Tag: CRA

File your return on time … whether refund, tax or nothing is due

Tax filing season — It’s an annual ritual that some look forward to, some dread and some simply forget or ignore.  

According to the Canada Revenue Agency (CRA):

  • About 50% of tax-filers receive a refund
  • Between 12.5 million and 14.4 million refunds are issued every year
  • The average refund for 2009 income tax returns was about $1,500

Whatever your personal perspective, prompt filing is a legal obligation for those who owe, and can still be a valuable opportunity for those who don’t.

The deadline

Individual tax returns are generally due on April 30, though in years when that day lands on a weekend — such as this year — the deadline is the following business day. Thus, CRA will consider your return as filed on time and your payment to be made on time if it is in their hands or is postmarked by midnight on Monday, May 2, 2011.

Where you or your spouse/common-law partner runs a business, your return is not due until June15, 2011, but any tax payment remains due by May 2.

Costs of non-compliance

Late-filing – If you owe tax and you’re even a day late filing a return, the penalties can be significant. The penalty is 5% of your 2010 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months.

Repeat late-filing – It’s worse if you are a repeat offender. Specifically, if you had to pay a late-filing penalty in 2007, 2008 or 2009, the respective penalty rates for 2010 can be 10% for the base rate, plus 2% per month to a maximum of 20 months.

Failure to report income and false reporting – If you fail to report an amount on your return for 2010 and you also failed to report an amount on your return for 2007, 2008 or 2009, you may face a penalty of 10% of the 2010 unreported amount. As well, if you knowingly make an omission or false statement on your return, you could be hit with a penalty of the greater of $100 and 50% of any reduced taxes or overstated credits.

Interest charges – Apart from the requirement to file a return, starting May 3, 2011, CRA charges compound daily interest (currently 5%) on outstanding taxes. This includes the balance showing on a notice of assessment or due to a reassessment. In addition, interest is charged on any penalties starting the day after the balance is due. 

Relief

If your late filing was due to circumstances beyond your control, you may complete CRA Form RC4288 to request a waiver of penalties and interest.  

With respect to a failure to report income or false reporting, CRA may waive the penalties if you now voluntarily report the income pursuant the Voluntary Disclosures Program.  

On the interest front, if you cannot pay your whole tax debt you can contact CRA to discuss payment arrangements and clarify instalment payment obligations. At the very least if you file your return on time, the reporting penalties can be avoided despite interest likely still being charged. 

No taxes due?

Even if you have no taxes due, filing a return will assure that you continue to receive certain credits and benefits including:

  • GST/HST credit, Canada Child Tax Benefit, Universal Child Care Benefit, and the Children’s Fitness Tax Credit
  • Guaranteed income supplement
  • Spouses splitting pension income must file a joint election using form T1032, and both must file returns, again even if one or both owe no taxes

Whatever your tax situation, it’s makes good financial sense to file your return on time. And, of course, the same applies to your clients as well.

Homebuyer triumphs in the face of conflicting HBP acquisition rules

The Home Buyers’ Plan (HBP) enables would-be homeowners to access their RRSP holdings to assist in the acquisition of a new home.  

In simplified terms, a person may withdraw up to $25,000 in a year and not have it included in taxable income, so long as the funds are devoted (a purposely soft term I have chosen for now) to the purchase of a new home by October 1 of the following year.  The person then has about 15 years to re-deposit the money to the RRSP without incurring penalties.

The set of HBP rules is not the most complicated drafting one may come across, but is nonetheless tax legislation, and earns its stripes fairly in that regard.  The cross-referencing of terms makes it a bit of a challenge to navigate, particularly for first-time homebuyers who by definition are likely to consult the rules but once in a lifetime.

And in a case heard near the end of 2009, a judge was presented with a set of facts that highlighted a conflict in those rules.

Undisputed facts

In June 2005, taxpayer AL withdrew $20,000 from her RRSP (the maximum allowed by the rules at that time), and used it as part of a series of initial payments to a builder for construction and eventual occupation of a condominium unit, with the last payment made in April, 2006.  The agreement required AL to take possession by May, 2008.

Following her 2005 tax filing, AL was assessed by the Canada Revenue Agency (CRA) for a $20,000 income inclusion on the basis that she had not taken possession of an eligible housing unit prior to October 1, 2006 in compliance with the HBP rules.

AL initiated an appeal from the assessment to the Tax Court of Canada under the informal procedure.  She represented herself opposite Crown counsel on behalf of the CRA.  

Daisy-chaining definitions 

For a taxpayer not to be immediately taxed on withdrawn RRSP funds, all parts of the definition of “regular eligible amount” (REA) must be satisfied, including the requirement that the individual must acquire the property by the completion date.  

One part of the REA definition addresses possession, whereby an individual must intend to use the property as a principal place of residence not later than one year after its acquisition.  In the case of a condominium unit, acquisition is the day the individual is entitled to immediate vacant possession of it.  In the present case, the written agreement entitles AL to vacant possession at May 1, 2008, so that is the deemed completion date.  

Another part of the REA definition addresses the issue of payments, which must be equal to or exceed the RRSP withdrawal and have been made between the withdrawal date and the completion date.  Pursuant to this rule, the deemed completion date is before October 1, 2006.

The world be deemed

According to Crown counsel, the date of acquisition cannot be considered to occur after the completion date for purposes of habitability and vacant possession, and before the completion date with respect to the commitment of building payments.  It must be one or the other; else, a person could engage a builder with an agreement for a very distant possession date, which in Crown’s opinion would be against the purpose of the HBP program.

The Crown goes on to suggest that the extension of the completion date was only available in circumstances when unforeseen delays occur, not if it is known in advance that the date of acquisition will be after the completion date.  Indeed, the written agreement has a possession date of May, 2008 which, according to the Crown, implies that AL knew at time of RRSP withdrawal she would not be acquiring the housing unit before the completion date. 

The judge acknowledged that the two deeming provisions were inherently in conflict, but declined to accept the further Crown submissions as to precedence of those rules.

In the end, the judge held that as long as the amounts withdrawn from the RRSP were used for the construction of the qualifying home before the completion date, that is October 1, 2006, it does not matter after that when the housing unit was ready to be occupied.  In fact, the property was still not ready by the time of hearing in 2009.

Overall, it is a practical determination that comports with the reality of building timelines in many cases.  Otherwise the rules would discriminate against buyers acquiring a property as part of a large scale building project, and that certainly could not be what the HBP was ever intended to do.

The taxman cometh

I’ve never been a fan of the term “taxman”.  

Seldom, if ever, is it used as a simple reference to a real person.  No, it is a loaded term that is invariably intended to bring to mind the stereotype of a misguided mandarin squeezing the economic life out of the ordinary Joe toiling to make a buck.

Oh, come on!

The foundations of our economy and society are not free, and tax is the necessary cost.  I won’t come to the defense of any particular politician, but I will say that it is neither simple to conceive nor easy to implement an effective tax system.

And as to those front line tax collection people, they probably rank just behind fast food wait staff in terms of the unwarranted abuse they must personally endure.

Having said that …

I came across a real headshaker case recently.  

The decision was handed down in December 2008, with the English translation just recently being available.  In either language, it doesn’t do much to improve the image of the ‘taxman’ as being cavalier and callous.  

Fortunately, the appeal court stepped in to make things right, but it should never have gotten that far.

A series of unfortunate events

Taxpayer CL was a nurse with two children.  She handled the domestic side while her husband worked outside the home and managed all their finances.  

A series of unfortunate events were visited upon the family beginning in 2002:

  1. CL’s husband died suddenly in 2002, followed in short order by the deaths of her mother and her father-in-law.
  2. The couple’s son fell into a serious depression with suicidal issues, and CL herself came under psychiatric care and medication.  
  3. In 2003, the family basement flooded and became infested with rats, at roughly the same time as financial need forced CL to re-enter the workforce.  She went through three job changes through to 2005.
  4. Meanwhile the accountant who had handled the couple’s tax returns fell ill during this time period and eventually died of cancer in 2005.

It was not until 2007 that CL was able to assemble the documentation to file her 2003 to 2006 tax returns and pay the $33,000 tax owing.  She received an assessment totaling about $13,000 in penalties and interest on arrears, which she appealed to the local Tax Service Office.  In support of her application for relief from the assessment, she cited the Canada Revenue Agency’s “Taxpayer Relief Provisions”.  

For further context, by November 2007 CL was collecting employment insurance benefits, due to her psychological condition and inability to work outside the home.

How exceptional must exceptional be?

In January 2008, the Director of the Tax Services Office replied that CL:

“failed to act quickly to remedy the delay and failed to meet your tax obligations in the past. As well, there was no error or delay on our part, nor were there circumstances beyond your control that might have prevented you from doing your accounting on time and as required. The penalty for late filing and interest on arrears are therefore upheld.”

CL appealed this response to the federal court for judicial review 

On further review

The judge affirmed that the Taxpayer Relief Provisions are not mandatory for CRA officials, but rather “were developed by the Department to guide it in the exercise of its discretion and enable it to manage the tax system more fairly, by allowing room for common sense to benefit taxpayers who have been victims of misfortune or circumstances beyond their control.”

One extract provides a non-exhaustive list of possible circumstances, such as 

     (a) natural or man-made disasters such as, flood or fire;
     (b) civil disturbances or disruptions in services, such as a postal strike;
     (c) a serious illness or accident; or;
     (d) serious emotional or mental distress, such as death in the immediate family.
     [Emphasis added by judge.]

After reviewing relevant case law, the judge stated that “if ever there was a situation that merited tax relief, it is the applicant’s in this case, in accordance with the very criteria formulated by the Department of National Revenue.”

CL’s appeal succeeded and the matter was directed back for resolution in accordance with the court’s findings.

Literary culture versus pop culture

By the way, despite that I played on Eugene O’Neill’s “The Iceman Cometh” for the present article title, I’m truly more of the Beatles bent with their straight-up “Taxman”.

Come to think of it, George Harrison wrote that latter piece as he entered the 95% tax bracket.  Perhaps the taxman in the foregoing case was summoning back the spirits of Messrs Wilson and Heath, the politicians George decried in his song.

Whatever the motivation, this taxman may not be the exception that proves any particular rule, but the situation most certainly should be viewed as ad libbing well off the script or songsheet of good tax system management.