The tax season is dreaded by many, as calculation, categorization, and business expense deduction can get complex and messy. The accountant can prepare your books and tax returns depending on the data provided. However, it is the taxpayer’s duty to exercise reasonable care and review the returns prepared by the tax professional to ensure accuracy. You should verify that all income and expenses are reported accurately, and that nothing appears to be out of order.

Your Duty as a Taxpayer 

At the end, you know your income and expenses better than anyone else. A tax professional can help you prepare the tax returns, but you have to review the returns for errors or omissions. If you fail to perform your duty of care, the Canada Revenue Agency (CRA) can reassess your income tax returns even after the normal reassessment period is over.

If the CRA finds any misrepresentation in your income tax returns, such as incorrect vehicle expenses based on an estimate, and can prove that it was due to carelessness, neglect, or willful default of the taxpayer, you would face a gross negligence penalty. 

As a taxpayer, it is your duty to understand how you are taxed, what tax benefits you can avail yourself of, and what documents you need if the CRA asks for them. The tax professional is limited by the information you provide, and missing out on any information or giving inaccurate information could trigger a penalty.

The Cost of Tax Negligence

There are several cases in the Tax Court where the ruling was in favour of the CRA because the taxpayer neglected their duty of care. Taxpayers were not aware of what was mentioned in their tax filings and what they were claiming. To make taxpayers more responsible, the CRA has imposed a hefty gross-negligence penalty of: 

• 50% of the tax on the understated income for incorrect income-tax returns, with a minimum penalty of $100.
• 25% of the understated net tax for incorrect goods and service tax/harmonized sales tax (GST/HST) returns, with a minimum penalty of $250.

This penalty is in addition to the tax payable and interest charges on the tax payable and penalty. For instance, the CRA found that Jacob had overstated expenses to evade $50,000 tax liability. He will be charged 50% of $50,000 as a gross negligence penalty, and the total cost would be as follows:

Tax payable = $50,000 

Gross negligence penalty = $25,000 

Interest accrued on $75,000

How CRA Proves Gross Negligence

Unlike other cases where the taxpayer bears the onus of proving the tax benefit, the CRA bears the onus of proving gross negligence. The CRA can easily identify false statements or incorrect income tax returns. The challenge is to prove that the taxpayer met the knowledge standard and willfully ignored the false statements or omissions.

In one such case of gross negligence, a retired personal support worker ceased using the services of a professional in 2012 and 2013 after learning about disputes between the CRA and the professional’s client. However, her 2012 and 2013 returns were reassessed in 2019, and claims for rental losses and employment-related motor vehicle expenses were denied. She had claimed an amount for basement renovations as a rental expense in her returns. After cross-examination, it was discovered that she had not provided the figure to the professional and that it was incorrect. 

Had she reviewed her income tax return before submission, she would have recognized this error. Thus, she was charged with gross negligence.

Similar to gross negligence, the CRA has several other methods to reassess your income tax returns beyond the reassessment period and penalize you for tax avoidance. 

Good Taxation Practices

Instead of staying in constant fear of when the CRA will reassess your returns and slap a hefty penalty, adopting good tax practices can give you peace of mind. 

Honesty and Transparency: Instead of looking for ways to reduce taxes by overstating expenses or underreporting income, stay honest and transparent in your returns and with your accountant. 

Maintain Regular Books of Accounts: Ensure that you report all income accurately. It is a common mistake to forget investment income or any other alternative income source. Instead of rushing into tax filing, start collecting records early, maintain regular books of accounts, and reconcile them with bank statements. This will ensure you do not miss out on reporting any transaction.

Record Cash Transactions: Avoid high-volume cash transactions as they attract CRA’s attention. If your business requires high-volume cash transactions, meticulously record each transaction and have a cash receipt to support your transaction. If the CRA requests supporting documents, you will have them readily available. 

Maintain Records and Documentary Proof: The CRA recommends retaining invoices, receipts, and bills for a minimum of six years. However, good practice is to keep them safe for more than six years, as the CRA can reassess your returns beyond the reassessment period.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Taxes

Talk to a professional accountant to help you prepare the books of accounts that are true and file tax returns. A skilled and credible accountant will send you the tax returns for review and answer your queries around the returns. At Edelkoort Smethurst CPAs LLP, our accountants and tax consultants offer services including tax planning, filing, and representation during CRA scrutiny. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and tax expertise, contact us online or by telephone at 905-517-2297.