I made a Mistake on my Tax Return. What do I do?

Posted on By Louise Polcaro
mistake,tax return,hard

Mistakes happen, even on tax returns!

If you’ve filed your tax return timely, you can request the Canada Revenue Agency (CRA) to amend and reassess the return to include the income omitted or deductions missed. The request should be made in writing to the CRA.

For circumstances where the omission or mistake would result in a penalty, a voluntary disclosure program (VDP) may be used. The VDP offers taxpayers a chance to correct errors on a previously filed tax return, or to file a return which should have been filed but was not.

The VDP provides two streams, one for income tax disclosures and one for GST matters. Tax professionals should always be contacted first when using the VDP.

1. Income Tax Stream

Income tax applications to the VDP are processed under “two tracks”: (1) the general program and (2) the limited program. Each case is assessed individually as to which track will apply.

General program

This program provides relief to taxpayers who intend to correct unintentional errors. If an application is accepted into this program, the taxpayer will not be subject to any penalties, nor referred for criminal prosecution. The taxpayer may also be granted partial relief of interest for assessment for a certain number of years.

Limited Program

This program limits the relief available for taxpayers who intentionally avoided their obligation to pay taxes. If a taxpayer is accepted to this program, they will not be referred for criminal prosecution, or charged gross negligence penalties, but may be charged other penalties as applicable. No interest relief will be provided.

CRA considers the following factors in determining acceptance into the limited program:

  • Efforts were made to avoid detection through the use of offshore vehicles
  • The dollar amounts involved
  • The number of years of non-compliance
  • The sophistication of the taxpayer

The existence of one or more factors does not automatically make the taxpayer ineligible or eligible for the limited program.

2.GST/HST stream

Registrants and other taxpayers required to report GST/HST apply to this stream of the VDP. This program provides taxpayers the opportunity to voluntarily correct inaccurate or incomplete GST/HST information, or disclose any information that should have been reported initially but was not.

Applications under this stream of the VDP are processed under three categories: (1) the wash transactions program, where one party may have reported and another has not; (2) the general program; and (3) the limited program, similar to the income tax limited program.. The determination of which category the application will be processed is based on a case-by-case assessment.

Executors and Powers of Attorney

If you are acting under a Power of Attorney or as an executor and notice that taxes have not been reported properly, you can apply on behalf of the grantor or deceased to the CRA’s VDP.

For further information, or assistance with voluntary disclosure, please contact a TEP.

Making gifts during your lifetime

Posted on By Joanna Pegum
gift in the post

It has become increasingly common for parents to give gifts to their children during their lifetime rather than leaving it in a Will. Whether motivated by a desire to view the recipient enjoy the benefits of the gift during the lifetime of the giver, or by the circumstances of the recipient (e.g., a child needs to move out, buy a house, or attend university), gifts made during the lifetime of the giver warrant specific consideration.

Inter vivos vs. testamentary gifts

Gifts made during the lifetime of the giver are called “inter vivos” gifts. Gifts made by Will are referred to as “testamentary” gifts.

Is there a tax on gifts in Canada?

There is no tax on gifts in Canada, either to the giver or to the recipient. However, there may still be tax consequences to making gifts. The most common consequence is that when an asset – such as stock, real property, or even art – is gifted, the item is deemed to have disposed of by the giver at fair market value. Tax will apply to the increase in value, if any, of the asset. In general, the giver of the gift will be liable for tax on half the value of the increase at their marginal tax rate.

One potential advantage to an inter vivos gift is that, generally, any further appreciation of the asset is deferred until the beneficiary disposes of the asset. An inter vivos gift may be appropriate as part of estate planning in situations where the asset is likely to increase further in value.

To avoid adverse tax consequences property should not be sold to the recipient at a price below fair market value. This may result in double tax as the giver’s sale price will be based on fair value whereas the recipient will have a low tax cost equal to the price paid.

Inter vivos gifts as a means to avoid probate fees

Consider the motivation behind making inter vivos gifts carefully. While such gifts are appropriate when made out of a genuine desire to permit the recipient to have the asset, they may not be appropriate as a means to avoid probate fees. Gifting assets during the lifetime of a testator or setting up joint accounts as a means of avoiding probate fees may have unintended results, complicate the administration of an estate, incur unwanted taxes, and/or result in a disproportionate distribution of assets. Also, commencing in 2023, it may also require compliance with the new “trust reporting rules”.  It should be noted that there has been a great deal of litigation regarding gifts made to avoid probate, which is time consuming and expensive, so any attempts to reduce probate fees should be planned and documented appropriately.

For further information or to plan appropriately for inter vivos gifts please consult a TEP.

What is my residence?

Posted on By admin
residence

Under Canada’s tax system, residency determines how much worldwide income will be subject to Canadian income tax. Canadian residents are taxed on all worldwide income, whereas individuals who are not Canadian residents are subject to Canadian income tax only on certain types of income that have been earned in Canada.

Although there is no statutory definition of residency for tax purposes, individuals are typically described as ‘factual residents’, ‘deemed residents’, ‘non-residents’ or ‘deemed non-residents’.

Factual residents

According to legislation, individuals who are “ordinarily resident” in Canada are considered to be ‘factual residents’ of Canada. The most important consideration in determining whether someone is resident in Canada is their residential ties with Canada. Primary factors to consider include:

  • A home in Canada
  • A spouse or common law partner in Canada
  • Children or other dependents in Canada

Other secondary ties that may be relevant include:

  • personal property in Canada, such as a car or furniture
  • social ties in Canada, such as memberships in Canadian recreational or religious organizations
  • economic ties in Canada, such as Canadian bank accounts or credit cards
  • a Canadian driver’s licence
  • a Canadian passport
  • health insurance with a Canadian province or territory

An individual who has left Canada may still be considered a factual resident if they maintain these types of residential ties. An individual who has recently arrived in Canada can be considered factually resident as of the date of immigration if they establish the above types of residential ties.

Deemed residents

Individuals who are not factual residents of Canada may still be deemed residents for tax purposes under the Income Tax Act. For example, individuals are deemed resident in Canada for tax purposes for a given year if they:

  • Spent 183 or more days in Canada during that calendar year
  • Served in the Canadian Forces during that calendar year
  • Worked as an ambassador, minister, high commissioner, officer or servant of Canada

Non-residents

Individuals who do not have significant residential ties with Canada and who lived outside of Canada during a given calendar year, or who stayed in Canada for less than 183 days of a given calendar year may be considered non-residents. Non-residents are only taxed on certain types of income that has been earned in Canada.

Deemed non-residents

Individuals who have close connections to more than one country may qualify as deemed non-residents even if they would otherwise meet the criteria for residency in Canada.

Part-year residents

Individuals arriving in or leaving Canada partway through a calendar year are typically considered part-year residents in the year of immigration or emigration. If an individual is considered a part-year resident, they are taxed on worldwide income only for the part of the calendar year during which they are resident in Canada. Part-year residents are not generally taxed on worldwide income for the portion of the year during which they are not resident in Canada.

If you have any questions about whether you are a resident of Canada for tax purposes, please consult a TEP.

Do I need to declare my cryptocurrency to CRA?

Posted on By Joanna Pegum
Attending to paperwork

Yes. Digital currencies, including cryptocurrencies, are subject to taxation under ordinary income tax rules. Gains and losses from buying and selling cryptocurrencies must be reported as part of income when filing a tax return. Since cryptocurrencies are not government-issued currency, they are treated by the Canada Revenue Agency (“CRA”) as a commodity.

Depending on the extent of the trading activities, the transactions may be characterized as being on account of income or capital. Generally, if an individual is in the business of trading cryptocurrency, any gains or losses will be treated as being on account of income. If an individual is not engaged in the business of trading cryptocurrency, any gains or losses will be treated as being on account of capital.

Using cryptocurrency to pay for goods or services is viewed as a barter transaction and is subject to the barter rules of the Income Tax Act. The monetary value or equivalent of the cryptocurrency is counted as the amount of the payment, or receipt, and the transaction is reportable for tax purposes.

Trading cryptocurrency for another type of cryptocurrency

Generally, when you trade one type of cryptocurrency for another type of cryptocurrency, CRA believes that the barter transactions rules will apply to that transaction. For example, if a taxpayer converted Bitcoin to Ethereum, CRA would consider this a disposition for tax purposes. This disposition for tax purposes must be reported on your income tax return as either business income (or loss) or a capital gain (or loss) depending on your specific circumstances.

How much tax will I pay on my cryptocurrency?

If transactions are characterized as being on account of income, the net income will be taxed at an individual’s marginal income tax rate. If transactions are characterized as being on account of capital, 50% of the realized capital gains will be taxed at an individual’s marginal rate.

If I gift my cryptocurrency, am I liable to tax?

When any item is donated or gifted for a value different than its acquisition cost, CRA will treat the donation or gift as a disposition of property. Accordingly, this applies to a gift or donation of cryptocurrency. The cryptocurrency will be valued at fair market value at the time of donation, and any capital gain or loss from the disposition must be reported. If the gift is made to a qualified donee (such as a registered charity), it may be possible to receive a tax receipt from that donee. The amount of the gift for tax purposes will be determined by the fair market value of the cryptocurrency at the time of the transfer.

How will CRA know about my profits?

Not reporting income from cryptocurrency transactions is illegal. In order to ensure a fair tax system, the CRA actively pursues non-compliance with respect to reporting income from cryptocurrency trading. Cryptocurrency exchanges increasingly require personal information in order to set up an account. CRA may be able to access this information and verify it with other sources to identify individuals who seek to avoid paying taxes on transactions.

What if I have made a loss?

Individuals in the business of trading cryptocurrency can deduct losses when computing income from a business. Losses that occur as a result of theft are likely deductible if they can be considered an inherent risk in carrying on the business and if the loss is reasonably incidental to the normal income-earning activities of the business.

How is cryptocurrency mining treated by the CRA?

Mining cryptocurrency involves solving complex computer problems in exchange for an award of cryptocurrency. This type of computer problem requires high processing power, often resulting in high electricity costs. The CRA has suggested personal mining may be treated as a non-taxable hobby or personal activity, whereas mining for commercial or business purposes should be reported as income. The electricity costs reasonably attributable to the cryptocurrency business may be deducted as business income.

What if I fail to declare any taxable profits?

It may be possible to correct a declaration made to CRA by pursuing a voluntary disclosure or by filing an amended return. Consult a licensed professional in order to ensure that these steps are taken appropriately and without risk of further penalty.

For further information, or assistance with tax planning, please contact a TEP.

Why is CRA investigating my deceased relative’s tax affairs?

Posted on By Louise Polcaro
tax,investigation

When a loved one dies, and you are named executor of the will, or you are assisting the executor with their duties, you may deal with the process of estate administration, filing tax returns and distributing all or portions of the estate. At what can be a stressful time, it may be difficult to find that the Canada Revenue Agency (CRA) is reviewing your deceased loved one’s affairs.

CRA may start an investigation for different reasons, including screening processes, audit projects, and information from connected files that have been selected for auditing. If a CRA auditor notices problematic information on your deceased relative’s tax return, such as inconsistences with information provided, that return may be selected for review or audit. If selected, the auditor will consider several types of records, including previously filed tax returns, business records, and personal records. Accordingly, it is important to keep well-organized records of your deceased relative’s tax information, business records, and personal records in the event of an audit.

I found a mistake on my deceased relative’s tax return. What do I do?

If you are acting under a Power of Attorney or as an executor and notice that taxes have not been reported properly, you may be entitled to apply to the Voluntary Disclosure Program (“VDP”).

The VDP offers taxpayers, dead or alive, a chance to correct errors on a tax return they had previously filed, or to file a return they should have filed, but did not. Voluntarily disclosing mistakes or newly found assets of your deceased relative may avoid some penalties that CRA would otherwise impose. For more information on the VDP, see Voluntary Disclosures Program – Introduction.

Updating CRA with any newly obtained information is important. An estate trustee can be held personally liable for any outstanding taxes on assets of the estate if assets are distributed prior to obtaining a clearance certificate from CRA. However, clearance certificates are issued on the assumption that information provided by the applicant is accurate and up-to-date. If new information comes to light, it should be disclosed to the CRA.

If you are uncertain whether you should enter the VDP and disclose newly found information to the CRA, it is possible to commence anonymous preliminary discussions with a CRA official to gain insight into the program and better understand the risk and benefits. Such discussions are meant to be informal and non-binding and can occur without disclosing the taxpayer’s identity. It is imperative to contact a tax professional before deciding how to proceed with the VDP.

How long after death can CRA reassess my relative’s affairs?

CRA can reassess tax returns for individuals for up to three years from the date of the original Notice of Assessment. After this date, returns may only be reassessed if the taxpayer made careless or neglectful misrepresentations to CRA.

For further information, or assistance with voluntary disclosure, please contact a tax professional.

The risks of not making a will

Posted on By admin
worried woman

Making a will can seem like an unpleasant or dreary task to be put off indefinitely. However, there are serious implications for the loved ones of someone who dies intestate (without a will). This article highlights some of the consequences associated with not preparing a will.

1. Your estate will be distributed under the rules of intestacy

A person who dies without a will is considered to have died “intestate”. Legally speaking, an intestate person has left no instructions as to how they wish for their assets to be divided and distributed on their death. In such circumstances, provincial legislation governs how property will be distributed amongst surviving relatives. Typically, these rules indicate that if a married person dies, an initial lump sum amount will be left to their spouse, plus a portion of the residue of the estate (the amount depends on whether there are any children of the deceased). If there are children, the residue is divided proportionately between any children and the surviving spouse. Where there are no children or spouse, the estate generally goes to the next of kin.

2. There is no opportunity to appoint guardians for minor children

One of the most important aspects of a will is appointing a guardian to look after minor child in the event of an untimely death. In the event all of the legal guardians of a child pass away without leaving wills, a Court Order will be required to select a guardian for the child. In the absence of such an order, the applicable provincial government would become involved.

3. There is no named executor

An executor is typically named when a person prepares their will. An executor is someone who is trusted to administer the estate according to the deceased’s wishes. However, if there is no will, there is also no appointment of an executor. As such, someone must apply and be appointed to act as administrator of the estate, which may result in delay, expense and frustration for family, friends and loved ones.

Other potential implications of not creating a will include:

  • Stepchildren and, in some jurisdictions, unmarried partners will likely be discounted from the estate;
  • Families may face additional administrative burdens which add to suffering at an already difficult time;
  • Familial disputes may arise; and
  • Expensive legal action may be required to resolve complications.

There are many risks associated with not preparing a will. As such, it is crucial that everyone prepare a will, preferably with the assistance of an experienced professional who can ensure that it is done properly.

For further information or assistance with drafting a will, please consult a TEP.