CRA to start verifying those tax returns
While you may have filed your 2012 tax return and already spent that tax refund, you should be aware that the Canada Revenue Agency's annual "matching program" to suss out inconsistencies is about to enter its peak season.
From October through March of the following year, the CRA compares the information on your personal income tax return to information provided by third-party sources, such as employers or financial institutions. If the numbers don't match up, you could be in for a nasty penalty from the CRA.
Take the recent case of a Toronto animator who went to Tax Court this summer to fight a penalty of over $5,500 for his repeated failure to report income on his returns.
Under the Income Tax Act, if you fail to report an amount in your income for the current year and you also failed to report an amount in income for any one of the prior three years, you are subject to a penalty of 10% of the amount not reported. The only way to get out of this penalty is to demonstrate that you exercised sufficient "due diligence" in reporting your income.
In the current case, the animator admitted that in 2008, 2009 and 2010 he failed to report certain amounts of employment income received on his tax returns. In his notice of appeal, he explained the omission by saying that in 2010, the year for which the penalty was being assessed, he worked for two animation studios, on three separate projects. At the first studio, he worked on one major project and at the second he worked on two smaller projects.
At the end of the year he received two T4 slips which he assumed was one from each animation studio; however, it turns out that that the second studio sent him two separate T4 slips, one for each project.
As tax season approached, he forwarded these slips, via his mother, to his family's accountant.
Later, a third T4 slip arrived in the mail. While the animator testified that he was "curious as to why another T4 arrived," he called his mother and asked her if she could check with the accountant to see if the accountant had all the necessary forms.
The accountant said that she had two T4 slips, which, according to the animator's testimony, seemed reasonable so he "foolishly put the T4 in [his] tax folder at home and didn't think much else of it." As it turned out, that T4 contained the bulk of his earnings for 2010 (the amount not reported being $55,702) and thus triggered the substantial penalty.
The animator testified that this was "just a simple oversight, albeit a bit of a boneheaded one" and argued that the 10% penalty was "devastatingly large for a person of my income and current situation."
Nonetheless, the judge, in upholding the penalty, was not swayed by this argument, saying that the animator's failure to even open the envelopes in which his T4 slips arrived or to review his tax returns showed that he simply didn't take "reasonable precautions to avoid the failure to include the unreported income in his tax returns."