With the start of tax season still a few weeks away, you may be surprised to see a letter from the taxman in your mail this month reminding you about your tax obligations relating to certain types of expenses you may have claimed in prior tax years.
It’s all part of the Canada Revenue Agency’s “educational letter” campaign, which began in 2010, “to inform selected taxpayers about their tax obligations and to encourage them to correct any inaccuracies in their past income tax … returns.” The goal of the letters is also to promote compliance for the upcoming 2015 tax-filing season.
This year, the CRA has sent letters to approximately 30,000 Canadians who reported rental, business, professional or employment activities on prior years’ returns. There are two types of educational letters being sent. The first is a letter that specifically addresses a claim on a prior year’s tax return. In the letter, the CRA provides taxpayers with information about the eligibility requirements for certain types of expenses. The second type of letter is more general and is being sent to the entire activity group making those taxpayers aware that the CRA may conduct an audit in their activity group.
The CRA indicated that these educational letters are being mailed to certain individuals who may be “at risk of misunderstanding their tax obligations,” which sounds like a euphemism aimed at taxpayers who may have taken liberties filing their prior years’ returns, especially when it comes to claiming expenses.
For expenses to be deductible they must be legitimate expenses incurred for the purpose of earning income and they must be reasonable in amount. Some expenses are simply never deductible (such as golf) while others may be restricted, such as the 50 per cent limitation on claiming meals and entertainment expenses.
If you received a letter, you have the opportunity to ask for an adjustment to your prior years’ tax returns if, in the words of the CRA, you find that you may have “incorrectly” claimed some items. To make an adjustment to a previously filed tax return, simply fill out Form T1-ADJ, T1 Adjustment Request in which you can change any amounts claimed or income reported on any line of your tax return or schedules. Alternatively, you can also make changes to your returns online by going to the “My Account for Individuals” feature on the CRA’s website.
If you received the general letter, it doesn’t necessarily mean that you will be selected for an audit, as the CRA uses a risk-assessment system to determine which taxpayers are most likely to “misunderstand their tax obligations.” The letter states that even if the CRA does decide to conduct an audit, it won’t start such an audit until at least 45 days after the date of the letter, giving taxpayers an opportunity to review prior years’ returns and adjust them, if necessary.
Under the tax rules, the CRA can adjust your tax return during the three years following the date on your notice of assessment. For example, if your 2012 tax return was filed on March 15, 2013, and the date on your 2012 notice of assessment is May 5, 2013, the CRA can reassess your 2012 tax return until May 5, 2016 (May 5, 2013 + three years).