for elections, advance pricing arrangements or rollover provisions.

From a financial point of view at least, it’s probably best to get the CRA weight off your shoulders before you tackle those hips or gut. This is one New Year’s resolution that can put you back on track for tax-efficient wealth building in 2017. After all, few circumstances can take you off your financial plan faster than trouble with the taxman.

Evelyn Jacks is President of Knowledge Bureau and author of 52 books, including Family Tax Essentials – How to Build a Wealth Purpose with a Tax Strategy.


Taxing the Rich: Will the Desired Results Occur?

President-elect Donald Trump will soon celebrate his inauguration and with his ascent to power, he has promised to reduce marginal tax rates, cut taxes, and allow businesses to expense new investments rather than deducting interest costs. In Canada, meanwhile, we await a new federal budget. What happens in the U.S., however, is relevant and could shape future taxation policies in Canada.

Top criticisms of the Trump plan: the top beneficiaries of the changes will be the 0.1% with incomes over $3.7 million who would save 14% of after tax income, compared to an 8% saving for middle income household; this according to research by the Tax Policy Centre.

For these reasons, a look at what happens when the rich are taxes provides interesting food for thought. According to a 2012 CD Howe Institute study,¹ rich people do indeed pay their fair share here in Canada. The 25,000 families who will be subject to the high-income tax in Ontario, for example, already pay 20% of all taxes. In fact, the top 1% of earners make about 12% of all income from taxable sources in Ontario but pay 27% of all income taxes.

The top 10% of earners are responsible for 66% of all net income taxes, and the top 25% are responsible for 88% of all provincial income taxes. Meanwhile, the bottom 75% of all taxpayers pay only 12% of all taxes.

What happens when we overtax the top 25% of taxpayers? According to the report, “rich” people respond to over-taxation in a variety of different ways, and the outcomes, not surprisingly, have the effect of reducing revenues to governments. In a nutshell, while some people will do nothing, many will do the things that make everything worse: reduce personal productivity by refusing overtime shifts, for example, or move to a jurisdiction with lower taxes.

That’s a particular challenge for indebted provinces. Because wealthier people have the resources to move, they will, especially if they also have skills that are in demand. In Canada, such moves tend to be inter-provincial, so those provinces that tax too aggressively may, in fact, find they will lose their top tax producers to other lower-taxed provincial jurisdictions.²

Other taxpayers will do the wrong things: they will enter the underground economy and become tax evaders, making it difficult for legitimate business owners to compete against those who don’t pay taxes. Everyone else will need to cover the tax gap, and may indeed suffer the consequences of increased audit activities and potential penalties and interest.

Most people don’t want to experience those negative outcomes. A better strategy may well be to work hard at raising the bell curve on wealth accumulation. As Former Finance Minister Michael Wilson controversially quipped in a speech to the Canadian Economics Association in 1985, after introducing the capital gains exemption and a number of other significant tax rate reforms, “Canada has an acute shortage of rich people.”

When tax policy is designed to help more middle income Canadians build more tax-efficient wealth, Canadian households can better weather market volatility, temporary unemployment, health changes, new business starts or economic uncertainty. That appears to be the direction our upcoming federal budget process will take: to champion middle class growth at the expense of top earners.

Whether any tax savings end up in the right investments, however, is up to individual choices. This is a key opportunity for investors and their professional advisors. High-income earners can respond to the possibility of rising taxes by making it their priority diversity income sources, split income within the family, and invest in a diversity of capital assets that will appreciate over time.

This strategy works just as well for the middle class; which has less disposable income to work with. Reducing taxes that are withheld from paycheques is a good place start raising wealth accumulation opportunities.

2017 TOP TAX STRATEGY: The future is now: plan for the creation of new money through tax efficiency; use it for early contributions to TFSAs and RRSPs in 2017.


 

¹2012 CD How Institute, “The Unexpected Impact of Ontario’s ‘Tax on the Rich’”.
²2004 J. Rhy Kesselman and Ron Cheung, “Tax Incidence, Progressivity and Inequality in Canada,” the Canadian Tax Journal, 52(3):709-789.