Missing income on returns a costly mistake
Just when you think you survived tax season by getting your return in minutes before last Monday’s April 30 deadline, you are mortified to find an errant T5 slip sitting in that pile of unopened mail on the dresser. Now what?
You can make a change to a return you’ve already submitted online by using the “My Account” feature on the Canada Revenue Agency website or by completing a Form T1-ADJ “T1 Adjustment Request” or simply writing a letter to your Tax Services office.
But perhaps you’re thinking to yourself, why bother? After all, surely the CRA has a copy of the missing slip and will simply adjust your return for the unreported income and send you a bill for any amount owing.
The reason you may want to fix your return yourself is that under the Income Tax Act, a “repeat omission penalty” can be assessed for failing to report income in any two tax years within a four-year period. The amount of the penalty is 10% of the amount of income not reported. An equal provincial penalty can also be imposed.
Consider the recent case of Barbara Norlock, who failed to report interest income of $876 in her 2006 income tax return and also failed to report $18,376 on her 2008 return. She was hit with a federal and provincial penalty of $1,837.60 each.
To avoid the penalty, a taxpayer can bring a “due diligence” defence for either the first or second failure to report income. The due diligence defence can be used in cases where the taxpayer has either made a “reasonable mistake of fact” or, at the very least, took reasonable precautions to avoid the event leading to the penalty.
While Ms. Norlock conceded that no such defence could be made for the 2008 taxation year, since presumably her omission was material, her argument in court focused on the 2006 omission of the $876 of interest income.
She testified that this omission “was a reasonable mistake of fact. [It was] overlooked … because she was not in the habit of earning and reporting interest income.… Viewed objectively, the mistake was reasonable as the amount of unreported income in 2006 was less than 1% of the income which [she] reported” that year.
The judge agreed that since the amount of unreported income in 2006 was only 1% of her total income, her failure to report it was indeed innocent. That being said, the judge was not convinced “that a reasonable person in the same circumstances would have made the same mistake.”
In the judge’s opinion, when Ms. Norlock took her tax forms to her accountant to have her 2006 tax return prepared, she should have realized that she had not received her T5 slip reporting her interest income and yet she took “no actions” to get a T5 for her Amex savings account.
As a result, the judge felt that Ms. Norlock failed to take “reasonable measures to report all of her income in 2006 or 2008” and the penalty was upheld.