It’s been about a month since the filing deadline for your 2014 personal income tax returns. Since then, the CRA has been sending out notices of assessment or requests for more information. In some taxpayers’ cases, they have received a notice of assessment, which reflects different results from the tax return they have filed. In rare cases, the notice will state that the taxes owing are lower than the amount calculated by the accountant. However, in most cases where there is a difference, the CRA notice will say the taxpayer owes more taxes.
How does this happen?
The amount of tax-related data stored by the CRA on each taxpayer grows annually. The amount of tax-related data sent to the CRA from institutions, such as banks, also grows annually. Information such as employment income (T4, T4E, T4P, etc.), investment income (T3, T5, T5013, etc.) and RRSP withdrawals (T4RIF) are all provided to CRA directly by institutions. In fact, most of this information is provided electronically to CRA, which means it is uploaded into CRA’s data bank almost instantly.
If a taxpayer receives a notice of assessment that is more than the amount calculated on his return, it’s because the taxpayer has omitted an income slip on his tax return. In this age of electronic data, CRA can determine which slips are missing on a tax return very quickly. In the case of employment income (the T4 related slips), all this information is already in CRA’s data bank, filed under the taxpayer’s SIN even before the taxpayer files his tax return.
Why is this important? Penalties
In the old days, it took CRA months to detect unreported income, if at all. In this current electronic age, CRA can very likely uncover unreported income, and do so very quickly. Taxpayers need to be diligent when assembling tax slips to prepare their tax returns. As I wrote in the previous blog “Penalties for Repeated Failure to Report Income”, the cost of not reporting income, intentional or unintentional, can be very high.
There is a repeat failure to report penalty whereby if a taxpayer fails to report an income amount in the current year and also fails to report an income amount in any of the last three years, the penalty is 20% of the unreported amount or 10% at the federal level and 10% at the provincial level.
Nowadays, not all tax slips come to us through the postal system where we would then file them neatly in a folder. Many institutions, including Canada’s EI agency, post tax information online for the taxpayer to download independently and many taxpayers do not take the time to remember all the financial events for the entire year and follow through when compiling their tax information. This is why an innocent oversight can result in serious penalties.
If you’ve received a notice to assessment indicating that you owe more taxes because you’ve forgotten about an RRSP withdrawal you made way back in January 2014, although this is disappointing, you still owe regardless. More importantly, for the next three years, you’ll want to make sure you don’t omit any income slips because the next time around, it will be the taxes owing plus a 20% penalty. This 20% penalty will stick even if the first offence was a minor oversight, such as a $50 interest slip from a savings account. Throw in late filing penalties on top of the repeat failure penalty, and things get ugly quickly!
Bottom line – take your time when compiling your tax information and make sure you file on time.