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Income Tax

Dealing with income tax issues, from filing your annual return to understanding assessments or dealing with an audit, can be very stressful. Information about some of the basics can help you understand not just your responsibilities but also your rights. The Canada Revenue Agency (CRA) is responsible for administering both the provincial and federal income tax systems.

Annual Tax Returns

Your annual tax return is how you report your income and calculate the taxes you owe.

When Tax Returns are Required

Not everyone is required to file an annual income tax return but returns must be filed in the following situations...

Individuals must file a tax return if they owe income tax. If you are an employee taxes are deducted from your pay but you could still owe taxes. The amount taken off is only an estimate of what you will owe based on your earnings. Things like whether you earned any income outside of your regular job or changes to people who are considered your dependants can affect the actual amount owing.

Filing a return is also required if capital property, such as a vacation home or stocks and bonds, are sold.

With the exception of registered charities, all corporations must file a corporate income tax return every tax year, regardless of whether or not there is any tax payable.

You must also file a tax return if the CRA makes a demand for filing even if there is no tax owing.

Consequences of Not Filing

If you do not file as required the CRA can determine the amount of tax you owe based on their estimates of your income without having your information. If you fail to file you will also have to pay a penalty based on the amount of tax you owe. Failing to file a return as required may also result in criminal charges. Criminal charges can be laid even if no formal demand to file has been made. In practice, it is unusual for CRA to file criminal charges without having first made a demand for filing but they can.

Late Filing

The due date for filing individual income tax returns is April 30, or the following Monday if the 30th happens to fall on a weekend. If you fail to file your return on time you will be charged a late-filing penalty based on the amount owing.

You may be tempted to delay filing or even not file if you know you do not have the money to pay the taxes you owe. However, even if you can't afford to pay, you can avoid penalties by filing on time. You will still be charged interest on the amount owing but filing will not result in you owing more interest. Repeatedly failing to file or failing to file on time can result in even harsher penalties.

Reasons for Filing

Even if you do not have to file a tax return you may want to in certain situations such as...

  • If you have a refund owing you must file in order to receive the refund.
  • You need to file an income tax return to be eligible for some benefits and rebates, such as the GST rebate.
  • Filing a return can increase your RRSP deduction limit in the future or establish your contribution room for a tax-free savings account (TFSA).
  • The CRA normally has three years to reassess your return from the time it is filed. If you do not file for any given year the CRA can reassess that year at any time. A reassessment provides the CRA with a further opportunity to scrutinize your return and make any required adjustments, typically not in your favour. It is important to note that the normal reassessment period does not apply in situations involving fraud or intentional misrepresentation.

Recording Income

When you do file you must ensure that you record all sources of income, worldwide, accurately and completely. Our tax system is based on self-reporting. Not paying your taxes is against the law, whether it is a result of never filing a return or filing an incomplete or inaccurate return. The consequences for deliberately avoiding taxes by either not fully reporting your income or falsely claiming expenses - or simply not filing a return as required - can be harsh.

Second Chances

Under our tax system the CRA has a policy of promoting voluntary compliance with our tax laws. Under the Voluntary Disclosures Program taxpayers can come forward and correct inaccurate or incomplete tax information or disclose unreported information.

Under the program taxpayers do not face prosecution and can have penalties reduced or eliminated. You still need to pay any taxes owing, plus related interest. There are certain criteria that must be met, including the requirement that an application for the program be made before the CRA has contacted the taxpayer regarding the tax years in question.

Keeping Records

You are required to keep records of anything that is needed to establish or back up the information on your return (e.g., bank and credit card statements). The CRA states that taxpayers should keep their financial records and any supporting documentation for a period of six years from the date of filing.

The CRA may also require you to keep certain financial records for a longer period. Certain records, such as those related to selling property, must be kept indefinitely.

Assessments

Once the CRA has processed your income tax return you will receive a Notice of Assessment summarizing the outcome.

Tax Enforcement

The CRA has many tools to address potential cases of tax evasion, fraud or non-compliance.

Audits

Canada's income tax system relies on people self-reporting their income completely and honestly. Audits encourage compliance and help detect issues with reporting.

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