At this time of year we all start to think about pulling together our paper work in order to have our 2011 Income Tax Return prepared. The most commonly asked question is “will I get a refund or will I have to pay”?
Many Canadians are still sorting out their 2010 Income Tax as they have recently been reassessed by CRA. I thought I would focus this month’s commentary on Reassessments and fill you in on why so many people receive them from early December until late January.
The Canadian Income Tax system is based on the honour system. CRA processes our information the way we file it and then later in the year they verify our information. Many people believe that if CRA accepts what they initially file, it must be right, which is not the case. During the initial processing of your Income Tax Return CRA will accept what you have submitted and only make obvious corrections based on information on their system at that time.
Income sources and Financial Institutions are required to provide you with information slips either by the end of February (T4’s and income like forms) or the end of March (T3’s and other trust like income) and are also required to send copies to CRA. Financial transactions such as RRSP contributions, charitable donations, self-employed contractor income and real estate sales are also reported to CRA. Under a number of Tax Treaties, more and more foreign governments are reporting to CRA payments made to Canadians.
Starting in late fall, CRA starts to match the information you have filed with information they have received from various sources. Every single box on every single form is lined up with that you reported earlier in the year. CRA also runs other checks and balances such as marital status verification. If something does not match, it is likely you will receive a letter or even an automatic Notice of Reassessment. CRA also targets certain deductions at random and will ask you to submit your documentation for verification. If you fail to do this within 30 days you will automatically be reassessed.
Many people panic and think they have done something wrong when they receive a letter from CRA. In most cases there is nothing to be concerned about; CRA either just wants to do a random verification of what was filed or they want to notify you of income you have failed to report. It is nothing personal.
It is important that you verify any Reassessment you have received to ensure that CRA is basing their review on correct information. If you think they have made a mistake act quickly to resolve the matter. The onus is on you to provide documentation and the fact that you did not receive the slip in the mail is not a valid excuse. You need to know your income sources and be proactive in reporting those amounts on your Income Tax Return even if you didn’t get a slip.
My final word is on penalties and interest. If you failed to report income and CRA later catches up with you, it will be necessary for you to pay interest. Usually CRA will not charge you a penalty the first time but, if items have been unreported more than once in recent years it is likely you will receive a 10% to 20% penalty in addition to the interest charges. In severe cases CRA can charge you a penalty up to 50% of the unpaid tax.