Lessons from Tax Season – Unreported Income

Tax season has come and, for most other than self-employed individuals, gone. There were some changes in 2015, and more are coming for 2016. The arts credit will be eliminated, and the fitness credit will be halved. The so-called family tax cut, which was billed as a form of income splitting for working families with children, has been eliminated for 2016.

From our standpoint, we adopted the ability to download slips directly from CRA. Our authorizations for personal tax clients have always given us access to information such as losses carried forward, RRSP limits, and a few slips (T4s, T4As, OAS, and CPP). However, for 2015, CRA expanded the program to include many additional types of slips (T5s and T3s, for example), and the information can be downloaded into our tax software. What did we discover, and what lessons can be learned?

There were a surprising number of times when we found that CRA had tax slips (T5s, T3s, share disposals) that our clients did not provide to us. We, in fact, went back to prior years on an occasional basis and found that these were missed in prior years. Personal returns are not prepared on an audited basis, and your accountant can only be responsible for information provided by you the taxpayer. This new CRA service enables us to identify and include missed slips, which allows us to better serve our clients.

However, the question remains as to why clients are not providing all of their slips. For standard slips such as T4s, T5s, and T3s, it might simply be that they were mailed to the wrong address. Slips may have been lost in the mail or in the home after receipt. Regardless, all taxpayers should track their various sources of income and investment accounts to make sure that they get slips from all companies.
Secondly, it has become apparent that some individuals do not realize that they must report the disposal of all investments (shares, mutual funds, etc.) from unregistered accounts on their personal returns. In the past (and still in most cases), individuals did not receive slips for these and figured that no slip meant no reporting. This is not the case, and you must track the cost of all investments and use it as a basis to calculate the gain when such assets are sold.

One final word of caution: CRA has a little-known policy with respect to repeated missed reporting, referred to as the “Repeated Failure to Report Income Penalty.” If you fail to report a source of income in the year and you missed reporting any source of income in the previous three tax years, you are subject to a penalty of 20% of the current year’s unreported income. Even if the previous infraction related to a small omission, the penalty is based on the current year’s unreported income. This is, of course, very punitive.

CRA is increasingly emphasizing reporting compliance. Letters intended to “scare” taxpayers into amending claims, more money spent on audit and review of tax information, and better matching between slips issued and those reported on actual returns are just a few of the ways in which CRA is making sure that it gets the proper amount of tax. Understanding your rights and responsibilities will better enable you to manage your tax liabilities while still complying with CRA’s tax rules and regulations.

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